AGREEMENT AND PLAN OF MERGER,

Exhibit 2.1

 

AGREEMENT AND PLAN OF MERGER

by and among

ASPEN EDUCATION GROUP, INC.,

FRAZIER HEALTHCARE II, L.P.

as Shareholders’ Representative,

MADRID MERGER CORPORATION,

and

CRC HEALTH CORPORATION

September 22, 2006

TABLE OF CONTENTS

 

 

-i-

TABLE OF CONTENTS

(continued)

 

 

-ii-

TABLE OF CONTENTS

(continued)

 

 

-iii-

TABLE OF CONTENTS

(continued)

 

 

 

-iv-

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this “ Agreement ”) is made as of September 22, 2006, by and among Aspen Education Group, Inc., a California corporation (the “ Company ”), Madrid Merger Corporation, a California corporation (“ Merger Sub ”), CRC Health Corporation, a Delaware corporation (“ Buyer ”), and Frazier Healthcare II, L.P., as Shareholders’ Representative.

RECITALS

A. The Company’s outstanding capital stock consists of 20,233,824 shares of common stock, no par value per share (“ Common Stock ”), 12,236,287 shares of 12% Series A Cumulative Convertible Preferred Stock, no par value per share (“ Preferred Stock A ”) and 4,078,762 shares of 12% Series B Cumulative Convertible Preferred Stock, no par value per share (“ Preferred Stock B ”). Preferred Stock A and Preferred Stock B are collectively referred to herein as the “ Preferred Stock ”. The Common Stock and the Preferred Stock are collectively referred to herein as the “ Company Stock ”, and each share of Company Stock is referred to herein as a “ Share ”. There are outstanding options (“ Options ”) to acquire an aggregate of 3,466,600 shares of Common Stock. There are outstanding warrants (“ Warrants ”) to acquire an aggregate of 5,192,316 shares of Common Stock.

B. Merger Sub is a wholly-owned subsidiary of Buyer.

C. The respective Boards of Directors of Buyer, Merger Sub and the Company deem it advisable and in the best interests of their respective shareholders to consummate the business combination provided for herein.

D. In furtherance thereof, the respective Boards of Directors of Buyer, Merger Sub and the Company have approved this Agreement and the Merger, upon the terms and subject to the conditions set forth in this Agreement.

E. The Board of Directors of the Company has determined to recommend to the Shareholders the adoption of this Agreement.

F. Buyer, as the sole shareholder of Merger Sub, has adopted this Agreement.

G. Concurrently with the execution and delivery of this Agreement the shareholders of the Company have adopted this Agreement.

NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter contained, and intending to be legally bound, the parties hereto hereby agree as follows:

ARTICLE I

Definitions

Certain terms used in this Agreement are listed in alphabetical order and defined or referred to below (such terms as well as any other terms defined elsewhere in this Agreement shall be equally applicable to both the singular and plural forms of the terms defined).

“ Additional Merger Consideration ” is defined in Section 2.13(a).

“ Agreement ” means this Agreement and the Exhibits and Schedules attached hereto.

“Allocation Certificate” is defined in Section 2.7(c).

“ Arbitrating Accountant ” is defined in Section 2.10(b).

“ Audited Financials ” is defined in Section 3.6.

“ Benefit Plans ” is defined in Section 3.13(a).

“ Books and Records ” is defined in Section 7.1.

“ Business Day ” means any day when banks in Los Angeles, California are open for conducting general commercial business.

“ Buyer ” is defined in the Preamble.

“ Buyer Officer’s Certificate ” means a certificate substantially in the form of Exhibit B attached hereto.

“ California Code ” means the Corporations Code of California.

“ Cash Equivalents ” means, collectively, the aggregate consolidated amount of cash on hand and in banks, cash equivalents and marketable securities of the Company and the Subsidiaries as of the open of business on the Closing Date (net of any bank overdrafts), as adjusted for any deposits in transit, any outstanding checks, in each case as determined in accordance with GAAP (without regard to any purchase accounting adjustments arising out of the transactions contemplated hereby) and only to the extent such overdraft, deposit in transit, outstanding check or other reconciling item is not reflected in the Closing Balance Sheet. Notwithstanding the foregoing, restricted cash and cash held in student accounts (defined for the purposes of this Agreement as funds deposited with the Company or its Subsidiaries on behalf of students for their incidental purchases) is excluded from the definitions of “Cash Equivalents” and “Current Assets.”

“ CERCLA ” is defined in Section 3.9(b)(v).

“ Certificates ” is defined in Section 2.11(b)(i).

“ Closing ” is defined in Section 2.3.

 

-2-

“ Closing Balance Sheet ” is defined in Section 2.9.

“ Closing Date ” is defined in Section 2.3.

“ Closing Estimate ” is defined in Section 2.7(b).

“ Closing Date Merger Amount ” means an amount equal to (i) the Closing Estimate, minus (ii) the Working Capital Escrow Amount.

“ Closing Date Per Share Amount ” means the quotient of (x) divided by (y), where (x) equals (i) the Closing Date Merger Amount, plus (ii) the aggregate exercise price for all Options cancelled pursuant to Section 2.6(a) plus the aggregate exercise price for all Warrants sold pursuant to Section 2.6(b), and (y) equals the total number of shares of Common Stock outstanding as of immediately prior to the Effective Time determined on a Fully Diluted Basis. For greater certainty, the phrase “aggregate exercise price” in the preceding sentence refers to the aggregate exercise price that would be payable upon exercise, regardless of whether such exercise actually occurs.

“ Closing Working Capital ” is defined in Section 2.8.

“ Code ” means the Internal Revenue Code of 1986, as amended.

