8-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported) January 27, 2002

Jenny Craig, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of Incorporation)

001-10887	33-0366188
(Commission File Number)	(IRS Employer Identification No.)

11355 North Torrey Pines Road, La Jolla, California	92037
(Address of Principal Executive Offices)	(Zip Code)

(858) 812-7000

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name or Former Address, if Changed since Last Report)

TABLE OF CONTENTS

	Item 5. Other Events
	Item 7. Exhibits
Exhibit 2.1
Exhibit 10.1
Exhibit 10.2
Exhibit 99.1

Item 5. Other Events

     On January 28, 2002, Jenny Craig, Inc. (the “Company”) announced that it had entered into an Agreement and Plan of Merger, dated as of January 27, 2002 (the “Merger Agreement”), with J Holdings Corp. (“Parent”) and J Acquisition Corp. (“Purchaser”), a direct wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, Purchaser will be merged with and into the Company (the “Merger”) and the Company will survive the Merger as a direct subsidiary of Parent. At the Effective Time of the Merger (as defined in the Merger Agreement), the stockholders of the Company will receive $5.30 in cash for each outstanding share of common stock, par value $0.000000005 per share, of the Company. Consummation of the Merger is subject to customary conditions, including the approval of the stockholders of the Company, the receipt of required regulatory approvals, and the receipt of the required financing under the Parent’s financing commitments. In accordance with and subject to the terms and conditions of the Merger Agreement, the Company has the right to terminate the Merger Agreement if it receives an unsolicited bona fide proposal to acquire the Company on terms which its Board of Directors and a special committee of its independent directors have determined to be more favorable to the Company’s stockholders than the Merger, if the termination is effected prior to 5:00 p.m. pacific time on March 29, 2002 or prior to a vote of stockholders in favor of the Merger, whichever is earlier, and certain other conditions are met. In the event of any such termination, the Company would be required to pay a termination fee of $4,875,000. A copy of the Merger Agreement is included herein as Exhibit 2.1 and a copy of the press release of the Company with respect to the Merger is included as Exhibit 99.1.

     Concurrently with the execution of the Merger Agreement, the Company, Sidney Craig, Jenny Craig, Craig Enterprises, Inc. (“CEI”), SJF Enterprises, Inc. (“SJF”), DA Holdings, Inc. (“DA”), J Holdings Corp. and J Acquisition Corp. entered into a Stockholders’ Voting Agreement (the “Voting Agreement”) pursuant to which Mr. Craig, Mrs. Craig, CEI, SJF and DA have agreed to vote shares beneficially owned by them representing approximately 66.9% of common stock of the Company in favor of the Merger. The agreement to vote in favor of the Merger terminates on the earlier of the Effective Time of the Merger or the termination of the Merger Agreement in accordance with its terms. A copy of the Voting Agreement is attached hereto as Exhibit 10.1.

     SJF has also executed a commitment letter (the “SJF Commitment Letter”) addressed to Parent pursuant to which SJF has agreed to contribute 754,717 shares of common stock of the Company to Parent immediately prior to the consummation of the Merger in exchange for shares of common stock of Parent representing twenty percent (20%) of the outstanding common stock of Parent and shares of preferred stock of Parent representing twenty percent (20%) of the outstanding preferred stock of Parent. A copy of the SJF Commitment Letter is attached hereto as Exhibit 10.2.

     The Merger Agreement, the Voting Agreement, SJF Commitment Letter and the press release are incorporated by reference into this Item 5 and the foregoing description of such documents and the Merger is qualified in its entirety by reference to such documents.

Item 7. Exhibits

     Exhibit 2.1. Agreement and Plan of Merger, dated January 27, 2002, by and among Jenny Craig, Inc., J Holdings Corp. and J Acquisition Corp.

     Exhibit 10.1. Stockholders’ Voting Agreement, dated January 27, 2002, by and among Jenny Craig, Inc., Sidney Craig, Jenny Craig, Craig Enterprises, Inc., SJF Enterprises, Inc., DA Holdings, Inc., J Holdings Corp. and J Acquisition Corp.

     Exhibit 10.2. Commitment Letter from SJF Enterprises, Inc., dated January 27, 2002, addressed to J Holdings Corp.

     Exhibit 99.1. Press Release, dated January 28, 2002, announcing the execution of the Agreement and Plan of Merger.

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

			JENNY CRAIG, INC.
			(Registrant)
Date	January 29, 2002	By	/s/ JAMES S. KELLY
			JAMES KELLY, Vice President and Chief Financial Officer

EX-2.1 3 v78658ex2-1.txt EXHIBIT 2.1 Exhibit 2.1 AGREEMENT AND PLAN OF MERGER by and among J HOLDINGS CORP., J ACQUISITION CORP. and JENNY CRAIG, INC. JANUARY 27, 2002 TABLE OF CONTENTS

PAGE ARTICLE I THE MERGER...........................................................................2 SECTION 1.1 COMPANY ACTIONS.........................................................2 SECTION 1.2 THE MERGER..............................................................2 SECTION 1.3 EFFECTIVE TIME..........................................................3 SECTION 1.4 CLOSING.................................................................3 SECTION 1.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION.....................3 SECTION 1.6 STOCKHOLDERS' MEETING AND PREPARATION OF PROXY STATEMENT................3 ARTICLE II CONVERSION OF SECURITIES.............................................................5 SECTION 2.1 CONVERSION OF CAPITAL STOCK.............................................5 SECTION 2.2 EXCHANGE OF CERTIFICATES................................................6 SECTION 2.3 DISSENTING SHARES.......................................................9 SECTION 2.4 COMPANY OPTION PLANS....................................................9 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................................................................10 SECTION 3.1 ORGANIZATION...........................................................10 SECTION 3.2 CAPITALIZATION.........................................................11 SECTION 3.3 AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY ACTION...................12 SECTION 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS..................................13 SECTION 3.5 SEC REPORTS AND FINANCIAL STATEMENTS...................................14 SECTION 3.6 NO UNDISCLOSED LIABILITIES.............................................15 SECTION 3.7 ABSENCE OF CERTAIN CHANGES.............................................15 SECTION 3.8 EMPLOYEE BENEFIT PLANS; ERISA..........................................17 SECTION 3.9 LABOR MATTERS..........................................................20 SECTION 3.10 LITIGATION............................................................21 SECTION 3.11 PERMITS; NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS..................21 SECTION 3.12 TAXES.................................................................21 SECTION 3.13 REAL PROPERTY.........................................................25 SECTION 3.14 ENVIRONMENTAL MATTERS.................................................26 SECTION 3.15 MATERIAL CONTRACTS....................................................27 SECTION 3.16 INTELLECTUAL PROPERTY.................................................29 SECTION 3.17 VOTING REQUIREMENTS...................................................30

i

PAGE SECTION 3.18 STATE TAKEOVER STATUTES...............................................30 SECTION 3.19 RELATED PARTY TRANSACTIONS............................................30 SECTION 3.20. RELATIONSHIPS WITH FRANCHISEES.......................................30 SECTION 3.21 QUASI-CORPORATION REQUIREMENTS........................................32 SECTION 3.22 INSURANCE..............................................................32 SECTION 3.23 INFORMATION IN PROXY STATEMENT........................................32 SECTION 3.24 OPINION OF FINANCIAL ADVISOR..........................................32 SECTION 3.25 BROKERS...............................................................32 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER............................................................33 SECTION 4.1 ORGANIZATION...........................................................33 SECTION 4.2 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION.................33 SECTION 4.3 CONSENTS AND APPROVALS; NO VIOLATIONS..................................34 SECTION 4.4 INFORMATION IN PROXY STATEMENT.........................................34 SECTION 4.5 FINANCING..............................................................35 SECTION 4.6 SHARE OWNERSHIP........................................................36 SECTION 4.7 PARENT AND THE PURCHASER'S OPERATIONS..................................36 SECTION 4.8 INVESTIGATION BY PARENT AND THE PURCHASER...............................36 SECTION 4.9 BROKERS................................................................37 ARTICLE V COVENANTS...........................................................................37 SECTION 5.1 INTERIM OPERATIONS OF THE COMPANY. ....................................37 SECTION 5.2 ACCESS TO INFORMATION..................................................42 SECTION 5.3 CONSENTS AND APPROVALS.................................................42 SECTION 5.4 NO ACTIONS BY PARENT OR PURCHASER......................................42 SECTION 5.5 NO SOLICITATION........................................................43 SECTION 5.6 PUBLICITY..............................................................45 SECTION 5.7 NOTIFICATION OF CERTAIN MATTERS........................................45 SECTION 5.8 DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION.................46 SECTION 5.9 FURTHER ASSURANCES.....................................................47 SECTION 5.10 REASONABLE BEST EFFORTS...............................................48 SECTION 5.11 FEES AND EXPENSES. ...................................................49 SECTION 5.12 REPORT ON FORM 8-K....................................................49 ARTICLE VI CONDITIONS..........................................................................50 SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.............50

ii

PAGE SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO EFFECT THE MERGER.....................................................................50 SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF PARENT AND THE PURCHASER TO EFFECT THE MERGER..........................................................51 ARTICLE VII TERMINATION.........................................................................52 SECTION 7.1 TERMINATION............................................................52 SECTION 7.2 EFFECT OF TERMINATION..................................................54 ARTICLE VIII MISCELLANEOUS.......................................................................55 SECTION 8.1 AMENDMENT AND MODIFICATION.............................................55 SECTION 8.2 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES..........................55 SECTION 8.3 NOTICES................................................................55 SECTION 8.4 COUNTERPARTS...........................................................56 SECTION 8.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES.........................57 SECTION 8.6 SEVERABILITY...........................................................57 SECTION 8.7 GOVERNING LAW..........................................................57 SECTION 8.8 JURISDICTION...........................................................57 SECTION 8.9 ASSIGNMENT.............................................................58 SECTION 8.10 ENFORCEMENT............................................................58 SECTION 8.11 ACTIONS BY THE COMPANY.................................................58

iii INDEX OF DEFINED TERMS

DEFINED TERM Page - ------------ ---- 7.1(c)(i) Expiration Date......................................................52 ACI............................................................................35 Acquisition Proposal...........................................................44 Affiliated Group...............................................................21 Agreement.......................................................................1 Benefit Plan...................................................................17 Business Day....................................................................7 California Code................................................................32 CEI............................................................................32 Certificate of Merger...........................................................3 Certificates....................................................................7 Claim..........................................................................46 Closing.........................................................................3 Closing Date....................................................................3 Closing Documents..............................................................12 COBRA..........................................................................19 Code...........................................................................18 Commitment Letter..............................................................35 Commitment Letters.............................................................35 Company.........................................................................1 Company Board...................................................................2 Company Common Stock............................................................1 Company Franchisees............................................................31 Company Intellectual Property..................................................29 Company Permits................................................................21 Company SEC Documents..........................................................14 Confidentiality Agreement......................................................42 Consulting Agreements...........................................................1 D&O Insurance..................................................................32 DAH.............................................................................1 DBCP...........................................................................35 DGCL............................................................................3 Dissenting Common Stock.........................................................9 DOJ............................................................................48 Effective Time..................................................................3 Employees......................................................................20

iv

DEFINED TERM Page - ------------ ---- Environmental Law..............................................................27 ERISA..........................................................................17 Exchange Act....................................................................4 Exchange Fund...................................................................6 Expiration Date................................................................52 Financing......................................................................35 Financing Source...............................................................35 Financing Sources..............................................................35 Financings.....................................................................35 Foreign Plan...................................................................20 Franchise Agreements...........................................................28 FTC............................................................................31 GAAP...........................................................................14 Governmental Entity........................................................13, 18 Hazardous Substances...........................................................27 Headquarters Lease.............................................................38 Houlihan.......................................................................32 HSR Act........................................................................13 Indemnified Party..............................................................46 Intellectual Property..........................................................29 IRS............................................................................18 Liens..........................................................................12 Material Contracts.............................................................28 Material Intellectual Property.................................................29 Maximum Premium................................................................47 Merger..........................................................................2 Merger Consideration............................................................6 Name Agreement..................................................................1 Option Plan....................................................................11 Options........................................................................11 Parent..........................................................................1 Parent Equity Commitment Letters...............................................35 Parent Equity Financing........................................................35 Parent Equity Investors........................................................35 Paying Agent....................................................................6 Permitted Liens................................................................17 Personal Service Contract......................................................27 Potential Acquiror.............................................................43 Proxy Statement.................................................................4 Purchaser.......................................................................1

v

DEFINED TERM Page - ------------ ---- Purchaser Common Stock..........................................................5 Purchaser Debt Commitment Letters..............................................35 Purchaser Debt Financing.......................................................35 Purchaser Lenders .............................................................35 Real Property Leases...........................................................25 Schedules.......................................................................1 SEC.............................................................................3 SEC-Filed Agreements...........................................................27 Secretary of State..............................................................3 Securities Act.................................................................14 Senior Commitment Letter.......................................................35 Senior Financing...............................................................35 Senior Lender..................................................................35 Shares..........................................................................1 SJF.............................................................................1 Special Committee...............................................................2 Special Meeting.................................................................4 Stockholders Agreement..........................................................1 Subsidiary.....................................................................10 Superior Proposal..............................................................44 Surviving Corporation...........................................................2 Tail Policy....................................................................47 Tax Return.....................................................................25 Taxes..........................................................................24 Termination Fee................................................................49 Termination Fee Event..........................................................49 Transactions....................................................................2 UFOCs..........................................................................31 Voting Debt....................................................................11 WARN...........................................................................20

