Form of Formation Agreement

FORM OF FORMATION AGREEMENT


BY AND AMONG


AMERICAN GREETINGS CORPORATION,


AGC INVESTMENTS, INC.


AND


AMERICANGREETINGS.COM, INC.


DATED


__________, 1999


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TABLE OF CONTENTS


SEPARATION AGREEMENT..............................................................................................1
RECITALS.......................................................................................................1


ARTICLE I. CONTRIBUTIONS..........................................................................................2


SECTION 1.01 AG CONTRIBUTION; AG.COM BUSINESS ASSETS...........................................................2
SECTION 1.02 ASSIGNMENT AND ASSUMPTION OF LIABILITIES..........................................................5
SECTION 1.03 TRANSFERS NOT EFFECTED ON OR PRIOR TO THE CLOSING DATE............................................7
SECTION 1.04 NO REPRESENTATIONS OR WARRANTIES; CONSENTS........................................................8
SECTION 1.05 TERMINATION OF AGREEMENTS.........................................................................9
SECTION 1.06 EXECUTION OF ANCILLARY AGREEMENTS.................................................................9


ARTICLE II. THE CLOSING..........................................................................................10


SECTION 2.01 THE CLOSING......................................................................................10
SECTION 2.02 TRANSACTIONS TO BE EFFECTED AT THE CLOSING.......................................................10
SECTION 2.03 UPDATING OF SCHEDULES............................................................................10


ARTICLE III. REPRESENTATIONS AND WARRANTIES OF AG AND AGCINV.....................................................11


SECTION 3.01 ORGANIZATION, STANDING AND POWER.................................................................11
SECTION 3.02 AUTHORITY; EXECUTION AND DELIVERY; ENFORCEABILITY................................................11
SECTION 3.03 NO CONFLICTS WITH CHARTER DOCUMENTS AND JUDGMENTS................................................11
SECTION 3.04 PURCHASE FOR INVESTMENT..........................................................................11


ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF AG.COM.............................................................12


SECTION 4.01 ORGANIZATION, STANDING AND POWER.................................................................12
SECTION 4.02 AUTHORITY; EXECUTION AND DELIVERY; ENFORCEABILITY................................................12
SECTION 4.03 NO CONFLICTS WITH CHARTER DOCUMENTS AND JUDGMENTS................................................12
SECTION 4.04 SHARES...........................................................................................12


ARTICLE V. SEPARATION AND INITIAL PUBLIC OFFERING................................................................13


SECTION 5.01 CONDUCT OF AG.COM BUSINESS PENDING SEPARATION AND CONDITIONS PRECEDENT TO THE SEPARATION.........13
SECTION 5.02 INITIAL PUBLIC OFFERING..........................................................................14
SECTION 5.03 REASONABLE BEST EFFORTS..........................................................................15
SECTION 5.04 EXPENSES; TRANSFER TAXES AND OTHER COSTS FOR SEPARATION..........................................15
SECTION 5.05 POST-CLOSING COOPERATION.........................................................................15
SECTION 5.06 FUTURE CONDUCT...................................................................................16
SECTION 5.07 LABOR AND EMPLOYEE BENEFIT ISSUES................................................................17
SECTION 5.08 INSURANCE PROGRAMS AND CLAIMS ADMINISTRATION.....................................................19


ARTICLE VI. INDEMNIFICATION......................................................................................21


SECTION 6.01 RELEASE OF CLAIMS................................................................................21
SECTION 6.02 INDEMNIFICATION BY AG.COM........................................................................23
SECTION 6.03 INDEMNIFICATION BY AG............................................................................23
SECTION 6.04 NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS.........................................................24
SECTION 6.05 INSURANCE PROCEEDS...............................................................................25
SECTION 6.06 CONTRIBUTION.....................................................................................25
SECTION 6.07 SUBROGATION......................................................................................26
SECTION 6.08 NO THIRD-PARTY BENEFICIARIES.....................................................................26
SECTION 6.09 REMEDIES CUMULATIVE..............................................................................26
SECTION 6.10 SURVIVAL OF INDEMNITIES..........................................................................26
SECTION 6.11 AFTER-TAX INDEMNIFICATION PAYMENTS...............................................................26