“ Common Stock ” is defined in the Recitals.

“ Company ” is defined in the Preamble.

“ Company Officer’s Certificate ” means a certificate substantially in the form of Exhibit C attached hereto.

“ Company Stock ” is defined in the Recitals.

“ Confidential Information Memorandum ” is defined in Article IV.

“ Confidentiality Agreement ” means the Confidentiality Agreement dated August 7, 2006 executed by Buyer in favor of the Company.

“ Constituent Entities ” is defined in Section 2.1.

“ Current Assets ” means the current consolidated assets of the Company and the Subsidiaries, as of the relevant date of determination, but excluding Cash Equivalents, deferred tax assets, restricted cash and cash held in student accounts, calculated in accordance with GAAP and consisting solely of the line items set forth on Exhibit D-1 .

“ Current Liabilities ” means the current consolidated liabilities of the Company and the Subsidiaries, including accrued liabilities calculated in accordance with GAAP, as of the relevant date of determination, but excluding deferred tax liabilities, calculated in accordance with GAAP and consisting solely of the line items set forth on Exhibit D-1 .

 

-3-

“ Damages ” means all assessments, levies, losses, fines, penalties, damages, costs and expenses, including reasonable attorneys’, accountants’, investigators’, and experts’ fees and expenses.

“ Debt Commitment Letter ” is defined in Section 5.5.

“ Delivery Date ” is defined in Section 2.9.

“ Disclosure Schedule ” is defined in Article III.

“ Dispute ” is defined in Section 2.10(a).

“ Dispute Notice ” is defined in Section 2.10(a).

“ Dispute Period ” is defined in Section 2.10(a).

“ Dissenting Share ” is defined in Section 2.19(a).

“ D&O Claim ” is defined in Section 7.7(a).

“ Effective Time ” is defined in Section 2.3.

“ Environmental Claims ” is defined in Section 3.9(b)(vii)(A).

“ Environmental Laws ” is defined in Section 3.9(b)(vii)(B).

“ Environmental Permits ” is defined in Section 3.9(b)(vii)(C).

“ Equity Commitment Letter ” is defined in Section 5.5.

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended.

“ Facility ” is defined in Section 3.9(b)(vii)(D).

“ Financial Statements ” is defined in Section 3.6.

“ Financing ” is defined in Section 5.5.

“ FIRPTA Certificate ” is defined in Section 8.2(b).

“ Fully Diluted Basis ” means assuming the exercise of all Warrants and all Options outstanding and exercisable as of immediately prior to the Effective Time or that become exercisable as a result of the Merger and conversion of all then outstanding Preferred Stock as of immediately prior to the Effective Time.

“ GAAP ” means U.S. generally accepted accounting principles, consistently applied.

 

-4-

“ Governmental Entity ” means any governmental or regulatory authority, agency, court, commission or other entity, domestic or foreign, including any Person serving as a fiscal intermediary, agent or carrier with respect to any governmental program or benefit.

“ Hazardous Substances ” is defined in Section 3.9(b)(vii)(F).

“ Healthcare and Human Services Laws ” is defined in Section 3.20(a).

“ HSR Act ” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (United States), as amended, and the rules and regulations thereunder.

“ Income Tax ” means any income, franchise, net profits, excess profits or similar Tax measured on the basis of net income.

“ Indebtedness ” means, to the extent not included in Working Capital and without duplication, the sum of the following items of the Company and its Subsidiaries, on a consolidated basis, immediately prior to Closing determined in accordance with GAAP: (a) all indebtedness for borrowed money (including the principal amount thereof, premium, if any, thereon and the amount of accrued and unpaid interest thereon) of the Company and its Subsidiaries, whether or not represented by bonds, debentures, notes or other securities, for the repayment of money borrowed or seller notes issued in connection with the acquisition of any Person, whether owing to banks, financial institutions or otherwise, including unreimbursed amounts drawn under letters of credit, surety bonds or similar obligations, (b) all guaranties, and other obligations of the Company or its Subsidiaries in respect of indebtedness for borrowed money of persons other than the Company or the Subsidiaries, (c) all premiums, fees, penalties, change of control payments or other consideration in respect of any of the foregoing, (d) capitalized leases entered into since the Interim Balance Sheet Date, (e) the redemption price of minority interests due to Sue Crowell in respect of her interest in SUWS of the Carolinas, (f) the Equity Price (as defined in the Niton Letter) due to Niton, Inc. and Dr. David Sack under that certain letter from the Company and Aspen Youth, Inc. to Niton, Inc. and Dr. Sack dated the date hereof (the “ Niton Letter ”) in respect of the purchase of interests in Eating Disorder Venture, LLC and the cancellation of Options held by Dr. Sack and (g) earnout obligations of the Company and its Subsidiaries in respect of the purchase of Copper Canyon Academy, New Leaf Academy and Texas Excel Academy, Inc. No Transaction Expenses and no undrawn amounts (or contingent reimbursement obligations) under any outstanding letters of credit shall be deemed Indebtedness. No earnout obligations in respect of the purchase of Outback Therapeutic Expeditions and Wilderness Therapy Programs, Inc., shall be deemed Indebtedness. The Termination Fee (as defined in the Niton Letter), if it shall come due, shall not be deemed Indebtedness, shall not be included in the definitions of Current Liabilities or Transaction Expenses, and shall not be included in the calculation of the Tax Amount.

“ Indemnification Provisions ” is defined in Section 7.7(a).

“ Interim Balance Sheets ” is defined in Section 3.6.

“ Interim Balance Sheet Date ” is defined in Section 3.6.

“ knowledge of the Company ” or “ known to the Company ” is defined in Section 11.13.

 

-5-

“ Leased Premises ” is defined in Section 3.18.