vi AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (together with all Schedules and Exhibits, as amended from time to time in accordance with the terms hereof, this "Agreement"), dated as of January 27, 2002, by and among J Holdings Corp., a Delaware corporation ("Parent"), J Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent (the "Purchaser"), and Jenny Craig, Inc., a Delaware corporation (the "Company"). WHEREAS, Parent and the Purchaser have proposed acquiring all of the outstanding common stock, par value $.000000005 per share, of the Company (the "Shares" or "Company Common Stock") at a price of $5.30 per Share in cash; WHEREAS, the Company, Parent and the Purchaser desire to make certain representations, warranties, covenants, and agreements in connection with the Merger, subject to, among other provisions hereof, the disclosure schedules referenced herein (the "Schedules"); WHEREAS, as a condition and inducement to Parent's and the Purchaser's entering into this Agreement and incurring the obligations set forth herein, Parent, the Purchaser, Sidney Craig, Jenny Craig, SJF Enterprises, Inc. ("SJF"), and DA Holdings, Inc. ("DAH") have entered into a Stockholders Voting Agreement in the form attached hereto as Exhibit A (the "Stockholders Agreement"); WHEREAS, each of Sidney Craig and Jenny Craig and Purchaser have entered into Consulting Services Agreements dated the date hereof, which shall become effective as of the Effective Time (the "Consulting Agreements"); WHEREAS, each of Sidney Craig and Jenny Craig and the Purchaser have entered into Non-Solicitation and Non-Competition Agreements dated the date hereof, which shall become effective as of the Effective Time; WHEREAS, Sidney and Jenny Craig, Parent and the Company have entered into an agreement dated the date hereof with respect to the use of the name "Jenny Craig" and related matters, which shall become effective as of the Effective Time (the "Name Agreement"); WHEREAS, the respective Boards of Directors of Parent, the Purchaser and the Company (in the case of the Company, with such Board having considered and acting subsequent to the unanimous recommendation of a special committee of such Board (the "Special Committee")) have approved, and deem it advisable and in the best interests of their respective stockholders to consummate, the acquisition of the Company by Parent and the Purchaser upon the terms and subject to the conditions set forth herein; and NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE I THE MERGER SECTION 1.1 COMPANY ACTIONS. (a) The Company hereby approves of and consents to the Merger and represents that the Board of Directors of the Company (the "Company Board"), at a meeting duly called and held, has, subject to the terms and conditions set forth herein and acting after having considered the recommendation of the Special Committee, (i) unanimously approved this Agreement and the transactions contemplated hereby, including the Merger (as defined in Section 1.2) (collectively, the "Transactions"), determining that the Merger is advisable and that the terms of the Merger are fair to, and in the best interests of, the Company's stockholders and recommending that the Company's stockholders approve the Merger and this Agreement and (ii) resolved to recommend that the stockholders of the Company adopt this Agreement and the Merger. SECTION 1.2 THE MERGER. Upon and subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3 hereof), the Company and the Purchaser shall consummate a merger (the "Merger") pursuant to which (a) the Purchaser shall be merged with and into the Company and the separate corporate existence of the Purchaser shall thereupon cease, (b) the Company shall be the successor or surviving corporation in the Merger (the "Surviving Corporation") and shall continue to be governed by the laws of the State of Delaware, and (c) the separate corporate existence of the Company with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. Pursuant to the Merger, (x) the Certificate of Incorporation of the Company, as amended as set forth on Exhibit B, shall be the Certificate of Incorpora- 2 tion of the Surviving Corporation, and (y) the By-laws of the Company shall be amended effective at the Effective Time to be identical in all respects to the By-laws of the Purchaser immediately prior to the Effective Time, in each case until thereafter amended as provided by law, the Certificate of Incorporation and such By-laws. The Merger shall have the effects set forth in the Delaware General Corporation Law ("DGCL"). SECTION 1.3 EFFECTIVE TIME. Parent, the Purchaser and the Company shall cause a Certificate of Merger (the "Certificate of Merger") to be executed and filed on the Closing Date (as defined in Section 1.4) (or on such other date as Parent and the Company may agree) with the Secretary of State of the State of Delaware (the "Secretary of State") as provided in the DGCL and shall make all other filings or recordings required under the DGCL to effectuate the Merger. The Merger shall become effective on the date of such filing with the Secretary of State or such time as is agreed upon by the parties and specified in the Certificate of Merger, and such time is hereinafter referred to as the "Effective Time." SECTION 1.4 CLOSING. The closing of the Merger (the "Closing") shall take place at 10:00 a.m., on a date to be specified by the parties, which shall be no later than the second business day after satisfaction or waiver of all of the conditions (excluding conditions that cannot, by their terms, be satisfied until the Closing Date), set forth in Article VI hereof (the "Closing Date") at the offices of Proskauer Rose LLP, 2049 Century Park East, Suite 3200, Los Angeles, California 90067, unless another date or place is agreed to in writing by the parties hereto. SECTION 1.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors of the Purchaser and the officers of the Company at the Effective Time shall, from and after the Effective Time, be the directors and officers, respectively, of the Surviving Corporation until their successors shall have been duly elected or appointed or qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Certificate of Incorporation and By-laws. SECTION 1.6 STOCKHOLDERS' MEETING AND PREPARATION OF PROXY STATEMENT. (a) As promptly as practicable following the date hereof, the Company shall, in cooperation with Parent and the Purchaser, prepare and file with the Securities and Exchange Commission ("SEC") the preliminary proxy materials relating to 3 the meeting of the Company's stockholders (together with any amendments or supplements thereto, the "Proxy Statement"). The Proxy Statement shall comply as to form in all material respects with the applicable provisions of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations thereunder, and, subject to Section 5.5, shall include a statement that the Company Board finds the Merger Agreement to be advisable, fair to and in the best interests of the Company. The Company shall use its reasonable best efforts to have the Proxy Statement cleared by the SEC as promptly as practicable after filing with the SEC. The Company shall, as promptly as practicable after receipt thereof, provide copies of any written comments received from the SEC with respect to the Proxy Statement to Parent and advise Parent of any oral comments with respect to the Proxy Statement received from the SEC. The Company shall consider all comments provided by Parent in good faith and no amendment or supplement to the information supplied by Parent for inclusion in the Proxy Statement shall be made without the approval of Parent, which approval shall not be unreasonably withheld or delayed. The Company shall cause the Proxy Statement to be mailed to its stockholders at the earliest practicable date following clearance of the Proxy Statement by the SEC. (b) The Company shall, as promptly as reasonably practicable following the execution of this Agreement, in accordance with applicable law (including, without limitation, following clearance of the Proxy Statement for mailing by the SEC) and its Certificate of Incorporation and By-laws, duly call, give notice of, convene and hold as soon as reasonably practicable after the date of this Agreement a meeting of its stockholders for the purpose of obtaining the necessary approval of the Transactions contemplated by this Agreement (the "Special Meeting") and shall present this Agreement for adoption by the Company's stockholders. Without limiting the generality of the foregoing and subject to Section 5.5, the Company agrees that its obligations pursuant to the first sentence of this Section 1.6(b) shall not be affected by the commencement, public proposal, public disclosure or communication to the Company of an Acquisition Proposal. Regardless of whether the Company Board has withdrawn, amended or modified its recommendation that its stockholders approve and adopt this Agreement, unless this Agreement has been terminated pursuant to the provisions of Article VII, the Company shall be required to hold the Special Meeting. (c) Parent shall provide the Company with the information concerning Parent and the Purchaser required to be included in the Proxy Statement. Parent shall vote, or cause to be voted, all of the Shares then beneficially owned by it, the Purchaser or any of its other subsidiaries and affiliates (including, without limitation, all 4 Shares over which any of them have the power to vote by proxy or otherwise) in favor of the approval of the Merger and the approval and adoption of this Agreement. For purposes of this Agreement, the term "affiliate" shall have the meaning given such term in Rule 12b-2 under the Exchange Act. (d) Parent, the Purchaser and the Company acknowledge that the stockholders of the Company who are parties to or bound by the Stockholders Agreement will vote their respective Shares on the approval and adoption of this Agreement at the Special Meeting, and that none of them will, without the written approval of the Special Committee, take any action by written consent or otherwise on the approval or adoption of this Agreement with respect to such Shares other than at the Special Meeting. Parent and the Purchaser each agree that they will not vote (or cause to be voted) the Shares owned by the stockholders of the Company who are parties to or bound by the Stockholders Agreement, other than at the Special Meeting and will not, without the written approval of the Special Committee, take any action by written consent or otherwise with respect to such Shares in lieu of the Special Meeting or otherwise (or cause any such action to be taken), including without limitation pursuant to the rights granted to Parent and the Purchaser under the Stockholders Agreement. ARTICLE II CONVERSION OF SECURITIES SECTION 2.1 CONVERSION OF CAPITAL STOCK. As of the Effective Time, by virtue of the Merger and without any action on the part of the holders of any shares of Company Common Stock or common stock, par value $.00001 per share, of the Purchaser (the "Purchaser Common Stock"): (a) Purchaser Common Stock. Each issued and outstanding share of the Purchaser Common Stock shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, $.00001 par value per share, of the Surviving Corporation. (b) Cancellation of Treasury Stock and Parent-Owned Stock. All shares of Company Common Stock that are owned by the Company as treasury stock and any shares of Company Common Stock owned by Parent, the Purchaser or any other wholly owned Subsidiary (as defined in Section 3.1 hereof) of Parent shall be automatically 5 canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor. (c) Conversion of Shares. Each issued and outstanding share of Company Common Stock (other than Shares to be cancelled in accordance with Section 2.1(b) hereof and any Dissenting Common Stock (as defined in Section 2.3 hereof)), shall be converted into the right to receive $5.30 per Share, in cash, payable to the holder thereof, without interest (the "Merger Consideration"), upon surrender of the certificate formerly representing such share of Company Common Stock in the manner provided in Section 2.2 hereof. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate which, prior to the Effective Time, represented any such Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration therefor upon the surrender of such certificate in accordance with Section 2.2 hereof, without interest. SECTION 2.2 EXCHANGE OF CERTIFICATES. (a) Paying Agent. Parent shall designate a bank or trust company reasonably acceptable to the Company to act as agent for the holders of shares of Company Common Stock in connection with the Merger (the "Paying Agent") to receive in trust the funds to which holders of shares of Company Common Stock shall become entitled pursuant to Section 2.1(c) (the "Exchange Fund"). At or immediately after the Effective Time, Parent or the Purchaser shall deposit or cause to be deposited with the Paying Agent, for the benefit of the holders of such shares of Company Common Stock, the Exchange Fund in the amount of the aggregate consideration to which such holders of shares of Company Common Stock shall be entitled at the Effective Time (or thereafter) pursuant to Section 2.1(c). The Exchange Fund shall be invested by the Paying Agent in obligations of, or guaranteed by, the United States of America, or any agency thereof, and backed by the full faith and credit of the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody's Investor Services, Inc. or Standard & Poors Corporation, respectively, or in deposit accounts, certificates of deposit or bankers' acceptances of, repurchase or reverse repurchase agreements with, or Eurodollar time deposits purchased from commercial banks with capital, surplus and undivided profits aggregating in excess of $1,000,000,000 (based on the most recent financial statements of such bank which are then publicly available at the SEC or otherwise). 6 (b) Exchange Procedures. As soon as reasonably practicable after the Effective Time, but in no event more than three (3) Business Days (a "Business Day" being any day other than Saturday or Sunday or any other day commercial banks are not required or authorized to close in the City of New York) thereafter, Parent shall cause the Paying Agent to mail to each holder of record of a certificate or certificates, which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates"), whose Shares were converted pursuant to Section 2.1 into the right to receive the Merger Consideration, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for payment of the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent and such other documents as may be reasonably required by the Paying Agent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration, without interest, for each share of Company Common Stock formerly represented by such Certificate and the Certificate so surrendered shall forthwith be cancelled. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such tax either has been paid or is not applicable. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive the Merger Consideration in cash as contemplated by this Section 2.2. For purposes of this agreement, the term "person" or "Person" shall mean any individual, corporation, partnership, limited liability company or other entity. (c) Transfer Books; No Further Ownership Rights in Company Common Stock. At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock on the records of the Company. From and after the Effective Time, the holders of Certificates evidencing ownership of shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect 7 to such Shares, except as otherwise provided for herein or by applicable law. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article II. (d) Termination of Fund; No Liability. At any time following six (6) months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any earnings received with respect thereto) which had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the payment of any Merger Consideration that may be payable upon surrender of any Certificates such stockholder holds, as determined pursuant to this Agreement, without any interest thereon. Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying Agent shall be liable to any person or entity in respect of any Merger Consideration from the Exchange Fund delivered, in good faith, to a public official pursuant to any applicable abandoned property, escheat or similar law. (e) Investment of the Exchange Fund. The Paying Agent shall, subject to compliance with Section 2.2(a), invest any cash included in the Exchange Fund as directed by the Surviving Corporation from time to time. Any interest and other income resulting from such investments shall promptly be paid to the Surviving Corporation. (f) Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such form and amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent will deliver in exchange for such lost, stolen or destroyed Certificate the applicable Merger Consideration with respect to the shares of Company Common Stock formerly represented thereby pursuant to this Agreement. (g) Withholding of Tax. The Purchaser shall be entitled to deduct and withhold from the Merger Consideration otherwise payable pursuant to this Agreement to any former holder of shares of Company Common Stock such amount as the Purchaser or the Paying Agent is required to deduct and withhold pursuant to applicable rules under the Code, or any provision of state, local or foreign law. To the extent that amounts are so withheld by the Purchaser, such withheld amounts shall be treated for all purposes of this 8 Agreement as having been paid to the former holder of shares of Company Common Stock in respect of which such withholding was made. SECTION 2.3 DISSENTING SHARES. Notwithstanding any provision of this Agreement to the contrary, if and to the extent required by the DGCL, shares of Company Common Stock which are issued and outstanding immediately prior to the Effective Time and which are held by holders of such shares of Company Common Stock who have properly exercised appraisal rights with respect thereto (the "Dissenting Common Stock") in accordance with Section 262 of the DGCL, shall not be exchangeable for the right to receive the Merger Consideration, and holders of such shares of Dissenting Common Stock shall be entitled only to such dissenters rights as are granted by Section 262 of the DGCL unless and until such holders fail to perfect or effectively withdraw or otherwise lose their rights to appraisal and payment under the DGCL. If, after the Effective Time, any such holder fails to perfect or effectively withdraws or loses such right, such shares of Dissenting Common Stock shall automatically be converted into and become exchangeable for the right to receive the Merger Consideration, without any interest thereon. Notwithstanding anything to the contrary contained in this Section 2.3, if the Merger is rescinded or abandoned or (ii) the stockholders of the Company revoke the authority to effect the Merger, then the right of any stockholder to be paid the fair value of such stockholder's Dissenting Common Stock pursuant to Section 262 of the DGCL shall cease. The Company shall (i) give Parent prompt notice of any demands received by the Company for appraisals of shares of Dissenting Common Stock, withdrawals of such demands and any other instruments served upon the Company pursuant to the DGCL and (ii) use its best efforts to keep Parent informed of and to allow Parent to provide comments in respect of all negotiations and proceedings with respect to demands for appraisal under the DGCL, and will not settle any such proceeding without Parent's written consent, which consent shall not be unreasonably withheld or delayed. The Company shall not, except with the prior written consent of Parent, make any payment with respect to any demands for appraisals or offer to settle or settle any such demands. SECTION 2.4 COMPANY OPTION PLANS. Pursuant to Section 5(f) of the Option Plan (as defined in Section 3.2), upon the exercise of any Option (as defined in Section 3.2) at or after the Effective Time, the holder of such Option shall be entitled to receive, in lieu of each Share as to which such Option shall then be exercisable but on the same terms and conditions of exercise set forth in such Option and in the Option Plan, including, without limitation, the expiration of periods of time prior to any such Option 9 becoming exercisable, an amount in cash equal to the Merger Consideration less the exercise price per Share. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and the Purchaser as follows: SECTION 3.1 ORGANIZATION. Each of the Company and its Subsidiaries (as defined in this Section 3.1) is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite corporate or other power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power or authority would not, and would not reasonably be expected to, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. As used in this Agreement, the word "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding such partnerships where such party or any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries. As used in this Agreement, any reference to any event, change or effect having a material adverse effect on or with respect to any entity (or group of entities taken as a whole) means such event, change or effect is materially adverse to the consolidated financial condition, businesses, assets or results of operations of such entity (or, if used with respect thereto, of such group of entities taken as a whole). The Company and each of its Subsidiaries is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not, and would not reasonably be expected to, in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. The Company has heretofore 10 made available to Parent accurate and complete copies of the certificate of incorporation and by-laws (or other similar organizational and governing documents), as currently in effect, of the Company and each of its Subsidiaries. SECTION 3.2 CAPITALIZATION. (a) The authorized capital stock of the Company consists of 100,000,000 shares of Company Common Stock. As of the date hereof, (i) 27,580,260 shares of Company Common Stock are issued, (ii) 20,688,971 shares of Company Common Stock are outstanding, (iii) 6,891,289 shares of Company Common Stock are held as treasury stock, (iv) 3,000,000 Shares are reserved for issuance pursuant to the Company's Stock Option Plan adopted in October 1991, as amended (the "Option Plan"), and (v) 2,152,100 employee stock options to purchase 2,152,100 Shares ("Options") granted under the Option Plan are outstanding. Schedule 3.2 sets forth true and complete information with respect to each holder of Options regarding the current exercise price, the date of grant, the term, the vesting schedule, whether the holder is an employee of the Company on the date of this Agreement, and the number of Options granted. All the outstanding shares of the Company Common Stock are, and all Shares which may be issued pursuant to the exercise of outstanding Options when issued in accordance with the respective terms thereof shall be, duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights. There are no bonds, debentures, notes, or other indebtedness having general voting rights (or convertible into securities having such rights) ("Voting Debt") of the Company or any of its Subsidiaries issued and outstanding. No restrictions or conditions to the exercise or the sale of the Options exist other than as set forth in the Option Plan or any option agreement entered into in connection with grants of Options under the Option Plan. The vesting of any Option shall not accelerate solely as a consequence of the Merger or any of the other Transactions contemplated by this Agreement. All outstanding Options have been issued pursuant to registration under or valid exemptions from the Securities Act (as defined in Section 3.5) and all applicable state securities law. Except as set forth above, on Schedule 3.2 and for the transactions contemplated by this Agreement, as of the date hereof, (x) there are no shares of capital stock of the Company authorized, issued, reserved for issuance or outstanding, (y) the Company and its Subsidiaries have not issued or, except as provided in Section (6)(a) of the Option Plan, agreed to issue any warrants, options, equity equivalents, interests in ownership or earnings of the Company or other similar equity rights (including phantom stock or stock appreciation rights), pre-emptive rights, agreements, arrangements or commitments of any character obligating the Company or any of its Subsidiaries to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, the Company or any of its Subsidiaries or 11 securities convertible into or exchangeable for such shares or equity interests and (z) there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any Shares, or capital stock of the Company or any Subsidiary or affiliate of the Company. (b) Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001 includes a list of all of the Subsidiaries of the Company. All the outstanding shares of capital stock of, or other equity interests in, each Subsidiary (i) have been duly authorized, validly issued and are fully paid and nonassessable, (ii) are owned directly or indirectly by the Company, free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens") and (iii) are free from any contractual restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests. Other than the Company's Subsidiaries, the Company does not directly or indirectly beneficially own any equity securities in any other entity. To its knowledge, other than as set forth in the Company SEC Documents (as defined in Section 3.5) as of the date hereof, no person or "group" beneficially owns more than 5% of the outstanding Company Common Stock with the terms "beneficially owns" and "group" when used in this Agreement having the meanings ascribed to them under Rule 13d-3 and Rule 13d-5 under the Exchange Act. (c) There are no stockholder agreements, voting trusts or other agreements or understandings to which the Company or any of its Subsidiaries is a party with respect to the voting or registration of the capital stock of the Company or any of its Subsidiaries. None of the Company or its Subsidiaries is required to redeem, repurchase or otherwise acquire shares of capital stock of the Company, or any of its Subsidiaries, respectively, as a result of the transactions contemplated by this Agreement. SECTION 3.3 AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY ACTION. (a) The Company has full corporate power and authority to execute, deliver and perform its obligations under this Agreement and the other agreements to be executed by the Company as contemplated hereunder (collectively, the "Closing Documents") and, subject, in the case of the Merger, to obtaining the vote of a majority of the outstanding shares of Company Common Stock in favor of the adoption of this Agreement (the "Required Company Vote"). The execution, delivery and performance by the Company of this Agreement and the other Closing Documents, and the consummation by it of the Transactions, have been duly authorized by the Company Board and, except for obtaining the approval of its stockholders as contemplated by Section 1.6 hereof, no other corporate 12 action on the part of the Company is necessary to authorize the execution and delivery by the Company of this Agreement and the other Closing Documents and the consummation by it of the Transactions. This Agreement has been duly executed and delivered by the Company and assuming due and valid authorization, execution and delivery hereof by the other parties thereto, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (b) The Special Committee has unanimously recommended to the Company Board that the Company enter into this Agreement. The Company Board, having considered and acting subsequent to the recommendation of the Special Committee, has approved and taken all corporate action required to be taken by the Company Board for the consummation of the transactions contemplated by this Agreement and has resolved (i) that this Agreement and the Transactions, taken together, are advisable and fair to, and in the best interests of, the Company and its stockholders; and (ii) to recommend that the stockholders of the Company approve and adopt this Agreement. The Company Board has directed that this Agreement be submitted to the stockholders of the Company for adoption by such stockholders. SECTION 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as set forth on Schedule 3.4 and except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), state or foreign laws relating to takeovers, state securities or blue sky laws and the DGCL, neither the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the Transactions contemplated hereby nor compliance by the Company with any of the provisions hereof shall (i) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws or similar organizational documents of the Company or of any of its Subsidiaries, (ii) require on the part of the Company or, to the extent required under any agreement between the Company and the Company Franchisees (as defined in Section 3.20), the Company Franchisees, any filing with, or permit, authorization, consent or approval of, any Governmental Entity (as defined in Section 3.8), (iii) result in a violation or breach of, or constitute (with or without due notice or lapse 13 of time or both) a default (or give rise to any right of termination, cancellation or acceleration or loss of benefit or creation of any Lien) under, any of the terms, conditions or provisions of any Material Contract (as defined in Section 3.15) or (iv) violate any judgment, order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its Subsidiaries, or to the Company's knowledge, any judgment, order or decree applicable to Company Franchisees or any of their properties or assets, excluding from the foregoing clauses (ii), (iii) and (iv) where the failure to obtain such permits, authorizations, consents or approvals or to make such filings, or the existence of such violations, breaches or defaults, would not, and would not reasonably be expected to, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole, and would not materially impair or delay the ability of the Company to consummate the transactions contemplated hereby. SECTION 3.5 SEC REPORTS AND FINANCIAL STATEMENTS. The Company has filed with the SEC all forms, reports, schedules, statements and other documents required to be filed by it since June 30, 1999 (as such documents have been amended since the time of their filing, collectively, the "Company SEC Documents"). As of their respective dates or, if amended, as of the date of the last such amendment, the Company SEC Documents, including, without limitation, any financial statements or schedules included therein, complied in all material respects with the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Company SEC Documents, and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the Company's Subsidiaries is required to file any forms, reports or other documents with the SEC pursuant to Sections 12 or 15 of the Exchange Act. The financial statements of the Company included in the Company SEC Documents have been prepared from, and are in accordance with, the books and records of the Company and its consolidated subsidiaries, comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position and the consolidated results of operations and cash flows of the Company and its consolidated subsidiaries as at the dates thereof or for the periods presented therein. 