SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19867
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ESKIMO PIE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0571720
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
901 Moorefield Park Drive
Richmond, VA 23236
(Address of principal executive offices, including zip code)
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Registrant's phone number, including area code:
(804) 560-8400
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
Class Outstanding at October 31, 1998
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Common Stock, $1.00 Par Value 3,458,597
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<TABLE>
ESKIMO PIE CORPORATION
Index
<CAPTION>
Page
Number
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 1998 and 1997 1
Condensed Consolidated Balance Sheets
September 30, 1998; December 31, 1997 and September 30, 1997 2
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
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ESKIMO PIE CORPORATION
Condensed Consolidated Statements of Income (Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
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(In thousands, except per share data)
Net sales $ 15,179 $ 13,124 $ 51,324 $ 55,038
Cost of products sold 9,025 7,964 29,578 32,095
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Gross profit 6,154 5,160 21,746 22,943
Advertising and sales promotion expenses 4,106 3,445 12,983 13,927
Selling, general and administrative expenses 1,803 1,864 6,293 7,311
Income from restructuring activities - 488 - 488
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Operating income 245 339 2,470 2,193
Interest income 26 48 128 142
Interest expense and other - net 167 179 511 533
Gain on disposal of fixed assets - 57 - 182
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Income before income taxes 104 265 2,087 1,984
Income tax expense 39 101 772 755
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Net income $ 65 $ 164 $ 1,315 $ 1,229
===========================================================================
Per common share
Basic and diluted:
Weighted average number of
common shares outstanding 3,458,598 3,458,006 3,458,326 3,455,565
Net income $ 0.02 $ 0.05 $ 0.38 $ 0.36
===========================================================================
Cash dividends $ 0.05 $ 0.05 $ 0.15 $ 0.15
===========================================================================
1
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ESKIMO PIE CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
<CAPTION>
Sept. 30, December 31, Sept. 30,
As of 1998 1997 1997
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(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents $ 1,302 $ 3,353 $ 3,400
Receivables 6,470 5,321 6,305
Inventories 6,830 4,342 5,998
Prepaid expenses 717 1,617 944
------------------------------------------------------
Total current assets 15,319 14,633 16,647
Property, plant and equipment - net 7,862 7,892 7,731
Goodwill and other intangibles 17,796 17,588 17,828
Other assets 1,340 1,467 1,394
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Total assets $ 42,317 $ 41,580 $ 43,600
======================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 3,726 $ 3,386 $ 2,981
Accrued advertising and promotion 2,059 1,389 1,852
Accrued compensation and related amounts 170 530 617
Other accrued expenses 824 698 737
Current portion of long term debt 1,317 1,317 1,317
------------------ ------------------ ----------------
Total current liabilities 8,096 7,320 7,504
Long term debt 4,230 5,218 5,547
Convertible subordinated notes 3,800 3,800 3,800
Postretirement benefits and other liabilities 3,281 3,161 3,444
Shareholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued and outstanding - - -
Common stock, $1.00 par value; 10,000,000 shares
authorized, 3,458,597 issued and outstanding in
1998, 3,458,002 at December 31, 1997 and 3,458,006
at September 30, 1997 3,458 3,458 3,458
Additional capital 4,385 4,353 4,283
Retained earnings 15,067 14,270 15,564
------------------ ------------------ ----------------
Total shareholders' equity 22,910 22,081 23,305
------------------ ------------------ ----------------
Total liabilities and shareholders' equity $ 42,317 $ 41,580 $ 43,600
================== ================== ================
2
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ESKIMO PIE CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Operating activities
Net income $ 1,315 $ 1,229
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,896 1,884
Gain on disposal of fixed assets - (1,181)
Change in deferred income taxes and other assets (40) (43)
Change in postretirement benefits and other liabilities 80 (37)
Change in receivables (1,149) (2,255)
Change in inventories and prepaid expenses (1,588) 2,924
Change in accounts payable and accrued expenses 777 (2,578)
-----------------------------------------
Net cash provided by (used in) operating activities 1,291 (57)
Investing activities
Acquisition of intangible assets (944) (573)
Capital expenditures (1,092) (907)
Proceeds from disposal of fixed assets - 1,992
Other 199 457
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Net cash (used in) provided by investing activities (1,837) 969
Financing activities
Cash dividends (517) (519)
Borrowings - 1,150
Principal payments on long term debt (988) (286)
-----------------------------------------
Net cash (used in) provided by financing activities (1,505) 345
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Change in cash and cash equivalents (2,051) 1,257
Cash and cash equivalents at the beginning of the year 3,353 2,143
-----------------------------------------
Cash and cash equivalents at the end of the quarter $ 1,302 $ 3,400
=========================================
</TABLE>
3
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ESKIMO PIE CORPORATION
Notes to Condensed Consolidated Financial Statements
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of the Company's financial position as of September 30, 1998 and its results of
operations for the three and nine months ended September 30, 1998 and 1997. The
results of operations for any interim period are not necessarily indicative of
results for the full year. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Company's 1997 Annual Report.
Accounting Changes: In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which will be effective for both interim
and annual reporting beginning with the Company's December 31, 1998 annual
financial statements. Statement No. 131 redefines how operating segments are
determined and requires disclosure of certain descriptive and financial
information about a company's operating segments. In February 1998, the FASB
issued Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which is also effective beginning with the Company's
December 31, 1998 financial statements. Statement No. 132 changes the disclosure
requirements relating to pension and other postretirement benefit obligations.
The adoption of Statements No. 131 and 132 will not affect the Company's
financial position, results of operations or cash flows as the impact of the
Statements is limited to the form and content of financial statement disclosure.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is effective for the
Company beginning January 1, 2000. Statement No. 133 requires "fair value"
reporting of derivative instruments with changes in fair values to be recorded
in earnings unless specific hedge criteria are met. Given that the Company's
only derivative financial instrument, an interest rate swap as described in Note
E to the Company's 1997 Financial Statements, expires in December 1998, the
Company does not anticipate any impact from this Statement.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires the
capitalization of certain software development costs when purchasing and
developing computer software for internal use. The Company has followed the
guidance of SOP 98-1 (and the related exposure drafts prior to the final
issuance of SOP 98-1) to account for the costs associated with the
implementation of its new management information system.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires start-up activities and organization costs
to be expensed as incurred. Management does not expect the adoption of SOP 98-5,
which is effective for the Company beginning January 1, 1999, to have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
Reclassifications: Certain amounts in the prior year financial
statements have been reclassified to conform with current presentation.
4
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<TABLE>
NOTE B - INVENTORIES Inventories are classified as follows:
- ----------------------------------------------------------------------------------------------------------------------------
September 30, 1998 December 31, 1997 September 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Finished goods $ 4,762 $ 2,943 $ 3,984
Raw materials and packaging supplies 2,999 2,330 3,065
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Total FIFO inventories 7,761 5,273 7,049
LIFO reserves (931) (931) (1,051)
------------ ------------ ------------
$ 6,830 $ 4,342 $ 5,998
========= ========= ==========
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</TABLE>
NOTE C - CONVERTIBLE SUBORDINATED NOTES
The Company's convertible subordinated notes mature in February 1999 if
not previously converted to common stock. These notes remain classified with
long term debt in accordance with the Company's intention and ability to
refinance the notes on a long term basis (through April 2000) under the
available $10 million committed line of credit
NOTE D - EARNINGS PER SHARE
All stock options granted to date and the effect of the assumed
conversion of the convertible subordinated notes were excluded from the earnings
per share calculations as the assumed conversions to common stock would be
anti-dilutive.
5
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ESKIMO PIE CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Eskimo Pie Corporation markets a broad range of frozen novelties, ice
cream and sorbet products under the Eskimo Pie, RealFruit, Welch's, Weight
Watchers, SnackWell's and OREO brand names. These nationally branded products
are generally manufactured by a select group of licensed dairies who purchase
the necessary flavors, ingredients and packaging directly from the Company.
Eskimo Pie Corporation also manufactures soft serve yogurt and premium ice cream
products for sale to the Foodservice industry. The Company also sells a full
line of quality flavors and ingredients for use in private label dairy products
in addition to the national brands it licenses.
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1998 was $65,000 or
$0.02 per share as compared with $164,000 or $0.05 per share for the comparable
period in 1997. For the nine month period ending September 30, 1998, net income
was $1,315,000 or $0.38 per share as compared with $1,229,000 or $0.36 per share
in 1997. As discussed below, the third quarter 1997 results include net gains
from restructuring activities, relating primarily to the sale of the Los Angeles
Flavors Plant, and the disposal of other fixed assets which total $545,000 or
$0.10 per share after related tax effects. In addition, the second quarter 1997
results include a gain of $125,000 resulting from the disposal of other fixed
assets which, when combined with the third quarter gains, amounted to $670,000
or $0.12 per share after related tax effects for the nine month period ending
September 30, 1997. Exclusive of these gains, profitability improved during both
the quarter and nine month periods ending September 30, 1998 when compared with
the comparable periods in 1997.
It is not the Company's intent to imply that alternate measures of
performance are more meaningful than net income as determined in accordance with
generally accepted accounting principles. However, management believes that
investors should consider the above information concerning the effects of 1997
activities to gauge the impact of those activities on on-going operations.
Additional information is provided below.
Net Sales and Gross Profit
For the third quarter of 1998, total Company sales increased 15.7% as
compared with the third quarter of 1997. Much of the sales growth came from the
National Brands Division which grew by 22.5%. Increases in Eskimo Pie and
Welch's brand product sales were exceptionally strong and are largely
attributable to the change in the timing of promotional spending. As previously
reported, the 1998 promotional calendar was not as front loaded as in 1997 and
as such, promotional spending and the resulting sales were more evenly spread
throughout the year. National brands sales increases also reflect the expanded
distribution of Eskimo Pie into the Northeast markets, the successful
introduction of OREO brand ice cream novelties and the Company's entry into the
single serve impulse market. Sales from the Foodservice and Flavors Divisions
also increased for the quarter (9.7% and 6.0%, respectively) reflecting the
results of focused emphasis in these businesses by dedicated personnel assigned
to the respective divisions as part of the corporate restructuring completed in
late 1997.
6
<PAGE>
The third quarter increases were not, however, large enough to fully
mitigate the revenue declines from the first half of 1998. During the first half
of the year, sales of the Company's nationally branded products were
significantly affected by unseasonably cool and wet weather in some of the
Company's strongest markets as well as by consumer movement to less expensive
private label products. In addition, sales of the Company's SnackWell's and
RealFruit brands continue to decline. The Company is in the process of testing
new products and expanding distribution of successful 1998 tests to offset the
expected SnackWell's and RealFruit declines. Several opportunities exist within
the Foodservice industry which the Company believes it can develop to offset the
negative sales trend resulting from declining soft serve yogurt consumption.
Gross profit, as a percent of sales, increased during both the quarter
and nine month periods as a result of an improved product mix (which includes a
higher percentage of Eskimo Pie and other National Brands products), the impact
of the third quarter 1997 Flavors consolidation and the full year benefit of
1997's initiatives to obtain more favorable pricing on key materials and
ingredients.
Significant market attention has been focused on recent increases in
butterfat prices which have increased by approximately 150% from the levels of a
year ago. As a licensing company, Eskimo Pie Corporation is not directly
impacted by the increased cost of this commodity. However, some of the Company's
licensees have increased the price of the Company's licensed ice cream and
novelty products as a result of their butterfat cost increases which may
ultimately affect consumer demand and the Company's sale of related components
and packaging. The Company is also affected by butterfat pricing in connection
with premium soft serve ice cream products sold to the Foodservice industry.