“ material ” means (a) with respect to the Company, material to the business, operations, assets, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole and (b) with respect to Buyer, material to the business, operations, assets, or results of operations or financial condition of Buyer.

“ Material Adverse Effect ” means any change, effect, event, occurrence, state of facts or development that (1) is materially adverse to the business, operations, assets, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole or (2) prevents or materially impedes, interferes with, hinders or delays beyond the Outside Date the consummation by the Company of the Merger or the other transactions contemplated by this Agreement; provided, however, that none of the following shall be deemed, either alone or in combination, to constitute, and none of the following, with the exception of (a), shall be taken into account in determining whether there has been or will be, a Material Adverse Effect: (a) any failure by the Company or its Subsidiaries to meet any internal or published projections, forecasts, or revenue or earnings predictions for any period ending on or after the date of this Agreement; (b) any adverse change, effect, event, occurrence, state of facts or development to the extent attributable to the announcement or pendency of the transactions contemplated by this Agreement; (c) to the extent that they do not have a materially disproportionate effect on the Company and its Subsidiaries taken as a whole, any adverse change, effect, event, occurrence, state of facts or development attributable to conditions affecting (i) the industry(ies) in which the Company or its Subsidiaries operate, (ii) the U.S. securities or financial markets, (iii) the U.S. economy as a whole, or (iv) the economy of any foreign country as a whole; or (d) any adverse change, effect, event, occurrence, state of facts or development resulting from (i) the taking of any action required by this Agreement, (ii) any change in accounting requirements or principles or any change in applicable laws, rules or regulations or the interpretation or enforcement thereof, (iii) something attributable to the acts or omissions of, Buyer, (iv) the acts or omissions of, or on behalf of, Buyer, or (v) to the extent that they do not have a materially disproportionate effect on the Company and its Subsidiaries taken as a whole, acts of war, terrorism, or other conflict.

“ Material Contract ” is defined in Section 3.11.

“ Merger ” is defined in Section 2.1.

“ Merger Price ” is defined in Section 2.7(a).

“ Merger Sub ” is defined in the Preamble.

“ Officer ” is defined in Section 7.7(a).

“ Option Amount ” is defined in Section 2.6(a)(i).

“ Options ” is defined in the Recitals.

“ Outside Date ” is defined in Section 11.1(e).

 

-6-

“ Owned Premises ” is defined in Section 3.18.

“ Paying Agent ” is defined in Section 2.11(a).

“ Payment Fund ” is defined in Section 2.11(a).

“ Pay-Off Letter ” is defined in Section 8.2(c).

“ Percentage Share ” means the quotient of (x) divided by (y), where (x) means the number of shares of Common Stock held by such Shareholder, Option holder or Warrant holder as of immediately prior to the Effective Time determined on a Fully Diluted Basis, and (y) means the total number of shares of Common Stock outstanding as of immediately prior to the Effective Time determined on a Fully Diluted Basis. Schedule 1 lists each Shareholder’s, Option holder’s and Warrant holder’s Percentage Share.

“ Permitted Encumbrances ” is defined in Section 3.7.

“ Per Share Amount ” means the quotient of (x) divided by (y), where (x) equals (i) the Merger Price (as may be adjusted in accordance with Section 2.13), plus (ii) the aggregate exercise price for all Options cancelled pursuant to Section 2.6(a) plus the aggregate exercise price for all Warrants sold pursuant to Section 2.6(b), and (y) equals the total number of shares of Common Stock outstanding as of immediately prior to the Effective Time determined on a Fully Diluted Basis. For greater certainty, the phrase “aggregate exercise price” in the preceding sentence refers to the aggregate exercise price that would be payable upon exercise, regardless of whether such exercise actually occurs.

“ Person ” means an individual, corporation, limited liability company, trust, partnership, joint venture, unincorporated organization, government agency or any agency or political subdivision thereof, or other entity.

“ Preferred Stock ” is defined in the Recitals.

“ Preferred Stock A ” is defined in the Recitals.

“ Preferred Stock B ” is defined in the Recitals.

“ Real Property ” is defined in Section 3.18.

“ Registered Intellectual Property ” is defined in Section 3.15.

“ Regulatory Permits ” is defined in Section 3.20(c).

“ Release ” is defined in Section 3.9(b)(vii)(G).

“ Released Escrow Amount ” is defined in Section 2.13(b).

“ Section 409A ” is defined in Section 3.13(f).

“ Securities Act ” is defined in Article IV.

 

-7-

“ Share ” is defined in the Recitals.

“ Shareholder Rep Party ” means the Shareholders’ Representative, its affiliates and each of their officers, directors, managers, employees, agents, partners, members and shareholders.

“ Shareholders ” means all shareholders of the Company holding beneficially and of record the issued and outstanding Common Stock and Preferred Stock.

“ Shareholders’ Representative ” is defined in Section 9.1.

“ Successor Plans ” is defined in Section 7.4(b).

“ Subsidiary ” means each entity as set forth on Schedule 3.1(b) .

“ Surviving Corporation ” is defined in Section 2.1.

“ Target Working Capital ” means negative $24,500,000.

“ Tax ” means any taxes, duties, assessments, fees, levies, or similar governmental charges, together with any interest, penalties, and additions to tax, imposed by any taxing authority, wherever located (i.e., whether federal, state, local, municipal, or foreign), whether disputed or not, including, without limitation, all net income, gross income, gross receipts, net receipts, sales, use, transfer, franchise, privilege, profits, social security, disability, withholding, payroll, unemployment, employment, excise, severance, property, windfall profits, value added, ad valorem, occupation, or any other similar governmental charge or imposition.