14 SECTION 3.6 NO UNDISCLOSED LIABILITIES. Except (a) as disclosed in the Company SEC Documents or on Schedule 3.6, (b) for liabilities and obligations incurred in the ordinary course of business since the date of the most recent financial statements included in the Company SEC Documents, and (c) for liabilities and obligations incurred in connection with the consummation of the Transactions, (x) since September 30, 2001, neither the Company nor any of its Subsidiaries has incurred any material liabilities required to be reflected on a consolidated balance sheet of the Company and its Subsidiaries (including the notes thereto) prepared in accordance with GAAP and (y) neither the Company nor any of its Subsidiaries has any liabilities which would, or would reasonably be expected to, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. SECTION 3.7 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Company SEC Documents or on Schedule 3.7, since June 30, 2001, the Company and its Subsidiaries have conducted their respective businesses in the ordinary course of business and there has not been (i) any event, change or effect that has resulted, or would reasonably be expected to result, in a material adverse effect on the Company and its Subsidiaries, taken as a whole; (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the equity interests of the Company or any Subsidiary of the Company (other than a wholly-owned Subsidiary); (iii) any change by the Company or any of its Subsidiaries in accounting principles or methods, except insofar as may be required by GAAP; (iv) any split, combination, or reclassification of any of the Company's capital stock or any redemption or other acquisition by the Company or any of its Subsidiaries of any shares of its capital stock, or any issuance or authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of the Company's capital stock, except for issuances under the Company's Option Plan; (v) (A) any granting by the Company or any of its Subsidiaries to any employee, director or executive officer of the Company or any Subsidiary of any increase in cash compensation, bonus or other benefits, except for normal increases in the ordinary course of business, (B) any granting by the Company or any of its Subsidiaries to any such employee, director or executive officer of any increase in severance or termination pay, except in the ordinary course of business or (C) any entry by the Company or any of its Subsidiaries into, or any amendment of, any employment, deferred compensation, consulting, severance, termination or indemnification agreement with any such employee, director or executive officer other than in the ordinary course of business; (vi) any Tax (as defined in Section 3.12) election that individually or in the aggregate would, or would reasonably be expected to, have a material adverse effect on the Company and its 15 Subsidiaries, taken as a whole, or on any of its Tax attributes, or any settlement or compromise of any material Tax liability other than settlements by the Company of Tax disputes referenced on Schedule 3.12; (vii) any amendment to any term of any outstanding security of the Company or any of its Subsidiaries that would materially increase the obligations of the Company or such Subsidiaries under such security; (viii) any entry into any agreement, commitment or transaction by the Company or any of its Subsidiaries which would require the expenditure by the Company of more than $250,000 in any twelve- month period, except for agreements, commitments or transactions entered into in the ordinary course of business in connection with purchases of food or related products or advertising services or products, including, without limitation, media purchases; (ix) (A) any incurrence or assumption by the Company or any Subsidiary of any indebtedness for borrowed money in an aggregate amount exceeding $100,000 (other than any renewals, replacements or extensions that do not increase the aggregate commitments thereunder) or (B) any guarantee, endorsement, or other incurrence or assumption of liability in an aggregate amount exceeding $100,000 (whether directly, contingently or otherwise) by the Company or any of its Subsidiaries for the obligations of any other Person (other than any wholly owned Subsidiary of the Company); other than in the case of (A) or (B) (x) in the ordinary course of business or (y) in connection with (1) any acquisition or capital expenditure permitted by Section 5.1 or (2) the Transactions; (x) any creation or assumption by the Company or any of its Subsidiaries of any Lien on any asset of the Company or any of its Subsidiaries other than Permitted Liens (as defined herein) or those Liens created or assumed in the ordinary course of business consistent with past practice; (xi) any making of any loan, advance or capital contribution to or investment in any Person by the Company or any of its Subsidiaries other than loans, advances, or capital contributions to or investments in wholly owned Subsidiaries of the Company or in Company Franchisees; (xii) (A) any contract or agreement entered into by the Company or any of its Subsidiaries on or prior to the date hereof and after July 1, 1998 relating to any acquisition or disposition of any business involving a purchase or sale price in excess of $50,000 in the aggregate (other than loan purchases or sales and other than acquisitions of franchises of the Company or a Subsidiary of the Company) or (B) any modification, amendment, assignment, termination or relinquishment by the Company or any of its Subsidiaries on or prior to the date hereof of any contract which requires payments in excess of $250,000 in any twelve-month period or is not terminable upon six (6) months' or less notice without penalty in accordance with its terms; (xiii) any settlement or compromise of any individual claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy requiring a payment in excess of $25,000; (xiv) any loss, casualty or damage (whether or not covered by insurance) to the assets of the Company or 16 any of its Subsidiaries in excess of $50,000; (xv) any entering into of any license, distribution, marketing or sales agreement, in each case on an exclusive basis, which involves payments in excess of $50,000 in any twelve-month period and is not terminable upon six (6) months' or less notice without penalty in accordance with its terms, other than such of the foregoing that are entered into in the ordinary course of business in connection with purchases of food or related products or advertising services or products, including, without limitation, media purchases; or (xvi) any agreement to do any of the foregoing. As used in this Agreement, "Permitted Liens" means (a) Liens for Taxes (i) not yet due and payable or (ii) being contested in good faith, if a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor, (b) statutory liens of landlords, liens of carriers, warehouse person, mechanics and other liens imposed by law incurred in the ordinary course of business, (c) Liens incurred or deposits made in connection with workers' compensation, unemployment insurance and other similar types of social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return of money bonds and similar obligations, in each case in the ordinary course of business, consistent with past practice, (d) purchase money liens incurred in the ordinary course of business, consistent with past practice, (e) easements, rights-of-way, restrictions and other similar charges of encumbrances, in each case, which do not materially interfere with the ordinary conduct of business of the Company and its Subsidiaries and do not materially detract from the value of the property to which such encumbrance relates; (f) other Liens incurred in the ordinary course of business; (g) Liens for indebtedness or liabilities permitted to be created hereunder; and (h) other liens that would not result in a material liability of the Company and its Subsidiaries, taken as a whole. SECTION 3.8 EMPLOYEE BENEFIT PLANS; ERISA. (a) Schedule 3.8 sets forth a true and complete list of all "employee benefit plans" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and all other employee benefit arrangements or payroll practices, including, without limitation, bonus, profit sharing, consulting or other compensation arrangements, pension, severance, deferred compensation, incentive, equity or equity-based compensation, stock purchase, sick leave, vacation pay, health, life and disability plans, together with any employment, termination or change in control agreements maintained, sponsored or contributed to by the Company and Subsidiaries (each a "Benefit Plan"). True, correct and complete copies of the following documents with respect to each of the Benefit Plans have been made available or delivered to Parent by the Company or its Subsidiaries: (i) any plans and related trust documents, and amendments thereto; (ii) the most recent Forms 5500 and 17 schedules thereto; (iii) the last IRS (as defined herein) determination letter; (iv) the most recent financial statements and actuarial valuations; (v) summary plan descriptions; (vi) written communications to employees relating to the Benefit Plans solely in the event that the communication specifies rights and benefits not described in the Benefit Plan document and such communication creates a material liability; and (vii) written descriptions of all non-written agreements relating to the Benefit Plans. The only trades or businesses (whether or not incorporated) since January 1, 1994, which are or have been under common control, or which are or have ever been treated as a single employer, with the Company or its Subsidiaries are the Company and its Subsidiaries. Except for noncompliance and any failures to maintain and operate any Benefit Plan as would not, individually or in the aggregate, result in a material liability to the Company or its Subsidiaries, taken as a whole: (i) each Benefit Plan has been maintained and operated in accordance with its terms and with applicable law, including, without limitation, ERISA, the Internal Revenue Code of 1986, as amended (the "Code") and the COBRA (as defined herein); (ii) each Benefit Plan intended to qualify under Section 401(a) of the Code and each related trust intended to be exempt from federal income tax under Section 501 of the Code (or similar provisions for Tax-registered or Tax-favored plans of foreign jurisdictions) has received a determination letter from the United States Internal Revenue Service (the "IRS") (or, if applicable, any required approvals of foreign governmental authorities for Tax-registered or Tax-favored plans of foreign jurisdictions) to the effect that the Benefit Plan is qualified under Section 401(a) of the Code (or similar provisions for Tax-registered or Tax-favored plans of foreign jurisdictions), which may be a favorable determination letter issued to a prototype sponsor, or has time remaining within which to apply for a determination letter; (iii) no claim, lawsuit, arbitration or other action has been threatened, asserted or instituted against any Benefit Plan (other than non-material routine claims for benefits, and appeals of such claims); and (iv) no Benefit Plan is under audit or investigation by the IRS, the United States Department of Labor or any other Governmental Entity. No Benefit Plan is a "multiemployer plan," as defined in Section 3(37) of ERISA. As used in this Agreement, "Governmental Entity" means any federal, state, local, municipal or foreign or other government or subdivision, branch, department or agency thereof or any governmental or quasi-governmental authority of any nature, including any court or other tribunal. (b) All contributions (including all employer contributions and employee salary reduction contributions) required to have been made under any of the Benefit Plans or by law, to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof (including any valid extension) or have been accrued on 18 the balance sheet of the Company as of September 30, 2001 included in the Company SEC Documents to the extent required under GAAP. (c) No Benefit Plan is subject to Title IV of ERISA or Section 412 of the Code. (d) Neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company or its Subsidiaries, any "party in interest" or "disqualified person" with respect to the Benefit Plans has engaged in a non-exempt "prohibited transaction" within the meaning of Section 4975 of the Code or Section 406 of ERISA. (e) None of the Benefit Plans which are "welfare benefit plans" within the meaning of Section 3(1) of ERISA provide for continuing benefits or coverage for any participant or any beneficiary of a participant post-termination of employment except as may be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and at the expense of the participant or the participant's beneficiary. (f) Except as described on Schedule 3.8 or in the items listed thereon, neither the execution and delivery of this Agreement nor the consummation of the Transactions will (i) result in any payment becoming due to any employee (current, former or retired) of the Company or any of its Subsidiaries, (ii) increase any benefits otherwise payable under any Benefit Plan or (iii) result in the acceleration of the time of payment or vesting of any such benefits. (g) Neither the Company nor any of its Subsidiaries has any contract, plan or commitment to create any additional Benefit Plan or to modify any existing Benefit Plan. (h) Except with respect to the Option Plan, no stock or other security issued by the Company or any of its Subsidiaries forms or has formed a material part of the assets of any Benefit Plan. (i) Any individual who performs services for the Company or any of its Subsidiaries (other than through a contract with an organization other than such individual) and who is not treated as an employee for federal income tax purposes by the Company or any of its Subsidiaries is not an employee for such purposes, except where treatment of such person as an employee would not result in a material liability to the Company and its Subsidiaries, taken as a whole. 19 (j) With respect to each Benefit Plan that covers employees outside of the United States ("Foreign Plan"), except as would not result in a material liability to the Company and its Subsidiaries, taken as a whole: (i) all employer and employee contributions to each Foreign Plan required by law or by the terms of such Foreign Plan have been made, or, if applicable, accrued in accordance with normal accounting practices. (ii) the fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded through insurance or the book reserve established for any Foreign Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations, as of the Effective Time, with respect to all current or former participants in such plan according to the actuarial assumptions and valuations most recently used to determine employer contributions to such Foreign Plan and no transaction contemplated by this Agreement shall cause such assets or insurance obligations to be less than such benefit obligations; and (iii) each Foreign Plan required to be registered has been registered and has been maintained in good standing with applicable regulatory authorities. SECTION 3.9 LABOR MATTERS. Except as set forth in Schedule 3.9, (i) to the knowledge of the Company, none of the employees of the Company or its Subsidiaries (the "Employees") is represented in his or her capacity as an employee of the Company by any labor organization; (ii) the Company and its Subsidiaries have not recognized any labor organizations nor has any labor organization been elected as the collective bargaining agent of any employees, nor has the Company entered into any collective bargaining agreement or union contract recognizing any labor organization as the bargaining agent of any Employees; (iii) to the knowledge of the Company, there is no union organization activity involving any of the Employees pending; (iv) there is no picketing pending, or to the knowledge of the Company, threatened, and there are no strikes, slowdowns, work stoppages, or lockouts involving any of the Employees pending, or to the knowledge of the Company, threatened that individually or in the aggregate would result in a material liability; and (v) there has been no "mass layoff" or "plant closing" as defined by the federal Worker Adjustment and Retraining Notification Act ("WARN") with respect to the Company within the six (6) months prior to the Effective Time. 20 SECTION 3.10 LITIGATION. Except as disclosed in the Company SEC Documents or on Schedule 3.10, (i) there is no suit, action, demand, injunction, order, decree, investigation or proceeding pending or, to the knowledge of the Company or its Subsidiaries, threatened against the Company or any of its Subsidiaries or any of their properties or assets which would have, or would reasonably be expected to have, a material adverse effect on the Company and its Subsidiaries, taken as a whole, or would be reasonably likely to impair or delay the ability of the Company to perform its material obligations under this Agreement and (ii) to the knowledge of the Company, there is no action, suit, proceeding or investigation pending or threatened against any current or former officer, director, employee or agent of the Company or any of its Subsidiaries (in his or her capacity as such) which does or would reasonably be expected to give rise to a claim for contribution or indemnification against the Company or any of its Subsidiaries, except, in each case, as would not, and would not reasonably be expected to, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. SECTION 3.11 PERMITS; NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS. Except as set forth on Schedule 3.11, (a) the Company and its Subsidiaries hold all permits, licenses, variances, exemptions, orders, registrations and approvals of all Governmental Entities which are required for the operation of the business of the Company and its Subsidiaries as currently conducted (collectively, the "Company Permits"), except where the failure to have any such Company Permit, individually or in the aggregate, would not, and would not reasonably be expected to, cause a material adverse effect on the Company and its Subsidiaries, taken as a whole, and (b) neither the Company nor any of its Subsidiaries is in default or violation of any term, condition or provision of (i) its respective certificates of incorporation or by-laws or similar organizational documents, (ii) any Material Contract or any agreement with any Company Franchisee listed on Schedule 3.20, (iii) any federal, state, local or foreign statute, law, ordinance, rule, regulation, judgment, decree, order, concession, grant or franchise or other approval applicable to the Company or any of its Subsidiaries, including, without limitation, in respect of employment and labor matters, or (iv) any Company Permits, excluding from the foregoing clauses (ii), (iii) and (iv), defaults or violations which would not, and would not reasonably be expected to, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. SECTION 3.12 TAXES. Except as set forth on Schedule 3.12: (a) The Company and its Subsidiaries or any consolidated, combined, unitary or affiliated group ("Affiliated Group") of which the Company or any of 21 its Subsidiaries is, or was, a member have (i) duly filed (or there has been filed on their behalf) with the appropriate governmental authorities all income, franchise and other material Tax Returns (as defined in Section 3.12(q)) required to be filed by them on or prior to the date hereof, and such Tax Returns are true, correct and complete in all material respects, and (ii) duly paid in full or made adequate provision in accordance with GAAP (or there has been paid or provision has been made on their behalf) for the payment of all Taxes (as defined in Section 3.12(q)) due with respect to such Tax Returns. (b) No federal, state or local audits are presently pending or, to the knowledge of the Company, threatened with regard to any Tax Return of the Company or its Subsidiaries, or any Affiliated Group. All deficiencies asserted or assessments made as a result of any examinations by any taxing authority of the Tax Returns of the Company, any Subsidiary or Affiliated Group have been fully paid. (c) There are no outstanding consents to extend the statutory period of limitations applicable to the assessment of any income, franchise or other material Taxes or any deficiencies of Taxes asserted against the Company or any of its Subsidiaries or any Affiliated Group, and no power of attorney granted by either the Company or any of its Subsidiaries or any Affiliated Group with respect to any Taxes is currently in force. (d) Neither the Company nor any of its Subsidiaries is a party to any agreement providing for the allocation or sharing of Taxes. (e) The Company and its Subsidiaries have complied with all applicable laws, rules and regulations relating to the payment and withholding of Taxes and have duly and timely withheld from employee salaries, wages and other compensation and have paid over to the appropriate taxing authorities all amounts required to be so withheld and paid over for all periods under all applicable laws, except where failure to comply would not result in a material liability of the Company and its Subsidiaries, taken as a whole. (f) Purchaser has had access to complete copies of (A) all income or franchise Tax Returns of the Company and its Subsidiaries (or, in the case of Tax Returns filed for an Affiliated Group, the portion of such consolidated Tax Returns relating to the Company or any Subsidiary) for the years ending June 30, 1998, June 30, 1999 and June 30, 2000 and (B) any audit report issued within the last three years relating to any income, franchise or other material Taxes due from or with respect to the Company, any Subsidiary or Affiliated Group. Listed on Schedule 3.12 are all taxable years for which 22 examinations are ongoing or statute of limitations periods have been extended in respect of United States federal Tax Returns. (g) Since July 1, 1997, no claim has been made by a taxing authority in a jurisdiction where the Company, any Subsidiary or Affiliated Group does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. (h) Since July 1, 1997, neither the Company nor any Subsidiary or Affiliated Group has (A) filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code), (B) agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of state, local or foreign law by reason of a change in accounting method or has any knowledge that the IRS has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any change in accounting method, (C) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any similar provision of state, local or foreign law, or (D) requested any extension of time within which to file any income, franchise or other material Tax Return, which Tax Return has since not been filed. (i) Since July 1, 1997, no property owned by the Company or any Subsidiary is (i) property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986, (ii) "tax-exempt use property" within the meaning of Section 168(h)(1) of the Code or (iii) "tax-exempt bond financed property" within the meaning of Section 168(g) of the Code. (j) Since January 1, 1997, the Company has not been and the Company does not anticipate becoming, a "United States real property holding company" within the meaning of Section 897 of the Code. (k) There is no contract, agreement, plan or arrangement between the Company or its Subsidiaries and any Employee covering any person that, individually or collectively, would give rise to the payment of any amount that would not be deductible by reason of Section 280G of the Code, or would constitute compensation that is not deductible by reason of the limitation set forth in Section 162(m) of the Code. 23 (l) Since July 1, 1997, the Company has not been subject to any private letter ruling of the IRS or comparable rulings of other taxing authorities. (m) There are no Liens other than Permitted Liens as a result of any unpaid Taxes upon any of the assets of the Company or any Subsidiary. (n) Since July 1, 1997 and, to the knowledge of the Company, prior thereto, neither the Company, any Subsidiary, nor any Affiliated Group reported any item on any Tax Return in a manner which (A) if not sustained would be reasonably likely, absent disclosure, to give rise to a penalty for substantial understatement of federal income Tax under Section 6662 of the Code (or any predecessor statute or any corresponding provision of any such predecessor statute, or state, local, or foreign Tax law), and (B) has not adequately been disclosed on such Tax Return in accordance with Section 6662(d)(2)(B) of the Code (or corresponding provision of any such predecessor statute, or state, local, or foreign Tax