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EXHIBIT 10.14
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RETAIL ALLIANCE AGREEMENT
BY AND BETWEEN
SEPHORA USA, LLC
AND
ADVANCED AESTHETICS, LLC AND ADVANCED AESTHETICS, INC.
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TABLE OF CONTENTS
Page
1. DEFINED TERMS.........................................................1
1.1 Definitions..................................................1
2. GRANT OF EXCLUSIVE RIGHTS.............................................5
2.1 Grant........................................................5
2.2 Rights Reserved by AAI.......................................6
3. TERM..................................................................6
3.1 Initial Term.................................................6
3.2 Additional Term..............................................6
3.3 Early Termination............................................6
3.4 Consequences of Termination..................................7
4. CONSIDERATION; PAYMENT PROCEDURES.....................................8
4.1 Consideration................................................8
4.2 No Other Consideration.......................................9
4.3 Payment Procedures...........................................9
5. EARN BACK OF PERFORMANCE DEPOSIT......................................9
5.1 Earn Back Right..............................................9
6. PRODUCTS AND EQUIPMENT...............................................10
6.1 Definition of Products......................................10
6.2 Product Specifications......................................10
6.3 Supply of Products to Sephora...............................10
6.4 Product Recalls.............................................11
6.5 Supply of AAI Equipment to Sephora; Software
Interface Development.......................................11
7. AAI CENTERS..........................................................12
7.1 Designation of Sephora Host Stores and Test Centers.........12
7.2 Construction of AAI Centers.................................12
7.3 Operation of AAI Centers....................................12
7.4 Qualified Sephora Cast Members..............................13
8. ADJACENT AAI FACILITIES..............................................13
8.1 Timing; Construction........................................13
8.2 Operation...................................................14
8.3 Adjacent AAI Facility Service Revenue; Monthly
Reconciliation..............................................14
9. SEPHORA ALLIANCE STORES..............................................14
9.1 Timing; Construction........................................14
9.2 Operations; Costs...........................................14
10. PROMOTIONAL CAMPAIGN.................................................15
10.1 Ownership...................................................15
10.2 Provision of Materials......................................15
10.3 AAI Promotions or Advertising...............................15
11. INTELLECTUAL PROPERTY................................................15
11.1 Grant of License to AAI Intellectual Property...............15
11.2 Grant of License to Sephora Intellectual Property...........15
11.3 Goodwill....................................................16
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TABLE OF CONTENTS
(Continued)
Page
12. REPRESENTATIONS AND WARRANTIES.......................................16
12.1 Representations and Warranties of AAI and Parent............16
12.2 Representations and Warranties of Sephora...................18
13. ADDITIONAL COVENANTS.................................................19
13.1 Prestige Operations.........................................19
13.2 Deliveries by AAI...........................................19
13.3 Accounting Audit Rights.....................................19
13.4 Ownership of Customer Information...........................19
13.5 Parent Guaranty.............................................20
13.6 Notification of Events......................................21
14. CONFIDENTIALITY; NON-COMPETITION.....................................21
14.1 Confidentiality.............................................21
14.2 Non-Competition.............................................22
15. INSURANCE............................................................22
15.1 AAI Insurance Obligations...................................22
15.2 Sephora Insurance Obligations...............................23
15.3 Policy Information..........................................23
16. INDEMNIFICATION......................................................23
16.1 Indemnification Obligation..................................23
16.2 Procedure...................................................24
16.3 Limitation on Liability.....................................24
16.4 Survival....................................................24
17. MISCELLANEOUS........................................................25
17.1 Notices.....................................................25
17.2 Dispute Resolution..........................................26
17.3 Relationship Among Parties..................................27
17.4 Amendments; Waivers.........................................27
17.5 Entire Agreement............................................27
17.6 Severability................................................28
17.7 No Assignment; No Third Party Beneficiaries.................28
17.8 Survival....................................................28
17.9 Governing Law; Submission to Jurisdiction...................28
17.10 Expenses....................................................28
17.11 Force Majeure...............................................28
17.12 Counterparts Facsimile Signatures...........................28
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RETAIL ALLIANCE AGREEMENT
This RETAIL ALLIANCE AGREEMENT (this "Agreement"), dated effective as
of , 2004, is made and entered into by and between SEPHORA USA, LLC, a Delaware
limited liability company ("Sephora"), and ADVANCED AESTHETICS, LLC, a Delaware
limited liability company doing business as Advanced Aesthetics Institute
("AAI") and ADVANCED AESTHETICS, INC., a Delaware corporation ("Parent").