ARTICLE VII. DEFINITIONS.........................................................................................27


SECTION 7.01 DEFINED TERMS....................................................................................27
SECTION 7.02 USE OF "PRIMARILY"...............................................................................33


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ARTICLE VIII. GENERAL PROVISIONS.................................................................................33


SECTION 8.01 ASSIGNMENT.......................................................................................33
SECTION 8.02 NO THIRD-PARTY BENEFICIARIES.....................................................................33
SECTION 8.03 NOTICES..........................................................................................33
SECTION 8.04 INTERPRETATION; EXHIBITS AND SCHEDULES...........................................................34
SECTION 8.05 COUNTERPARTS.....................................................................................34
SECTION 8.06 ENTIRE AGREEMENT.................................................................................34
SECTION 8.07 SEVERABILITY.....................................................................................35
SECTION 8.08 AMENDMENTS AND WAIVERS...........................................................................35
SECTION 8.09 DISPUTE RESOLUTION...............................................................................35
SECTION 8.10 GOVERNING LAW....................................................................................37
SECTION 8.11 ASSURANCES OF CERTAIN ACTIONS....................................................................37
SECTION 8.12 TERMINATION......................................................................................37


EXHIBITS --------


EXHIBIT A Form of Articles of Incorporation and Bylaws of AG.com EXHIBIT B Form of Equity Incentive Compensation Plans EXHIBIT C Form of Cross License Agreement EXHIBIT D Form of Web Services Agreement EXHIBIT E Form of Administrative Services Agreement EXHIBIT F Form of Registration Rights Agreement EXHIBIT G Form of Tax and Indemnification Agreement


SCHEDULES ---------


(p2) 1.01(b)(i) Tangible Personal Property (p2) 1.01(b)(ii) Inventory (p3) 1.01(b)(iii) Receivables (p2) 1.01(b)(vi) AG Group Contracts (p2) 1.01(b)(vii) Claims Related to the AG.com Business (p3) 1.01(b)(viii) Sales-Related Materials (p4) 1.01(b)(ix) Permits (p4) 1.01(b)(xi) Intellectual Property (p4) 1.01(c)(i) Excluded Assets (p5) 1.02(a)(iv) Liabilities (p6) 1.02(b)(i) Actions (p7) 1.03(b) Joint Contracts (p8) 1.04(a) Liens (p9) 1.05(b) Surviving Agreements (p17) 5.07(a) Employees


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FORMATION AGREEMENT


FORMATION AGREEMENT (this "Agreement") dated as of ________, 1999, between American Greetings Corporation, an Ohio corporation ("AG"), AGC Investments, Inc., a wholly owned Subsidiary of AG and a Delaware corporation ("AGCINV") and AmericanGreetings.com, Inc., a Delaware corporation ("AG.com").


RECITALS


WHEREAS, the Board of Directors of AG has determined that it is in the best interests of AG and its shareholders to separate the AG.com Business from AG's other operations.


WHEREAS, in furtherance of the foregoing, it is appropriate and desirable to separate and transfer the AG.com Business Assets to AG.com and to cause AG.com to assume the Assumed AG.com Liabilities, all as more fully described in this Agreement and the Ancillary Agreements;


WHEREAS, prior to the execution and delivery of this Agreement, AGCINV had formed AG.com and now owns all of the 1000 Shares of Common Stock, par value $.001 per share, of AG.com, which has two wholly owned subsidiaries, AGCM, Inc. ("AG.com OpCo"), an Ohio corporation and AG.com, Inc., a Delaware corporation ("AG.com Properties");


WHEREAS, in exchange for ____________________ shares of Class B Common Stock of AG.com, AGCINV intends to contribute in a tax-free transaction to AG.com certain property and assets (that were contributed to AGCINV from the AG Group pursuant to a tax-free transaction), and AG and AGCINV (including, without limitation, on behalf of and in favor of AG's Affiliates) shall cross-license with AG.com and AG.com Properties certain Intellectual Property rights related to the AG.com Business, and AG and AGINV will endeavor to have certain employees transfer to AG.com;


WHEREAS, subsequent to the Separation and the other transactions effected by this Agreement, AG.com intends to undertake a number of transactions involving the issuance of shares of Class A Common Stock, including, without limitation, in connection with an offering to the public registered with the Commission (the "Initial Public Offering") and the establishment of incentive compensation plans for the benefit of employees of AG.com;