law) and in each case where any such item, if not sustained, would, or would reasonably be expected to, result in a material liability of the Company and its Subsidiaries, taken as a whole. (o) The Company has not constituted either a "distributing corporation" or a "controlled corporation" within the meaning of Section 355(a)(1)(A) of the Code in a distribution qualifying for tax free treatment under Section 355 of the Code (A) in the two years prior to the date of this Agreement or (B) in a distribution that could otherwise constitute part of a "plan" or "series of transactions" (within the meaning of Section 355(e) of the Code) in conjunction with this Agreement. (p) Other than with respect to Taxes of the Company and its Subsidiaries, neither the Company nor any of its Subsidiaries is liable for Taxes of any other person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign Tax law). (q) For purposes of this Agreement, "Taxes" shall mean any and all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, excise, real or personal property, sales, withholding, social security, occupation, use, service, service use, license, net worth, payroll, franchise, transfer and recording taxes, fees and charges, imposed by the IRS or any taxing authority (domestic or foreign), including, without limitation, any state, county, local or foreign government or any subdivision or taxing agency thereof (including a United States possession)), whether computed on a 24 separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, penalties or additional amounts attributable to, or imposed upon, or with respect to, any such taxes, charges, fees, levies, or other assessments. For purposes of this Agreement, "Tax Return" shall mean any report, return, document, declaration, or other information or filing required to be supplied to any taxing authority or jurisdiction (domestic or foreign) with respect to Taxes. SECTION 3.13 REAL PROPERTY. (a) Except as set forth on Schedule 3.13(a), neither the Company nor any of its Subsidiaries owns in fee any real property. Each of the Company and its Subsidiaries has good and valid title to each parcel of real property owned by it free and clear of all Liens, except (A) Taxes and general and special assessments not in default and payable without penalty and interest, and (B) other Liens which do not materially interfere with the Company's or any of its Subsidiaries' use and enjoyment of such real property or materially detract from or diminish the value thereof. (b) Schedule 3.13(b) sets forth the location of premises occupied by the Company or its Subsidiaries pursuant to leases, subleases and other agreements (the "Real Property Leases") under which the Company or any of its Subsidiaries uses or occupies or has the right to use or occupy, now or in the future, any real property. Parent has had access to written copies of all Real Property Leases (and all modifications, amendments and supplements thereto and all side letters to which the Company or any of its Subsidiaries is a party affecting the obligations of any party thereunder) and such documents constitute and represent the Company's and its Subsidiaries' liabilities and obligations under Real Property Leases in all material respects. Except as set forth on Schedule 3.13(b), to the knowledge of the Company, each Real Property Lease whose term has not expired constitutes the valid and legally binding obligation of the Company or the applicable Subsidiary of the Company, enforceable in accordance with its terms, and is in full force and effect. To the knowledge of the Company, all rent payable by the Company and its Subsidiaries as tenants under each Real Property Lease whose term has not expired has been paid when due. The Company has not received any written notice of termination or uncured default of a material nature on the part of the Company or any such Subsidiary in all cases other than such circumstances that would not, and would not reasonably be expected to, cause a material adverse effect on the Company and its Subsidiaries, taken as a whole. Each of the Company and its Subsidiaries has a good and valid leasehold interest in each parcel of real property leased by it pursuant to unexpired written Real Property 25 Leases free and clear of all Liens, except (A) Taxes and general and special assessments not in default and payable without penalty and interest, and (B) other Liens which do not materially interfere with the Company's or any of its Subsidiaries' use and enjoyment of such real property or materially detract from or diminish the value thereof. (c) Except as set forth on Schedule 3.13(c), no party to any Real Property Lease has given written notice to the Company or any of its Subsidiaries of or made a claim in writing against the Company or any of its Subsidiaries with respect to any material breach or default thereunder. SECTION 3.14 ENVIRONMENTAL MATTERS. (a) Except (i) as set forth in Schedule 3.14 and (ii) as set forth in the Company SEC Documents: (i) since July 1, 1997, neither the Company nor any of its Subsidiaries has received any written communication from any person or entity (including any Governmental Entity) stating or alleging that the Company or any Subsidiary is a potentially responsible party under an Environmental Law (as defined in Section 3.14(b)) with respect to any actual or alleged environmental contamination; to the Company's knowledge, no Governmental Entity is conducting or has conducted any environmental remediation or environmental investigation which could reasonably be expected to result in liability for the Company or any Subsidiary under any Environmental Law; and neither the Company nor any Subsidiary has received any request for information under any Environmental Law from any Governmental Entity with respect to any actual or alleged environmental contamination, except, in each case, for communications, environmental remediation and investigations and requests for information which would not, and would not reasonably be expected to, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole; and (ii) since July 1, 1997, the Company has not received any written communication, notice, notification, demand, request for information, citation, summons, or order from any person or entity (including any Governmental Entity) stating or alleging that the Company may have violated any Environmental Law, or that the Company has caused or contributed to any environmental contamination that has caused any property damage or personal injury under any 26 Environmental Law, except, in each case, for statements and allegations of violations and statements and allegations of responsibility for property damage and personal injury which would not, and would not reasonably be expected to, individually or in the aggregate, cause a material adverse effect on the Company and its Subsidiaries, taken as a whole. (iii) since July 1, 1997, the Company has not received written notice that a Hazardous Substance (as defined herein) has been discharged, disposed of, dumped, injected, pumped, deposited, spilled, leaked, emitted or released at, on or under any property owned, leased or operated by the Company or any of its Subsidiaries in violation of an Environmental Law, which circumstance, individually or in the aggregate, would cause the Company or its Subsidiaries to have liability which would, or would reasonably be expected to, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (b) For purposes of this Section 3.14, "Environmental Law" means all applicable foreign, state, federal and local laws, regulations and rules, including common law, judgments, decrees and orders relating to pollution, the preservation of the environment, contaminants, wastes or chemicals or toxic, radioactive, ignitable, corrosive, reactive or otherwise Hazardous Substances, wastes or materials, and the release of materials into the environment. (c) For purposes of this Section 3.14, "Hazardous Substances" means any pollutant, contaminant, waste or chemical or any toxic, radioactive, corrosive, reactive, or otherwise hazardous substance, waste or material, or any substance having any constituent elements displaying any of the foregoing characteristics, including, without limitation, petroleum, its derivatives, byproducts, and other hydrocarbons, or. any substance, waste or material regulated under any Environmental Laws. SECTION 3.15 MATERIAL CONTRACTS. (a) Except as set forth on Schedule 3.15 or with respect to agreements filed as exhibits to the Company SEC Documents (the "SEC-Filed Agreements"), neither the Company nor any Subsidiary is a party to any (i) (A) employment, severance, personal services or consulting contract ("Personal Service Contract") which requires payments in any twelve-month period in excess of $100,000 and may not be canceled without penalty on notice to the other party of less than six months, or 27 (B) non-competition contract or (C) other contract requiring the Company to indemnify an employee, director or officer of the Company or a Subsidiary (including, without limitation, any contract to which the Company or any of its Subsidiaries is a party involving Employees but excluding any Personal Service Contract); (ii) licensing, merchandising, product design or development or distribution agreement; (iii) contract granting a right of first refusal or first negotiation; (iv) partnership or joint venture agreement; (v) agreement for the acquisition, sale or lease of material properties or assets of the Company (by merger, purchase or sale of assets or stock or otherwise) entered into since July 1, 1997, excluding any agreements for the purchase and sale of franchises of the Company or its Subsidiaries; (vi) contract or agreement with any Governmental Entity; (vii) loan or credit agreement, mortgage, indenture or other agreement or instrument (other than leases entered into the ordinary cause of business) evidencing indebtedness for borrowed money by the Company or any of its Subsidiaries or any such agreement pursuant to which indebtedness for borrowed money may be incurred; (viii) agreement that purports to limit, curtail or restrict the ability of the Company or any of its Subsidiaries to compete in any geographic area or line of business (excluding any contracts granting franchises by the Company or its Subsidiaries which are listed on Schedule 3.20(b) (the "Franchise Agreements")); (ix) contract or agreement that would be required to be filed as an exhibit to a Form 10-K filed by the Company with the SEC on the date hereof; (x) manufacturing or distributorship agreement; or (xi) commitment or agreement to enter into any of the foregoing; in each of the cases described in (ii), (v), (x) or, to the extent relating to such clauses, (xi) above where such agreement or contract requires payments in any twelve month period in excess of $250,000 and may not be canceled without penalty on notice to the other party of less than six (6) months (and in all cases excluding any agreement or contract entered into in the ordinary course of business in connection with purchases of food or related products or advertising services or products, including without limitation, media purchases) (together with the Franchise Agreements and the SEC-Filed Agreements, the "Material Contracts")). (b) To the knowledge of the Company, (i) each of the Material Contracts constitutes the valid and legally binding obligation of the Company or its Subsidiaries, as applicable, enforceable in accordance with its terms, and is in full force and effect, (ii) there is no material default under any Material Contract so listed either by the Company or by any other party thereto, and (iii) no event has occurred that with the lapse of time or the giving of notice or both would constitute a material default thereunder by the Company or any other party. No party to any such Material Contract has given written notice to the Company of or made a claim in writing against the Company with respect to any material breach or material default thereunder. 28 SECTION 3.16 INTELLECTUAL PROPERTY. (a) The Company and its Subsidiaries own, free and clear of any Liens, or have the valid and enforceable right to use, the Intellectual Property (as defined in Section 3.16(d) below) currently used in the conduct of their businesses as currently conducted, with such exceptions that would not, or would not reasonably be expected to, individually or in the aggregate, cause a material adverse effect on the Company and its Subsidiaries, taken as a whole ("Company Intellectual Property"). (b) Except as set forth in Schedule 3.16, to the knowledge of the Company: (i) the Material Intellectual Property (as defined in Section 3.16(d) below) is registered or applications have been filed in the jurisdictions set forth on Schedule 3.16, the registrations are subsisting and unexpired, and the registrations and applications are free of all Liens and have not been abandoned in the jurisdiction set forth on such Schedule 3.16; (ii) no judgment, decree, injunction, rule or order has been rendered by any Governmental Entity which would limit, cancel or question the validity of, or the Company's or its Subsidiaries' rights in and to, the Material Intellectual Property in the United States (including its territories and possessions), Canada, Australia, and New Zealand; (iii) the Company has not received any written notice of any claims by any person that the Company or Company Intellectual Property has infringed or is infringing the rights of any third party in any Intellectual Property; and (iv) neither the Company nor any of its Subsidiaries has received written notice of any pending or threatened suit, action or adversarial proceeding that seeks to limit, cancel or question the validity of, or the Company's or any such Subsidiary's rights in and to, the Material Intellectual Property in the United States (including its territories and possessions), Canada, Australia, and New Zealand. (c) The consummation of the Merger and the other Transactions will not result in a the loss by the Company or its Subsidiaries of any rights to the Company Intellectual Property. (d) "Material Intellectual Property" shall have the meaning set forth on Schedule 3.16. "Intellectual Property" shall mean all rights, privileges and priorities provided under federal, state and foreign law relating to intellectual property, including, without limitation, all (x)(1) inventions, discoveries, processes, formulae, designs, methods, techniques, procedures, concepts, developments, technology, new and useful improvements thereof and know-how relating thereto, whether or not patented or eligible for patent 29 protection; (2) copyrights and copyrightable works, including computer applications, programs, software, databases and related items; (3) trademarks (registered or unregistered), service marks, trade names, trade dress, corporate names, domain names and all common-law rights relating thereto; (4) trade secrets and other confidential information; (y) registrations, applications and recordings for any of the foregoing; and (z) licenses or other similar agreements granting the rights to use any of the foregoing, as well as all goodwill symbolized by any of the foregoing. SECTION 3.17 VOTING REQUIREMENTS. The affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock at the Special Meeting is the only vote of the holders of any class or series of the Company's capital stock necessary to approve and adopt this Agreement and the Transactions. SECTION 3.18 STATE TAKEOVER STATUTES. The Company Board has approved this Agreement and the consummation of the Transactions and such approval constitutes approval of the Merger and the other Transactions by the Company Board under the provisions of Section 203 of the DGCL such that Section 203 does not apply to the Merger and the other Transactions. SECTION 3.19 RELATED PARTY TRANSACTIONS. Except for those arrangements, agreements and contracts set forth on Schedule 3.19 or described in the Company SEC Documents, there are no written arrangements, agreements and contracts currently in effect entered into by the Company or any of its Subsidiaries with any person who is an executive officer, director or affiliate of the Company or any of its Subsidiaries, or any entity of which any of the foregoing is an affiliate, other than those arrangements, agreements and understandings which (i) are terminable by the Company upon no more than 30 days' prior notice without payment of any premium or penalty or (ii) would not, individually or in the aggregate, reasonably be expected to create or result in a liability to the Company in excess of $60,000. SECTION 3.20. RELATIONSHIPS WITH FRANCHISEES. (a) Except as set forth on Schedule 3.20(a), the consummation of the Transactions will not give any franchisee the right to terminate its relationship with the Company or any of its Subsidiaries or reduce the amount of royalties payable by such franchisee to the Company or any of its Subsidiaries. 30 (b) Schedule 3.20(b) contains a true, complete and accurate list of all franchisees of the Company and its Subsidiaries ("Company Franchisees") as of the date hereof and the states or other jurisdictions in which such franchisees are located and a true and accurate list of the Franchise Agreements. (c) Schedule 3.20(c) sets forth a true and complete list of (i) all states and countries in which the Company Franchisees are located and in which the Company or its Subsidiaries have received an official written notice from the appropriate state officials that the offer to sell and the sale of their franchises are exempt from the registration provisions of such jurisdiction's franchise registration law; and (ii) all other states in which the Company Franchises are located and in which the Company and its Subsidiaries have offered to sell or have sold their franchises based upon a claimed exemption from the registration provisions of such state's applicable franchise registration laws. True and correct copies of all written notices of registrations and all written notices of exemption, as described in clauses (a) and (b) above, have been furnished to the Parent, and such registration and exemption notices are in full force and effect as of the date hereof except as set forth in Schedule 3.20; in each case, except as would not, and would not reasonably be expected to, cause a material adverse effect in the Company and its Subsidiaries, taken as a whole. (d) The Company has delivered to the Parent true and correct copies of the Company's Uniform Franchise Offering Circulars ("UFOCs"), which are currently being used in connection with the offers to sell and the sales of its franchises. The UFOCs currently used by the Company and its Subsidiaries (i) comply in all material respects with all applicable federal, state and foreign laws and regulations pertaining to offers to sell and the sale of franchises in jurisdictions in which they are being used, including, without limitation, in the United States, the Uniform Franchise Offering Circular Guidelines adopted by the North American Securities Administrators Association on April 25, 1993 and approved by the Federal Trade Commission on December 30, 1993 ("FTC") as an alternative to the FTC disclosure statement; and (ii) do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; in all cases, except where any failure to comply or an untrue statement or omission would not, or would not reasonably be expected to, cause a material adverse effect on the Company and its Subsidiaries, taken as a whole. 31 SECTION 3.21 QUASI-CORPORATION REQUIREMENTS. The Company does not meet the requirements set forth in Section 2115(a) of the California Corporations Code (the "California Code") and is not subject to the provisions of the California Code identified in Section 2115(b) thereof. SECTION 3.22 INSURANCE. Schedule 3.22 sets forth a true and complete list of directors and officers liability ("D&O Insurance") and general liability insurance policies maintained by the Company or any of its Subsidiaries (including the providers of such insurance policies) and all claims made under such policies since July 1, 1999 other than claims made under workers compensation policies resulting in any payment by such insurance company in an amount greater than $50,000 for such claims or for all claims arising out of the same or similar incidents (in all cases including all outstanding claims as of the date hereof seeking payment in excess of $50,000 and the status thereof). All such insurance policies are in full force and effect, all premiums due and payable thereunder have been paid; and none of the Company or any of its Subsidiaries is in material default thereunder. SECTION 3.23 INFORMATION IN PROXY STATEMENT. The Proxy Statement shall not at the date it is filed with the SEC, at any time that it is amended or supplemented, at the time it is first mailed to stockholders and at the time of the meeting of stockholders to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading , except that no representation or warranty is made by the Company with respect to information that Parent or the Purchaser supplied to the Company for inclusion therein or for incorporation by reference therein. SECTION 3.24 OPINION OF FINANCIAL ADVISOR. The Company Board and the Special Committee have received the opinion of Houlihan Lokey Howard & Zukin ("Houlihan"), dated the date of this Agreement, to the effect that, as of such date, the Merger Consideration is fair from a financial point of view to holders of Shares (other than Craig Enterprises, Inc. ("CEI") and its affiliates and Parent and its affiliates), a signed copy of which opinion has been or will promptly be delivered to Parent. SECTION 3.25 BROKERS. Except for Houlihan and Koffler & Company, whose fees and expenses shall be paid by the Company in accordance with the Company's agreement with such firm, no broker, investment banker, financial advisor or other person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in 32 connection with the Transactions based upon arrangements made by or on behalf of the Company. A true and correct copy of the agreements between the Company and each of Houlihan and Koffler & Company have been delivered to Parent. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER Parent and the Purchaser jointly and severally represent and warrant to and agree with the Company as follows: SECTION 4.1 ORGANIZATION. Each of Parent and the Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate or other power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power or authority would not, and would not reasonably be expected to, have a material adverse effect on Parent, the Purchaser and Parent's other Subsidiaries, taken as a whole. Parent and each of its Subsidiaries is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not, and would not reasonably be expected to, in the aggregate, have a material adverse effect on Parent and its Subsidiaries, taken as a whole. Parent and the Purchaser have heretofore delivered to the Company accurate and complete copies of the certificate of incorporation and by-laws (or other similar organizational and governing documents), as currently in effect, of Parent and the Purchaser. SECTION 4.2 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION. Each of Parent and the Purchaser has full corporate power and authority to execute, deliver and perform its obligations under this Agreement and to consummate the Transactions. The execution, delivery and performance by Parent and the Purchaser of this Agreement and the consummation of the Transactions have been duly authorized by their respective Boards of Directors and by Parent as the sole stockholder of the Purchaser and no other corporate action on the part of Parent and the Purchaser is necessary to authorize the execution and delivery by Parent and the Purchaser of this Agreement and the consummation by them of the Transactions. This Agreement has been duly executed and 33 delivered by Parent and the Purchaser, as the case may be, and, assuming due and valid authorization, execution and delivery hereof by the Company, is a valid and binding obligation of each of Parent and the Purchaser, as the case may be, enforceable against them in accordance with its respective terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific perfor- mance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. SECTION 4.3 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act, the HSR Act, state or foreign laws relating to takeovers, state securities or blue sky laws and the DGCL, neither the execution, delivery or performance of this Agreement by Parent and the Purchaser nor the consummation by Parent and the Purchaser of the Transactions nor compliance by Parent and the Purchaser with any of the provisions hereof (i) shall conflict with or result in any breach of any provision of the respective certificate of incorporation or by-laws or similar organizational documents of Parent, any of its Subsidiaries or the Purchaser, (ii) require on the part of Parent or the Purchaser any filing with, or permit, authorization, consent or approval of, any Governmental Entity, (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration or loss of benefit or creation of any Lien) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Parent, any of its Subsidiaries or the Purchaser is a party or by which any of them or any of their properties or assets may be bound or (iv) violate any judgment order, writ, injunction, decree, statute, rule or regulation applicable to Parent, any of its Subsidiaries or the Purchaser or any of their properties or assets, excluding from the foregoing clauses (ii), (iii) or (iv) where the failure to obtain such permits, authorizations, consents or approvals or to make such filings, or the existence of such violations, breaches or defaults, would not, and would not reasonably be expected to, individually or in the aggregate, cause a material adverse effect on Parent, its Subsidiaries or the Purchaser taken as a whole and would not materially impair or delay the ability of Parent or the Purchaser to consummate the Transactions. SECTION 4.4 INFORMATION IN PROXY STATEMENT. None of the information supplied by Parent or the Purchaser for inclusion or incorporation by reference in the Proxy Statement shall, at the date it is filed with the SEC, at any time it is amended or supplemented, at the time it is first mailed to stockholders and at the time of the meeting of 34 stockholders to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. SECTION 4.5 FINANCING. (a) Third-Party Commitment Letters. Parent has delivered to the Company a true and complete executed commitment letter dated as of December 28, 2001 from Ableco Finance LLC (the "Senior Lender") pursuant to which the Senior Lender has committed to provide senior debt financing (the "Senior Financing") to Parent on the terms and subject to the conditions set forth in such commitment letter pursuant to which the Senior Lender's financing commitment expires on May 31, 2002 (the "Senior Commitment Letter"). (b) Parent and Purchaser Financing Commitments. Parent has delivered to the Company (i) true and complete commitment letters from ACI Capital Co., Inc. ("ACI") and Deutsche Bank Capital Partners ("DBCP") (the "Purchaser Lenders") pursuant to which the Purchaser Lenders have committed to provide subordinated debt financing (the "Purchaser Debt Financing") to Purchaser on the terms and subject to the conditions set forth in such commitment letters (the "Purchaser Debt Commitment Letters") and (ii) true and complete commitment letters from ACI and DBCP (the "Parent Equity Investors", and together with the Senior Lender, and the Purchaser Lenders, the "Financing Sources" and, each, a "Financing Source") pursuant to which the Parent Equity Investors have committed to provide equity financing (the "Parent Equity Financing", and together with the Senior Financing and the Purchaser Debt Financing, the "Financings", and, each a "Financing") to Parent on the terms and subject to the conditions set forth in such commitment letters (the "Parent Equity Commitment Letters", and, together with the Senior Commitment Letter and the Purchaser Debt Commitment Letters, the "Commitment Letters", and, each a "Commitment Letter"). In addition, Parent has delivered to the Company