Butterfat purchases within these operations traditionally account for less than
1% of consolidated cost of goods sold.
Expenses and Other Income
As compared with the prior year, advertising and promotion expense
increased during the third quarter due to the previously discussed change in
timing of the promotional programs. The 1997 promotional plan included heavy
"pre-season" spending whereas 1998 spending is more evenly spread throughout the
year. Promotional spending has been reduced on a year to date basis in response
to the decline in sales. A large portion of the Company's promotional spending
is volume based trade support and as sales decline, spending against promotional
commitments declines as well.
During the third quarter of 1997, the Company consolidated its flavors
production in New Berlin, Wisconsin. In connection with the consolidation, the
Company discontinued flavors operations in Los Angeles, California, terminated
the employment of the plant's 14 employees and sold the plant facility. Included
in income from restructuring activities is a $1,000,000 gain from the sale of
the plant assets offset primarily by approximately $300,000 of employee
severances. In addition, $200,000 of severances and other non-recurring costs
associated with 1997 restructuring activities were also offset against the
income recognized from the flavors consolidation. As of September 30, 1998 all
severance costs have been paid to former employees with the exception of
approximately $35,000 which will be paid by December 31, 1998.
The 1997 gain on disposal of fixed assets relates primarily to
equipment which was written off in the third quarter of 1996 when no alternate
use appeared available. The equipment was being leased to one of the Company's
licensees who had asked to have the equipment removed. The 1997 gain equals the
proceeds received from the sale of the equipment which had no book value at the
beginning of 1997.
Selling, general and administrative expenses continue to trend at the
levels achieved in late 1997 as a result of management's cost control
initiatives and restructuring activities. Interest income and expense, as well
as the effective income tax rate, remain consistent with the prior year.
7
<PAGE>
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
During the third quarter, the Company extended its licensing agreement
with Welch Foods, Inc. (Welch's). Under the agreement, the Company will continue
to provide sales, marketing, product development and production support for the
Welch's Fruit Juice Bars which the Company has managed since 1980. The extended
licensing agreement continues through the year 2008 and provides for enhanced
opportunities for new product development under the Welch's trademark. The
Company paid Welch's approximately $800,000 in August 1998 as partial payment
against a total $1,500,000 of license fees payable over the term of the license.
Although management expects the license to remain in effect through the term of
the agreement, there are no guaranteed or required payments under the license
and certain termination clauses exist which would preclude payment of the
balance of the license fees.
The Company's financial position remains strong. In addition to the
investment in the Welch's license discussed above, the Company has also made
approximately $1,092,000 in capital investments (primarily related to computer
technology and New Berlin plant improvements) and $988,000 in scheduled debt
payments during 1998. The Company believes that the annual cash generated from
operations and funds available under its credit agreements will provide the
Company with sufficient funds and the financial flexibility to support its
ongoing business, strategic objectives and debt repayment requirements.
On October 23, 1998, the Company's Board of Directors declared a
quarterly cash dividend of $.05 per share, payable on January 2, 1999, to
shareholders of record on December 16, 1998. While the Company anticipates that
it will have a regular quarterly dividend, the amount and timing of any future
dividends will depend on the general business conditions encountered by the
Company, as well as the financial condition, earnings and capital requirements
of the Company and other factors deemed relevant by the Board of Directors.
IMPACT OF YEAR 2000
Recently, considerable attention has been given to the Year 2000 (Y2K)
Problem which stems from the inability of certain computerized applications and
devices (hardware, software and equipment) to process dates after December 31,
1999. The Company's efforts to address the Y2K Problem consists of three main
components; the implementation of a new management information system, review of
other internal systems and equipment, and inquiries of external trading partners
(key licensees, customers, suppliers, service providers).
The Company is in the process of implementing a new management
information system that will, among other benefits which extend well beyond Y2K
Problems, address the Company's Y2K Problems relating to financial and
operational management information. The new information system is installed and
implementation is complete in over half of the Company's operations. The
remaining operations are expected to be implemented by mid-1999. Project
expenditures relating to the new management information system approximate
$1,200,000 through September 30, 1998 and the Company expects to incur an
additional $250,000 to complete the project. The costs of the new management
information system have been capitalized under the provisions of the AICPA's
Statement of Position 98-1 and will be amortized to expense over the expected
useful life.
The Company is also in the process of reviewing other internal systems
and equipment to assess their exposure to the Y2K Problem. Most of the Company's
plant and office equipment is mechanical in nature and therefore, may not be
subject to the Y2K Problem. The Company has begun its review of operations and
will develop remedies and contingency plans to address problems if and when they
are identified. The Company expects to complete its review of other internal
systems and equipment during the second quarter of 1999. At this time,
management does not believe that the costs to remedy Y2K Problems associated
with other internal systems and equipment will be material, however, no
guarantee can be made that problems will not be identified that require material
costs to remedy.
8
<PAGE>
Finally, the Company expects to begin inquiries with its external
trading partners by December 31, 1998. Such inquiries will result in the
collection and appraisal of voluntary statements made by external parties with
limited opportunity for independent factual verification. Although the Company
will undertake reasonable efforts to determine the readiness of its trading
partners, no assurance can be given to the validity or reliability of
information obtained. Prior to June 30, 1999, the Company expects to develop
initial contingency plans to address the potential failure of its key trading
partners to be Y2K compliant. Management believes, based on past experience,
that it could locate suitable replacements if any partners were lost due to Y2K
Problems. However, the Company can not reliably predict the readiness of all of
its partners (as well as the readiness of their respective external trading
partners) and as such, the Company could be affected by the disruption of other
business interests outside of the Company's control.
The Company believes its approach to the Y2K Problem is adequate to
maintain the continuation of its business operations with limited financial or
operational impact. However, the Y2K Problem has many aspects and potential
consequences, some of which may not be reasonably anticipated, and there can be
no assurance that unforeseen consequences will not arise.
FORWARD LOOKING STATEMENTS
Statements contained in this Report on Form 10-Q regarding the
Company's future plans and expected performance are forward looking statements
within the meaning of federal securities laws and are based upon management's
current expectations and beliefs about future events and their effect upon
Eskimo Pie Corporation. There can be no assurance that future developments will
mirror those currently anticipated by management. These forward looking
statements involve risks and uncertainties including but not limited to, the
level of consumer interests in the Company's products, product costing, the
weather, performance of the Company's management team, the Company's
relationships with its licensees and licensors, the highly competitive nature of
the frozen dessert market, as well as government regulation and the Y2K Problem.
The risks and uncertainties are further discussed in the Company's Annual Report
on Form 10-K as filed with the Securities and Exchange Commission for the year
ended December 31, 1997. Actual results may vary materially from those included
herein and the Company assumes no responsibility for updating these statements.
9
<PAGE>
PART II, OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits:
10.1 Master License Agreement between the Company and
Welch Foods, Inc. dated as of August 1, 1998,
filed herewith.
27. Financial Data Schedules, filed herewith.
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESKIMO PIE CORPORATION
Date: November 12, 1998 By /s/ David B. Kewer
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David B. Kewer
President and Chief Executive Officer
Date: November 12, 1998 By /s/ Thomas M. Mishoe, Jr.
------------------------------
Thomas M. Mishoe, Jr.
Chief Financial Officer, Vice President,
Treasurer and Corporate Secretary
Date: November 12, 1998 By /s/ William T. Berry, Jr.
------------------------------
William T. Berry, Jr.
Assistant Vice President, Controller
10
EXHIBIT 10.1
MASTER LICENSE AGREEMENT
This Agreement is entered into as of this 1st day of August, 1998 by
and between Welch Foods Inc., A Cooperative, a Michigan corporation with a
principal place of business at Three Concord Farms, 575 Virginia Road, Concord,
Massachusetts 01742 ("Welch's"), Eskimo Inc. ("Licensee"), a Virginia
corporation and a wholly-owned subsidiary of Eskimo Pie Corporation and Eskimo
Pie Corporation, a Virginia corporation ("Eskimo"), with Licensee and Eskimo
both having a principal place of business at 901 Moorefield Park Drive,
Richmond, Virginia 23236.
BACKGROUND FACTS
A. Welch's is the owner of the trademarks WELCH'S, WELCH'S (Design) and
WELCHADE as set forth in Schedule A to this Agreement and certain Trade Dress
(as hereinafter defined);
B. Welch's is engaged, inter alia, in the business of manufacturing and
distributing frozen juice bar bases (the "Base" or "Bases") used for the
manufacture of frozen juice bars sold under the Trademarks and Trade Dress;
C. The formulae for the manufacture of the Bases are confidential and
proprietary trade secrets owned by Welch's.
D. Eskimo and Licensee are engaged, inter alia, in the business of
manufacturing and/or licensing others to manufacture and sell ice cream and
other frozen novelty and frozen dessert products.
E. Welch's and Eskimo are parties to a Master License Agreement dated
as of August 31, 1992 (the "1992 Agreement") pursuant to which Eskimo uses and
licenses others to use the Trademarks and Trade Dress on and in connection with
frozen fruit juice bars as more particularly described in the 1992 Agreement.
F. Welch's, Licensee and Eskimo desire to terminate the 1992 Agreement
and to enter into this Agreement.
G. Licensee desires to use and license others to use the Trademarks and
Trade Dress on and in connection with the Licensed Products described herein and
Welch's is willing to authorize Licensee's use and sublicense subject to the
terms and conditions of this Agreement.
TERMS AND CONDITIONS
The parties agree as follows:
ARTICLE I - DEFINITIONS
In this Agreement, unless the context of the Agreement clearly
indicates the contrary, the following terms shall have the following meanings:
1.1 "Agreement Year" means each calendar year commencing on or after
January 1, 1999 during the Term of this Agreement.
1.2 "Effective Date" means August 1, 1998.
1.3 "Frozen Novelty Product" means a single-serve non-beverage frozen
dessert or frozen non-beverage snack item (with single-serve meaning less than 6
ounces in volume) typically produced in an ice cream plant and typically
distributed through an ice-cream distribution system.
1.4 "Licensed Products" means (i) the fruit flavored Frozen Novelty
bars, enumerated in Schedule B hereof (which Schedule may be modified from time
to time by written agreement between the parties) made from the Bases and/or
other ingredients specified by Welch's in a form for sale to distributors and
consumers under the Trademarks ("Existing Products") and (ii) any other newly
developed products in the frozen dessert category as may be mutually agreed upon
in writing by the parties pursuant to Section 6.1 ("New Products").
1.5 "Packaging Material" means packaging, labels, unit bags, wrappers,
"multi-pak" retail cartons, point of purchase displays, advertising and
promotional material used in connection with the sale, offer for sale,
advertising and promotion of the Licensed Products.
1.6 "Persons" means individuals, corporations, partnerships or other
legally recognized commercial entities operated for profit.
1.7 "Soft-serve Product" means any frozen ice cream or frozen yogurt
product intended for use in a frozen soft-serve machine, including but not
limited to, frozen yogurt and sorbet products, and such other products as may be
mutually agreed upon in writing, which are to be sold and dispensed from
soft-serve machines. A Soft-serve Product containing 10% or more juice content,
when and if developed and included as a New Product under this Agreement, shall
be referred to as a "New Soft-serve Product."
1.8 "Sublicense" means the form of sublicense agreement attached hereto
as Schedule C or the form of sublicense agreement used in connection with the
1992 Agreement.
1.9 "Sublicensees" means any Person approved by Welch's to enter into a
Sublicense in accordance with the terms of this Agreement, or any Person who is
already approved by Welch's and a party to a Sublicense relating to the Licensed
Products entered into pursuant to the terms of the 1992 Agreement or the 1985
Agreement (as defined below).
