Co-pack Agreement

CO-PACK AGREEMENT


THIS AGREEMENT is made this 8th day of June, 1999


BETWEEN:


NESTLE CANADA INC., a corporation organized and existing under
the laws of the Province of Ontario (the "Vendor")


- and -


ARCHIBALD CANDY CORPORATION, a corporation organized and existing
under the laws of the State of Illinois (the "Purchaser").


WHEREAS:


A. The Vendor and the Purchaser have entered into an Asset Purchase Agreement dated May 26, 1999 (the "Asset Purchase Agreement"), pursuant to which the Purchaser purchased from the Vendor certain assets as designated in the Asset Purchase Agreement;


B. The assets purchased by the Purchaser under the Asset Purchase Agreement include the retail business for the distribution and sale of the Products but do not include the production facility located at 1500 Birchmount Road, Scarborough, Ontario (the "Vendor's Facility"); nor do they include the equipment and machinery used to produce and package the Products and located at the Vendor's Facility;


C. The Purchaser desires that the Vendor produce for the Purchaser at the Vendor's Facility the products set forth in Schedule 1 attached hereto (collectively, the "Products");


D. The Vendor desires to produce the Products for the Purchaser at the Vendor's Facility;


NOW THEREFORE, in consideration of the mutual covenants and conditions hereinafter set forth, the Vendor and the Purchaser mutually agree as follows:


ARTICLE 1. SPECIFICATIONS


1.1 The Vendor shall produce, package, store and ship the Products in
accordance with Good Manufacturing Practices prevailing in the
industry and in compliance (other than non-compliance in a minor or
inconsequential manner) with the specifications, formulae,
manufacturing processes, quality control standards,


-2-


coding systems and any other standards or guidelines (collectively,
the "Specifications") attached hereto as Schedule 2.


1.2 (a) The Vendor shall use commercially reasonable efforts to implement
such changes in the Specifications as the Purchaser may from time
to time request. Such changes shall not be effective until
agreed upon by the Vendor and the Purchaser in writing and signed
by a duly authorized officer of the Vendor and the Purchaser.
Any change in the Specifications which increases or decreases the
Vendor's costs shall result in a commensurate increase or
decrease in the prices set forth in Schedule 1 hereto; provided
that any such price increases or decreases are agreed upon in a
writing signed at such time by a duly authorized officer of the
Vendor and the Purchaser.


(b) The Vendor shall use commercially reasonable efforts to produce,
package, store and ship additional products that the Purchaser
may from time to time request, including gift items, seasonal
items and specialty packaging. No such additional products shall
become "Products" unless and until agreed upon (including the
prices of such additional products) by the Vendor and the
Purchaser in writing and signed by a duly authorized officer of
the Vendor and the Purchaser.


1.3 In the event of a conflict or inconsistency between the Specifications
and either a Good Manufacturing Practice or an applicable law or
regulation, the Specifications shall control unless the application of
a particular Specification would result in the violation of an
applicable law or regulation, in which case that applicable law or
regulation shall control.


1.4 The Vendor shall prepare, maintain and submit to the Purchaser the
quality control records and reports referred to in Schedule 2 and
shall also retain for the Purchaser, for a period of one week, at
least four ounces of samples per Product per shift for quality control
purposes. The Vendor also shall retain for the Purchaser, at the
Purchaser's expense, any additional samples that the Purchaser
reasonably requests.


1.5 Prior to the commencement of, and at any time during, production,
packaging, storage and shipping operations, the Purchaser shall have
the right, upon reasonable notice, to send one or more of its
authorized employees to observe, audit and inspect, during regular
business hours, the manufacturing, warehousing and any facilities,
including the Vendor's Facility, used to produce, package, store and
ship the Products, and the Purchaser shall have access to all relevant
records of the Vendor, it being agreed that such employees may be
assigned by the Purchaser on a full time basis and that the Vendor
shall allow such employees to document the Vendor's purchasing,
production, storage and shipping practices to


-3-


the extent relating to the Products. The Vendor further agrees
that, during the term of this Agreement and for the 90 days
following the termination of this Agreement, it shall, upon the
request of the Purchaser and at the Purchaser's expense (including,
without limitation, a reasonable per diem charge), use reasonable
efforts to make certain of its employees (as mutually agreed
between the Vendor and the Purchaser) available to the Purchaser at
the Purchaser's Chicago facility for purposes of training the
Purchaser's employees in the manufacture of the Products.