a true and complete commitment letter from SJF pursuant to which SJF has agreed to contribute Shares to the Parent on the terms and subject to the conditions set forth in such commitment letter. (c) Financing Sources Generally. The obligations of the Financing Sources to consummate the Financings are not subject to any condition other than set forth in the applicable Commitment Letter. Parent is not aware of any facts or circumstances that would cause Parent or the Financing Sources to be unable to consummate the Financings in accordance with the terms of the Commitment Letters. Parent agrees to promptly notify the Company if at any time prior to the Effective Date it no longer believes in good faith that it 35 will be able to consummate the Financings on substantially the terms described in the Commitment Letters. As of the date hereof, each of the Commitment Letters is in full force and effect and has not been amended in any material respect. To the knowledge of Parent and the Purchaser, the Financings will be sufficient to consummate the Merger and to pay all fees and expenses related to any of the foregoing. The financing and other fees that are due and payable under the Commitment Letters have been paid in full. SECTION 4.6 SHARE OWNERSHIP. None of Parent, the Purchaser or any of their respective affiliates or "associates" (as such term is defined under Rule 12b-2 under the Exchange Act) beneficially own any Shares, other than, if applicable, SJF or any affiliate thereof. SECTION 4.7 PARENT AND THE PURCHASER'S OPERATIONS. Parent and the Purchaser were formed solely for the purpose of engaging in the transactions contemplated hereby and have not engaged in any business activities or conducted any operations other than in connection with the transactions contemplated hereby. SECTION 4.8 INVESTIGATION BY PARENT AND THE PURCHASER. Parent and the Purchaser have conducted their own independent review and analysis of the businesses, assets, condition, operations and prospects of the Company and its Subsidiaries. In entering into this Agreement, Parent and the Purchaser have relied solely upon their own investigation and analysis and upon the representations, warranties, comments and agreements of the Company set forth in this Agreement, and Parent and the Purchaser: (a) acknowledge that, other than as set forth in this Agreement, none of the Company, its Subsidiaries or any of their respective directors, officers, employees, affiliates, agents or representatives (including without limitation Koffler & Company) makes any representation or warranty, either express or implied, as to the accuracy or completeness of any of the information provided or made available to Parent or the Purchaser or their agents or representatives; and (b) agrees, to the fullest extent permitted by law that except for the liability of the Company in accordance with the terms of this Agreement for the representations and warranties of the Company included in this Agreement and except with respect to fraud, that none of the Company, its Subsidiaries or any of their respective directors, officers, employees, stockholders, affiliates, agents or representatives (including without limitation Koffler & Company) shall have any liability or responsibility whatsoever to Parent or the Purchaser on any basis (including without limitation in contract, tort or otherwise) based 36 upon any information provided or made available, or statements made, to Parent or the Purchaser. Notwithstanding anything to the contrary contained in this Agreement, no investigation of the Company by the Purchaser or its representatives or advisors prior to or after the date of this Agreement shall diminish, obviate or cure any of the representations or warranties of the Company contained in this Agreement. SECTION 4.9 BROKERS. Except as set forth on Schedule 4.9, no broker, investment banker, financial advisor or other person is entitled to any broker's, finder's financial advisor's or other similar fee or commission in connection with the Transactions based upon arrangements made by or on behalf of Parent or the Purchaser. ARTICLE V COVENANTS SECTION 5.1 INTERIM OPERATIONS OF THE COMPANY. The Company covenants and agrees that, except (i) as expressly permitted by this Agreement, (ii) as disclosed in any of the Schedules, or (iii) as agreed in writing by Parent, after the date hereof, and prior to the Effective Time: (a) the business of the Company and its Subsidiaries shall be conducted in the ordinary course of business consistent with past practice and in compliance in all material respects with all applicable laws and regulations and the Company shall use its reasonable best efforts to preserve intact their current business organizations, to keep available the services of their current officers and other key employees and to preserve their relationships with those persons having business dealings with them to the end that their goodwill and ongoing businesses shall be unimpaired at the Effective Time; (b) the Company shall not, directly or indirectly, (i) sell, transfer or pledge or agree to sell, transfer or pledge any Company Common Stock or capital stock of any of its Subsidiaries beneficially owned by it, either directly or indirectly other than pursuant to the exercise of Options outstanding on the date hereof and disclosed on Schedule 3.2 or Options received by non-employee directors after the date hereof pursuant to the third sentence of Section 6(a) of the Option Plan; (ii) amend its Certificate of Incorporation or By-laws or similar organizational documents; or (iii) split, combine or re- classify the outstanding Company Common Stock or any outstanding capital stock of any of the Subsidiaries of the Company; 37 (c) neither the Company nor any of its Subsidiaries shall: (i) declare, set aside or pay any dividend or other distribution payable in cash, stock or property with respect to its capital stock other than dividends from a wholly-owned Subsidiary to another Subsidiary or to the Company; (ii) issue, sell, pledge, dispose of or encumber any shares of, or securities convertible into or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of capital stock of any class of the Company or its Subsidiaries, other than shares of Company Common Stock issued pursuant to the exercise of Options outstanding on the date hereof and disclosed on Schedule 3.2 or Options received by non-employee directors after the date hereof pursuant to the third sentence of Section 6(a) of the Option Plan; (iii) transfer, lease, license, sell, mortgage, pledge, dispose of, or encumber any material assets or properties with an aggregate value exceeding $500,000; (iv) incur or modify any material indebtedness or other material liability, in an amount exceeding $2,000,000, provided that the Company may borrow money for use in the ordinary and usual course of business; (v) acquire or agree to acquire by merger or consolidation, or purchase a substantial portion of the stock or assets of, any business or any Person; or (vi) redeem, purchase or otherwise acquire directly or indirectly any of its capital stock; (d) neither the Company nor any of its Subsidiaries shall (i) enter into any contract or agreement that if in existence as of the date hereof would constitute a Material Contract, other than in the ordinary course of business consistent with past practice; (ii) enter into any contract, agreement, commitment or arrangement providing for, or amend any contract, agreement, commitment or arrangement to provide for, the taking of any action that would be prohibited hereunder; (iii) modify, amend or terminate the Name Agreement or any of its Material Contracts or, except in the ordinary course of business and consistent with past practice, waive, release or assign any material rights or claims (absolute, accrued, asserted or unasserted, contingent or otherwise) in a manner materially adverse to the Company or Subsidiary party thereto; (iv) pay, discharge or satisfy any claim, liability or obligation exceeding $250,000 (absolute, accrued, asserted or unasserted, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in the consolidated financial statements of the Company and its Subsidiaries or incurred in the ordinary course of business; or (v) waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company or any of its Subsidiaries is a party, provided, however, that the Company may enter into a lease in connection with the relocation (to a location within a fifty mile radius of the present location) of its headquarters (the "Headquarters Lease") on such terms and provisions as the Company shall determine provided that the annual lease rental payable to the landlord under such lease does not exceed one million five 38 hundred thousand dollars ($1,500,000) (excluding the effect of common area maintenance charges, operating expense pass-throughs, or similar charges, including, without limitation, insurance, tax and other costs required to be paid by the Company and excluding the effect of any rental increases based upon a "cpi" factor or percentage increase in lieu thereof). The Company will keep Parent reasonably apprised of its relocation efforts and of the proposed terms of any such lease, and will consult in good faith with Parent with respect thereto; (e) neither the Company nor any of its Subsidiaries shall permit any material insurance policy naming it as a beneficiary or a loss payable payee to be cancelled or terminated without notice to Parent, except in the ordinary course of business and consistent with past practice; (f) neither the Company nor any of its Subsidiaries shall: (i) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other Person other than a Subsidiary, or in the case of a Subsidiary, the Company or a Subsidiary, except in the ordinary course of business consistent with past practice; or (ii) make any loans, advances or capital contributions to, or investments in, any other Person (other than to Subsidiaries of the Company), other than in the ordinary course of business consistent with past practice; (g) neither the Company nor any of its Subsidiaries shall materially change any of the accounting policies or procedures used by it unless required by GAAP or applicable law; (h) neither the Company nor any of its Subsidiaries shall adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its Subsidiaries (other than the Merger); (i) except as permitted hereunder neither the Company nor any of its Subsidiaries shall take, or agree to commit to take, any action that would make any representation or warranty of the Company contained herein inaccurate in any material respect at, or as of any time prior to, the Effective Time (except for representations made as of a specific date) or would be reasonably likely to result in any of the conditions to the Merger set forth in Article VI not being satisfied, or that would materially impair the ability of the Company, Parent, the Purchaser or the holders of the Shares to consummate the Merger in accordance with the terms hereof or materially delay such consummation; 39 (j) neither the Company nor any of its Subsidiaries shall make, or commit to make, any capital expenditure or expenditures which (1) exceed $1,000,000 in the aggregate excluding capital expenditures pursuant to (2) or (3) below; (2) exceed $1,000,000 in the aggregate in connection with any refurbishment of any Company-owned centres; and (3) exceed One Hundred Fifty Thousand Dollars ($150,000) in the aggregate in connection with the leasehold improvements relating to the Headquarters Lease and the written consent of Parent, which shall not be unreasonably withheld, shall be required for any capital expenditures in connection with the Headquarters Lease which exceed One Hundred Fifty Thousand Dollars ($150,000); (k) neither the Company nor any of its Subsidiaries shall make or revoke any Tax election, or change (or make a request to any taxing authority to change) its Tax accounting methods, policies, practice or procedures, except in each case as required by GAAP or shall settle or compromise any Tax liability where the payment required by the Company or its Subsidiaries to compromise or settle such amount exceeds $100,000, in any case other than settlements or compromises of the matters disclosed on Schedule 3.12; (l) (i) establish any new compensation or benefit plan or arrangement which would require payments in excess of $100,000 in any twelve- month period, or (ii) enter into any employment, consulting, retention, termination, severance or change in control agreement with an executive officer where liability could exceed $100,000; (m) neither the Company nor any of its Subsidiaries shall revalue in any material respect any of its assets, including, without limitation, writing down the value of inventory or writing-off notes or accounts receivable other than in the ordinary and usual course of business consistent with past practice or as required by GAAP; (n) neither the Company nor any of its Subsidiaries shall settle or compromise any pending or threatened suit, action or claim relating to the transactions contemplated hereby without Parent's prior written consent which will not be unreasonably withheld where the aggregate amount paid by the Company in settlement (including, without limitation, by funding the retention amount under the applicable insurance policy) and all expenses incurred in connection with all such suits, actions or claims would not exceed five hundred thousand dollars ($500,000) and the Company, Parent and Purchaser and their affiliates are released as part of such settlement, or any other suit, action or claim which would require a payment by the Company or a Subsidiary in excess of $300,000 in the case of claims arising out of or in connection with the employment of the claimant or $100,000 in all other cases or would result in an agreement or covenant by the Company or Subsidiaries 40 which would, or would reasonably be expected to, have a material adverse effect on the Company and its Subsidiaries, taken as a whole; (o) neither the Company nor any of its Subsidiaries shall enter into any agreement or arrangement that limits or otherwise restricts the Company or any of its Subsidiaries or any successor thereto or that could, after the Effective Time, limit or restrict the Surviving Corporation and its affiliates (including Parent) or any successor thereto, from engaging or competing in any line of business or in any geographic area other than agreements pursuant to which the Company or a Subsidiary grants franchises to operate weight loss centres; (p) neither the Company nor any of its Subsidiaries shall make any change to, or amend in any way, the employment contracts, salaries or other compensation of any officer, director, employee, agent, or other similar representative of the Company or any of its Subsidiaries whose annual compensation exceeds $100,000 or, in the case of directors, $25,000, other than changes or amendments that (i) are made in the ordinary course of business and consistent with past practice, (ii) do not and will not result in increases of more than 10% in the salary of any such Person, and (iii) do not and will not exceed, in the aggregate, the lesser of (A) 5% of the total salaries, wages and other compensation of all Employees whose annual compensation exceeds $100,000, taken as a whole or (B) $75,000 in the aggregate; provided that in no event shall there be any increase in compensation for any of the individuals listed on Schedule 5.1(a); (q) neither the Company nor any of its Subsidiaries shall amend, alter, or terminate partially or completely, any Benefit Plan relating to or affecting any Employee where the incremental additional cost to the Company or any Subsidiary of any such action would exceed $100,000 in the twelve-month period following the taking of such action; (r) neither the Company nor any of its Subsidiaries shall (i) enter into any labor or collective bargaining agreement, (ii) amend, alter or terminate any collective bargaining agreement to which it is a party in any manner that would, or would reasonably be expected to, have a material adverse effect on the Company and its Subsidiaries, taken as a whole; and (s) neither the Company nor any of its Subsidiaries shall authorize or enter into an agreement to do any of the foregoing. 41 SECTION 5.2 ACCESS TO INFORMATION. Upon reasonable written notice, the Company shall (and shall cause each of its Subsidiaries to) afford to the officers, employees, accountants, counsel, financing sources and other representatives of Parent, access, during normal business hours, to all its properties, books, contracts, commitments and records and, during such period, the Company shall (and shall cause each of its Subsidiaries to) furnish promptly to Parent (a) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws and (b) all other information concerning its business, properties and personnel as Parent may reasonably request. Unless otherwise required by law, Parent shall hold any such information which is nonpublic in confidence in accordance with the provisions of the Confidentiality Agreement between the Company and Parent, dated June 14, 2001 (the "Confidentiality Agreement"). SECTION 5.3 CONSENTS AND APPROVALS. Each of the Company, Parent and the Purchaser shall take all actions necessary to comply promptly with all legal requirements which may be imposed on it with respect to this Agreement and the transactions contemplated hereby (which actions shall include, without limitation, furnishing all information required under the HSR Act and in connection with approvals of or filings with any other Governmental Entity) and shall promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their Subsidiaries or affiliates in connection with this Agreement and the Transactions. Each of the Company, on the one hand, and Parent and the Purchaser, on the other hand, shall, and shall cause its Subsidiaries to, take all actions necessary to obtain (and shall cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party required to be obtained or made by such party, or any of their respective Subsidiaries, in connection with the Merger or the taking of any action contemplated thereby or by this Agreement. SECTION 5.4 NO ACTIONS BY PARENT OR PURCHASER. Except as permitted hereunder, neither the Parent nor the Purchaser shall take or agree to commit to take any action that would be reasonably likely to result in any of the conditions to the Merger set forth in Article VI not being satisfied, or that would materially impair the ability of the Company, Parent, the Purchaser or the holders of the Shares to consummate the Merger in accordance with the terms hereof or materially delay such consummation. 42 SECTION 5.5 NO SOLICITATION. (a) The Company and its Subsidiaries shall immediately cease and shall instruct and use their best efforts to cause each of their respective affiliates, directors, officers, employees, agents and representatives (including without limitation any investment banker, financial advisor, attorney, accountant or other representative retained by it or any of its Subsidiaries) to immediately cease any discussions or negotiations with any other parties that may be ongoing with respect to any Acquisition Proposal (as defined below). The Company and its Subsidiaries shall not, and shall instruct and use their best efforts to cause their respective officers, directors, employees and investment bankers, attorneys or other agents retained by or acting on behalf of the Company or any of its Subsidiaries not to, (i) initiate, solicit or encourage, directly or indirectly, any inquiries, any expressions of interest or the making of any proposal that constitutes or is reasonably likely to lead to any Acquisition Proposal, (ii) except as permitted below, engage in negotiations or discussions with, or furnish any information, data or assistance to any third party relating to an Acquisition Proposal, or (iii) except as permitted below, enter into any agreement with respect to any Acquisition Proposal or approve any Acquisition Proposal. (b) Notwithstanding anything to the contrary contained in this Agreement, the Company and the Company Board and any committee thereof (i) provided the Company has complied with its obligations under Section 5.5 (including Section 5.5(g)) may participate in discussions or negotiations (including, as a part thereof, making any counterproposal) with or furnish information (provided that such information has been previously delivered to Parent and Parent is notified of any such information so furnished) to any third party making an unsolicited Acquisition Proposal after the date hereof and prior to the 7.1(c)(i) Expiration Date (as defined below) (a "Potential Acquiror") if the Company Board or the Special Committee determines (A) in good faith that such Acquisition Proposal constitutes or is reasonably likely to lead to a Superior Proposal (as defined below) and (B) in good faith, after consultation with its outside legal counsel, that the failure to participate in such discussions or negotiations or to furnish such information would be inconsistent with the Board's or committee's fiduciary duties under applicable law, and (ii) shall be permitted to take and disclose to the Company's stockholders a position with respect to any tender or exchange offer by a third party, or amend or withdraw such position, pursuant to Rules 14d-9 and 14e-2 of the Exchange Act. In the event the Company is participating in discussions or negotiations with a Potential Acquiror in accordance with the terms of this Section 5.5, the Potential Acquiror shall be permitted access to and the right to negotiate with Sidney Craig and Jenny Craig and their affiliates. Prior to entering into negotiations with a Potential Acquiror, the Company shall enter into a confidentiality agreement with the Potential 43 Acquiror containing provisions not less favorable in any material respect to the Company than the provisions of the Confidentiality Agreement. (c) Except as permitted by this Section 5.5, neither the Company Board nor any committee thereof will (i) approve, recommend or propose publicly to approve or recommend, any Acquisition Proposal or (ii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement related to any Acquisition Proposal. Notwithstanding the foregoing, in the event that the Company Board or a committee thereof determines (i) in good faith, after consultation with its outside legal counsel, that a failure to withdraw or modify its recommendation would be inconsistent with the Board's or committee's fiduciary duties under applicable law and (ii) that the pending Acquisition Proposal is a Superior Proposal, the Company Board may (x) withdraw or adversely modify its approval or recommendation of the Transactions, (y) approve or recommend such Superior Proposal or (z) terminate this Agreement in accordance with Section 7.1(c)(i). (d) For purposes of this Agreement, "Acquisition Proposal" shall mean any inquiry, offer or proposal, whether in writing or otherwise, made by a third party who is not an affiliate of Sidney Craig or Jenny Craig (i) to acquire (including by way of lease, exchange, sale, mortgage, pledge or otherwise, in a single transaction or series of related transactions) the Company or any of its material Subsidiaries, (ii) to acquire 20% or more of the equity interest in, the Company or its material Subsidiaries, or (iii) with respect to a merger, consolidation or other business combination, sale of shares of capital stock, sale of assets, tender offer or exchange offer or liquidation or dissolution or similar transaction involving the Company or its material Subsidiaries (other than the transactions contemplated by this Agreement). (e) The term "Superior Proposal" means any bona fide proposal to acquire, directly or indirectly, more than a majority of the Shares then outstanding or all or substantially all the assets of the Company, and otherwise on terms which the Company Board, having considered and subsequent to the recommendation of the Special Committee, determines in good faith to be more favorable to the Company's stockholders than the Merger (after receipt of advice from its financial advisor), for which financing, to the extent required, is then committed. (f) In addition to the obligations of the Company set forth in this Section 5.5, the Company shall promptly and in any event within 24 hours advise Parent orally and in writing of any Acquisition Proposal or request for information relating to the 44 Company or any of its Subsidiaries, or for access to the properties, books or records of the Company or any of its Subsidiaries by any person that is considering making, or has made, an Acquisition Proposal and shall keep Parent informed, on a prompt basis of the status and material terms thereof and, if in writing, promptly deliver or cause to be delivered to Parent a copy of such inquiry or proposal. (g) The Company covenants and agrees that it will take all reasonable actions in respect of enforcement of the provisions of any confidentiality and standstill provisions contained in agreements to which the Company is a party or to which the Company is subject; provided however, that notwithstanding anything to the contrary in this Agreement, if requested by a third party, the Company may waive, to the extent provided below, any standstill or similar provision in favor of the Company in any agreement with such third party if the Company Board subsequent to the recommendation of the Special Committee reasonably believes that there is a reasonable likelihood that such third party will submit an Acquisition Proposal that could constitute a Superior Proposal (any such waiver to be limited to permitting such third party to make such Acquisition Proposal on a confidential basis to the Company Board), and any such waiver shall not be construed as a breach of this Section 5.5. (h) The parties hereto acknowledge and agree that in connection with an Acquisition Proposal the Company may engage Houlihan to provide additional services for such reasonable and customary additional fees as Houlihan and the Company shall agree. SECTION 5.6 PUBLICITY. The initial press release with respect to the execution of this Agreement shall be a joint press release reasonably acceptable to Parent and the Company. Thereafter, so long as this Agreement is in effect, neither the Company, Parent nor any of their respective affiliates shall issue or cause the publication of any press release or other announcement with respect to the Merger, this Agreement or the other Transactions contemplated hereby without the prior consultation of the other party, except as may be required by law or by any listing agreement with a national securities exchange. SECTION 5.7 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice to Parent and Parent shall give prompt notice to the Company, of (i) the occurrence, or non-occurrence of any event the occurrence, or non-occurrence of which would cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Effective Time or (ii) any material failure of the Company or Parent, as the case may be, to comply with or satisfy any covenant, 45 condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.7 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 5.8 DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION. (a) From and after the Effective Time, Parent and Surviving Corpora tion shall, jointly and severally, indemnify, defend and hold harmless any person who is now, or has been at any time prior to the date hereof, or who becomes prior to the Effective Time, an officer, director, employee or agent (the "Indemnified Party") of the Company or any of its Subsidiaries against all losses, claims, damages, liabilities, costs and expenses (including attorneys' fees and expenses), judgments, fines, losses, and amounts paid in settlement in connection with any actual or threatened action, suit, claim, proceeding or investigation (each a "Claim") to the extent that any such Claim is based on, or arises out of, (i) the fact that such person is or was a director, officer, employee or agent of the Company or any Subsid iaries or is or was serving at the request of the Company or any of its Subsidiaries as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (ii) this Agreement, or any of the transactions contemplated hereby, in each case to the extent that any such Claim pertains to any matter or fact arising, existing, or occurring prior to or at the Effective Time, regardless of whether such Claim is asserted or claimed prior to, at or after the Effective Time, and, in each case, to the full extent permitted under Delaware law or the Company's Certificate of Incorporation, By-laws or indemnifi cation agreements, if any, in effect at the date hereof, including provisions relating to ad vancement of expenses incurred in the defense of any action or suit. Without limiting the foregoing, in the event any Indemnified Party becomes involved in any capacity in any Claim, at or prior to the Effective Time the Surviving Corporation shall, from time to time, promptly upon any request therefor, advance to such Indemnified Party its legal and other expenses (including the cost of any investigation and preparation incurred in connection therewith), subject to the provision by such Indemnified Party of an undertaking to reimburse the amounts so advanced in the event of a final non-appealable determination by a court of competent jurisdiction that such Indemnified Party is not entitled to indemnification. (b) All rights to indemnification and all limitations of liability existing in favor of the Indemnified Party as provided under Delaware law or the Company's Certificate of Incorporation, By-laws or indemnification agreements, if any, in effect at the date hereof shall survive the Merger and shall continue in full force and effect, without any amendment thereto, for a period of seven years from the Effective Time; provided that, in the event any Claim or Claims are asserted or made within such seven year period, all rights to indemnification in respect of any such Claim or Claims shall continue until disposition of any 46 and all such Claims; provided further, that any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under Delaware law, the Company's Certificate of Incorporation or By-laws or such agreements, if any, as the case may be, shall be made by independent legal counsel selected by the Indemnified Party and reasonably acceptable to Parent and; provided further, that nothing in this Section 5.8 shall impair any rights or obligations of any present or former directors or officers of the Company. (c) In the event the Surviving Corporation or any of their successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary to effectuate the purposes of this Section 5.8, proper provision shall be made so that the successors and assigns of the Surviving Corporation assume the obligations set forth in this Section 5.8 and none of the actions described in clauses (i) or (ii) shall be taken until such provision is made. (d) The Surviving Corporation shall maintain the Company's existing D&O policy covering acts or omissions occurring at or prior to the Effective Time for a period of not less than six years after the Effective Date by acquiring within ten (10) days after the Effective Time from the Company's current insurer a Run-Off Policy providing such coverage in accordance with the draft Run-Off Endorsement ("Auto-Seller / Buyer Merger - Premium Preset") which has been provided to Purchaser (the "Tail Policy"). If the Surviving Corporation does not acquire the Tail Policy, the Surviving Corporation will acquire insurance equivalent thereto from insurers of equal or better quality; provided that the Surviving Corporation shall not be required to expend on an annual basis more than 175% of the annual premium paid by the Company for its current premium year (the "Maximum Premium"); and provided further, that if the annual cost of such insurance would exceed the Maximum Premium, the Surviving Corporation shall acquire the maximum level of coverage which can be acquired for the Maximum Premium. The Company represents to the Parent that the annual premium for its current premium year is seven hundred thousand dollars ($700,000). SECTION 5.9 FURTHER ASSURANCES. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its respective reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the Transactions contemplated by this Agreement. If at any time after the 47 Closing Date any further action is necessary or desirable to carry out the purposes of this Agreement, the parties hereto shall take or cause to be taken all such necessary action, including, without limitation, the execution and delivery of such further instruments and documents as may be reasonably requested by the other party for such purposes or otherwise to consummate and make effective the transactions contemplated hereby. SECTION 5.10 REASONABLE BEST EFFORTS. (a) Subject to the terms and conditions of this Agreement each party will use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable under applicable laws to consummate the Merger and the other transactions contemplated by this Agreement as soon as practicable after the date hereof, including without limitation, in the case of Parent and the Purchaser to consummate the Financings. In furtherance and not in limitation of the foregoing, each party hereto agrees to make or cause its applicable affiliate to make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated hereby as promptly as practicable after the date hereof and to supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR Act and to take all other actions necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act as soon as practicable. (b) Each of Parent, the Purchaser and the Company shall, in connection with the efforts referenced in this Section 5.10 to obtain all requisite approvals and authorizations for the transactions contemplated by this Merger Agreement under the HSR Act or any other applicable law, use its reasonable best efforts to (A) make all appropriate filings and submissions with any Governmental Entity that may be necessary, proper or advisable under applicable laws in respect of any of the Transactions contemplated by this Agreement, (B) cooperate in all respects with each other in connection with any such filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private party, (C) promptly inform the other party of any communication received by such party from, or given by such party to, the Antitrust Division of the Department of Justice ("DOJ") or any other Governmental Entity and of any material communication received or given in connection with any proceeding by a private party, in each case regarding any of the transactions contemplated hereby (D) and consult with each other in advance of any meeting or conference with the DOJ or any such other Governmental Entity or, in connection with any proceeding by a private party, with any other Person. 48 (c) In case at any time after Closing any further action is necessary or desirable to carry out the purposes of this Agreement, the parties to this Agreement (or as applicable, their officers and directors) shall take all such necessary action as may be reasonable in the context thereof. Parent and the Purchaser acknowledge and agree that the Company is not obligated to seek any consents, waivers or approvals with respect to any of the agreements, contracts or instruments listed in the Disclosure Schedules to this Agreement, including, without limitation, the leases and agreements listed in Schedule 3.4 hereto, and the receipt of any such consent, waiver or approval shall not be a condition to Parent's and Purchaser's obligations hereunder; provided, however, that the Company shall use reasonable efforts to obtain consents, waivers or approvals with respect to the leases and agreements listed on Schedule 3.4 hereto, or any other lease or agreement under which consent is required as a result of the consummation of the transactions contemplated hereby, in each case to the extent requested by the Purchaser in writing. SECTION 5.11 FEES AND EXPENSES. (a) Except as provided in this Section 5.11, all fees and expenses incurred in connection with the Merger, this Agreement and the Transactions shall be paid by the party incurring such fees or expenses, whether or not the Merger is consummated. (b) In the event that (i) this Agreement is terminated (A) by the Company pursuant to Section 7.1(c)(i) or (B) by the Parent pursuant to Section 7.1(d)(i)(B) or (C) (or Section 7.1(d)(i)(D) to the extent the resolution takes the action described in Section 7.1(d)(i)(B) or (C)) and (ii) if the Company is not entitled to terminate this Agreement by reason of Section 7.1(b)(i), Section 7.1(b)(ii), Section 7.1(c)(ii) or Section 7.1(c)(iii) (a "Termination Fee Event"), then the Company shall pay to the Parent a fee of Four Million Eight Hundred Seventy Five Thousand Dollars ($4,875,000) (the "Termination Fee"). The Termination Fee shall be payable by the Company immediately upon the termination if the Company terminates this Agreement pursuant to Section 7.1(c)(i) and shall be payable by the Company within two (2) business days of either Termination Fee Event described in Section 5.11(b)(i)(B) above, in each case by wire transfer of immediately available funds to the account set forth on Schedule 5.11(b). SECTION 5.12 REPORT ON FORM 8-K. The Company will, within two (2) business days of execution and delivery hereof, file with the SEC a Report on Form 8-K reporting the execution and delivery of this Agreement and attaching this Agreement and other material Transaction documents as exhibits thereto. Parent will be promptly provided a copy of such report and a reasonable opportunity to comment thereon. 49 ARTICLE VI CONDITIONS SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective obligation of each party to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions: (a) Stockholder Approval. This Agreement shall have been approved and adopted by the requisite vote of the holders of Company Common Stock; (b) HSR Act. Any waiting period applicable to the Merger under the HSR Act shall have expired or been terminated; (c) Statutes; Consents. (i) No statute, rule, order, decree or regulation shall have been entered, enacted, promulgated or enforced by any foreign or domestic Governmental Entity or authority of competent jurisdiction which prohibits the consummation of the Merger and (ii) all foreign or domestic governmental consents, orders and approvals required for the consummation of the Merger and the transactions contemplated hereby shall have been obtained and shall be in effect at the Effective Time other than consents, orders or approvals which are individually and in the aggregate, immaterial; and (d) Injunctions. There shall be no order or preliminary or permanent injunction of a foreign or United States federal or state court or other Governmental Entity of competent jurisdiction in effect precluding, restraining, enjoining or prohibiting consummation of the Merger. SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO EFFECT THE MERGER. The obligation of the Company to effect the Merger shall be further subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) the representations and warranties of Parent and the Purchaser shall be true and accurate in all material respects as of the date hereof, and true and accurate as of the Effective Time as if made at and as of such time (except for those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need only be true and accurate as of such date or with respect to such period) and except where the failure of such representations and warranties to be so true and accurate (without giving effect to any limitation as to materiality or material adverse 50 effect set forth therein) would not, and would not reasonably be expected to, individually or in the aggregate, have a material adverse effect on Parent), and the Company shall have received a certificate of an executive officer of each of Parent and Purchaser to such effect; and (b) each of Parent and the Purchaser shall have performed in all material respects all of the respective obligations hereunder required to be performed by Parent or the Purchaser, as the case may be, at or prior to the Effective Time and the Company shall have received a certificate of an executive officer of each of Parent and Purchaser to such effect. SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF PARENT AND THE PURCHASER TO EFFECT THE MERGER. The obligation of Parent and the Purchaser to effect the Merger shall be further subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) the representations and warranties of the Company shall be true and accurate in all material respects as of the date hereof, and true and accurate as of the Effective Time as if made at and as of such time (except for those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time which need only be true and accurate as of such date or with respect to such period and except where the failure of such representations and warranties to be so true and accurate (without giving effect to any limitation as to materiality or material adverse effect set forth therein) would not, and would not reasonably be expected to, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries taken as a whole), and Parent and the Purchaser shall have received a certificate of an executive officer of the Company to such effect; (b) the Company shall have performed in all material respects all of the obligations hereunder required to be performed by the Company at or prior to the Effective Time and Parent and the Purchaser shall have received a certificate of an executive officer of the Company to such effect; (c) Parent shall have received the Senior Financing for the Transactions on terms substantially as set forth in the Senior Commitment Letter and SJF shall have consummated or be prepared to consummate the transactions set forth in the SJF Commitment Letter. 51 ARTICLE VII TERMINATION SECTION 7.1 TERMINATION. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Effective Time, whether before or after stockholder approval thereof: (a) By the mutual consent of the Parent and the Company. (b) By either of the Company or the Parent: (i) if any Governmental Entity of competent jurisdiction shall have issued an order, decree, preliminary or permanent injunction, statute, law, ordinance, regulation or ruling or taken any other action (which order, decree, preliminary or permanent injunction, statute, law, ordinance, regulation, ruling or other action the parties hereto shall use their respective reasonable best efforts to prevent or lift), in each case permanently restraining, enjoining or otherwise prohibiting the Transactions and such order, decree, ruling or other action shall have become final and non-appealable; or (ii) the Effective Time shall not have occurred on or prior to May 31, 2002 (the "Expiration Date") provided that if the expiration date and the date by which the Senior Financing must be closed as set forth in the Senior Commitment Letter are extended to a date on or prior to June 30, 2002, the Expiration Date shall be extended to the same date, (provided further that the right to terminate this Agreement under this Section 7.1(b)(ii) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date). (c) By the Company: (i) prior to the earlier of (A) 5:00 P.M. Pacific Time on the first business day at least sixty (60) calendar days after public announcement of the Merger (the "7.1(c)(i) Expiration Date") or (B) receipt of the Required Company Vote, in each case in order to accept a Superior Proposal, if the Company Board shall have immediately thereafter approved, and the Company shall immediately thereafter enter into, a definitive agreement providing for the implementation of a Superior Proposal; provided, however, that (1) the Company is not then in breach of Section 5.5, (2) the Company has notified the Parent in writing that it is prepared to enter into an agreement with respect to a Superior 52 Proposal and the material terms thereof, (3) during the three-business day period after the Company's notice contemplated by (2) above, (A) the Company shall have offered to negotiate with (and, if accepted, negotiate with), and shall have caused its respective financial and legal advisors to have offered to negotiate with (and, if accepted, negotiate with) Parent to attempt to make such adjustments in the terms and conditions of this Agreement as would enable the Company to proceed with the Transactions and (B) the Board of Directors of the Company, subsequent to the recommendation of the Special Committee, shall have concluded, after considering the results of such negotiations and the revised proposals made by the Parent, if any, that any Superior Proposal giving rise to the Company's notice continues to be a Superior Proposal, (4) such termination is within ten (10) business days following the three-business day period referred to above and (5) no termination pursuant to this Section 7.1(c)(i) shall be effective unless the Company has made payment of the Termination Fee required by Section 5.11(b) by sending the wire transfer of the Termination Fee to the account set forth on Schedule 5.11(b); (ii) if a breach by Parent or the Purchaser of any representation or warranty contained in Article IV hereof has occurred, which breach, in the aggregate, would give rise to a failure of a condition set forth in Section 6.2(a) and cannot be or has not been cured within thirty (30) days after the giving of written notice to Parent or the Purchaser of such breach; (iii) if a breach by Parent or the Purchaser of any of the covenants or agreements contained herein has occurred, which breach, in the aggregate would give rise to a failure of a condition set forth in Section 6.2(b) and cannot be or has not been cured within thirty (30) days after the giving of written notice to Parent or the Purchaser of such breach; or (iv) a material adverse effect with respect to Parent or the Purchaser shall have occurred and be continuing at the time of termination, and cannot be or has not been cured within thirty (30) days after the giving of written notice to Parent or the Purchaser of such occurrence. (d) By the Parent: (i) if, prior to the Effective Time, the Company Board shall have (A) withdrawn, or modified or changed in a manner adverse to Parent or the Purchaser its approval or recommendation of the Merger, (B) recommended a Superior Proposal, (C) failed to call the Special Meeting within five (5) days, or failed to hold the Special Meeting 53 within forty-five (45) days, after the date the SEC clears the Proxy Statement for mailing to the Company's stockholders following receipt of an Acquisition Proposal; provided, however, that such 45-day period shall be extended by such period of time as the Company may reasonably require to prepare, file and clear with the SEC, and circulate to stockholders of the Company (and, if required, to adjourn, postpone or reschedule any previously called or established Special Meeting or Special Meeting date), any amendment or supplement to the Proxy Statement that may, in the reasonable judgment of the Company, after consultation with its outside counsel, be required under applicable law, including, without limitation, the Exchange Act and the DGCL; or (D) resolved to do any of the foregoing; or (ii) if a breach by the Company of any representation or warranty contained in Article III has occurred, which breach, in the aggregate, would give rise to a failure of a condition set forth in Section 6.3(a) and cannot be or has not been cured within thirty (30) days after the giving of written notice to the Company of such breach; (iii) if a breach by the Company of any of the covenants or agreements contained herein has occurred, which breach, in the aggregate would give rise to a failure of a condition set forth in Section 6.3(b) and cannot be or has not been cured within thirty (30) days after the giving of written notice to the Company of such breach; or (iv) if a material adverse effect with respect to the Company shall have occurred since the date hereof and be continuing at the time of termination, and cannot be or has not been cured within thirty (30) days after the giving of written notice to the Company of such occurrence. SECTION 7.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement by either the Company, Parent or the Purchaser, as provided in Section 7.1, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become null and void and have no effect, and there shall be no liability on the part of Parent, the Purchaser or the Company other than the provisions of the final sentence of Section 5.2 and the provisions of Section 5.11 and this Section 7.2 and Sections 8.3, 8.5, 8.6, 8.7, 8.8 and 8.10; provided, however, that nothing herein shall relieve any party from liability for damages resulting from a breach of this Agreement by such party. 54 ARTICLE VIII MISCELLANEOUS SECTION 8.1 AMENDMENT AND MODIFICATION. Subject to applicable law, this Agreement may be amended, modified and supplemented in any and all respects, whether before or after any vote of the stockholders of the Company contemplated hereby, by written agreement of the parties hereto, by action taken by their respective Boards of Directors (with the further approval of the Special Committee if such amendment, modification or supplement would adversely affect the Company), at any time prior to the Closing Date with respect to any of the terms contained herein; provided, however, that after the approval of this Agreement by the stockholders of the Company, no such amendment, modification or supplement shall reduce or change the Merger Consideration. SECTION 8.2 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the representations and warranties in this Agreement or in any schedule, instrument or other document delivered pursuant to this Agreement shall survive the Effective Time. This Section 8.2 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. SECTION 8.3 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or sent by an overnight courier service, such as FedEx, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or the Purchaser, to: ACI Capital Co., Inc. 900 Third Avenue 26th Floor New York, New York 10022 Attention: Kevin S. Penn, Managing Director Telephone No.: (212) 634-3350 Telecopy No.: (212) 634-3351 55 with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Howard Chatzinoff, Esq. Telephone No.: (212) 310-8340 Telecopy No.: (212) 310-8007 and (b) if to the Company, to: Sidney Craig Chairman and Chief Executive Officer 11355 North Torrey Pines Road La Jolla, California 92037 Telephone No.: (858) 812-7000 Telecopy No.: (858) 812-2730 with a copies to: Proskauer Rose LLP 2049 Century Park East, Suite 3200 Los Angeles, California 90067 Telephone No.: (310) 557-2900 Telecopy No.: (310) 557-2193 Attention: Thomas W. Dollinger, Esq.; and Latham & Watkins 633 West Fifth Street, Suite 4000 Los Angeles, California 90071 Telephone No.: (213) 485-1234 Telecopy No.: (213) 891-8763 Attention: Paul D. Tosetti, Esq. SECTION 8.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall 56 become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. SECTION 8.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement and the Confidentiality Agreement (including the documents and the instruments referred to herein and therein): (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Section 5.8 and Article II, are not in tended to confer upon any person other than the parties hereto any rights or remedies hereunder. SECTION 8.6 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. SECTION 8.7 GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of law thereof or of any other jurisdiction. SECTION 8.8 JURISDICTION. (a) Any legal action or proceeding with respect to this Agreement or any matters arising out of or in connection with this Agreement or otherwise, and any action for enforcement of any judgment in respect thereof shall be brought exclusively in the Unites States federal courts in the State of Delaware or any Delaware state court, and, by execution and delivery of this Agreement, the Company, Parent and the Purchaser each hereby accepts for itself and in respect of its property, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts and appellate courts thereof. The Company, Parent and the Purchaser irrevocably consent to service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, or by recognized international express carrier or delivery service, to the Company, Parent or the Purchaser at their respective addresses referred to in Section 8.3 hereof. 57 (b) The Company, Parent and the Purchaser each hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or otherwise brought in the courts referred to above and hereby further irrevocably waives and agrees, to the extent permitted by applicable law, not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of any party hereto to serve process in any other manner permitted by law. SECTION 8.9 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that the Purchaser may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent or to any direct or indirect wholly owned Subsidiary of Parent. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. SECTION 8.10 ENFORCEMENT. The parties agree that irreparable damage would occur in the event that this Agreement was not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to specific performance of the terms hereof, this being in addition to any other remedy to which they are entitled at law or in equity. SECTION 8.11 ACTIONS BY THE COMPANY. Any action requiring the approval of the Company Board which is to be taken or which is made or required to be taken or made by or for the benefit of the Company pursuant to, in connection with, or in furtherance of this Agreement shall, prior to the Effective Time, be made or taken, as applicable, upon the recommendation of and with the approval of the Special Committee (in addition to any other action required by law). 