1.10 "Territory" means the United States of America and Puerto Rico.
1.11 "Trade Dress" means all packaging designs, graphics, layouts,
get-up, or other elements of trade dress used in connection with the Licensed
Products either during the pendency of the 1992 Agreement or the parties'
earlier Agreement dated December 31, 1985, as amended (the "1985 Agreement"), or
while this Agreement is in effect and whether created by or under the authority
of Welch's or Licensee.
1.12 "Trademarks" means each of the trademarks that are set forth in
Schedule A to this Agreement and the Trade Dress and such other Welch's-owned
trademarks as the parties may hereafter agree in writing to use in connection
with the Licensed Products.
1.13 "Welch's", "Licensee", "Eskimo" and "Bases" shall have the
meanings given each above, respectively.
1.14 "Welch's Standards" means the specifications and quality control
directions covering each of the Licensed Products which are set forth in a
separate written manual and which Welch's may, from time to time, establish, all
of which are incorporated herein by reference.
ARTICLE II - GRANT OF TRADEMARK LICENSE
2.1 Upon the terms and conditions set forth herein, Welch's hereby
grants Licensee and Licensee hereby accepts, for the Term (as hereinafter
defined), the exclusive, non-transferable, non-assignable right to use and to
sublicense Eskimo and other Persons, through Sublicenses between Licensee or
Eskimo and such other Persons, to use the Trademarks in the Territory only on
and in connection with the manufacture, distribution, promotion and sale of the
Licensed Products, and only so long as the Licensed Products sold by Eskimo,
Licensee or Sublicensees are in strict compliance with the Welch's Standards.
Licensee hereby undertakes that all Licensed Products sold by it or any
Sublicensee under the Trademarks will be in strict compliance with the Welch's
Standards and that any Licensed Products, the quality of which Welch's has
disapproved shall not be sold, offered for sale, advertised or promoted under
any of the Trademarks.
2.2 (a) Nothing in this Agreement shall be construed to prevent Welch's
from granting any other licenses for the use of the Trademarks or from using the
Trademarks in any manner whatsoever, whether inside or outside the Territory,
Welch's having retained and reserved all other rights not expressly provided
herein to Licensee or Eskimo. Welch's agrees that, except as provided for in
Section 15.2, it will grant no other licenses for the Territory effective during
the Term for the use of the Trademarks, nor will it exploit the Trademarks for
its own account, in connection with the Licensed Products or any other Frozen
Novelty or Soft-serve Products (the "Comparable Products"); provided however,
that this provision shall not operate to prevent Welch's from exploiting the
Trademarks for its own account (directly or with a third party other than by
licensing a third party) in connection with a "Rejected New Product" (as
hereinafter defined).
(b) A "Rejected New Product" is a Comparable Product that
Licensee declines to include as a New Product after concept-screening and
consumer acceptance testing in the manner described in this Section. If Welch's
presents an idea for a proposed New Product, the parties shall jointly review
such idea through agreed-upon concept screening. If after such screening,
Licensee elects not to pursue the idea, Welch's may at its own expense continue
to develop the proposed product and further quantify consumer acceptance of such
product through limited test marketing, a product/concept forecast model such as
Bases or any other methodology agreed upon by the parties, that will provide a
volume projection and consumer trial and repeat rates. Welch's shall present to
Licensee in writing the results of such further consumer acceptance testing and
Licensee shall within 30 days of receipt of the presentation of such results
notify Welch's in writing of its decision to include or to decline to include
such proposed product as a New Product. If, at this point, Licensee agrees to
include the proposed product as a New Product, Licensee shall bear 50% of the
cost of the further consumer acceptance testing expended to that point by
Welch's. If Licensee declines to include the proposed product as a New Product
or fails to notify Welch's of its decision one way or the other within such
30-day time period, such proposed product shall be a Rejected New Product.
2.3 Licensee agrees that during the Term of this Agreement neither
Licensee nor Eskimo shall, directly or indirectly, manufacture, distribute,
promote or sell any Comparable Products which contain 10% or more juice content
other than the Licensed Products, except that Licensee and Eskimo may
manufacture, distribute, promote or sell any Soft-serve Products under
trademarks owned by Licensee or Eskimo.
2.4 The license herein granted extends only to the Territory. Licensee
agrees: (a) that Licensee will not use or knowingly permit any use of the
Trademarks, or any trademark confusingly similar thereto, in any geographic area
other than the Territory; (b) that Licensee will not ship, deliver or otherwise
transfer or knowingly permit the shipment, delivery or transfer of, any Licensed
Products across or outside the boundaries of the Territory; and (c) Licensee
shall not sell or permit the sale of Licensed Products to Persons or entities
who Licensee knows intend to, are likely to, or are suspected to resell outside
of the Territory.
2.5 Licensee or Eskimo may elect to engage in the manufacture of the
Licensed Products itself or through the use of co-packers. In the event Eskimo
engages directly in the manufacture of the Licensed Products itself, the
provisions of this Agreement that relate in any way to the manufacture of
Licensed Products shall apply directly to Eskimo to the same extent as to other
Sublicensees. In the event Licensee or Eskimo desires to engage in the
manufacture of the Licensed Products through one or more co-packers, the
relationship between Licensee or Eskimo and any such co-packer shall be subject
to a written agreement containing terms and conditions comparable to those of a
Sublicense and Welch's shall have the right to approve any such agreement
insofar as the provisions thereof in any way relate to the matters referred to
in the second to last sentence of Section 12.1 and Schedule J pursuant thereto.
The provisions of this Agreement shall be applicable to any such proposed or
approved co-packer to the same extent as if such co-packer were a proposed
sublicensee or a Sublicensee.
2.6 Unless sooner terminated in accordance with the provisions hereof,
the term of the Agreement shall commence on the Effective Date and end on
December 31, 2008 (the "Term").
ARTICLE III: LICENSE FEES
3.1 In consideration for the exclusive rights granted to the Licensee
under this Agreement, Licensee agrees to pay Welch's a license fee of Eight
Hundred Fifty Thousand Dollars ($850,000) ("Initial License Fee") upon the
execution of this Agreement;
3.2 As further consideration for the rights granted to Licensee under
this Agreement, Licensee agrees to pay Welch's an additional licensee fee of Six
Hundred Fifty Thousand Dollars ($650,000) payable in accordance with the
schedule set forth on Schedule D ("Additional License Fee"), subject to the
conditions set forth in 3.3 below. The Initial License Fee and Additional
Licensee Fee are collectively referred to as the "License Fee."
3.3 Licensee's obligation to pay the Additional License Fee is subject
to the limitation that if this Agreement is terminated by Welch's for any reason
whatsoever (including automatic terminations under Sections 13.1, 19.3(a) or
19.3 (d)) or by Licensee pursuant to Sections 14.2 or 19.3(f), Welch's shall not
be entitled to be paid any installments of the Additional License Fee scheduled
to be paid on or after the termination of this Agreement; provided, however,
that this limitation shall not apply in the event Welch's terminates this
Agreement as a result of a breach or default by Licensee or Eskimo and within 12
months after such termination Licensee or Eskimo enters into a license agreement
with a third party in connection with the manufacture, distribution, promotion
and sale of any Frozen Novelty Product containing 10% or more juice content or
any product comparable to a New Soft-serve Product in the event that any such
New Soft-serve Product was marketed under this Agreement at the time of such
termination.
ARTICLE IV - FLOOR AMOUNT AND ANNUAL VOLUME TARGETS
4.1 (a) The parties anticipate that the business contemplated under
this Agreement will generate sales of Licensed Products in a volume sufficient
to cause the "Floor Amount" (as hereinafter defined) to be met or exceeded. The
Floor Amount for the first three Agreement Years shall be an amount not less
than the number of Base pails required to be purchased in order to generate
$1.75 million in gross margins to Welch's and for the last seven Agreement Years
shall be an amount not less than the number of Base pails required to be
purchased in order to generate $2 million in gross margins to Welch's, in all
Agreement Years based upon the margins and costs in effect for each such
Agreement Year ("Floor Amount"). The Floor Amount for Agreement Year One shall
be 27,778 Base pails which has been calculated based upon the margins and costs
currently in effect. The Floor Amount for each subsequent Agreement Year shall
be determined in accordance with the foregoing method and agreed upon in writing
each year as part of formulation of the Annual Business Plan (as hereinafter
defined).
(b) If the sales of Licensed Products in any of the first three
Agreement Years are insufficient to generate Base pail purchases equal to or
exceeding the Floor Amount, Licensee shall have the option of (i) purchasing the
quantity of Base necessary to meet the Floor Amount (such amount referred to as
the "Deficiency"), (ii) paying Welch's an amount equal to Welch's gross margins
on the Deficiency or (iii) any combination of (i) and (ii). Licensee shall have
60 days after the end of the Agreement Year in which the Deficiency occurred to
take any such action. If Licensee determines not to take any such remedial
action, it shall notify Welch's in writing of its decision ("Licensee Notice").
Welch's shall have the option of terminating this Agreement by giving written
notice of termination to Licensee within 30 days of the date of the Licensee
Notice. Welch's ability to terminate this Agreement as set forth in the
preceding sentence shall be its exclusive remedy with respect to Licensee's
failure to attain the Floor Amount in the first three Agreement Years in the
event Licensee elects not to take any of the remedial actions set forth in the
first sentence of this subsection (b).
(c) In the event of a Deficiency occurring in any Agreement Year
beginning with or after Agreement Year 4 , Licensee shall have the option of (i)
purchasing the quantity of Base necessary to eliminate the Deficiency, (ii)
paying Welch's an amount equal to Welch's gross margins on the Deficiency or
(iii) any combination of (i) and (ii). Licensee shall have 60 days after the end
of the Agreement Year in which the Deficiency occurred to take any such action.
If Licensee determines not to take any such remedial action, it shall notify
Welch's in writing of its decision ("Licensee Notice"). Welch's shall have the
option of terminating this Agreement by giving written notice of termination to
Licensee within 30 days of the date of the Licensee Notice. In addition, in the
event a Deficiency occurs in two out of any three consecutive Agreement Years
beginning with or after Agreement Year 4, regardless whether Licensee takes the
foregoing remedial action, Welch's shall have the option to terminate this
Agreement by written notice to Licensee given within 60 days of the end of the
second Agreement Year in which the Deficiency occurred. Welch's ability to
terminate this Agreement as set forth in this subsection (c) shall be its
exclusive remedy with respect to Licensee's failure to attain the Floor Amount
in Agreement Years beginning with or after Agreement Year 4.
4.2 (a) Schedule E sets forth the formula for determining the annual
volume targets for Existing Products including volume relating to the Club Store
business ("Core Business Volume Targets"). Schedule F sets forth the formula for
determining the annual volume targets for New Products ("New Products Volume
Targets"). The Core Business Volume Targets and New Products Volume Targets for
each Agreement Year will be calculated based on these formulas and the sum of
both for any given Agreement Year are referred to as Total Volume Targets.
(b) If Licensee fails to meet the Total Volume Targets for any
Agreement Year, Licensee shall have the option of (i) purchasing the quantity of
Base necessary to meet the particular Total Volume Target (such amount referred
to as the "Shortfall"), (ii) paying Welch's an amount to be determined in
accordance with the formula set forth on Schedule G or (iii) any combination of
(i) and (ii). Licensee shall have 60 days after the end of the Agreement Year in
which the Shortfall occurred to take any such action. If Licensee determines not
to take any such remedial action, it shall notify Welch's in writing of its
decision ("Licensee Notice"). Welch's shall have the option of terminating this
Agreement by giving written notice of termination to Licensee within 30 days of
the date of the Licensee Notice. Welch's ability to terminate this Agreement as
set forth in the preceding sentence shall be its exclusive remedy with respect
to Licensee's failure to attain the Volume Targets in the event Licensee elects
not to take any of the remedial actions set forth in the first sentence of this
Section.