1.6 If any of the Vendor's Facility, processes, inventories or equipment
are in unsanitary condition or do not otherwise comply (a) with the
Specifications (other than non-compliance in a minor or
inconsequential manner) or (b) in all material respects, with all
applicable laws, rules and regulations or the terms and conditions of
this Agreement, the Vendor shall, within 30 days of notification by
the Purchaser, take such action as will correct the deficiencies and
bring such Vendor's Facility, processes, inventories and equipment
into compliance with the Specifications, all applicable laws, rules
and regulations and the terms and conditions of this Agreement.


1.7 The Vendor shall not relocate the production of the Products from the
Vendor's Facility to another facility without the prior written
consent of the Purchaser.


1.8 The Purchaser reserves the right at any time, either before or after
shipment of any Products, to reject any Products which have not been
produced, packaged, stored or shipped by the Vendor in compliance
(other than non-compliance in a minor or inconsequential manner) with
the Specifications or which are otherwise not in compliance, in all
material respects, with the terms and conditions of this Agreement
("Non-Conforming Products"). Specifically, but not by way of
limitation, both parties agree that:


(a) the Purchaser may reject and refuse to pay for any Products which
have been produced and packaged during a particular run if a
representative number of samples from that production or
packaging run do not comply (other than non-compliance in a minor
or inconsequential manner) to the Specifications or are otherwise
not in compliance, in all material respects, with the terms and
conditions of this Agreement;


(b) the Purchaser may reject and refuse to pay for any Products which
(i) have been damaged during storage or handling by the Vendor,
(ii) do not fully comply with the Specifications (other than
non-compliance in a minor or inconsequential manner) or (iii) do
not fully comply, in all material respects, with the other terms
and conditions of this Agreement;


-4-


(c) any Product Supplies (defined in Paragraph 2.1), work in progress
or Products rejected by the Purchaser pursuant to Paragraph
1.8(a) or (b) hereof shall be dealt with by the Vendor at the
Vendor's cost and expense in a manner which shall absolutely
preclude re-use in the production of the Product (unless the
Purchaser's consent to re-use is obtained, which consent shall
not be unreasonably withheld). The Vendor shall remove all
Purchaser identification and dispose of the same as mutually
agreed in writing between the Purchaser and the Vendor;


(d) if the Purchaser has previously paid the Vendor for
Non-Conforming Products which are later validly rejected by the
Purchaser, the Purchaser shall invoice the Vendor for the cost of
such Non-Conforming Products thus rejected and for any freight,
handling or other disposition costs or expenses incurred by the
Purchaser in connection with such Non-Conforming Products, and
the Purchaser shall be entitled, at the Purchaser's election,
either to (i) offset and withhold the sum of such invoice amount
from amounts due and owing to the Vendor hereunder or (ii)
require the Vendor to pay to the Purchaser the sum of such
invoice amount within 30 days of the date of such invoice;


(e) in the event the Vendor has produced or shipped any
Non-Conforming Products, the Purchaser may order the Vendor to
suspend the further production or packaging of the affected
Products until such time as the Vendor has corrected the
non-conformity; and


(f) If a Product becomes a Non-Conforming Product due to defective
Product Supplies furnished by the Purchaser to the Vendor, then
the Vendor shall not be liable to the Purchaser and the Purchaser
shall pay all costs associated with the correction of each such
non-conformity or with the disposition of such Product.


(g) If the Purchaser chooses to accept a Non-Conforming Product as a
"second" the Vendor and Purchaser shall mutually agree on the
price to be paid by the Purchaser for such Non-Conforming
Product, failing which the Purchaser shall have all of its rights
relating to a Non-Conforming Product as provided herein or
elsewhere in this Agreement.


1.9 The Vendor shall make available, at the Purchaser's request, the
results of all federal, provincial and local inspection reports and
sanitation audits, conducted any time during the term of this
Agreement or up to 30 days after the termination of this Agreement,
and relating to or affecting the (i) Vendor's Facility or (ii)
Equipment, Product Materials, work-in-process or Products located
therein. The Vendor shall notify the Purchaser's designated quality
assurance representative immediately by telephone of any such
inspections or audits or of any other


-5-


information which indicates to the Vendor the presence of any
Non-Conforming Products and shall telecopy written confirmation of
such to the Purchaser within two business days. The Vendor shall
promptly communicate to the Purchaser's designated quality
assurance representative Products on "hold" beyond normal periods
of time as specified in the Specifications and shall comply with
the Purchaser's directions regarding the disposition of same.