RECITALS
A. Sephora is a leading retailer with an excellent reputation for
selling a wide variety of prestige and innovative beauty products, including
skin care products, in the United States and Canada (the "Territory") through
retail stores and through the internet, including on its website www.sephora.com
B. AAI is the owner and operator of a fully integrated aesthetics
resource center that brings together medical and non-medical aesthetic
practitioners to create and deliver optimized client appearance.
C. AAI desires to expand its existing diagnostic and treatment platform
by developing a line of skin care products with scientifically proven efficacy,
as more specifically described herein, and Sephora desires to become the
exclusive retailer of such products in the Territory.
D. To further the parties' mutual interest as set forth in these
premises, Sephora and AAI desire to engage in a strategic retail alliance on the
terms set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. DEFINED TERMS
1.1 Definitions. Capitalized terms used herein will have the respective
meanings set forth below:
"AAI" has the meaning set forth in the Preamble.
"AAI Center" has the meaning set forth in Section 2.1.2 hereof. The
phrase "AAI Centers" includes the Test Centers unless otherwise expressly
indicated.
"AAI Equipment" means the proprietary equipment of AAI necessary to
provide the AAI Services. The operation of the AAI Equipment is dependent, in
part, on the use of third party operating software that will be furnished by AAI
with the AAI Equipment. The initial AAI Equipment to be provided by AAI
hereunder is listed on Schedule 1 attached hereto and incorporated herein by
this reference.
"AAI Host Store" has the meaning set forth in Section 9.1 hereof.
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"AAI Intellectual Property" has the meaning set forth in Section 11.1
hereof.
"AAI Methods" means, collectively, AAI methodologies regarding skin
biology and skin care actives; the diagnostic techniques and methods used by AAI
to identify and define skin care issues; and the proper use of the AAI Equipment
and the Products.
"AAI Salon" means the aesthetic facial salons owned and operated by AAI
in the Territory whether under the brand "Georgette Klinger," or otherwise.
"AAI Services" means the services listed on Schedule 2 attached hereto
and incorporated herein by this reference that will be provided (i) at AAI
Centers by Qualified Sephora Cast Members and/or (ii) at Adjacent AAI
Facilities. All AAI Services incorporate the AAI Methods, involve the sale of
the Products, and utilize the AAI Equipment. If necessary to obtain a lease,
permits or otherwise comply with Applicable Law at an AAI Center, Sephora Host
Store, or Adjacent AAI Facility, Sephora and AAI may agree to limit the types of
AAI Services offered at any particular AAI Center or Adjacent AAI Facility.
"Adjacent AAI Facility" has the meaning set forth in Section 2.1.3
hereof.
"Adjacent AAI Facility Product Revenue" has the meaning set forth in
Section 8.3 hereof.
"Adjacent AAI Facility Service Revenue" has the meaning set forth in
Section 8.3 hereof.
"Affiliate" means, with respect to any Person (including any party),
any other Person that directly or indirectly controls, is controlled by or is
under common control with that Person, or which that Person beneficially owns
more than fifty percent (50%) of the equity interests therein (provided,
however, that with respect to the parties, no individual or entity as to which
the ultimate parent entity of a party does not directly or indirectly control
the operations or management thereof will be deemed to be an Affiliate of such
party for purposes of this Agreement).
"Agreement" has the meaning set forth in the Preamble.
"Applicable Law" means, as applicable in the context so used, any law,
ordinance, rule, regulation, order, license, permit and other requirement, now
or hereafter in effect, of any Governmental Body of competent jurisdiction
(including, without limitation, regulations promulgated by the U.S. Food and
Drug Administration and the Occupational Safety and Health Administration
regarding health and safety) which is applicable to the operation of the AM
Centers, Adjacent AM Facilities, Sephora Host Stores, Sephora Alliance Stores
and/or the AAI Salons, the manufacture and sale of the Products, the design,
manufacture and use of the AM Equipment, the use of the AM Methods, the
provision of the AAI Services, or the business and operations of Sephora.