4.3 The Floor Amount and Volume Targets are expressed in terms of Base
purchased from Welch's by Licensee and Eskimo. The parties acknowledge that
Welch's may change its method of operations such that Base purchases no longer
represent an appropriate measure of volume or in certain cases Base may be used
in a lower percentage in one or more New Products than in the Existing Products.
In either such event, the parties will in good faith determine and agree in
writing upon a mutually acceptable method for converting the affected Floor
Amount and Volume Targets to an equivalent measurement.
ARTICLE V - ANNUAL BUSINESS PLAN AND INCENTIVE PAYMENT
5.1 The parties shall establish a mutually acceptable annual business
plan for each Agreement Year ("Annual Business Plan" ) by October 31 of the
preceding year, to be approved in writing by the President of Welch's and the
President of Eskimo or their respective designees. The first Annual Business
Plan shall be established for the Agreement Year commencing on January 1, 1999.
In structuring the Annual Business Plan, it is the parties' intention to achieve
a plan which results in the profits derived from the business contemplated under
this Agreement being split 60% to Licensee and 40% to Welch's (on a net
contribution post-royalty basis calculated under the sublicensing method of
product manufacturing). The Annual Business Plan shall include agreement with
respect to all Licensed Products as to (1) volume for each Licensed Product and
the associated revenue; (2) pricing issues; (3) projected gross margins; (4)
marketing plan and related spending; (5) packaging issues; (6) all particulars
of New Products and (7) consideration of the cost of the License Fee. The
formula for calculating the net contribution post-royalty is set forth on
Schedule H.
5.2 Licensee and Welch's shall each keep and maintain complete and
accurate records of all their respective information used in connection with
formulation of the Annual Business Plan and monitoring achievement of such Plan
and shall each allow representatives or attorneys of the other, upon advance
written notice during normal business hours to inspect and make extracts or
copies of such records for the purpose of ascertaining the correctness of such
information. All such books of account and records shall be maintained and each
party shall have access as specified herein, for a period of three (3) years
following the Agreement Year to which such books and records relate.
5.3 If Licensee achieves or exceeds its Annual Business Plan with
respect to net contribution post-royalty for any Agreement Year, Licensee will
pay Welch's an incentive payment of $100,000 as of April 30 of the Agreement
Year following the Agreement Year in which its Annual Business Plan was met. At
Welch's option, the incentive payment will made be in the form of (a) cash or
(b) $100,000 worth of Eskimo Common Stock ("Incentive Stock"), with the number
of shares to be determined based upon the closing price per share of the Eskimo
Common Stock on December 31 of the Agreement Year in which the Annual Business
Plan was met.
5.4 Welch's represents, warrants and covenants that: (i) it will
receive shares of Incentive Stock issued to it for investment only for its own
account and not with a present view to resale or distribution thereof; (ii) it
understands that the shares of Incentive Stock will be issued without
registration, under exemptions from registration in the federal and state
securities laws that may depend upon the intent hereby represented and that
Eskimo will rely on such representations in issuing the Incentive Stock without
registration; (iii) Welch's agrees that the certificates representing the
Incentive Stock may, in the discretion of Eskimo, be marked with a legend to the
effect that the Incentive Stock is subject to restrictions on transfer and
distribution set forth herein and (iv) any costs associated with holding or
disposing of any shares of Incentive Stock will be borne by Welch's.
5.5 Welch's agrees that before any disposition is made by Welch's of
any of the Incentive Stock, Welch's shall give written notice to Eskimo
describing the manner and timing of any such proposed disposition. No such
disposition shall be made unless and until (i) such disposition is made pursuant
to the provisions of Rule 144 or similar "safe harbor" provisions promulgated
under the Securities Act of 1933, as amended (the "Act") or (ii) Welch's has
furnished Eskimo an opinion of counsel satisfactory to Eskimo to the effect that
no registration under the Act is required with respect to such disposition.
ARTICLE VI - NEW PRODUCT DEVELOPMENT
6.1 Licensee and Welch's shall agree in advance in writing on all
criteria and expenditures relating to any New Products to be developed under
this Agreement as part of formulation of the Annual Business Plan. Such criteria
shall include without limitation the criteria and timing for the introduction of
each New Product.
6.2 Licensee and Welch's agree that each will bear 50% of all Costs (as
defined below) incurred by either party on or for the development of New
Products; provided, however, that Welch's will bear 50% of the cost of films and
separations on only the first set of packaging films for each New Product, with
Licensee to bear the total cost of additional packaging films necessitated to
accommodate the requirements of multiple Sublicensees. Costs are (i)
out-of-pocket media and creative development costs; (ii) out-of-pocket costs of
development and execution of consumer promotions; (iii) introductory allowances
as well as allowances for advertising and feature price activity; (iv)
out-of-pocket costs of projects commissioned for New Product development; (v)
out-of-pocket costs of developing packaging for New Products; and (vi)
out-of-pocket costs of product development test runs or plant produced product
for research or trade sell-in purposes. Costs shall not include (x) internal
overhead or administrative costs of Licensee, Eskimo or Welch's or (y) internal
personnel costs of Licensee, Eskimo or Welch's.
6.3 Licensee and Welch's agree that with regard to New Products where
Base is used in a lower percentage than in the Existing Products, the parties
will develop a mutually acceptable approach to calculating the royalty shortfall
due to reduced Base utilization ("New Business Margin Differential") which
provides for a royalty payment to Welch's which maintains the same percentage
contribution margin on New Products as that earned by Welch's under the sale of
Base for the Existing Products. This New Business Margin Differential will be
included as part of the development of the Annual Business Plan and paid to
Welch's as related product components are sold by the Licensee.
ARTICLE VII - SHARING OF MARKETING AND PROMOTIONAL EXPENSES
The parties agree to bear all Marketing and Promotional Expenses
associated with the Licensed Products on the following basis:
Licensee/Eskimo Welch's
--------------- -------
Existing Products 66 2/3% 33 1/3%
Club Store Business 55% 45%
New Products (during "Introductory
Years" as defined below) 50% 50%
New Products (during "Post-Introductory
Years" as defined below) 66 2/3% 33 1/3%
Marketing and Promotional Expenses are (i) out-of-pocket media and creative
development costs; (ii) out-of-pocket costs of development and execution of
consumer promotions; (iii) introductory allowances as well as allowances for
advertising and feature price activity; and (iv) out-of-pocket costs of projects
commissioned for marketing and promotion of Welch's brands/products and jointly
approved by Licensee and Welch's. Marketing and Promotional Expenses shall not
include (x) internal overhead or administrative costs of Licensee, Eskimo or
Welch's or (y) internal personnel costs of either Licensee, Eskimo or Welch's.
Marketing and Promotional Expenses shall include research and development costs
related to Existing Products and costs related to packaging for Existing
Products only as may be agreed upon in advance in writing on a case by case
basis.
Slotting fees for any particular geographical region for a New Product
will be borne 50% by Licensee and Welch's during any Agreement Year in which
that New Product is in development, is in test marketing for that region or in
which such New Product is first introduced into that region ("Introductory
Years") and 66 2/3% by Licensee and 33 1/3% by Welch's for all years subsequent
to Introductory Years ("Post-Introductory Years").
ARTICLE VIII - BASE PURCHASES
8.1 Except as may be otherwise agreed by the parties in writing from
time to time with respect to the use of fruit juice ingredients purchased from
another Person, Licensee agrees that it will manufacture the Licensed Products
only by the use of Bases purchased from Welch's under this Agreement in
accordance with the Welch's Standards, and that Licensed Products manufactured
by any Sublicensee shall be manufactured only by use of Bases purchased by
Eskimo or Licensee from Welch's in accordance with the Welch's Standards. The
Bases purchased by Eskimo or Licensee from Welch's will be used or resold for no
purpose other than the manufacture and sale of the Licensed Products under the
Trademarks. Welch's will sell Bases to Licensee, and Licensee shall purchase
Bases from Welch's, as provided for by this Agreement. Welch's warrants that the
Bases comprising any shipment or delivery made by it to Licensee hereunder,
shall, as of the date of such shipment, be in accordance with the Welch's
Standards, of good and merchantable condition and fit for the manufacture of the
Licensed Products. Welch's further warrants that the Bases have been produced
and shall be held, prior to shipment, in conformity with all applicable federal,
state and local rules and regulations. All orders for Bases shall be in writing,
or oral with written confirmation, and shall be received by Welch's at least 14
days before the requested delivery dates. Welch's will, however, use reasonable
efforts consistent with the requirements of its other business, to meet
requested delivery dates on shorter notice. If an order for Bases is received by
Welch's not later than 14 days before the delivery date requested in the order,
subject to the provisions of Sections 8.4 and 19.10, Welch's shall ship such
Bases so as to ensure receipt of same by Licensee on or before the delivery date
requested. If Welch's fails to do so, the Floor Amount and the Total Volume
Targets for the Agreement Year in which such failure occurs shall be reduced by
that amount which Welch's failed to ship in accordance with this Section.
8.2 The price to be paid by Licensee for Bases shall be Welch's
standard prices in effect at the date of shipment and are subject to Welch's
standard terms and conditions of sale. If there is any inconsistency between
this Agreement and Welch's standard terms and conditions of sale, the terms of
this Agreement shall control. The current standard prices and payment terms for
Bases are set forth in Schedule I and shall be established as part of the Annual
Business Plan.
8.3 Subject to the provisions of Section 19.10, Welch's shall ship
Bases from its nearest plant of Base production. If Bases are not so shipped,
Welch's shall be responsible for the excess in freight charges incurred over
what the freight charges would have been if the shipment had been dispatched
from Welch's nearest Base production facility. Title and risk of loss shall pass
to Licensee upon loading on the carrier's vehicle at point of shipment.
8.4 At least thirty (30) days prior to the end of each calendar quarter
for each Agreement Year, Licensee shall provide Welch's with a reasonable good
faith written estimate of the volumes of Bases, by Base, that it will order (for
Eskimo's or Licensee's use or for use of Sublicensees) during the two (2)
calendar quarters following the date of such report. Welch's shall not be
required to sell Licensee volumes of Bases ordered to the extent such volumes
exceed estimates submitted to Welch's under this Section. Welch's shall,
however, in such case, use reasonable efforts, consistent with the requirements
of its other business, to accommodate Licensee's requirements over any estimate
or requirement. Welch's is not under any obligation to accept or ship any orders
received from Licensee if Licensee is overdue, at the time, on any payment owing
to Welch's or is in breach or violation of this Agreement.
ARTICLE IX - QUALITY CONTROL
9.1 Licensee agrees that the Licensed Products sold by it or by any
Sublicensee will be manufactured, sold and distributed in accordance with all
applicable Federal, State and local laws. Licensee agrees that the Licensed
Products to be manufactured and sold under this Agreement shall be, in all
respects, safe and non-injurious, and fit for human consumption. The quality of
the Licensed Products sold by Licensee or any Sublicensee shall meet the Welch's
Standards. Licensee shall, at all times, conduct business in a manner that will
maintain the reputation that Welch's has established in the business community
and with consumers and avoid practices that will reflect unfavorably on Welch's.