“ Tax Amount ” is defined in Section 2.9.

“ Tax Returns ” mean all reports, returns, statements (including, without limitation, estimated reports, returns, or statements), claims for refund and other similar filings relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

“ Transaction Expenses ” means all fees, commissions, costs and expenses incurred by the Company, its Subsidiaries or the Shareholders (to the extent the Company, its Subsidiaries or the Surviving Corporation pays or is obligated to pay such fees and expenses incurred by the Shareholders) in connection with this Agreement or the Merger to the extent not paid in full at or prior to the Closing or not otherwise included in Working Capital, including (a) all brokerage or finders’ fees or agents’ commissions or any similar charges, including the amounts payable to UBS Securities LLC, (b) all legal, accounting, financial advisory, consulting and other fees and expenses of third parties or affiliated parties and (c) all payments to employees, directors or independent contractors that accelerate, come due or are payable as a result of or in connection with the closing of the Merger (other than payments in respect of Options).

“ Transferred Employees ” is defined in Section 7.4(a).

“ WARN Act ” means, collectively, the Worker Adjustment and Retraining Notification Act of 1988 and the California specific WARN Act (as set forth in Sections 1400-1408 of the California Labor Code), as amended.

 

-8-

“ Warrants ” is defined in the Recitals.

“ Warrant Amount ” is defined in Section 2.6(b).

“ Working Capital ” means the difference of Current Assets less Current Liabilities.

“ Working Capital Adjustment Amount ” is defined in Section 2.13(b).

“ Working Capital Escrow Amount ” means $8,000,000.

ARTICLE II

Purchase and Sale of Shares; Closing and Manner of Payment

2.1 General . On the terms and subject to the conditions contained in this Agreement, at the Effective Time, in accordance with this Agreement and the California Code, Merger Sub shall merge (the “ Merger ”) with and into the Company, the Company shall continue as the surviving corporation (sometimes herein referred to as the “ Surviving Corporation ”) and the separate corporate existence of Merger Sub shall cease. The Company and Merger Sub are sometimes herein referred to as the “ Constituent Entities .”

2.2 Effect of the Merger . Immediately following the Merger, the Surviving Corporation shall (a) possess all the rights, privileges, powers and franchises, both public and private, of the Constituent Entities, (b) be vested with all property, whether real, personal or mixed, and all debts due on whatever account, and all other causes of action, and all other interests belonging to or due to each of the Constituent Entities, and (c) be responsible and liable for all the obligations and liabilities of each of the Constituent Entities, all with the effect set forth in the California Code.

2.3 Closing; Effective Time . The closing of the Merger (the “ Closing ”) shall take place at the offices of Morgan, Lewis & Bockius LLP, 300 S. Grand Avenue, Suite 2200, Los Angeles, California 90071, at 10:00 a.m. on a date to be specified by the parties which shall be no later than two (2) Business Days after satisfaction (or waiver as provided herein) of the conditions set forth in Article VIII (other than those conditions that by their nature will be satisfied at the Closing), unless another time, date and/or place is agreed to in writing by the parties. The date upon which the Closing occurs is herein referred to as the “ Closing Date .” Simultaneously with, or as soon as practicable following, the Closing, the parties shall cause a certificate of merger to be filed with the Secretary of State of the State of California as provided in Section 1103 of the California Code. The Merger shall become effective at such time as the certificate of merger is so filed or at such later time as is set forth in the certificate of merger, if different, which time is hereinafter referred to as the “ Effective Time .”

2.4 Charter, Bylaws, Directors and Officers . At the Effective Time, (a) the Articles of Incorporation of Merger Sub as in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation, and thereafter may be amended in accordance with its terms and as provided by law; (b) the Bylaws of Merger Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, and thereafter may be amended in accordance with their terms and as provided by law; and (c) the directors and officers of the Surviving Corporation shall be the persons listed on Schedule 2.4 hereto, in each case until the earlier of their death, resignation or removal.

 

-9-

2.5 Common Stock and Preferred Stock . At the Effective Time, by virtue of the Merger, automatically and without any action on the part of any party:

(a) Each share of Common Stock (other than Dissenting Shares) issued and outstanding immediately prior to the Effective Time shall be converted without any action on the part of the holders thereof into and represent the right to receive and become exchangeable for an amount in cash (without interest and payable in accordance with this Article II) equal to the Per Share Amount;

(b) Each share of Preferred Stock issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares) shall be converted, without any action on the part of the holders thereof, into and represent the right to receive and become exchangeable for an amount in cash (without interest and payable in accordance with this Article II) equal to the number of shares of Common Stock issuable upon conversion of such share of Preferred Stock (including the conversion of accrued and unpaid dividends thereon) immediately prior to the Effective Time multiplied by the Per Share Amount;

(c) Each Share, if any, held in the Company’s treasury or owned beneficially by Buyer or Merger Sub shall be cancelled and retired without payment of any consideration therefor; and

(d) Each issued and outstanding share of common stock of Merger Sub outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation.

2.6 Options and Warrants . With respect to any Option or Warrant outstanding as of immediately prior to the Effective Time:

(a) Options .