WHEREAS, it is appropriate and desirable to set forth the principal corporate transactions required to effect the Separation and the Initial Public Offering and certain other agreements that will govern certain matters relating to the Separation and the Initial Public Offering and the relationship of AG and AG.com and their respective Subsidiaries following the Initial Public Offering; and


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WHEREAS, all defined terms, unless the context otherwise requires, shall be given the meanings set forth in Article VII;


NOW, THEREFORE, in consideration of the premises and the mutual agreements herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound by the terms hereof applicable to each of them, hereby agree as follows:


ARTICLE I.
CONTRIBUTIONS


SECTION 1.01 AG CONTRIBUTION; AG.COM BUSINESS ASSETS.


(a) On the terms and subject to the conditions of this Agreement, in exchange for (i) the issuance and delivery on the Closing Date of _____________________ shares of Class B Common Stock (the "Shares") to AGCINV, and (ii) the assumption on the Closing Date by AG.com and its Subsidiaries of the Assumed AG.com Liabilities, AG shall or shall cause one or more of AG's Subsidiaries and Affiliates (together, other than AG.com, AG.com OpCo and AG.com Properties, with AG, being herein referred to as the "AG Group") to sell, assign, transfer, convey and deliver to AGCINV all the right, title and interest of the AG Group in, to and under the AG.com Business Assets, and AGCINV shall sell, assign, transfer, convey and deliver, to AG.com, effective as of the Closing Date, all the right, title and interest of the AG Group and AGCINV in, to and under the AG.com Business Assets and AG shall, on the Closing Date, contribute its position regarding the intercompany debt in existence at Closing otherwise owed by AG.com to AG (the "Intercompany Debt") to AGCINV and AGCINV shall contribute Fifty Million Dollars ($50,000,000) in immediately available funds to AG.com. The contribution and acquisition of the AG.com Business Assets and the assumption of the Assumed AG.com Liabilities shall constitute the "Separation".


(b) The term "AG.com Business Assets" means all rights, title and interest in the business, properties, assets, goodwill and rights of the AG Group, of whatever kind and nature, real or personal, tangible or intangible, that are owned, leased or licensed by the AG Group consisting of the following:


(i) All computers, machinery, equipment, tools, supplies,
furniture, fixtures, personalty, vehicles and other tangible
personal property primarily used or held for use by the AG
Group in the conduct of the AG.com Business, consisting of
that listed on SCHEDULE 1.01(B)(I);


(ii) all inventory owned, used or held by AG or any member of the
AG Group and related primarily to the AG.com Business,
consisting of that listed on SCHEDULE 1.01(B)(II);


(iii) all accounts receivable, notes and other amounts receivable
from third parties, including, without limitation, customers
and employees, arising primarily from the conduct of the
AG.com Business before or through the Closing Date, whether or
not


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in the ordinary course, together with any unpaid financing
charges accrued thereon, consisting of all such receivables
listed on SCHEDULE 1.01(B)(III);


(iv) subject to the terms of the Cross License Agreement and the Tax and Indemnification Agreement, all books of account, general, financial and tax records, invoices, shipping records, supplier lists, correspondence and other documents, records and files primarily relating to the AG.com Business, and all personnel records of persons employed by the AG Group that become employees of AG.com as of the Closing Date or thereafter;


(v) the goodwill of AG primarily relating to the AG.com Business;


(vi) all of the contracts and agreements (collectively, the "AG.com Contracts") to which any member of the AG Group is a party or by which any member of the AG Group or of their respective assets is bound, whether or not in writing, consisting of:


(a) all contracts or agreements listed or described
on SCHEDULE 1.01(B)(VI);


(b) any other contract or agreement that relates
exclusively to the AG.com Business;


(c) any guarantee, indemnity, representation,
warranty or other Liability of any member of the AG Group in
respect of any contract specified in this Section 1.01(b)(vi);
and


(d) any contract or agreement that is otherwise
expressly contemplated pursuant to this Agreement or any of
the Ancillary Agreements to be assigned to AG.com,


but excluding any such contract or agreement that is contemplated to be retained by any member of the AG Group pursuant to any provision of this Agreement or any Ancillary Agreement;


