RETAIL ALLIANCE AGREEMENT

 

                                                                   EXHIBIT 10.14

 

 

--------------------------------------------------------------------------------

 

                            RETAIL ALLIANCE AGREEMENT

 

                                 BY AND BETWEEN

 

                                SEPHORA USA, LLC

 

                                       AND

 

             ADVANCED AESTHETICS, LLC AND ADVANCED AESTHETICS, INC.

 

--------------------------------------------------------------------------------

 

 

 

<PAGE>

 

                                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

 

 

                                       -i-

 

<PAGE>

 

                                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

 

 

 

 

 

<PAGE>

 

                            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.

 

                                        1

 

<PAGE>

 

         "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).

 

                                       -2-

 

<PAGE>

 

         "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

 

                                       -3-

 

<PAGE>

 

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.

 

                                       -4-

 

<PAGE>

 

         "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:

 

                                       -5-

 

<PAGE>

 

              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

 

                                       -6-

 

<PAGE>

 

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

 

                                       -7-

 

<PAGE>

 

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

 

         &nbs