(i) Each Option, to the extent outstanding and exercisable for one or more shares of Common Stock immediately prior to the Effective Time or which will otherwise in accordance with its terms vest on an accelerated basis on the consummation of the Merger, shall, at the Effective Time, be cancelled and cease as to those shares of Common Stock. In exchange for each such cancelled Option, the Company (or the Surviving Corporation as its successor) shall pay to the holder a cash amount (the “ Option Amount ”) determined by multiplying (A) the number of shares of Common Stock as to which such Option is so cancelled by (B) the dollar amount (if any) by which the Per Share Amount exceeds the exercise price per share of Common Stock in effect under such Option immediately prior to the Effective Time. However, no cash amount or other consideration shall be payable with respect to any cancelled Option for which the exercise price payable per share of Common Stock immediately prior to the Effective Time is equal to or greater than the Per Share Amount. The cash payments made to each holder of a cancelled Option shall be subject to the collection of all applicable federal, state and local income and employment withholding taxes by the Company (or the Surviving Corporation), and all cash payments made to each such holder of a cancelled Option shall accordingly be reduced by the amount of those withholding taxes, with the net amount to be paid to such holder in accordance with Sections 2.18(a) and (b).

 

-10-

(ii) The Company shall take all actions necessary so that each Option, to the extent outstanding immediately prior to the Effective Time but not accelerated or otherwise exercisable for one or more of the underlying shares of Common Stock, shall be cancelled without further action at the Effective Time.

(iii) Schedule 2.6(a) sets forth a true and complete list as of the date hereof of each outstanding Option, including the option holder, the number of shares of Common Stock subject to such option, the number of those shares for which the Option is exercisable or will be accelerated and exercisable as of the Closing Date, the number of shares for which the Option is not exercisable and the exercise price payable per share. On the Closing Date, the Company shall deliver to Buyer an updated Schedule 2.6(a) current as of such Closing Date

(b) Warrants . Each Warrant outstanding immediately prior to the Effective Time shall be sold by the holder thereof to the Company in consideration for the right to receive an amount in cash, without interest, payable in accordance with this Article II (the “ Warrant Amount ”), equal to the product of (i) the Per Share Amount less the exercise price per share of Common Stock under such Warrant as of immediately prior to the Effective Time; and (ii) the aggregate number of shares of Common Stock into which such Warrant is exercisable immediately prior to the Effective Time.

2.7 Merger Price and Closing Estimate .

(a) Merger Price . Subject to Section 2.8, the merger price (the “ Merger Price ”) shall be equal to:

(i) Two Hundred Ninety-One Million Dollars ($291,000,000);

(ii) plus the aggregate amount of Cash Equivalents;

(iii) plus the principal amount and accrued interest due to the Company under that certain Note and Pledge Agreement dated June 30, 2005, issued by Educational Services of America, College Park School and Rossier Educational Enterprises, Inc.;

(iv) minus the aggregate of all Indebtedness; and

(v) minus the aggregate amount of Transaction Expenses.

(b) Closing Estimate . For purposes of the Closing, the Company shall, not less than two (2) days prior to the Closing Date, make a good-faith estimate of the Merger Price, as adjusted by the Working Capital Adjustment Amount (the “ Closing Estimate ”), based upon the most recent ascertainable financial information of the Company and the Subsidiaries.

(c) Fully Diluted Shares . For purposes of the Closing and the calculation of the Per Share Amount and the Closing Date Per Share Amount, the Company shall, not less than two (2) days prior to the Closing Date, provide Buyer with an officer’s certificate (the

 

-11-

“ Allocation Certificate ”) setting forth (i) the total number of shares of Common Stock outstanding as of immediately prior to the Effective Time determined on a Fully Diluted Basis and (ii) the holders thereof. The Allocation Certificate shall be final and binding on the Company, all Shareholders and holders of Options and Warrants.

2.8 Working Capital Adjustment . The Merger Price will be (i) increased on a dollar for dollar basis by the amount by which the Working Capital as of the open of business on the Closing Date (“ Closing Working Capital ”) is greater than Target Working Capital, or (ii) decreased on a dollar for dollar basis by the amount by which the Working Capital as of the open of business on the Closing Date is less than Target Working Capital. Working Capital will not include any Transaction Expenses to the extent included in the calculation of the Merger Price (without regard to this Section 2.8).

2.9 Determination of Cash Equivalents, Indebtedness and Working Capital . The amounts of Cash Equivalents, Indebtedness and Closing Working Capital shall each be determined from a consolidated balance sheet (the “ Closing Balance Sheet ”) of the Company and the Subsidiaries as of the open of business on the Closing Date. The Closing Balance Sheet shall be prepared in accordance with GAAP and Exhibit D-1 , provided that in the event of any conflict between GAAP and Exhibit D-1 , GAAP shall control; provided that, notwithstanding the foregoing, Working Capital shall be calculated solely on the basis of the line items set forth on Exhibit D-1 . Notwithstanding anything to the contrary herein or in GAAP but without duplication, the Closing Balance Sheet shall reflect as a current asset of the Company (and Working Capital shall include as an asset) the Tax Amount calculated in the manner set forth on Exhibit D-2 . The “ Tax Amount ” means the economic cash value of Income Tax benefits to the Company and its Subsidiaries arising at any time from any and all deductible payments related to (i) any exercise, or cancellation pursuant to Section 2.6(a), of an Option that occurs on or after the date hereof and prior to the Effective Time, (ii) any bonuses paid on the Closing Date in connection with the Merger, or (iii) all transaction expenses that are deductible for Tax purposes, including (to the extent deductible in the year ending on the Closing Date) unamortized (as of immediately prior to the Closing) transaction expenses with respect to Indebtedness being paid off at Closing and the fees and expenses of legal counsel, accountants, investment bankers and the Shareholders’ Representative. Buyer, at its sole cost and expense, shall prepare the Closing Balance Sheet and deliver the Closing Balance Sheet to the Shareholders’ Representative not more than seventy-five (75) days following the Closing Date. “ Delivery Date ” means the date on which the Closing Balance Sheet is so delivered. Buyer and the Shareholders’ Representative shall, throughout the entire period starting on the Closing Date and ending on the Delivery Date, meet from time to time at either party’s request and discuss any and all financial and business matters relating to the preparation of the Closing Balance Sheet.