"Capital Expenditures" means the aggregate expenditures by Sephora for
the construction of the AAI Centers, the Adjacent AAI Facilities and the Sephora
Alliance Stores including, without limitation, expenditures for leasehold
improvements, furniture, fixtures and equipment (including AAI Equipment).
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"Change of Control" has the meaning given in Section 3.3.2 hereof.
"Claim" means any claim, action or proceeding instituted against a
party by a third Person, including, without limitation, any Governmental Body.
"Confidential Information" has the meaning given in Section 14.1
hereof.
"CRM Application" has the meaning given in Section 6.5.2 hereof.
"Customer Information" means information collected, owned and managed
by Sephora, in accordance with Applicable Law, from Sephora's clients and
customers as a result of providing the AAI Services, or selling the Products,
whether or not such information is integrated into the Software Interface or the
CRM Application.
"Disclosing Party" has the meaning set forth in Section 14.1 hereof
"Dispute" has the meaning set forth in Section 17.2.1 hereof
"Escrow" has the meaning set forth in Section 4.1.1.
"FDA" means the U.S. Food and Drug Administration.
"Force Majeure" has the meaning set forth in Section 17.11 hereof
"Governmental Body" means any foreign, federal, state, local or other
governmental authority or regulatory body.
"Incapacitated" means, with respect to AAI or Sephora, (i) such party
becomes insolvent because of its inability to pay its debts as they become due;
(ii) such party makes a general assignment for the benefit of its creditors;
(iii) a voluntary petition in bankruptcy is filed by such party, or an
involuntary petition is filed against such party and is not opposed within 90
days of such filing; (iv) such party is adjudicated a bankrupt or insolvent; (v)
such party consents to the appointment of a receiver or other custodian for such
party's business or assets, or a receiver or other custodian of such party's
assets or property, or any substantial part thereof, is appointed by any court
of competent jurisdiction; (vi) a final judgment in an amount in excess of
$500,000 rendered against such party remains unsatisfied or of record for 90
days or longer; (vii) such party is dissolved; or (viii) execution is levied
against a substantial portion of such party's business or property.
"Indemnified Party" has the meaning set forth in Section 16.1 hereof
"Indemnifying Party" has the meaning set forth in Section 16.1 hereof "Initial
Term" has the meaning set forth in Section 3.1 hereof "Johns Hopkins" means
Johns Hopkins Medicine, acting through The Johns Hopkins Health System
Corporation, a Maryland corporation, and The Johns Hopkins University, a
Maryland corporation.
"Johns Hopkins Agreement" means the Services and Licensing Agreement to
be entered into by and between Johns Hopkins, Advanced Aesthetics, Inc., and AAI
regarding Johns Hopkins' development of skin testing methodologies and skin care
product efficacy testing protocols, the scientific testing on Third Party
Products and the Products, and the use of
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the Johns Hopkins Certification, including, without limitation, a grant to AAI
and Sephora to use the Johns Hopkins Certification in connection with the
Products, the AAI Equipment and the AAI Services. The latest draft of the Johns
Hopkins Agreement is attached hereto as Exhibit C.
"Johns Hopkins Certification" means the branded validation authorized
by the Johns Hopkins Agreement signifying the results of specific testing of the
AAI Products and the validation of the AAI Equipment and the AAI Services.
"Liability" means any debt, obligation, duty or liability of any nature
(including any unknown, undisclosed, unmatured, unaccrued, unasserted,
contingent, indirect, conditional, implied, vicarious, derivative, joint,
several or secondary liability), regardless of whether such debt, obligation,
duty or liability would be required to be disclosed on a balance sheet prepared
in accordance with GAAP and regardless of whether such debt, obligation, duty or
liability is immediately due and payable.
"Material Adverse Effect" with respect to a party hereto, means a
material adverse effect on the business, financial condition or results of
operations of such party.