58 IN WITNESS WHEREOF, Parent, the Purchaser and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. J HOLDINGS CORP. By:/s/ KEVIN S. PENN -------------------------------- Name: Kevin S. Penn Title: President J ACQUISITION CORP. By:/s/ KEVIN S. PENN ------------------------------- Name: Kevin S. Penn Title: President JENNY CRAIG, INC., a Delaware corporation By:/s/ SID CRAIG ------------------------------- Name: Sidney Craig Title: Chairman and Chief Executive Officer EX-10.1 4 v78658ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 STOCKHOLDERS' VOTING AGREEMENT STOCKHOLDERS' VOTING AGREEMENT, dated as of January 27, 2002, among J Holdings Corp., a Delaware corporation ("Parent"), J Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent (the "Purchaser"), Jenny Craig, Inc., a Delaware corporation (the "Company"), and the stockholders named in Exhibit A hereto (each, a "Stockholder" and collectively, the "Stockholders"). WHEREAS, simultaneously herewith, Parent and the Purchaser are entering into an Agreement and Plan of Merger, dated as of the date hereof (as amended from time to time, the "Merger Agreement"), with the Company, which contemplates, among other things, that the Purchaser will merge with and into the Company pursuant to the merger contemplated by the Merger Agreement (the "Merger"); capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Merger Agreement, whether or not such Merger Agreement shall be in effect from time to time; WHEREAS, as of the date hereof, each Stockholder owns beneficially and, to the extent indicated on Exhibit A hereto, of record the number of shares of Company Common Stock set forth opposite such Stockholder's name on Exhibit A hereto (all such shares owned by the Stockholders and any shares of Company Common Stock hereafter acquired by any Stockholder prior to the termination of this Agreement, whether upon the exercise of options, warrants or rights, the conversion or exchange of convertible or exchangeable securities, or by means of purchase, dividend, distribution or otherwise being referred to herein as the "Shares"); and WHEREAS, as a condition to the willingness of Parent and the Purchaser to enter into the Merger Agreement, Parent and the Purchaser have requested that each Stockholder agree, and in order to induce Parent and the Purchaser to enter into the Merger Agreement, each Stockholder has agreed, jointly and severally, to enter into this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I VOTING AGREEMENT SECTION 1.1 Voting Agreement. Each Stockholder hereby agrees that, during the period commencing on the date hereof and continuing until the first to occur of the Effective Time or the termination of the Merger Agreement in accordance with its terms, at any meeting of the stockholders of the Company, however called, each Stockholder shall vote his, her or its Shares (a) in favor of the approval and adoption of the Merger Agreement, the Merger and all the transactions contemplated by the Merger Agreement and this Agreement and any other actions required in furtherance thereof and hereof, (b) against any action or agreement that would result in a breach in any respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement; and (c) except as otherwise expressly agreed to in writing in advance by the Parent, against: (A) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company or any of its Subsidiaries (other than the Merger and the transactions contemplated by the Merger Agreement); (B) a sale, lease or transfer of a material amount of assets of the Company or any of its Subsidiaries, or a reorganization, recapitalization, dissolution or liquidation of the Company or any of its Subsidiaries; (C) any change in a majority of the persons who constitute the board of directors of the Company; (D) any change in the present capitalization of the Company or any amendment of the Company's certificate of incorporation or bylaws; (E) any other material change in the Company's corporate structure or business; or (F) any other action involving the Company or any of its Subsidiaries which is intended, or could reasonably be expected, to impede, interfere with, delay, postpone, or adversely affect the Merger and the transactions contemplated by the Merger Agreement, including, without limitation, any action to approve or facilitate any Acquisition Proposal. No Stockholder shall enter into any agreement or understanding with any person or entity the effect of which would be inconsistent with or violative of the provisions and agreements contained in this Agreement, including, without limitation, in this Section 1.1. SECTION 1.2 Irrevocable Proxy. Each Stockholder hereby irrevocably constitutes and appoints each of Kevin Penn, Ezra Field and Parent, during the period commencing on the date hereof and continuing until the earlier of (x) the Effective Time or (y) the termination of the Merger Agreement in accordance with its terms, as his, her or its attorney and proxy pursuant to the provisions of Section 212(c) of the Delaware General Corporation Law ("DGCL"), with full power of substitution, to vote and otherwise act with respect to the Shares which such Stockholder is entitled to vote at any meeting of stockholders of the Company (whether annual or special and whether or not an adjourned or postponed meeting) on, and only on, the matters described in Section 1.1 and to execute and deliver any and all consents, instruments or other agreements or documents in order to take any and all such actions required to be taken by Stockholder as set forth in this Agreement. THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE, AND COUPLED WITH AN INTEREST. Each Stockholder hereby revokes all other proxies and powers of attorney with respect to such Stockholder's Shares that it may have heretofore appointed or granted, and no subsequent proxy or power of attorney shall be given or written consent executed (and if given or executed, shall not be effective) by such Stockholder with respect thereto. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of a Stockholder and any obligation of such Stockholder under this Agreement shall be binding upon the heirs, personal representatives, successors and assigns of such Stockholder, and shall not terminate until the earlier of the Effective Time or the termination of the Merger Agreement in accordance with its terms. Each Stockholder hereby authorizes all that each such proxy may lawfully do or cause to be done by virtue hereof. Such irrevocable proxy is executed and intended to be irrevocable in accordance with the provisions of 2 Section 212(e) of the Delaware General Corporation Law. Each Stockholder represents, severally as to itself and not jointly, that any proxies heretofore given in respect of such Stockholder's Shares or any other voting securities of the Company are not irrevocable and hereby revokes any and all previous proxies with respect to the Shares or any other voting securities of the Company. The Stockholders acknowledge and agree that any proxy holder may vote the Shares at the Special Meeting. Notwithstanding anything herein to the contrary, this Agreement shall not apply or in any way bind or restrict The Sid and Jenny Craig Foundation or the Foundation Shares (as defined in Exhibit A). ARTICLE II CAPTURE SECTION 2.1 Capture. In order to induce Parent and the Purchaser to enter into the Merger Agreement, during the term of this Agreement, each of the Stockholders agrees to the matters set forth in this Article II with respect to such Stockholder's Shares: (a) Capture. The Stockholders agree, jointly and severally, to pay to Parent on demand, in cash, an amount equal to fifty percent (50%) of the first $13,838,600 of Stockholder Profit (as defined below) and twenty percent (20%) of all such Stockholder Profit in excess of $13,838,600 of such Stockholder Profit from the consummation after a Capture Termination (as defined below) of any Acquisition Proposal (a "Capture Acquisition Proposal") that is consummated within twelve (12) months of a Capture Termination Date (as defined below), if any, or as to which a definitive agreement is entered into within twelve (12) months of a Capture Termination Date, if any, and consummated on or prior to June 30, 2003. The Capture Termination Date is the date of termination of the Merger Agreement as the result of a Capture Termination. A "Capture Termination" means a termination of the Merger Agreement (1) by the Company pursuant to Section 7.1(c)(i) of the Merger Agreement or (2) by Parent pursuant to Section 7.1(d)(i)(B) or Section 7.1(d)(i)(C) of the Merger Agreement (or Section 7.1(d)(i)(D) to the extent the resolution takes the action described in Section 7.1(d)(i)(B) or (C) of the Merger Agreement); provided that, in any such case, at the time of such termination, the Company is not entitled to terminate the Merger Agreement by reason of Section 7.1(b)(i), Section 7.1(b)(ii), Section 7.1(c)(ii) or Section 7.1(c)(iii) of the Merger Agreement. The "Stockholder Profit" of any Stockholder from the consummation of any Capture Acquisition Proposal shall equal (A) the aggregate consideration received by such Stockholder pursuant to such Capture Acquisition Proposal, valuing any non-cash consideration (including any direct or indirect residual interest in the Company) at its fair market value on the day immediately preceding the date of such consummation plus (B) the fair market value, on the date of disposition, of all Shares of such Stockholder disposed of after the Capture Termination Date and prior to the date of consummation of the Capture Acquisition Proposal less (C) Seventy-Three Million Three Hundred Forty-Four Thousand Five Hundred Eighty Dollars ($73,344,580) (the "Original Merger Consideration"). Notwithstanding anything herein to the contrary, 3 (x) no capture amount pursuant to this Section 2.1(a) shall be payable by any of the Stockholders hereunder unless a Capture Acquisition Proposal is consummated on or prior to June 30, 2003 and (y) no such amount shall be payable other than at the time of consummation of the Capture Acquisition Proposal. (i) In the event that (x) prior to the Effective Time, an Acquisition Proposal shall have been made and (y) the Effective Time of the Merger shall have occurred and the Parent for any reason shall have increased the amount of the Original Merger Consideration in connection with such Acquisition Proposal, each Stockholder shall pay to the Parent on demand an amount in cash equal to the product of (A) the number of Shares of such Stockholder and (B) fifty percent (50%) of the first $1.00 of Excess Consideration (as defined below) and twenty percent (20%) of such Excess Consideration in excess of $1.00. The term "Excess Consideration" means the excess, if any, of (1) the per share cash consideration or the per share fair market value of any non-cash consideration, determined as of the Effective Time of the Merger as the case may be, actually received by the Stockholder as a result of the Merger, over (2) $5.30. (b) For purposes of Section 2.1(a) hereof, the fair market value of any non-cash consideration consisting of: (i) securities listed on a national securities exchange or traded on the NASDAQ/NMS shall be equal to the average closing price per share of such security as reported on such exchange or NASDAQ/NMS for the five trading days after the date of determination; and (ii) consideration which is other than cash or securities of the form specified in clause (i) of this Section 2.1(b) shall be determined by a nationally recognized independent investment banking firm mutually agreed upon by the parties within ten Business Days of the event requiring selection of such banking firm; provided, however, that if the parties are unable to agree within two Business Days after the date of such event as to the investment banking firm, then the parties shall each select one firm, and those firms shall select a third investment banking firm, which third firm shall make such determination; provided further, that the fees and expenses of such investment banking firm shall be borne equally by the Parent, on the one hand, and the Stockholders, on the other hand. The determination of the investment banking firm shall be binding upon the parties. (c) Any payment under this Section 2.1 shall (x) if paid in cash, be paid by wire transfer of same day funds to an account designated by the Parent and (y) if paid through a mutually agreed transfer of securities, be paid through delivery of such securities, suitably endorsed for transfer. 4 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of the Stockholders. The Stockholders, jointly and severally, represent and warrant to the Parent as follows: (a) Each entity Stockholder is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority to enter into and deliver this Agreement and to carry out its obligations hereunder. Each individual Stockholder has the requisite power, authority and legal capacity to enter into and deliver this Agreement and to carry out its obligations hereunder. This Agreement has been duly executed and delivered by each Stockholder and, assuming its due authorization, execution and delivery by Parent and the Purchaser, is a legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms. (b) The execution and delivery of this Agreement by each Stockholder does not, and the performance of this Agreement by each Stockholder will not, (i) conflict with or violate any applicable statutes, laws, ordinances, rules or regulations or (ii) conflict with or violate any contract or other instrument to which the Stockholder is a party or by which such Stockholder is bound, including, without limitation, any voting agreement, stockholders agreement or voting trust. (c) The execution and delivery of this Agreement by each Stockholder does not, and the performance of this Agreement by such Stockholder will not, require any Stockholder to obtain any consent, approval, authorization or permit of, or to make any filing with or notification to, any person or Governmental Entity, except as may be required by the Exchange Act and the HSR Act. (d) There is no suit, action, investigation or proceeding pending or, to the knowledge of each Stockholder, threatened, against such Stockholder at law or in equity before or by any Governmental Entity that could reasonably be expected to impair the ability of such Stockholder to perform its obligations hereunder, and there is no judgment, decree, injunction, rule, order or writ of any Governmental Entity to which such Stockholder is or its assets are subject that could reasonably be expected to impair the ability of such Stockholder to perform its obligations hereunder. (e) Each Stockholder owns beneficially and of record the shares of Company Common Stock set forth opposite such Stockholder's name on Exhibit A hereto (with respect to such Stockholder, the "Existing Shares"). The Existing Shares constitute all the shares of Company Common Stock owned beneficially and of record by such Stockholder. Each Stockholder has sole voting power, sole power of disposition, sole power to demand appraisal rights and all other stockholder rights with respect to all of its Existing Shares, with no restrictions, other than restrictions on disposition pursuant to 5 applicable securities laws, on such Stockholder's rights of voting or disposition pertaining thereto. (f) Each Stockholder acknowledges that such Stockholder is an informed and sophisticated investor and, together with such Stockholder's advisors, has undertaken such investigation as they have deemed necessary, including the review of the Merger Agreement and this Agreement, to enable such Stockholder to make an informed and intelligent decision with respect to the Merger Agreement and this Agreement and the transactions contemplated thereby and hereby. No Stockholder will seek rescission or revocation of this Agreement or seek to withdraw or revoke any vote, irrevocable proxy or irrevocable instruction delivered by it or on its behalf in connection therewith. (g) Except as applicable in connection with the transactions contemplated hereby, each Stockholder's Shares and the certificates representing such Shares are now, and at all times during the term hereof will be, held by such Stockholder, free and clear of all liens, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever, except for any such encumbrances or proxies arising hereunder in favor of the Parent. SECTION 3.2 Survival. Notwithstanding anything otherwise provided for herein, each Stockholder's representations and warranties contained in this Article III shall be true and correct as of the date Parent or the Purchaser, as the case may be, consummates the Merger. ARTICLE IV COVENANTS OF THE STOCKHOLDERS SECTION 4.1 No Solicitation. Each Stockholder shall cease, and shall instruct and use its best efforts to cause each of their respective affiliates, directors, officers, employees, agents and representatives (including without limitation any investment banker, financial advisor, attorney, accountant or other representative retained by such Stockholder) to immediately cease, any discussions or negotiations with any other parties that may be ongoing with respect to any Acquisition Proposal. Each Stockholder will not, directly or indirectly, and will instruct and use its best efforts to cause each of their respective officers, directors, employees, investment bankers, attorneys and other agents retained by or acting on behalf of such Stockholder not to, directly or indirectly (i) initiate, solicit, or encourage, any inquiries, any expression of interest or the making of any proposal which constitutes or is reasonably likely to constitute any Acquisition Proposal, (ii) engage in negotiations or discussions with, or furnish any information, data or assistance to any third party relating to any Acquisition Proposal or (iii) enter into any agreement with respect to any Acquisition Proposal or approve any Acquisition Proposal. Anything in this Section 4.1 to the contrary notwithstanding, nothing in this Section 4.1 shall limit in any way a Stockholder who is an officer or director of the Company from exercising any of his rights or performing any of his duties as an officer or director of the Company. Notwithstanding anything to the contrary contained herein, Sidney Craig, 6 Jenny Craig and each other Stockholder may, at the request of the Board or the Special Committee thereof, provided the Board or Special Committee is acting in accordance with the provisions of Section 5.5(b) of the Merger Agreement, participate in negotiations or discussions and furnish information, data or assistance to a third party in connection with an Acquisition Proposal. SECTION 4.2 Restriction on Transfer. Until and unless this Agreement has been terminated, each Stockholder shall not, except as expressly provided for in this Agreement (a) sell, exchange, pledge, encumber or otherwise transfer or dispose of, or agree to sell, exchange, pledge, encumber or otherwise transfer or dispose of, any of its Shares, or any interest therein, (b) deposit its Shares into a voting trust or enter into a voting agreement or arrangement with respect to such Shares or grant any proxy with respect thereto or (c) enter into any agreement, arrangement, understanding, or undertaking to do any of the foregoing. Notwithstanding the foregoing, each Stockholder may transfer Shares owned by such Stockholder to any corporation, partnership or limited liability company of which all of the issued and outstanding voting and equity securities are beneficially owned by Craig Enterprises, Inc. ("CEI"), but only if all of the issued and outstanding voting and equity securities of CEI are beneficially owned by Sidney Craig and/or Jenny Craig. Any such transferee shall agree in writing to be bound by this Agreement as if he, she or it were a signatory hereto, and no such transfer shall relieve any Stockholder of his, her or its obligations hereunder. CEI hereby agrees that it shall not transfer nor cause or permit any such transferee to transfer any Shares in violation of this Section 4.2 and hereby agrees to take any necessary action in order to comply with the provisions of this Section 4.2. No transfer in violation of this Agreement shall be made or recorded on the books of the Company and any such transfer shall be void and of no force or effect. Notwithstanding anything to the contrary herein, SJF Enterprises, Inc. ("SJF") may consummate the SJF Contribution (as defined in the Merger Agreement) in accordance with the terms of its Commitment Letter to Parent, of even date herewith. SECTION 4.3 Waiver of Appraisal Rights. Each Stockholder hereby waives any appraisal or other rights to dissent from the Merger that such Stockholder may have. SECTION 4.4 Reliance by Parent. Each Stockholder understands and acknowledges that Parent is entering into, and causing the Purchaser to enter into, the Merger Agreement in reliance upon such Stockholder's execution and delivery of this Agreement. SECTION 4.5 Further Assurances. From time to time, at the other party's request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further lawful action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement. SECTION 4.6 Stockholder Capacity. No person executing this Agreement who is or becomes during the term hereof a director or officer of the Company makes any 7 agreement or understanding herein in his or her capacity as such director or officer. Each Stockholder signs solely in his or her capacity as the record and beneficial owner of such Stockholder's Shares. SECTION 4.7 Stop Transfer. Each Stockholder agrees with, and covenants to, the Parent that during the term of this Agreement, such Stockholder shall not request that the Company register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any of such Stockholder's Shares, unless such transfer is made in compliance with this Agreement (including the provisions of Article 2 hereof). In the event of a stock dividend or distribution, or any change in the Company Common Stock by reason of any stock dividend, split-up, recapitalization, combination, exchange of shares or the like, the term "Shares" shall be deemed to refer to and include the Shares as well as all such stock dividends and distributions and any shares into which or for which any or all of the Shares may be changed or exchanged. SECTION 4.8 Termination. This Agreement shall terminate upon the earlier of (a) the Effective Time or (b) the termination of the Merger Agreement in accordance with its terms; provided, however, that the obligations of the Stockholders set forth in Article II hereof shall survive a Capture Termination and shall be enforceable in accordance with the terms of Article II hereof; provided, further, however, that nothing in this Section 4.8 shall relieve the parties hereto of any liability for a breach of or a default under this Agreement. SECTION 4.9 No Written Consent. Parent, Purchaser and the Stockholders agree that the Stockholders will vote their respective Shares on the approval and adoption of this Agreement at a meeting of the stockholders of the Company, and that the Stockholders will not take any action by written consent or otherwise on the approval or adoption of this Agreement with respect to such Shares other than at the Special Meeting. Parent and Purchaser each agree that they will not vote (or cause to be voted) the Shares owned by the Stockholders, other than at a meeting of the stockholders of the Company and will not take any action by written consent or otherwise with respect to such Shares in lieu of a meeting or otherwise (or cause any such action to be taken). 8 ARTICLE V DEFINITIONS SECTION 5.1 Definitions. For the purpose of this Agreement, "beneficially own" or "beneficial ownership" with respect to any securities shall mean having "beneficial ownership" of such securities (as determined pursuant to Rule 13d-3 under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing, subject to any fiduciary duty in the case of securities not held of record. ARTICLE VI MISCELLANEOUS SECTION 6.1 Severability. If any term or other provision of this Agreement is or is deemed to be invalid, illegal or incapable of being enforced by any applicable rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of this Agreement is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner so that the terms of this Agreement remain as originally contemplated to the fullest extent possible. SECTION 6.2 Entire Agreement. This Agreement constitutes the entire understanding between Parent, the Purchaser and each Stockholder with respect to the subject matter hereof and thereof and supersedes all prior agreements and understandings, both written and oral, between Parent, the Purchaser and each Stockholder with respect to the subject matter hereof and thereof. SECTION 6.3 Certain Events. Each Stockholder agrees that this Agreement, including without limitation the proxy granted pursuant to Section 1.2, and the obligations hereunder shall attach to such Stockholder's Shares and shall be binding upon any person to which legal or beneficial ownership of such Shares shall pass, whether by operation of law or otherwise, including, without limitation, such Stockholder's heirs, guardians, representatives, administrators or successors. Notwithstanding any transfer of Shares, the transferor shall remain liable for the performance of all obligations under this Agreement of the transferor. SECTION 6.4 Counterparts. This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same instrument. 9 SECTION 6.5 Mutual Drafting. Each party hereto has participated in the drafting of this Agreement, which each party acknowledges is the result of extensive negotiations between the parties. SECTION 6.6 Assignment. This Agreement shall not be assigned by operation of law or otherwise without the prior written consent of the other parties hereto, provided that Parent may assign its rights hereunder to any direct or indirect wholly owned subsidiary of Parent, but no such assignment shall relieve Parent of its obligations hereunder if such assignee does not perform such obligations. SECTION 6.7 Amendments. This Agreement may not be amended, supplemented, waived or otherwise modified or terminated, except upon the execution and delivery of a written agreement executed by the parties hereto. SECTION 6.8 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly received if so given) by delivery in person, facsimile transmission, registered or certified mail (postage prepaid, return receipt requested), or courier service providing proof of delivery to the respective parties at the following addresses (or to such other address for a party as shall be specified in a notice given in accordance with this Section 6.8). If to Parent or the Purchaser: J Holdings Corp. J Acquisition Corp. 900 Third Avenue 26th Floor New York, New York 10022 Telecopy No.: (212) 634-3351 Attention: Kevin S. Penn with copies to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Telecopy No.: (212) 310-8007 Attention: Howard Chatzinoff, Esq. If to the Stockholders: 16092 San Dieguito Road Rancho Santa Fe, CA 92067 Telecopy No.: (619) 756-0641 10 Attention: with a copy to: Proskauer Rose LLP 2049 Century Park East, Suite 3200 Los Angeles, California 90067 Telecopy No.: (310) 557-2900 Attention: Thomas W. Dollinger, Esq. If to the Company: Jenny Craig, Inc. 11355 North Torrey Pines Road La Jolla, CA 92037 Telecopy No.: (858) 812-2730 Attention: SECTION 6.9 No Third Party Beneficiaries. This Agreement is not intended to be for the benefit of, and shall not be enforceable by, any person or entity not a party hereto; provided however, that the parties hereto acknowledge that the Company is intended to be a beneficiary of, and shall be entitled to rely on, the covenants and agreements contained in Section 4.9 hereof. SECTION 6.10 Specific Performance. Each of the parties hereto acknowledges that a breach by it of any agreement contained in this Agreement will cause the other party to sustain damage for which it would not have an adequate remedy at law for money damages, and therefore each of the parties hereto agrees that in the event of any such breach the aggrieved party shall be entitled to the remedy of specific performance of such agreement and injunctive and other equitable relief in addition to any other remedy to which it may be entitled, at law or in equity. SECTION 6.11 Remedies Cumulative. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other right, power or remedy by such party. SECTION 6.12 No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon strict compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its rights to exercise any such or other right, power or remedy or to demand such compliance. 11 SECTION 6.13 Governing Law. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to the principles of conflicts of law. (b) Each party hereby irrevocably submits to the exclusive jurisdiction of the Court of Chancery in the State of Delaware in any action, suit or proceeding arising in connection with this Agreement, and agrees that any such action, suit or proceeding shall be brought only in such court (and waives any objection based on forum non conveniens or any other objection to venue therein); provided, however, that such consent to jurisdiction is solely for the purpose referred to in this subsection (b) and shall not be deemed to be a general submission to the jurisdiction of such court or in the State of Delaware other than for such purposes. SECTION 6.14 Waiver of Jury Trial. EACH OF PARENT, PURCHASER AND THE STOCKHOLDERS HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, PURCHASER OR THE STOCKHOLDERS IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF. SECTION 6.15 Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. [Signatures on Following Page] 12 IN WITNESS WHEREOF, Parent, the Purchaser and each Stockholder have caused this Agreement to be duly executed as of the date first above written. J HOLDINGS CORP. By: /s/ KEVIN S. PENN ------------------------------- Name: Kevin S. Penn Title: President J ACQUISITION CORP. By: /s/ KEVIN S. PENN ------------------------------- Name: Kevin S. Penn Title: President /s/ SID CRAIG ------------------------------- Sidney Craig /s/ JENNY CRAIG ------------------------------- Jenny Craig CRAIG ENTERPRISES, INC. By: /s/ SID CRAIG ------------------------------- Name: Sidney Craig Title: Chairman 13 SJF ENTERPRISES, INC. By: /s/ SID CRAIG ------------------------------- Name: Sidney Craig Title: Chairman DA HOLDINGS, INC. By: /s/ SID CRAIG ------------------------------- Name: Sidney Craig Title: Chairman JENNY CRAIG, INC. By: /s/ SID CRAIG ------------------------------- Name: Sidney Craig Title: Chairman and Chief Executive Officer [Solely with Respect to Sections 4.2, 4.7 and 4.9 hereof] 14 Exhibit A