2.10 Disputes Regarding Closing Balance Sheet . Buyer shall make available to the Shareholders’ Representative the books, records and personnel of the Company and the Subsidiaries which the Shareholders’ Representative requires in order to review the Closing Balance Sheet and Buyer’s determination of Cash Equivalents, Closing Working Capital and Indebtedness. Disputes with respect to the Closing Balance Sheet shall be resolved as follows:

(a) The Shareholders’ Representative shall have thirty (30) days following the Delivery Date (the “ Dispute Period ”) to dispute any of the elements of or amounts reflected on

 

-12-

the Closing Balance Sheet and affecting the calculation of the Merger Price or Per Share Amount (a “ Dispute ”). If the Shareholders’ Representative does not give to Buyer written notice of a Dispute (a “ Dispute Notice ”) within the Dispute Period, the Closing Balance Sheet shall be treated as if it had been accepted and agreed to by the Shareholders’ Representative in the form in which it was delivered, and shall be final and binding upon the parties hereto. If the Shareholders’ Representative has a Dispute, the Shareholders’ Representative shall give Buyer a Dispute Notice within the Dispute Period, setting forth the elements and amounts with which it disagrees. Within thirty (30) days after delivery of the Dispute Notice, Buyer and the Shareholders’ Representative shall attempt to resolve the Dispute and agree in writing upon the final content of the disputed Closing Balance Sheet.

(b) If Buyer and the Shareholders’ Representative are unable to resolve any Dispute within the thirty (30) day period following the Shareholders’ Representative’s delivery of a Dispute Notice, the Shareholders’ Representative and Buyer shall jointly engage the Los Angeles office of Ernst & Young LLP (the “ Arbitrating Accountant ”) as arbitrator. If Ernst & Young LLP is unable or unwilling to serve as Arbitrating Accountant, the Arbitrating Accountant shall be the Los Angeles office of an accounting firm selected promptly by agreement of Buyer and the Shareholders’ Representative. In connection with the resolution of any Dispute, the Arbitrating Accountant shall have access to all documents, records, work papers, facilities and personnel necessary to perform its function as arbitrator. The Arbitrating Accountant’s function shall solely be to resolve the Dispute. The Arbitrating Accountant shall allow Buyer and the Shareholders’ Representative (and their respective representatives) to present their respective positions regarding the Dispute. The Arbitrating Accountant may, at its discretion, conduct a conference concerning the Dispute, at which conference each party shall have the right to present additional documents, materials and other information and to have present its advisors, counsel and accountants. In connection with such process, there shall be no other hearings or any oral examinations, testimony, depositions, discovery or other similar proceedings. The Arbitrating Accountant shall thereafter promptly render its decision on the question in writing and finalize the Closing Balance Sheet. Such written determination shall be final and binding upon the parties hereto, and judgment may be entered on the award. Upon the resolution of all Disputes, the Closing Balance Sheet shall be revised to reflect the resolution. The fees and expenses of the Arbitrating Accountant shall be paid half by the Shareholders’ Representative on behalf of the Shareholders, on the one hand, and half by Buyer, on the other hand.

2.11 Manner of Payment of Merger Price and Indebtedness .

(a) Paying Agent .

(i) At or prior to the Effective Time, Buyer shall enter into an agreement with a bank or trust company of recognized standing designated by Buyer and that is reasonably satisfactory to the Company (the “ Paying Agent ”). At the Closing, Buyer shall deposit with the Paying Agent (A) the Working Capital Escrow Amount, and (B) the Closing Date Merger Amount (collectively, the “ Payment Fund ”).

 

-13-

(b) Exchange Procedures .

(i) As soon as reasonably practicable after the date hereof, the Company shall cause the Paying Agent to mail to each holder of record of a certificate or certificates representing shares of Company Stock (“ Certificates ”) and to each holder of Warrants (A) a letter of transmittal that shall specify that delivery shall be effected, and risk of loss and title to the Certificates and Warrants shall pass, only upon proper delivery of the Certificates and Warrants to the Paying Agent and which shall be reasonably satisfactory to Buyer, and (B) instructions for use in effecting surrender by such holder of Certificates to the Paying Agent in exchange for a portion of the Merger Price.

(ii) At or after the Effective Time, the holder of each Certificate and/or Warrant, upon the surrender by such holder to the Exchange Agent of such Certificate or Warrant, as applicable, together with the letter of transmittal duly completed and validly executed by such holder in accordance with the instructions thereto, and such other documents as may reasonably be required by the Paying Agent, shall be entitled to receive in exchange for such Certificate or Warrant, as applicable, a check (or, if requested by such holder, a wire transfer) for the Per Share Amount into which shares of the Company Stock theretofore represented by such Certificate have been converted pursuant to Section 2.5, or Warrant Amount into which such Warrant has been converted pursuant to Section 2.6(b) and such Certificate or Warrant, as applicable, shall forthwith thereafter be canceled. Until such time as any adjustment pursuant to Section 2.13 has been determined, all payments made by the Paying Agent shall be calculated on the basis that the Per Share Amount shall be deemed to equal the Closing Date Per Share Amount. In the event of a transfer of ownership of shares of Company Stock or Warrant, as applicable, that is not registered on the transfer records of the Company, the cash consideration payable hereunder with respect to such shares of Company Stock or Warrant, as applicable, may be paid to a Person other than the Person in whose name the Certificate or Warrant, as applicable, so surrendered is registered, if such Certificate or Warrant, as applicable, shall be properly endorsed or otherwise be in proper form for transfer. Subject to Section 2.19, each Certificate or Warrant, as applicable, shall be deemed at all times from and after the Effective Time to represent only the right to receive, upon exchange as contemplated in this Section 2.11, the Per Share Amount or Warrant Amount, as applicable, calculated in accordance with this Agreement. No interest shall be paid or accrue on any Per Share Amount payable upon surrender of any Certificate.