"Net Revenue" means gross sales revenue from (i) the sale of the
Products by Sephora, (ii) the provision of the AAI Services from the AAJ
Centers, and (iii) the operation of the Sephora Alliance Stores and the Adjacent
AAI Facilities, less customary allowances, discounts, and returns; gross sales
revenue does not include sales tax or other taxes collected from customers for
payment to a governmental authority.
"Parent" has the meaning given in the Preamble hereof.
"Performance Deposit" has the meaning set forth in Section 4.1.1
hereof.
"Performance Deposit Balance" means that portion of the Performance
Deposit not yet earned back by Sephora pursuant to Section 5 hereof.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization or Governmental Body.
"Product Availability Date" means the date on which both (1) the
Products are first available for purchase by Sephora and (2) Sephora is prepared
to sell the Products in Sephora Retail Stores or on the Website. The parties
anticipate that the Product Availability Date will be in July 2005.
"Products" has the meaning set forth in Section 6.1 hereof.
"Promotional Campaign" has the meaning set forth in Section 10.1
hereof.
"Purchase Order" means a purchase order issued by Sephora to AAI for
any Product substantially in the form attached hereto as Exhibit A. I the event
of any conflict between the provisions of a Purchase Order and the provisions of
this Agreement, the provisions of this Agreement will control.
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"Qualified Sephora Cast Member" has the meaning set forth in Section
7.3 hereof. "Receiving Party" has the meaning set forth in Section 14.1 hereof.
"Renewal Term" has the meaning set forth in Section 3.2 hereof. "Sephora" has
the meaning set forth in the Preamble.
"Sephora Host Store" has the meaning set forth in Section 7.1 hereof.
"Sephora Intellectual Property" has the meaning set forth in Section 11.2
hereof. "Sephora Alliance Store" has the meaning set forth in Section 9.1
hereof. "Sephora Alliance Store Costs" has the meaning set forth in Section 9.2
hereof.
"Sephora Retail Stores" means the retail stores now and hereafter owned
and operated by Sephora in the Territory. As of December 31, 2004, Sephora
expects to own and operate approximately ninety-five (95) Sephora Retail Stores.
"Software Interface" has the meaning given in Section 6.5.2 hereof
"Term" means the Initial Term or the Renewal Term, as applicable.
"Termination Date" means the date on which the Term of this Agreement
terminates either because the Initial Term or any Renewal Term has expired or
because this Agreement has been sooner terminated in accordance with Section 3.3
hereof.
"Territory" has the meaning set forth in Recital A.
"Test Centers' has the meaning set forth in Section 7.1.1 hereof
"Third Party Products" means an assortment of cosmetic products or
cosmeceuticals sold by Sephora, from time to time, from the Sephora Retail
Stores (including the Sephora Host Stores and the Website). An assortment of
Third Party Products may be incorporated by AAI into the AAI Services performed
by the Qualified Sephora Cast Members at the AAI Centers and may be utilized,
featured and promoted by AAI in AAI Salons and Adjacent AAI Facilities to
enhance the professional credibility and awareness of Third Party Products,
subject to any limitations imposed by the vendors of the Third Party Products.
"Website" means any point of presence maintained by Sephora on the
Internet or on any other public or private data network including that certain
website which is identified by the URL www.sephora.com With respect to any
Website maintained by Sephora on the World Wide Web or any successor public data
network, such Website includes all HTML pages (or similar unit of information
presented in any relevant data protocol) that either (a) are identified by the
same second-level domain (such as http://www.sephora.com) or by the same
equivalent level identifier in any relevant address scheme, or (b) contain
branding, graphics, navigation or other characteristics such that a user
reasonably would conclude that the pages are part of an integrated information
or service offering.
2. GRANT OF EXCLUSIVE RIGHTS
2.1 Grant. Subject to the limited exceptions set forth in Section 2.2
below, AAI grants to Sephora for the Term of this Agreement the exclusive right
throughout the Territory (but only in the Territory) to:
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2.1.1 Sell the Products in Sephora Retail Stores, through the
Website and through any other retail channel of distribution anywhere in the
Territory and promote the sale of the Products through the Promotional Campaign
and any other means reasonably identified by Sephora including television or
radio advertising and catalogues;
2.1.2 Utilize the AAI Intellectual Property and AAI Methods to own
and operate defined retail sales and consultation centers as more particularly
described in Section 7 within the four walls of Sephora Retail Stores (each, an
"AAI Center").