(vii) all claims, causes of action, rights of recovery and rights of set-off of any kind (including rights to insurance proceeds and rights under and pursuant to all warranties, representations and guarantees made by suppliers of products, materials or equipment, or components thereof), pertaining to, arising out of, and enuring to the benefit of the AG Group which relate primarily to the AG.com Business and which do not relate to the Excluded Liabilities, including, without limitation, the Actions listed on SCHEDULE 1.01(B)(VII);


(viii) subject to the terms of the Cross License Agreement, all sales and promotional literature, lists of customer names and information relating to each customer, and other sales-related materials owned, used, associated with or employed by any member of the AG Group relating primarily to the AG.com Business as listed on SCHEDULE 1.01(b)(VIII);


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(ix) all municipal, state and federal franchises, permits, licenses, agreements, waivers, exemptions, approvals, authorizations, domain names, and telephone and modem numbers held or used by any member of the AG Group related primarily to the AG.com Business, to the extent transferable, consisting of the permits, domain names, names, and telephone and modem numbers listed on SCHEDULE 1.01(b)(IX);


(x) to the extent specified in Section 5.07, the relationships and agreements with respect to the AG.com Employees listed on SCHEDULE 5.07(a);


(xi) all registered and issued Intellectual Property primarily used in the AG.com Business consisting of that listed on SCHEDULE 1.01(b)(XI);


(xii) excluding Intellectual Property covered by license from AGCINV or another AG Group member to AG.com under the Cross License Agreement, all other Intellectual Property Rights used primarily in the AG.com Business, including, without limitation, patent applications identified to AG.com; and


(xiii) any assets (including, without limitation, prepaid expenses) reflected in the AG.com Balance Sheet as "Assets" of AG.com, subject to any dispositions of such assets subsequent to the date of AG.com Balance Sheet. The term "AG.com Business Assets" shall also include, subject to the other terms of this Agreement, any and all other assets, rights and claims of every kind and nature held immediately prior to the Closing Date by a member of the AG Group and used primarily in the AG.com Business. The intention of the immediately prior sentence is only to rectify any inadvertent omission from a Schedule or transfer or conveyance of any asset, right or claim that, had the parties hereto given specific consideration to such asset, right or claim as of the date hereof, would have otherwise been classified as a AG.com Business Asset. In furtherance of the foregoing, AG and AG.com shall confer from time to time prior to the Closing Date to supplement or update the Schedules to this Agreement. In addition, AG shall be entitled to review work papers and asset ledgers used to prepare the AG.com Balance Sheet to identify assets included in the AG.com Business Assets. Moreover, no asset, right or claim shall be deemed an AG.com Business Asset solely as a result of this paragraph if such asset, right or claim is expressly excluded as an asset being transferred by an Ancillary Agreement. In addition, no asset, right or claim shall be deemed an AG.com Business Asset solely as a result of this paragraph unless AG.com requests assistance in transferring an asset on or prior to twelve (12) months after the Closing Date. Notwithstanding the use of the term "primarily" in connection with a listed item comprising the AG.com Business Assets, if an asset is listed on a Schedule referenced in Section 1.01(b), it shall be considered an AG.com Business Asset, even if not used "primarily" in the AG.com Business. In addition, notwithstanding the foregoing, the AG.com Business Assets shall not in any event include the Excluded Assets referred to in Section 1.01(c) below.


(c) For the purposes of this Agreement, "Excluded Assets" shall mean: (i) the assets, rights and claims listed or described on SCHEDULE 1.01(C)(I), (ii) any and all assets of the AG Benefit Plans and (iii) any and all assets, rights and claims that are expressly contemplated by this Agreement or any Ancillary Agreement (or the Exhibits and Schedules hereto or thereto) as assets, rights or claims to be retained by AG.


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SECTION 1.02 ASSIGNMENT AND ASSUMPTION OF LIABILITIES.