9.2 Prior to the first production run of any Licensed Product by
Licensee, Eskimo or any Sublicensee, Licensee shall furnish to Welch's free of
cost, for its written approval, a reasonable number of samples of each Licensed
Product, and any Packaging Material; provided, however, that any Licensed
Products or Packaging Materials which have been approved by Welch's under the
1992 Agreement or the 1985 Agreement need not be resubmitted for approval and
shall be deemed approved without further action on the part of Licensee or any
Sublicensee. Licensed Products, as well as any Packaging Material, not so
previously approved shall be subject to the written approval of Welch's, and any
such Licensed Product, or Packaging Material which is disapproved by Welch's
shall not be sold or distributed by Licensee or by any Sublicensee. Welch's
shall have 10 (ten) business days from the receipt of any Licensed Products to
review and approve - or disapprove - any Licensed Product and any Packaging
Material. If approval or disapproval is not transmitted to Licensee within such
ten (10) day period, approval will be deemed given. After samples have been
approved pursuant to this paragraph, Licensee shall not depart therefrom and
shall ensure that any Sublicensee shall not depart therefrom in any material
respect without Welch's prior written consent. Licensee acknowledges that the
purpose of the approval retained by Welch's under this Article is solely to
ensure the quality of the Licensed Products meets the Welch's Standards.
9.3 From time to time after Licensee or any Sublicensee has commenced
selling the Licensed Products and upon Welch's request, Licensee shall furnish,
without cost, to Welch's additional random samples of each Licensed Product
(from a regular production run or runs) being manufactured and sold by Licensee
or any Sublicensee hereunder, together with any Packaging Material.
9.4 Welch's shall have the right - on reasonable advance written notice
on an annual basis - to have its representatives visit the plant or plants where
the Licensed Products are made and where Packaging Material is printed or
produced in order to determine whether the Welch's Standards are being met.
9.5 Licensee shall supervise the performance of each Sublicensee with
respect to the Licensed Products on a continuing basis and take such action as
may be reasonably necessary and proper to ensure that each Sublicensee complies
with all terms of its Sublicense, including without limitation, the Welch's
Standards. Licensee shall notify Welch's (i) at least quarterly of all known or
apparent failures by Sublicensee and (ii) within five (5) business days after
learning of a known or suspected material failure of any Sublicensee, in either
case to comply with any provision of the Sublicense that may in any way pertain
to or affect the quality of the Licensed Products.
9.6 Licensee shall promptly and professionally respond to any consumer
complaints coming to its attention regarding the Licensed Products. Licensee
shall maintain a separate file available for review and copying by
representatives or attorneys of Welch's containing written communications from
any regulatory agency, consumers, and Sublicensees relating to the Licensed
Products.
9.7 Licensee shall maintain and operate all of its premises, plant
facilities and equipment used in connection with the Bases and Packaging
Material in accordance with applicable laws, rules, regulations, good
manufacturing practices, and the Welch's Standards. Licensee shall immediately
notify Welch's of the presence of any Bases under its control found to be
defective, adulterated, not in good or merchantable condition or otherwise not
in conformity with Welch's specifications. If such Bases cannot be determined by
Welch's to be recoverable or reconditionable or usable for any purpose, the same
shall be destroyed by Licensee at Welch's option; and to the extent such
deficiency, adulteration, condition or non-conformity originated prior to
delivery of such Bases by Welch's to Eskimo or Sublicensee, such destruction
shall be at Welch's expense.
ARTICLE X - USE OF TRADEMARKS
10.1 Except as specifically provided for herein, the Licensee and
Sublicensees shall not use any trademark other than the Trademarks (or such
other trademarks as are approved by Welch's) on or in relation to the Licensed
Products or Packaging Material. The Licensee and Sublicensees shall use the
Trademarks only as provided herein and shall not represent in any manner that
they have any ownership interest in and to the Trademarks or registrations
thereof.
10.2 Welch's represents and warrants to Licensee that Welch's (i) is
the owner of the Trademarks, (ii) has (subject to any license agreements to
which it is a party) exclusive rights in and to the Trademarks and (iii) has not
licensed any Person the right to use the Trademarks in the Territory in
connection with the Licensed Products (or Comparable Products as that term is
defined in Section 2.2) and has no knowledge of any such use. Subject to the
provisions of Section 10.10, Welch's agrees that, during the Term, it shall
maintain, protect and defend the Trademarks, including without limitation the
appropriate registration of the Trademarks. If the Licensee receives notice or
knowledge that its use of the Trademarks may infringe trademarks or other rights
of any third person the Licensee shall, as soon as possible, report to Welch's
in writing the details relating to the potential infringement.
10.3 Based on Welch's warranty made in Section 10.2, Licensee
acknowledges the validity of the Trademarks and any registrations therefor and
Welch's right, title and interest in and to the use of such Trademarks in the
Territory and elsewhere, including Welch's right to register or to have
registered in the Territory and any other jurisdiction all Trademarks.
10.4 Apart from its license rights under this Agreement, Licensee and
Sublicensees shall not acquire any right, title or interest in or to the use of
the Trademarks during or after the Term.
10.5 All use of the Trademarks by Licensee and Sublicensees shall inure
to the benefit of Welch's. Licensee agrees that it will not otherwise apply
anywhere or any time for any registration as owner or exclusive licensee of the
Trademarks. If, notwithstanding this Agreement Licensee develops, adopts or
acquires, directly or indirectly, any right, title or interest in or to the use
of the Trademarks, or in any trademark similar either graphically or
phonetically to the Trademarks, Licensee will at Welch's request assign to
Welch's or any designee of Welch's any right, title and interest in and to the
use of the Trademarks or trademarks in any and all such jurisdictions together
with any goodwill incident to such Trademarks or trademarks. The obligations of
this paragraph shall survive the expiration of this Agreement or any termination
of this Agreement by either party and for whatever cause. No consideration other
than the mutual covenants and considerations of this Agreement shall be
necessary for any such assignment, transfer or conveyance.
10.6 Licensee and Sublicensees shall use the Trademarks only on or in
relation to the Licensed Products and Packaging Material. Licensee and
Sublicensees shall display the Trademarks only in such form and style and with
such notice of registration as may be agreed on in writing by Welch's. Licensee
shall comply, and require each Sublicensee to comply, with any requirements
issued from time-to-time by Welch's with respect to the use of the Trademarks.
10.7 If any act or failure to act by Licensee which in the reasonable
opinion of Welch's constitutes a danger to the value or validity of Welch's
ownership of or rights in the Trademarks, Welch's may in lieu of or in addition
to any other remedy available to it (including termination of this Agreement
which remedy is subject, however, to Licensee's right to cure as provided in
Section 14.1) give notice to Licensee describing the danger and may suspend in
whole or in part (effective on Licensee's receipt of the notice) the rights of
Licensee to use the Trademarks. The suspension shall continue until Welch's has
reasonably determined that the danger no longer exists.
10.8 Licensee and Sublicensees shall not use or adopt, during the Term
of this Agreement nor at any time thereafter, in its business, in its business
name, in its trading style, or in any of its services or on any of its products
any trademark, service mark, name style or dress which is so similar to, or so
nearly resembles any of the Trademarks, as to be likely to or as to be
calculated to cause deception or confusion, or which is graphically or
phonetically similar to any of the Trademarks. If Licensee does at any time
adopt or use any trademark, service mark, name, dress or style in breach of this
clause, Licensee will immediately, on notice from Welch's, discontinue that
adoption or use.
10.9 Licensee agrees to promptly give notice in writing to Welch's of
any infringements or suspected or threatened infringements, imitations, illegal
use or misuse in the Territory of the Trademarks which come to the Licensee's
attention. However, Licensee shall not at any time take any action in the
courts, administrative agencies, or arbitration tribunals to prevent the
infringement or imitation, illegal use or misuse of any of the Trademarks, it
being clearly understood and agreed to by Licensee that such action falls wholly
within the authority of Welch's as sole owner of the Trademarks. Welch's may
decide in its absolute discretion whether and what steps should be taken to
prevent or terminate such infringements including the institution of legal
proceedings where required.
10.10 Welch's will have sole control over and will conduct any
action(s) as it deems necessary pursuant to this Article. Licensee undertakes,
at Welch's expense, fully and without reservation whatsoever to render to
Welch's all assistance in connection with any matter pertaining to the
protection of the Trademarks, including, but not limited to furnishing
documents, records, files and other information, making available its employees,
executing all necessary documents and its consent to be joined as a party to any
legal proceedings as Welch's may reasonably request.
10.11 Upon the termination of this Agreement, Licensee, Eskimo and
Sublicensees shall immediately cease and desist from all use of the Trademarks
except as specifically provided for in Article XV.
ARTICLE XI - PACKAGING MATERIALS
11.1 In connection with the sale, offer for sale, advertising and
promotion of the Licensed Products, Licensee shall only use, or authorize
Sublicensees to use Packaging Material approved by Welch's in writing, which
approval shall cover the artwork and Trademark usage thereon.
11.2 Licensee shall make available to Sublicensees such approved
Packaging Material or authorize, in writing, Sublicensees to purchase such
approved Packaging Material from qualified suppliers approved by Licensee, in
accordance with the terms of the Sublicense.
11.3 Licensee shall not develop or permit the development by any
Person, of new Packaging Material without the express written consent of
Welch's; all such Packaging Material developed shall, notwithstanding their
invention, creation or use by Licensee or any Person, remain the property of
Welch's who shall not use or license the use of said Packaging Material within
the Territory during the Term of this Agreement. The parties agree that any new
Packaging Material developed by Licensee or other Person is work specifically
commissioned by Welch's and shall be considered a work-made-for-hire within the
meaning of the Copyright Revision Act of 1976 (as amended) and that Welch's
shall be considered the author of any Packaging Material and is entitled to all
rights to which an owner of copyright is entitled under this Act, or the
copyright law of any country, including the right to revise and supplement the
Packaging Material or any portion(s) thereof. To the extent any Packaging
Material is not or cannot be work-made-for-hire, Licensee hereby agrees, upon
request and without further consideration, to execute or obtain execution from
all necessary parties, an assignment transferring to Welch's all rights, title
and interest in and to all or any portion(s) of the Packaging Material, and
provide such instruments of transfer or other documents to Welch's; should
Licensee refuse or fail to execute such instruments of transfer or other
documents, Licensee herein appoints Welch's as its attorney in fact for the
limited purpose of executing such instruments and documents on Licensee's
behalf.
11.4 Licensee shall apply such copyright or other notice to any
approved Packaging Material as may be required by Welch's, and shall cooperate
with Welch's in the execution, filing and prosecution of any trademark or
copyright applications that Welch's, at its own expense, may desire to file.
ARTICLE XII - SUBLICENSING
12.1 A Person shall become a Sublicensee (or a Sublicensee previously
approved in accordance with the 1992 Agreement may continue or renew its
Sublicense without further approval) and may purchase Bases from Licensee only
by executing the Sublicense as set forth in Schedule C. Before Licensee or
Eskimo shall undertake to enter into a Sublicense with a Sublicensee not already
approved in accordance with the 1992 Agreement ("New Sublicensee"), it shall
obtain Welch's written consent to the identity of the proposed New Sublicensee.