2.1.3 Develop retail space for the operation of an AAI Salon
adjacent to a Sephora Retail Store which is designed to permit the free
pass-through of customers from the AAJ Salon space to the Sephora Retail Store
as more particularly described in Section 8 hereof (each such adjacent retail
space to be referred to as an "Adjacent AAI Facility"); and
2.1.4 Sublease retail space from AAI for the purpose of
constructing and operating a Sephora Alliance Store, as more particularly
described in Section 9 hereof.
2.2 Rights Reserved by AAI. Notwithstanding the exclusive rights granted to
Sephora under Section 2.1 hereof, AAI reserves all rights to use the AAI
Intellectual Property and the AAI Methods, and to sell the Products: (i) in AAI
Salons, excluding an Adjacent AAI Facility; (ii) in offices of licensed medical
or dental doctors including medical spas; (iii) on cruise ships; and (iv)
subject to Sephora's consent, which consent may be granted or withheld in
Sephora's sole discretion, through any other retail distribution channel that
will not have a Material Adverse Effect on Sephora's rights under this
Agreement.
3. TERM
3.1 Initial Term. The initial term of this Agreement (the "Initial
Term") will commence on the date first written above and expire on December 31,
2010 (the "Initial Expiration Date") unless sooner terminated in accordance with
the terms of this Agreement.
3.2 Additional Term Upon the expiration of the Initial Term, this
Agreement may be , extended for one additional term of three (3) years (a
"Removal Term") by mutual agreement of Sephora and AM.
3.3 Early Termination. This Agreement will terminate prior to the
expiration of the Initial Term or the Renewal Term, as applicable, in the manner
and on the earliest date on which any of the following occurs:
3.3.1 upon execution of a written termination agreement by Sephora
and AAI;
3.3.2 by Sephora, in its sole discretion, thirty (30) days after
Sephora receives notice of a transaction by AAI or by any Person which has a
direct or indirect ownership interest in AAI that results in fifty percent (5
0%) or more of the constituent ownership interests in AAI being sold, assigned,
transferred, shared, divided, conveyed or otherwise disposed of to a person not
a beneficial owner of AAI on the date of this Agreement (or a current Affiliate
thereof), or which otherwise results in a change in control of AAI a "Change of
Control" provided, that (i) any sale, assignment, transfer or disposal to AAI's
current beneficial owners or any of their
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current Affiliates and (ii) an initial public offering of AAI, shall not
constitute a Change of Control; provided, further, that if Sephora does not
elect to terminate this Agreement following a Change of Control, by delivery of
a written notice of termination to AAI within thirty (30) days of Sephora's
receipt of notice of a Change of Control, then this Agreement will continue in
full force and effect and will be binding on AAI's successor-in-interest;
3.3.3 by Sephora in its sole discretion within one hundred eighty
(180) days after Sephora discovers that the Johns Hopkins Agreement has been
terminated;
3.3.4 automatically, by either AAI or Sephora, if the other party
hereto becomes Incapacitated;
3.3.5 by Sephora in its sole discretion if Richard R. Rakowski
stops serving as Chairman of AAI at any time prior to December 31, 2007;
provided, however, that the death or permanent physical disability of Mr.
Rakowski will not trigger a termination right in favor of Sephora so long as AAI
identifies a qualified replacement within ninety (90) days following the date of
such death or disability; and
3.3.6 by either AAI or Sephora in its sole discretion within one
hundred eighty (180) days after receipt of a written report indicating that Net
Revenue for any trailing twelve (12) month period (from and after December 31,
2006) is less than Five Million Dollars ($5,000,000).
3.4 Consequences of Termination. Except as expressly provided herein,
such expiration or termination will not relieve any party of any obligations or
prejudice any rights of any other party existing at the time of expiration or
termination or terminate those rights or obligations which by their nature
survive the expiration or termination of this Agreement. On the Termination
Date, the following will occur:
3.4.1 Sephora's exclusive rights under Section 2.1 will
automatically terminate and be of no further force and effect.