1.10 The Vendor shall immediately notify the Purchaser by telephone and by
telecopy and in accordance with Article 17 of any prospective recall,
seizure, withdrawal or destruction of any of the Products or of the
need for such actions of which the Vendor is aware. The Purchaser
shall immediately notify the Vendor by telephone and by telecopy in
accordance with Article 17 of any prospective recall, seizure,
withdrawal or destruction of any of the Products or the need for such
actions of which the Purchaser is aware. The Vendor and the Purchaser
shall co-operate with one another in implementing any recall, seizure,
withdrawal or destruction of any of the Products. The costs and
expenses incurred in connection with any such recall, seizure,
withdrawal or destruction of any of the Products shall be allocated
between the Purchaser and the Vendor based on the relative fault, if
any, of a party. In the event that neither the Purchaser nor the
Vendor has any fault with respect to any such recall, seizure,
withdrawal or destruction the Vendor and the Purchaser shall each pay
one-half of all costs associated therewith; provided that where the
fault is attributable to a supplier of the Vendor in connection with
this Agreement, the Vendor shall pay all costs and the Purchaser shall
assign to the Vendor any action it may have to pursue the third party
at fault and shall cooperate with the Vendor in connection therewith.


ARTICLE 2. PROCUREMENT


2.1 (a) The Vendor shall have full responsibility for the procurement of
and the payment for all raw materials, ingredients and packaging
materials ("Product Supplies") necessary to produce the Products
for the Purchaser in accordance with this Agreement. The Vendor
shall have full responsibility for the procurement of and the
payment for all services and arrangements necessary for it to
produce, package, store and ship the Products for the Purchaser
in accordance with this Agreement.


(b) The Vendor shall store all Product Supplies in accordance with
Good Manufacturing Practices prevailing in the industry and in
strict compliance with the terms and conditions set forth in
Schedule 2. Such Product Supplies shall be ordered in quantities
mutually agreed to by the Purchaser and the Vendor.


-6-


(c) The Vendor shall use its best efforts to purchase all Product
Supplies at the lowest available cost, consistent with the
Vendor's obligation to produce and package the Products in
compliance with terms and conditions set forth in the
Specifications and in compliance with the other terms and
conditions of this Agreement.


2.2 The Purchaser shall have the right to review all pricing and/or supply
proposals received by the Vendor and purchase orders placed by the
Vendor in respect of any Product Supplies.


2.3 The Vendor shall examine all Product Supplies and shall have the final
responsibility for accepting or rejecting Product Supplies which do
not conform with (i) the Specifications, (ii) the other terms and
conditions of this Agreement or (iii) applicable federal, provincial
and local laws, rules, regulations and guidelines.


2.4 The Vendor shall handle all shipper damage and shortage claims
relating to Product Supplies.


ARTICLE 3. RECEIVING, SCHEDULING, STORAGE AND SHIPMENT


3.1 The Vendor's obligations with respect to receiving, scheduling of
production, use of pallets, storage, handling and shipment of Products
are as set forth in the Specifications, failing which the Vendor shall
deal with such matters in accordance with the Vendor's ordinary
practices.


3.2 Within 60 days of the date of this Agreement, the Purchaser shall
provide a forecast of the Purchaser's anticipated requirements for the
remaining term of the Agreement, broken down by Product and by SKU
(the "Annual Forecast"). On or before the first day of each month,
the Purchaser agrees to provide the Vendor with a rolling schedule of
the Purchaser's production requirements for the shorter of (a) the
following three month period and (b) the remainder of the term of the
Agreement. Such rolling schedules shall include a firm production
commitment for the first scheduled month (the "Monthly Production
Order") and a non-binding estimate of the Purchaser's production
requirements for the shorter of (a) the remaining two months covered
by such schedule and (b) the remainder of the term of the Agreement.
The Vendor shall meet the Purchaser's requirements as set forth in the
Monthly Production Order and the Purchaser shall be required to
purchase all Product so produced, except to the extent otherwise
provided in Section 1.8 herein. If the Monthly Production Order in
any rolling schedule provided by the Purchaser to the Vendor varies by
10% or more from the estimate for such month provided by the Purchaser
to the Vendor in its previous rolling schedule, then any incremental
increase or decrease in the cost of manufacturing


-7-


any of the Products resulting from such variation shall increase or
decrease, dollar for dollar, the price for such Products as
provided in Article 4 herein. If upon receipt of a forecast the
Vendor becomes aware of its inability to meet its requirements set
forth therein the Vendor shall promptly notify the Purchaser and
cooperate with the Purchaser with respect thereto.


3.3 The Vendor shall maintain sufficient inventories of the Products to
meet the rolling schedules provided to the Vendor by the Purchaser.


3.4 The Vendor shall prepare and submit to the Purchaser the receiving and
shipping docum ...