Welch's shall be provided with such information regarding proposed sublicensees
as it may reasonably request and is available to Licensee at the time of the
report. Licensee or Eskimo shall offer to sublicense and shall sublicense only
under the Sublicense. It is agreed that Welch's shall be recognized as and have
the status of a third party beneficiary under each Sublicense. No Sublicense
between Licensee or Eskimo and a New Sublicensee of the Trademarks shall be
effective until Welch's approves such New Sublicensee. Without the express
written consent of Welch's, no modification by way of addition or deletion shall
at any time be made to those provisions of any Sublicense referenced on Schedule
J, nor shall any addition be made at any time to the Sublicense that in any way
derogates from any of the provisions referenced on Schedule J or from any
provision of this Agreement. If the operation of a Sublicensee is proposed to be
extended to another facility owned by a Sublicensee, Welch's shall have the
right to approve the extension in advance as if a new proposed Sublicensee were
involved.
12.2 No provision of a Sublicense shall relieve Licensee or Eskimo from
any obligation owed to Welch's under this Agreement or by operation of law or
equity.
12.3 Licensee shall make reasonable efforts to identify and investigate
the capacity of potential Sublicensees and to exploit the business contemplated
by this Agreement through the vehicle of sublicensing the Trademark to achieve
and maintain distribution and market penetration for the Licensed Products via
channels and customary outlets for similar products in the Territory. In
furtherance thereof, Licensee shall direct its attention to financially capable
Persons that have experience in the manufacture and sale of quality products,
that are able to satisfy the demand in the market to be served in terms of
personnel, plant and equipment and that are otherwise able to perform under the
Sublicense. In its selection of Persons, Licensee shall consider not only the
qualifications of the proposed Sublicensee, but also the market to be involved
to assure effective representation and maximum distribution and market
penetration.
12.4 Except as otherwise provided herein, Licensee shall have sole
responsibility for the supervision of the Sublicensees with respect to the
Licensed Products and the administration of the sublicense system. Except when
and to the extent that any of the same may by occasioned by the acts or
omissions of Welch's concerning the Bases or its handling of the Bases or in the
event of an infringement action relating to the use of the Trademarks so long as
such use has been approved by Welch's and is in accordance with the terms and
conditions of this Agreement, Licensee agrees that Welch's shall have no
liability to any person with respect to any agreement or transaction between
Licensee and any Sublicensee, proposed sublicensee, or any third party.
12.5 Inasmuch as the Trademarks stand for products of quality and
uniformity, it is essential that the Welch's Standards be maintained at all
times in order to preserve the value and reputation of the Trademarks and to
assure the success of the business contemplated under this Agreement.
Accordingly, each Sublicensee is required under its Sublicense to manufacture,
package, handle and distribute the Licensed Products in conformity with the
Welch's Standards. Licensee undertakes full and complete responsibility for
maintaining product quality under the Welch's Standards and assuring that the
Sublicensees comply with the Welch's Standards in every particular and the
requirements of their Sublicensees; provided, however, that Welch's shall have
the right to exercise to the extent it may deem appropriate the rights reserved
in the Sublicense.
12.6 Each Sublicense shall be executed in triplicate with one copy each
provided to Welch's, Licensee and the Sublicensee.
12.7 A Sublicense or the right of a Sublicensee to produce under a
Sublicense at a particular facility may be terminated independently by either
Welch's or Licensee after consultation with the other. Welch's agrees that it
shall refrain from effecting terminations for a cause other than one involving
the quality of the Licensed Products or the protection or appropriate use of the
Trademarks as established or required by the Welch's Standards or the
Sublicense; in other cases, termination shall be effected by the Licensee. If,
after consultation with Licensee, Welch's decides to terminate any Sublicense it
shall not, while Licensee is performing under the requirement below, communicate
notice of termination (the "Notice") directly to the Sublicensee involved.
Rather, Welch's shall communicate the Notice to Licensee and Licensee shall
dispatch the Notice to the Sublicensee, with a copy to Welch's, within 24 hours
of receipt of the Notice from Welch's. If for any reason the Notice is not
dispatched by Licensee to the Sublicensee within such 24 hour period, Welch's
shall be free to communicate the Notice directly to the Sublicensee.
ARTICLE XIII - BANKRUPTCY
13.1 If a petition in bankruptcy is filed by or against Licensee or
Eskimo, or if Licensee or Eskimo becomes insolvent, or makes an assignment for
the benefit of its creditors or an arrangement pursuant to any bankruptcy law,
or if Licensee or Eskimo discontinues its business or if a receiver is appointed
for it or its business, to the fullest extent permitted by law at the time of
the occurrence, the license hereby granted shall automatically terminate
forthwith without any notice whatsoever being necessary. In the event that this
license is so terminated, Licensee and Eskimo, their receivers, representatives,
trustees, agents, administrators, successors, and/or assigns shall have no right
to sell, exploit or in any way deal with or in any Licensed Products covered by
this Agreement or any Packaging Material, except with and under the special
consent and instructions of Welch's in writing, which they shall be obligated to
follow.
13.2 In the event of an appointment of a trustee in bankruptcy for
Welch's, assignment of assets for the benefit of Welch's creditors, any levy of
execution involving the license herein granted, adjudication of Welch's
bankruptcy, or rejection of the license herein granted by such trustee, Licensee
shall retain it rights hereunder. Rejection of this Agreement by such trustee
shall constitute grounds for termination of this Agreement by Licensee upon
thirty days written notice to Welch's.
ARTICLE XIV - BREACH OR DEFAULT
14.1 If Licensee or Eskimo breaches any warranty or covenant or fails
to perform any of its respective obligations under the terms of this Agreement,
including without limitation any breach or default based upon any Sublicensee's
failure to perform, or breach of Sublicensee's obligations, under its respective
Sublicense, Welch's shall have the right to terminate the Agreement upon twenty
(20) days notice in writing, subject to Licensee's and Eskimo's right to cure
any such breach or default as hereinafter provided. If Licensee or Eskimo
completely remedies the breach or default within the twenty (20) day period and
satisfies Welch's that the failure or breach has been remedied, or if such
breach or default cannot be cured with due diligence within twenty (20) days,
and Licensee or Eskimo shall have commenced curing such breach or default with
due diligence and shall proceed thereafter with due diligence and good faith to
complete the curing thereof promptly, such breach or default shall not give
Welch's the remedy of terminating this Agreement. Further provided, that Welch's
shall have no right to terminate this Agreement based upon any Sublicensee's
failure to perform, or breach of, its obligations under its respective
Sublicense as long as following notice by Welch's to Licensee or Eskimo of such
default or breach by Sublicensee, Licensee or Eskimo cures such breach or
default in accordance with the terms of this Article, which cure may, to the
extent necessary, be effected by termination of the affected Sublicensee's
Sublicense. Termination of the Agreement under the provisions of this Section
14.1 shall be without prejudice to any rights which Welch's may otherwise have
against Licensee.
14.2 If Welch's breaches any warranty or covenant or fails to perform
any of its obligations under the terms of this Agreement, Licensee shall have
the right to terminate the Agreement upon twenty (20) days notice in writing,
subject to Welch's right to cure any such breach or default as hereinafter
provided. If Welch's completely remedies the breach or default within the twenty
(20) day period and satisfies Licensee that the failure or breach has been
remedied, or if such breach or default cannot be cured with due diligence within
twenty (20) days, and Welch's shall have commenced curing such breach or default
with due diligence and shall proceed thereafter with due diligence and good
faith to complete the curing thereof promptly, such breach or default shall not
give Licensee the remedy of terminating this Agreement. Termination of the
Agreement under the provisions of this Section 14.2 shall be without prejudice
to any rights which Licensee may otherwise have against Welch's.
ARTICLE XV - OBLIGATIONS OF LICENSEE
UPON TERMINATION OR EXPIRATION
15.1 Upon expiration of the Agreement or its termination for any
reason:
a. Any indebtedness which may then be owing by one party to
another shall become due and payable immediately;
b. Licensee's obligation to pay any Additional License Fee
installment, the due date of which has not yet occurred, shall cease; and
c. Except as provided in Section 15.2, Licensee, Eskimo and
Sublicensees shall immediately discontinue the use of the Trademarks in
connection with the Licensed Products, its corporate or other business names and
any other manner or use whatsoever.
15.2 Licensee, Eskimo and Sublicensees shall be permitted, on a
non-exclusive basis, to balance-out all remaining inventory of Bases and
Packaging Materials for a period of six (6) months after such expiration or
termination ("Work-out Period"), as long as the Licensed Products and Licensee,
Eskimo and Sublicensees meet the Welch's Standards and other obligations of this
Agreement. The end of the Work-Out Period shall be referred to as the
Termination Date; provided, however, that any Licensed Product covered by this
Agreement remaining in inventory upon the Termination Date which is in
conformance with the Welch's Standards may be sold off.
For purposes of this Agreement, "balance-out" shall mean purchasing and
selling Bases, Packaging Materials, and other materials that are required to
concurrently use up existing Bases, Packaging Materials, and other materials
which are used in the manufacture, distribution and sale of the Licensed
Products (with inventory levels established in good faith by Licensee, Eskimo
and Sublicensees).
15.3 In the event this Agreement, or any Sublicense, is terminated in
accordance with its terms (i) based on Licensee's, Eskimo's or any Sublicensee's
failure to affix notice of copyright, trademark or service mark registration, or
any other notice required under this Agreement on the Licensed Products or
Packaging Material, (ii) based on non-compliance by Licensee, Eskimo or any
Sublicensee with the Welch's Standards, or (iii) because the Licensed Products
are found to be unsafe for public use or consumption or toxic or hazardous the
public health or safety, Licensee, Eskimo and the affected Sublicensee(s) shall
destroy all non-complying Licensed Products or Packaging Material within
fourteen (14) days of receipt of notice of termination ("Destruction Period"),
and an Affidavit based on personal knowledge attesting to such destruction in a
form acceptable to Welch's shall be supplied. If Welch's does not receive such
an Affidavit within five (5) business days following the end of the Destruction
Period Welch's shall have the right, in addition to all other rights and
remedies, to enter Licensee's, Eskimo's or the affected Sublicensee(s) premises
and remove any such Licensed Products or Packaging Materials.
ARTICLE XVI - EFFECT OF TERMINATION OR EXPIRATION
Upon the termination or expiration of this Agreement, all rights
granted to Licensee and Eskimo hereunder shall forthwith revert to Welch's, who
shall be free, inter alia, to use for its own account or to license others to
use the Trademarks in connection with the manufacture, sale, distribution and
promotion of the Licensed Products within the Territory, and Licensee will
refrain from further use of the Trademarks or any further reference to them,
direct or indirect, in connection with the manufacture, sale, distribution or
promotion of the Licensed Products, except as provided in Article XV.
ARTICLE XVII - INDEMNIFICATION BY LICENSEE,
PRODUCT LIABILITY INSURANCE AND OTHER OBLIGATIONS
17.1 Licensee and Eskimo shall indemnify and hold harmless Welch's and
its officers, directors, employees and agents from any liability, loss, expense
(including reasonable attorneys' fees and disbursements) or claim by any third
party resulting from or arising out of (i) any breach by Licensee or Eskimo of
any warranties, covenants or agreements in the performance of its respective
obligations under this Agreement; or (ii) any actual or alleged injury, damage
or death to any person or property arising or resulting out of the distribution
and sale or the use or consumption of the Licensed Products manufactured and
sold under this Agreement; provided, however, Licensee's or Eskimo's respective
obligations hereunder shall in no way require defense or indemnification
regarding any liability, loss, expense or claim to the extent that the same
arises out of (x) any breach by Welch's of any warranties, covenants or
agreement in the performance of its obligations under this Agreement; (y) any
act or omission of Welch's with respect the Bases or (z) any allegations that
the Trademarks as used on the Licensed Products infringe any valid patent,
trademark, trade name, design or copyright or application therefor or
registration thereof (so long as such use was approved by Welch's and was in
accordance with the terms and conditions of this Agreement).