2.12 Further Rights in Company Stock . Subject to Section 2.13, all Per Share Amounts issued and paid upon conversion of shares of Company Stock, all Option Amounts issued and paid and all Warrant Amounts issued and paid, each in accordance with the terms hereof, shall be deemed to have been issued and paid in full satisfaction of all rights pertaining to such Company Stock, Option or Warrant, as applicable.

2.13 Manner of Payment of Adjustment . Following the Closing, the Buyer and the Shareholders’ Representative shall determine the final Merger Price following the procedures established in Sections 2.8, 2.9 and 2.10. If, based on the Merger Price as finally determined:

(a) the Merger Price exceeds the Closing Estimate, the Surviving Corporation shall promptly (but in any event within five (5) days of the final determination of the Merger

 

-14-

Price) pay the excess (such excess, the “ Additional Merger Consideration ”) to the Paying Agent on behalf of the Shareholders, Option holders and Warrant holders. The Paying Agent shall promptly pay (i) to each Shareholder and Warrant holder that has previously delivered to the Paying Agent Certificates, Warrants, letters of transmittal and other documentation required by Section 2.11(b)(ii), such Shareholder’s or Warrant holder’s pro rata share of the Working Capital Escrow Amount and the Additional Merger Consideration in accordance with such Shareholder’s or Warrant holder’s Percentage Share, and (ii) to the Surviving Corporation an aggregate amount equal to the sum of the Option holders’ pro rata shares of the Working Capital Escrow Amount and the Additional Merger Consideration in accordance with the Option holders’ respective Percentage Shares, to then be distributed by the Surviving Corporation to each Option holder in accordance with such Option holder’s Percentage Share.

(b) the Closing Estimate exceeds the Merger Price, Shareholders’ Representative shall direct the Paying Agent to promptly deliver from the Working Capital Escrow Amount (but in any event within (5) days of the final determination of the Merger Price) such excess (the “ Working Capital Adjustment Amount ”) to the Surviving Corporation. Notwithstanding anything to the contrary contained herein, in no event shall the Working Capital Adjustment Amount exceed the Working Capital Escrow Amount and neither the Company nor any Shareholder shall have any liability whatsoever to the extent the difference between the Closing Estimate minus the Merger Price, exceeds the Working Capital Escrow Amount. To the extent the Working Capital Escrow Amount exceeds the Working Capital Adjustment Amount (such excess, the “ Released Escrow Amount ”), the Paying Agent shall promptly pay (i) to each Shareholder and Warrant holder that has previously delivered to the Paying Agent Certificates, Warrants, letters of transmittal and other documentation required by Section 2.11(b)(ii) such Shareholder’s or Warrant holder’s pro rata share of the Released Escrow Amount in accordance with such Shareholder’s or Warrant holder’s Percentage Share, and (ii) to the Surviving Corporation an aggregate amount equal to the sum of the Option holders’ pro rata shares of the Released Escrow Amount in accordance with the Option holders’ respective Percentage Shares, to then be distributed by the Surviving Corporation to each Option holder in accordance with such Option holder’s Percentage Share.

In each case, such payment shall be made by wire transfer of immediately available funds pursuant to wire transfer instructions furnished by the Paying Agent (if the payment is to the Paying Agent) or by the Surviving Corporation (if the payment is to the Surviving Corporation).

2.14 Termination of the Payment Fund . Any portion of the Payment Fund that remains undistributed to the holders of shares of Company Stock for twelve (12) months after the Effective Time may be delivered to the Surviving Corporation, upon demand, and any holders of shares of Company Stock or Warrants who have not theretofore complied with this Article II shall thereafter look only to the Surviving Corporation (subject to applicable abandoned property, escheat and similar Laws) for the Merger Price, without any interest thereon.

2.15 No Liability . None of Buyer, the Company, Merger Sub or the Surviving Corporation shall be liable to any Person for any amount from the Payment Fund delivered to a governmental authority or agency pursuant to any applicable abandoned property, escheat or similar Laws.

 

-15-

2.16 Withholding Rights . Each of the Surviving Corporation, Buyer and the Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any Shareholder, Option holder and/or Warrant holder such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign Tax Law. To the extent that amounts are so withheld by the Surviving Corporation, Buyer or the Paying Agent, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Shares, Option holder and/or Warrant holder in respect of which such deduction and withholding was made by the Surviving Corporation, Buyer or the Paying Agent, as the case may be.

2.17 Lost, Stolen or Destroyed Certificates . If any Certificate or Warrant shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate or Warrant to be lost, stolen or destroyed, and, if required by the Surviving Corporation or the Paying Agent, the posting by such Person of a bond, in such reasonable amount as the Surviving Corporation or Paying Agent may direct, as indemnity against any claim that may be made against it with respect to such Certificate or Warrant and the payment of any fee charged by the Paying Agent for such service, the Paying Agent will issue in exchange for such lost, stolen or destroyed Certificate or Warrant the amount of cash to which the holder thereof is entitled pursuant to this Article II (subject to any applicable withholding taxes).

2.18 Options and Indebtedness .

(a) At the Closing or promptly thereafter, Buyer shall cause the Paying Agent to pay to the Surviving Corporation an amount equal to the aggregate Option Amount to be paid to the Option holders calculated on the basis that the Per Share Amount shall be deemed to equal the Closing Date Per Share Amount. Buyer shall then cause the Surviving Corporation to issue a payroll check to each Option holder for such holder’s Option Amount calculated on the basis that the Per Share Amount shall be deemed to equal the Closing Date Per Share Amount, less applicable withholding as set forth in Section 2.6(a).