(a) Except as set forth in one or more of the Ancillary Agreements or in this Agreement, from and after the Closing Date, AG.com hereby assumes and agrees faithfully to pay, perform and fulfill all obligations under the following in accordance with their respective terms (the "Assumed AG.com Liabilities"):


(i) any and all Liabilities that are expressly
contemplated by this Agreement or any Ancillary Agreement (or
the Schedules hereto or thereto) as Liabilities to be assumed
by AG.com, and all agreements, obligations and Liabilities of
AG.com under this Agreement or any of the Ancillary
Agreements;


(ii) all Liabilities, primarily relating to, arising
out of or resulting from:


(A) the operation of the AG.com Business, as
conducted at any time prior to, on or after the
Closing Date, including, without limitation, (i) any
Liability that is not an Excluded Liability relating
to, arising out of or resulting from any act or
failure to act by any director, officer, employee,
agent or representative (whether or not such act or
failure to act is or was within such Person's
authority); (ii) those employee-related Liabilities
relating to any past or present employee of AG.com or
any past or present employee of AG who was engaged
primarily in the AG.com Business prior to the
Separation which are specifically assumed by AG.com
pursuant to the provisions of Section 5.07; and (iii)
any Liability that is not an Excluded Liability
related to service, warranty, support and product
liability in connection with the AG.com Business,
including products and technologies;


(B) the operation of any business conducted
by AG.com or any of its subsidiaries at any time
after the Closing Date including, without limitation,
any Liability relating to, arising out of or
resulting from any act or failure to act by any
director, officer, employee, agent or representative
of AG.com or its Subsidiaries (whether or not such
act or failure to act is or was within such Person's
authority); and


(C) any AG.com Business Assets (including
without limitation any liability under the AG.com
Contracts and any guarantee, indemnity,
representation, warranty or other Liability of any
member of the AG Group in respect of any contract
specified in this Section 1.02(a)(ii)(C));


(iii) all Liabilities reflected as "Liabilities" or
obligations of AG.com in the AG.com Balance Sheet, subject to
any discharge of such Liabilities subsequent to the date of
AG.com Balance Sheet; and


(iv) all Liabilities listed on SCHEDULE 1.02(a)(IV).


(b) Notwithstanding the foregoing, the Assumed AG.com Liabilities shall not in any event include the Excluded Liabilities referred to in this Section 1.02(b). For purposes of this Agreement, "Excluded Liabilities" shall mean:


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(i) any Liability of AG arising out of any Action pending or, to the knowledge of AG, threatened as of the Closing Date including, without limitation, Actions that are listed on SCHEDULE 1.02 (b)(I) and any Liability arising out of or related in any way to the business known as CreataCard kiosk business;


(ii) any Liability for Taxes, whether or not accrued, assessed or currently due and payable, (A) of the AG Group or (B) relating to the operation or ownership of the AG.com Business or the AG.com Business Assets for any Tax period (or portion thereof) ending on or prior to the Closing Date (for purposes of this clause (ii), all real property Taxes, personal property Taxes and similar ad valorem obligations levied with respect to the AG.com Business Assets for a Tax period that includes (but does not end on) the Closing Date shall be apportioned between the AG Group and AG.com and AG.com's Subsidiaries based upon the number of days of such period included in the Tax period prior to the Closing Date and the number of days of such Tax period after the Closing Date hereof (which period shall include the Closing Date);


(iii) any Liability of AG or any of its Subsidiaries arising under any AG Benefit Plan relating to periods prior to, on or after, the Closing Date, including, without limitation, any liability under ERISA, but excluding any Liability provided in Section 5.07 to be assumed by AG.com;


(iv) any Liability of AG that relates to, or that arises out of, the termination of the employment with the AG Group prior to the Closing Date of any employee or former employee of the AG.com Business (including as a result of the transactions contemplated by this Agreement) except as specifically stated in Section 5.07;


(v) all Liabilities relating to pollution, contamination or harm of any land or the environment attributable to, caused by or otherwise involving any business of the AG Group; and


(vi) any Liability of AG that does not relate primarily to the AG.com Business (including, without limitation, all Liabilities relating to any Employee that does not become an AG.com Employee and all Liabilities involving any business of the AG Group after the Closing Date), but excluding any Liability as may be otherwise expressly contemplated by this Agreement or any Ancillary Agreement to be assumed by AG.com.


(c) On and after the Closing Date, AG.com and its Subsidiaries shall be responsible for all Assumed AG.com Liabilities, regardless of when or where such Liabilities arose or arise, or whether the facts on which they are based occurred prior to or subsequent to the Closing Date, regardless of where or against whom such Liabilities are asserted or determined (including any Assumed AG.com Liabilities arising out of claims made by AG's or AG.com's respective directors, officers, employees, agents or Affiliates) (and, except to the extent arising from an Excluded Liability) ...