17.2 Welch's shall indemnify and hold harmless Licensee, Eskimo and
their respective officers, directors, employees and agents from any liability,
loss, expense (including reasonable attorneys' fees and disbursements) or claim
by any third party resulting from or arising out of (i) any breach by Welch's of
any warranties, covenants or agreements in the performance of its obligations
under this Agreement; (ii) any act or omission of Welch's with respect the Bases
or (iii) any allegations that the Trademarks as used on the Licensed Products
infringe any valid patent, trademark, trade name, design or copyright or
application therefor or registration thereof (so long as such use was approved
by Welch's and was in accordance with the terms and conditions of this
Agreement).
17.3 At their own expense, each of the parties hereto shall maintain,
with insurers acceptable to the other, comprehensive general liability
insurance, including, but not limited to, product liability and contract
liability coverage of minimum limits of not less than $5,000,000 for each person
and $10,000,000 for each accident or occurrence with the other named as an
additional insured. The policies for such insurance shall contain vendor's
coverage and require the insurer to give Welch's and Licensee 30 days' prior
written notice of any reduction in coverage, cancellation or termination of such
insurance. Certificates of such insurance shall be sent by each to the other
and, upon a party's request, copies of such policies shall be delivered to the
other.
17.4 Except as any of the same may be required with respect to the
Bases, if any approvals, permits, licenses, registrations or the like are
required to be obtained or maintained or governmental fees paid relative to any
facet of the business contemplated by this Agreement, Welch's shall have no
responsibility and shall bear no expense in connection with the same and all
requirements in connection therewith shall be accomplished appropriately by
Licensee.
17.5 If in relation to the conduct of any part of the business
contemplated by this Agreement any regulatory agency inquiries, directives or
challenges shall develop or formal proceedings or any other type of involvements
should arise on account of the acts or omissions of Licensee, it shall be
Licensee's responsibility to resolve, respond to, comply with or defend same
appropriately at its own expense. Notwithstanding, Licensee shall not enter into
any compromise, settlement or resolution of any such matter which would
prejudice the rights of, or operate to the detriment of, Welch's without
notifying and consulting with Welch's as to the impact of the activity. At its
election, Welch's may, at its own expense, undertake to intervene in any such
matter or to assume control of the matter. In such case, Licensee shall render
all reasonable assistance that may be required by Welch's.
ARTICLE XVIII - DISPUTE RESOLUTION PROCEDURES
The parties agree to use their best efforts to reach agreement with
respect to matters that this Agreement obligates them to agree upon
prospectively and to resolve all disputes relating to this Agreement by mutual
agreement. If the parties are unable to agree upon such matters or resolve such
disputes within 30 days then the matter shall be presented to the President of
Welch's and the President of Eskimo. Such officers shall negotiate in good faith
with a view toward reaching a resolution of the matter that is mutually
acceptable to the parties. If the matter has not been resolved within 30 days
after it has been submitted to such officers and the matter involves the failure
to agree upon an Annual Business Plan or an alternative method of stating the
Floor Amount or the Volume Targets pursuant to Section 4.3, the parties shall
submit the matter for mediation to a mutually acceptable mediator and the
results of such mediation shall be binding upon the parties. If the matter has
not been resolved within 30 days after it has been submitted to such officers
and the matter involves anything other the matters referred to in the preceding
sentence, any party shall be entitled to seek judicial relief from any court
described in Section 19.8. Further provided, however, that if the matter or
dispute relates to quality of the Licensed Products or protection and
appropriate use of the Trademarks as established or required by the Welch's
Standards or this Agreement, this Article shall not be construed to prevent
Welch's from first seeking injunctive relief or terminating this Agreement in
accordance with its terms.
ARTICLE XIX - MISCELLANEOUS
19.1 All notices and statements required under this Agreement shall be
in writing addressed to the parties as set forth below (or such other address as
any party shall notify the others in writing) and shall be sent certified mail,
return receipt requested, by overnight delivery service that provides evidence
of receipt, or by facsimile with a confirmation copy sent by such overnight
delivery service. The date of mailing or sending shall be deemed the date the
notice or statement is given.
If to Welch's:
Welch Foods, Inc.
Three Concord Farms
575 Virginia Road
Concord, Massachusetts 01742
Attn: Legal Department
If to Licensee or Eskimo:
Eskimo Inc.
901 Moorefield Park Drive
Richmond, Virginia 23236
Attn: President
19.2 Licensee shall not represent itself as the agent or legal
representative of Welch's for any purpose whatsoever, and shall have no right to
create or assume any obligation of any kind, express or implied for or on behalf
of Welch's in any way whatsoever. This Agreement shall not create or be deemed
to create any agency, partnership, franchise or joint venture between the
parties.
19.3 (a) This Agreement is personal to Licensee and, other than as set
forth below, shall not be assigned by Licensee in any manner, whether by
operation of law or otherwise, or in the event of a Change in Control (as
defined below), except with the prior written consent of Welch's which consent
shall not be unreasonably withheld. Any assignment in violation of the preceding
sentence shall be null and void and shall result in termination of this
Agreement. This Agreement or the rights and duties hereunder may, however, be
assigned by Licensee to Eskimo or to any other affiliate of Eskimo which is
wholly-owned by Eskimo ("Affiliate").
(b) For purposes of this Agreement, a Change in Control means (i) a
merger, consolidation or share exchange in which Eskimo or an Affiliate is not
the surviving or continuing corporation or (ii) the sale or transfer of
substantially all of Eskimo's assets or earning power to a third party.
(c) In the event of a proposed Change in Control, Licensee will,
consistent with its other obligations under such circumstances, notify Welch's
of such proposed Change in Control and the identity of the party proposing to
acquire control of Eskimo ("Potential Acquiror"). Welch's agrees to evaluate, in
good faith, the suitability of the Potential Acquiror to exploit the business
contemplated under this Agreement. Based on such evaluation, Welch's shall,
within 30 days of notice of such proposed Change in Control, notify Licensee and
Eskimo whether or not it approves the Potential Acquiror. If Welch's approves
the Potential Acquiror, Welch's shall consent to the assignment to and/or
assumption of this Agreement on its current terms by the Potential Acquiror and,
in the event the proposed Change in Control is consummated, this Agreement shall
be so assigned and assumed by the Acquiror effective upon such consummation.
(d) If Welch's does not approve the Potential Acquiror and therefore
notifies Licensee and Eskimo in writing that it will not consent to the
assignment and/or assumption of this Agreement by the Potential Acquiror, this
Agreement shall terminate effective upon the date of the consummation of the
Change in Control with such Potential Acquiror. If such Change in Control is one
occurring at any time prior to August 1, 2000 and Welch's, at any time within 12
months following such termination of this Agreement, licenses a third party
("New Licensee") the exclusive right to use the Trademarks in connection with
the Licensed Products ("New License") on financial terms that are equally as or
more favorable to Welch's than the terms of this Agreement as determined in this
Section, Welch's shall be entitled to retain only the pro rata portion of the
Initial License Fee calculated in accordance with (e) below.
The New License shall be deemed to be on financial terms
equally as or more favorable to Welch's if the "Equivalent Rate" of the New
License Fee (as hereinafter defined) equals or exceeds $283,333. The Equivalent
Rate shall be the quotient resulting from dividing the total new license fee to
be paid to Welch's by New Licensee during or with respect to the first two years
of the term of the New License (regardless of designation or method or form of
payment) ("New License Fee") divided by three. Welch's agrees to notify Licensee
prior to the execution of a New License of the terms and conditions of any New
License and to provide Licensee with all information necessary for Licensee to
determine the Equivalent Rate.
(e) The portion of the Initial License Fee which Welch's shall be
entitled to retain shall be an amount equal to the product of the Initial
License Fee times a fraction, the numerator of which is the number of full
months which have elapsed from the Effective Date up through the date of
termination hereunder and the denominator of which is 24. Welch's shall refund
to Licensee or its successor the balance of the Initial License Fee which it is
not entitled to retain hereunder within 15 days of the grant of such New License
to a New Licensee under (d) above.
(f) This Agreement may be assigned by Welch's without any consent of
Eskimo; provided, however, if Welch's assigns this Agreement (including an
assignment by operation of law) without obtaining the consent of Eskimo,
Licensee shall have the right to terminate this Agreement upon written notice to
Welch's.
19.4 This Agreement is intended by the parties as a final and complete
expression of their agreement, and supersedes any and all prior and
contemporaneous agreements and understandings relating to it, including without
limitation, the 1992 Agreement which shall terminate automatically effective
upon the execution of this Agreement; provided, however, all Sublicenses entered
into prior to the Effective Date shall remain in full force and effect until
otherwise modified or terminated in accordance with their terms, and this
Agreement does not change, or affect Welch's status as a third party beneficiary
of any such Sublicense. Welch's agrees that (i) concurrent with the execution of
this Agreement it will refund to Eskimo $41,667, representing the ratable
portion of the license fee prepaid by Eskimo for 1998 under the 1992 Agreement
that will remain unearned at the termination of the 1992 Agreement and (ii)
Eskimo shall have no further obligation or liability under Section 3.5 of the
1992 Agreement.
19.5 This Agreement may not be modified and none of its terms may be
waived, except in writing signed by both parties. The failure of either party to
enforce, or the delay by either party in enforcing, any of its rights shall not
be deemed a continuing waiver or a modification of this Agreement. In construing
and enforcing this Agreement, neither party shall be considered the drafter of
this Agreement.
19.6 If any part of this Agreement shall be declared invalid or
unenforceable by a court of competent jurisdiction, it shall not affect the
validity of the balance of this Agreement.
19.7 The headings of the paragraphs are for convenience only and in no
way limit or affect the provisions hereof.
19.8 This Agreement shall be governed by and interpreted in accordance
with the law of the Commonwealth of Virginia. Each of the parties hereby agrees
that any suit, action, or proceeding arising out of this Agreement may be
instituted against it in the United States District Court for the District of
Massachusetts or the United States District Court for the Eastern District of
Virginia (assuming such court has jurisdiction over such suit, action or
proceeding). Each of the parties hereby waives any objection that it may have to
the venue of any such suit, action, or proceeding, and each of the parties
hereby irrevocably consents to the jurisdiction of any such court in any such
suit, action or proceeding.
19.9 Each party acknowledges that all information relating to the
business and operations of the other which is disclosed to the other or which
the other learned during the pendency of the 1992 Agreement, the 1985 Agreement
or learns during the Term, including without limitation, data experience,
formula, methods, processes, techniques, business plans, product development and
know-how whether of a technical, engineering, operational or business nature
relating to the use, manufacture, storage, handling, sale, licensing and
distribution of the Bases and the Licensed Products, is the valuable,
proprietary information of the other ("Confidential Information"). Each party
acknowledges the need to preserve the secrecy and confidentiality of the other's
Confidential Information, and agrees that, during the Term of this Agreement and
after termination thereof, neither party shall use or disclose the Confidential
Information of the other except as is necessary for each party to perform its
obligations under this Agreement. Each party shall take reasonable steps to
ensure such confidentiality and secrecy, and each party agrees to indemnify the
other against any damage which may be suffered by the other as of result of a
willful breach of this Section. Upon any Termination Date, each party shall upon
the request of the other deliver promptly to the other all documents containing
such party's Confidential Information that are in the possession and control of
the other party.