(b) After the final determination of the Merger Price and upon receipt of the payment, if any, made to the Surviving Corporation by the Paying Agent pursuant to Section 2.13(a) or (b), Buyer shall cause the Surviving Corporation to issue a payroll check to each Option holder for such holder’s pro rata share of the Working Capital Escrow Amount and Additional Merger Consideration, or the Released Escrow Amount, as applicable, determined in accordance with such holder’s Percentage Share, less applicable withholding as set forth in Section 2.6(a).

(c) At the Closing, Buyer shall cause the Surviving Corporation to also pay in accordance with the Pay-Off Letters the Indebtedness of the Company set forth on Schedule 2.18(c) by wire transfer of immediately available funds.

2.19 Dissenting Shares .

(a) Notwithstanding any provision of this Agreement to the contrary, any Shareholder who has not voted in favor of the Merger, has demanded and perfected such

 

-16-

Shareholder’s dissenters’ rights of such Shareholder’s shares in accordance with the applicable provisions of the California Code and has not effectively withdrawn or lost such dissenters’ rights (a “ Dissenting Share ”), shall not be converted into or represent a right to receive cash pursuant to Sections 2.5(a), but the holder thereof shall be entitled only to such rights as are granted by the applicable provisions of the California Code; provided, however, that any Dissenting Share held by a Person at the Effective Time who shall, after the Effective Time, withdraw or lose such dissenters’ rights, in either case pursuant to the California Code, shall be deemed to be converted into, as of the Effective Time, the right to receive cash pursuant to Section 2.5(a).

(b) The Company shall give Buyer (i) prompt notice of any written demands for dissenters’ rights, withdrawals of demands for dissenters’ rights and any other instruments served pursuant to the applicable provisions of the California Code relating to the dissenters’ rights process received by the Company, and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for dissenters’ rights under the California Code. The Company will not voluntarily make any payment with respect to any demands for dissenters’ rights and will not, except with the prior written consent of Buyer, settle or offer to settle any such demands.

ARTICLE III

Representations and Warranties of the Company

The Company makes the following representations and warranties. No representation or warranty shall survive the Closing, and none shall merge into any instrument of conveyance. All representations and warranties of the Company are made subject to the express exceptions noted in the schedule delivered by the Company to Buyer concurrently herewith and identified by the parties as the “ Disclosure Schedule ”. Any disclosure set forth on any particular schedule of the Disclosure Schedule shall be treated as disclosed with respect to all other schedules of the Disclosure Schedule regardless of whether or not a specific reference is made thereto. The inclusion of any item or fact in the Disclosure Schedule shall not be deemed an admission that such item or fact is material for the purposes of this Agreement.

3.1 Organization and Qualifications .

(a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California and is duly qualified or authorized to transact business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires such licensing or qualification, except where the failure to be so qualified, licensed or authorized would not either individually or in the aggregate reasonably be expected to have a Material Adverse Effect.

(b) Schedule 3.1(b) sets forth a complete and accurate list of (i) each Person in which the Company owns, of record or beneficially, any direct or indirect equity or other interest, including, without limitation, any shares of capital stock or limited liability company interest, or any similar right or interest, (ii) the jurisdiction of incorporation, formation or

 

-17-

organization of each such Subsidiary, each jurisdiction in which such Subsidiary is qualified or licensed to conduct business, and (iii) each record owner of the capital stock, limited liability company or membership interests, or other equity interests of each such Subsidiary. Each Subsidiary (A) has the requisite corporate or limited liability company power and authority, as applicable, to carry on its business as it is now being conducted, to use its name and to own or lease and operate its properties as and in the places where such business is now conducted and such properties are now owned or leased and operated, and (B) is duly qualified to do business as a foreign corporation or limited liability company, as applicable, and in good standing in each jurisdiction where the nature of the activities conducted by it or the character of the properties owned, leased or operated by it require such qualification, except where the failure to be so qualified or in good standing would not reasonably be expected to have a Material Adverse Effect. There are no other Persons in which the Company owns, of record or beneficially, directly or indirectly: (x) any shares of capital stock or securities convertible into capital stock of any other corporation or (y) any participating interest in any partnership, joint venture or other non-corporate business enterprise.

3.2 Corporate Power; Enforceable Obligation .

(a) The Company has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby to be performed by it. This Agreement has been duly authorized, executed, and delivered by the Company and is the legal, valid, and binding obligation of the Company, except as may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium, or other laws affecting the enforcement of creditors’ rights in general, and except that the enforceability of the Agreement is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

(b) The Board of Directors of the Company has (i) duly approved this Agreement, the Merger and the transactions contemplated hereby, (ii) determined that the Merger is advisable and in the best interests of the Shareholders and (iii) recommended that the Shareholders adopt this Agreement and directed that this Agreement be submitted to the Shareholders for adoption, and the Shareholders have, by the required votes under the Company’s charter and the California Code, adopted this agreement.

3.3 No Violations . Except as set forth on Schedule 3.3 , The execution, delivery, and performance of this Agreement by the Company will not contravene, breach or violate (a) any law, rule, or regulation to which the Company or any Subsidiary is subject, (b) any judgment, order, injunction, or decree of any court, arbitrator, or governmental authority or agency that is applicable to the Company or any Subsidiary or (c) the charter or organizational documents of the Company or any Subsidiary; nor will such execution, delivery, or performance violate, be in conflict with, result in the breach of, or require the consent of any other party to, any Material Contract or, to the Company’s knowledge,