3.4.2 AAI will be obligated to sell Products to Sephora on a
non-exclusive basis to the extent necessary to fulfill Purchase Orders
outstanding on the Termination Date if fulfillment is so elected by Sephora, and
to permit Sephora to exercise its rights under Section 3.4.4 below.
3.4.3 AAI will be permitted to sell its Products, utilize the AAI
Methods and the AAI Intellectual Property and provide any AAI Services as it
deems, in its sole discretion, appropriate including, but not limited to (i)
selling its Products to Persons other than Sephora, (ii) promoting the sale of
the Products through promotional campaigns and any other means reasonably
identified by AAI, including television or radio advertising and catalogues, and
(iii) providing the AAI Services and utilizing the AAI Intellectual Property and
the AAI Methods to own and/or operate retail sales and consultation centers in
cooperation with other Persons.
3.4.4 Sephora, in sole discretion, will have the right to elect to
continue to operate any or all of the AAI Centers and Sephora Alliance Stores,
in operation immediately prior to the Termination Date, in the same maimer that
such AAI Centers and/or Sephora
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Alliance Stores were operated immediately prior to such termination and in
connection therewith, sell the Products, use the AAI Intellectual Property and
utilize the AAI Methods. Such continued operations shall be on a non-exclusive
basis for up to twelve (12) months following the termination of the Agreement
(the " Period") The Tail Period can be extended by mutual written agreement of
Sephora and AAI. During the Tail Period, Sephora will pay AAI an annual
licensing fee on December 31 of each year (pro-rated for any partial calendar
year) equal to (i) the sum of $50,000 multiplied by the number of AAI Centers
and the Sephora Alliance Stores operated during the preceding calendar year up
to a maximum aggregate licensing fee of $500,000. No additional license fee will
be payable to AAI during the Tail Period for Products sold by Sephora.
3.4.5 If Sephora has terminated the Agreement under Section 3.3.3
or 3.3.5, then by the thirtieth ( day following the Termination Date, AAI shall
return to Sephora 100% of the Performance Deposit Balance. If either party has
terminated the Agreement under Section 3.3.6, then by the thirtieth ( day
following the Termination Date, AAI shall return to Sephora an amount equal to
50% of the Performance Deposit Balance.
3.4.6 If Sephora has not elected to continue to operate the AAI
Centers and the Sephora Alliance Stores under Section 3.4.4, then Sephora will
have a period of six (6) months from the Termination Date to close the AAI
Centers and Sephora Alliance Stores in an orderly manner.
3.4.7 AAI will remain liable for the remaining term of any
sublease for Adjacent AAI Facilities, it being expressly understood that the
termination of this Agreement will not terminate such sublease.
3.4.8 If Sephora has not elected to continue to sell the Products
under Section 3.4.4, then Sephora will have a period of six (6) months from the
Termination Date to sell off Product carried by Sephora and AAI must repurchase
all remaining inventories of the Product (at Sephora's original cost) that are
carried by Sephora within twelve (12) months from the end of such sell-off
period as designated by Sephora for repurchase, with payment for all of the
repurchased inventory to be made, at AAI's election, in either one lump sum or
in equal monthly installments over a period not to exceed six (6) months from
the end of such sell-off period.
4. CONSJDERATION; PAYMENT PROCEDURES
4.1 Consideration. In consideration of the grant of exclusive rights
from AAI to Sephora under Section 2.1 hereof, Sephora will provide AAI with the
consideration set forth in this Section 4.1.
4.1.1 Upon the execution and delivery of this Agreement by Sephora
and AAI, Sephora will deposit the sum of Five Million Dollars ($5,000,000) (the
"Performance Deposit") in an interest bearing account with an escrow agent
jointly selected by AAI and Sephora (the "Escrow"). The Performance Deposit is
intended to secure Sephora's performance of its obligations under this Agreement
and may be earned back by Sephora upon completion of certain milestones as set
forth in Section 5 hereof. The Performance Deposit, with interest accrued
thereon, will be released to AAI on the date on which AAI (i) delivers the
fully-executed Johns Hopkins Agreement to Sephora that does not materially
differ from the draft version
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