19.10 Whenever performance by a party of any of its obligations
hereunder, other than the payment of money due, is substantially or completely
interrupted or prevented by reason of an act of God, strike, lockout, labor
trouble or other industrial disturbance, transportation dislocation, shortage of
supply, late or misdelivery of supplies, casualty, civil strife or a
circumstance beyond the reasonable and good faith control of the party required
to act, such performance shall be excused for the period during which such state
of affairs continues. In addition, Welch's shall have the right, in cases when
short grape crops are a negative factor in terms of Welch's meeting commitments,
to limit the availability of Bases and to allocate grape ingredients among its
products on a proportional reduction basis; provided, however, that in the event
of such a reduction, the Floor Amount and Volume Targets for the Agreement Year
in which such reduction occurs shall be reduced by a corresponding amount.
19.11 Each party represents and warrants to the other that it has full
power and authority to enter this Agreement and that execution and performance
of this Agreement shall not conflict with or affect any existing agreements with
or commitments with other parties.
19.12 Each of the parties shall execute and deliver to, or cause to be
executed and delivered to, the other party, such further instruments, or take
such other action as may reasonably be requested of it hereunder to consummate
more effectively the transactions contemplated hereby.
19.13 This Agreement may be executed simultaneously in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instruments.
19.14 Eskimo hereby guarantees to Welch's that Licensee shall perform
all of its obligations hereunder in accordance with the terms of this Agreement
and Eskimo hereby agrees to be bound by all the provisions of this Agreement
applicable to Licensee to the same extent as Licensee.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed as of the day and year first above written.
ESKIMO INC.
By: /s/ David B. Kewer
---------------------------------------
Title: President and Chief Executive Officer
ESKIMO PIE CORPORATION
By: /s/ David B. Kewer
---------------------------------------
Title: President and Chief Executive Officer
WELCH FOODS INC., A COOPERATIVE
By: /s/ Daniel P. Dillon
---------------------------------------
Title: President
<PAGE>
Schedules
---------
Schedule A Trademarks
Schedule B Existing Products
Schedule C Sublicense Agreement
Schedule D Payment Schedule for Additional License Fee
Schedule E Core Business Volume Targets
Schedule F New Business Volume Targets
Schedule G Formula for Payment in Event of Shortfall
Schedule H Formula for Calculation of Net Profit Contribution
Post-Royalty
Schedule I Welch's Pricing and Payment Terms
Schedule J Provisions of Sublicense to be Modified only with
Welch's Consent Pursuant to Section 12.1
<PAGE>
Schedule A
TRADEMARKS
The Trademarks are:
1. WELCH'S
2. WELCH'S (Design) - as per attached
3. WELCHADE
<PAGE>
Schedule B
EXISTING PRODUCTS
The Licensed Products consist of:
1. Grape juice bars containing 30% grape juice.
2. Raspberry juice bars containing 30% fruit juice (of which 5% is
raspberry).
3. Strawberry juice bars containing 30% fruit juice (of which 5% is
strawberry).
4. Grape, raspberry and strawberry juice bars as described above made
from no-sugar-added bases and containing aspartame or other non-nutritive
sweetener(s) approved by Welch.
5. "Tropical Blends" juice bars consisting of the following flavors:
strawberry banana juice bars; pineapple juice bars; and orange pineapple banana
juice bars.
<PAGE>
Schedule C
SUBLICENSE AGREEMENT
Sublicense Agreement under 1992 Agreement to be modified
to make changes necessary to conform to this Agreement
<PAGE>
<TABLE>
Schedule D
Additional License Fee Due
under the Master License Agreement, dated August 1, 1998, between
Welch Foods, Inc.; Eskimo Inc. and Eskimo Pie Corporation
<CAPTION>
Calendar Imputed Present Value
Year Interest Payment Date Payment Amount at June 30, 1998
---- -------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
1998 $29,290
1999 58,580
2000 58,580
2001 58,580
2002 58,362 July 1, 2002 $157,271.34 $115,599.13
2003 54,200 July 1, 2003 157,271.34 107,036.23
2004 45,955 July 1, 2004 157,271.34 99,107.62
2005 37,049 July 1, 2005 157,271.34 91,766.32
2006 27,431 July 1, 2006 157,271.34 84,968.81
2007 17,044 July 1, 2007 157,271.34 78,674.83
2008 5,828 July 1, 2008 157,271.34 72,847.06
--------------
$650,000.00
</TABLE>
<PAGE>
Schedule E
CORE BUSINESS VOLUME TARGETS*
Agreement Year One 87.5% of the actual Base
purchases** for Existing
Products (including Club Store
business**) in calendar year
1998
Agreement Years Two - Ten 87.5% of the actual Base
purchases** for Existing
Products (including Club Store
business**) in the immediately
preceding Agreement Year
- ------------------------
*Targets are stated in terms of purchases of Base pail equivalents with a "pail"
being equivalent to 4.75 gallons of Base. The Core Business Volume Targets
together with the New Business Volume Targets are subject to adjustment to the
extent necessary to generate collectively the Minimum Amount pursuant to Section
4.1.
**In determining actual Base purchases for purposes of calculating Core Business
Volume Targets, if club store business accounts for more than 15% of Base
purchases in any one year, then, prior to calculating the Core Business Volume
Target, the actual Base purchases for such year shall be reduced by the amount
necessary to reflect the Base purchases that would have resulted if club store
business had accounted for only 10% of such Base purchases
<PAGE>
Schedule F
NEW BUSINESS VOLUME TARGETS
First and Second Year of New Product None
Third through Fifth Year of New Product 87.5% of the Annual Business
Plan Volume for the New Product
for such years
Remaining years during Term of New Product 87.5% of the actual volume
relating to such New Product in
the immediately preceding year
<PAGE>
<TABLE>
Schedule G
Calculation of Payment Required to Cure Minimum Volume Shortfall
under the Master License Agreement, dated August 1, 1998, between
Welch Foods, Inc.; Eskimo Inc. and Eskimo Pie Corporation
<CAPTION>
Core Business New Business
--------------- ----------------
<S> <C> <C>
Minimum Volume Targets - expressed in Base pail equivalents (as
determined under Article 4.1 and Schedules E and F of the Master
License Agreement)
--------------- ----------------
less: Actual Base pail equivalent Purchases (inclusive of
pails purchased for sale to the Club Store business)
--------------- ----------------
equals: Volume Shortfall - expressed in Base Pails
--------------- ----------------
times: Welch's Standard Contribution Margin (*)
--------------- ----------------
Payment Required to Cure Minimum Volume Shortfall
--------------- ----------------
(*) Calculation of Welch's Standard Contribution Margin
- -------------------------------------------------------------------
Base Pail Sales Price
-----------
less: Material Cost
-----------
Direct Labor
-----------
Fixed Plant Overhead
-----------
equals: Welch's Standard Contribution Margin
---------------
</TABLE>
<PAGE>
<TABLE>
Schedule H
Formula for Calculating the Net Contribution (Post-royalty)
under the Master License Agreement, dated August 1, 1998, between
Welch Foods, Inc.; Eskimo Inc. and Eskimo Pie Corporation
<CAPTION>
Eskimo and Welch's
Licensee,
Consolidated
--------------- ------------------
<S> <C> <C>
Sales Revenues (for Eskimo, includes cartons, wraps, base concentrate and any
other items sold by Eskimo in relation to Welch's Licensed Products; for
Welch's, includes base concentrate and any other items sold by Welch's in
relation to Licensed Products)
--------------- ------------------
Cost of Goods Sold (includes materials, direct labor and freight only;
excludes plant and administrative overhead absorption) ( ) ( )
--------------- ------------------
Advertising & Sales Promotion Expense (actual Eskimo expenditures)
( ) ( )
---------------
Welch's Contribution to Advertising & Sales Promotion Expense ( )
--------------- ------------------
Amortization of License Fee ( 150,000) 150,000
--------------- ------------------
Imputed Interest on Licensee Fee ( )
--------------- ------------------
Adjustment to Account for New Business Margin Differential (to account for
distribution of profits from products in which Base is not an essential
ingredient) ( )
--------------- ------------------
Net Contribution (Post-royalty) from Annual Business Plan
--------------- ------------------
Expected Profit Split from Annual Business Plan
--------------- ------------------
Target Profit Split - calculated under the sublicensing method of product 60% 40%
manufacturing
Approved by:
- --------------------------------- ------------------------------------
Dated: Dated:
- --------------------------------- ------------------------------------
President President
Eskimo Pie Corporation Welch Foods Inc., A Cooperative
</TABLE>
<PAGE>
Schedule I
WELCH'S PRICING and
PAYMENT TERMS
Product Code Flavor Size (Gallons) Price
------------ ------ -------------- -----
770 Pineapple 4.75 $ 104
771 Pineapple 50 $ 1067
772 Strawberry-Banana 4.75 $ 104
773 Strawberry-Banana 50 $ 1067
774 Orange-Pineapple-Banana 4.75 $ 104
775 Orange-Pineapple-Banana 50 $ 1067
785 Raspberry 4.75 $ 112
786 Raspberry 50 $ 1147
787 Strawberry 50 $ 1067
796 Strawberry 4.75 $ 104
798 Grape 50 $ 1067
830 NSA Grape 4.75 $ 104
831 NSA Grape 50 $ 1067
832 NSA Strawberry 4.75 $ 104
833 NSA Strawberry 50 $ 1067
834 NSA Raspberry 4.75 $ 112
835 NSA Raspberry 50 $ 1147
869 Grape 4.75 $ 104
Payment Terms are 2% 10 days, Net 30 days.
<PAGE>
Schedule J
Provisions of Sublicense to be Modified only with Welch's Consent
Pursuant to Section 12.1
Article I - Definitions (except 1.1, 1.4, 1.8, 1.10, 1.11, which each may be
modified without Welch's consent)
Article II - Grant of Trademark License (except in Section 2.1, the word
"exclusive" and the last two sentences; Section 2.2 in its entirety; and Section
2.4 in its entirety, which may be modified without Welch's consent)
Article III - Purchase and Sale of Bases (except the second through the fifth
sentences of Section 3.2, which may be modified without Welch's consent)
Article IV - Quality Control
Article VI - Use of Trademarks
Article VII - Packaging Materials and Ingredients (except Section 7.1, which may
be modified without Welch's consent)
Article VIII - Term, Termination and Breach (except Section 8.1 in its entirety,
8.2(iii), and in Section 8.7 the phrase "all Sublicensee Fees due through the
time of termination shall become immediately due and payable," which may be
modified without Welch's consent)
Article IX - Indemnification
The first sentence of 10.1 of Article X - Minimum Quantities
Article XI - Other Restrictions and Limitations
Article XII- Assignment
Article XIV - Relationship of Parties
Article XVI - Compliance with Law
Article XVII - Authority
Article XVIII - Virginia Law
Article XIX - Third Party Beneficiary
Article XX - Succession to Rights of Licensee and/or Eskimo
Article XXI - Waiver
Article XXII - Severability
Article XXIII - Miscellaneous
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,302
<SECURITIES> 0
<RECEIVABLES> 6,470
<ALLOWANCES> 0
<INVENTORY> 6,830
<CURRENT-ASSETS> 15,319
<PP&E> 20,207
<DEPRECIATION> 12,345
<TOTAL-ASSETS> 42,317
<CURRENT-LIABILITIES> 8,096
<BONDS> 8,030
0
0
<COMMON> 3,458
<OTHER-SE> 19,452
<TOTAL-LIABILITY-AND-EQUITY> 42,317
<SALES> 51,324
<TOTAL-REVENUES> 51,324
<CGS> 29,578
<TOTAL-COSTS> 48,854
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 511
<INCOME-PRETAX> 2,087
<INCOME-TAX> 772
<INCOME-CONTINUING> 1,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,315
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