Name Shares - ---- ------ Sidney Craig(1) 13,838,600 Jenny Craig(1) 13,838,600 Craig Enterprises, Inc. (1) 13,838,600 SJF Enterprises, Inc.(2) 13,838,600 DA Holdings, Inc. 1,950,000

(1) 13,838,600 of these shares are beneficially owned by SJF Enterprises, Inc. ("SJF"), and 373,900 are owned beneficially and directly by The Sidney and Jenny Craig Foundation (the "Foundation Shares"). Sidney and Jenny Craig own all of the outstanding voting and equity securities of Craig Enterprises, Inc. which owns all of the outstanding voting and equity securities of SJF. (2) Of the 13,838,600 shares beneficially owned by SJF, 11,888,600 are owned directly by SJF and 1,950,000 are owned directly by DA Holdings, Inc., all of the outstanding voting and equity securities of which are owned by SJF. 15 EX-10.2 5 v78658ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 January 27, 2002 J HOLDINGS CORP. 900 Third Avenue, 26th Floor New York, NY 10022 Re: Equity Capital Commitment Gentlemen: Reference is made to that certain Agreement and Plan of Merger (the "Agreement"), dated as of the date hereof, by and among J Holdings Corp. ("Parent"), J Acquisition Corp. ("Purchaser") and Jenny Craig, Inc. (the "Company"), which agreement contemplates the acquisition by Parent of 100% of the outstanding shares of the Company (such acquisition, together with agreements related thereto or contemplated thereby, representing the "Transaction"). In connection therewith, SJF Enterprises, Inc. or an affiliate thereof (the "Investor") is pleased to advise you that it hereby commits to contribute to Parent 754,717 shares of the common stock of the Company (the "Investment"), to be exchanged (immediately prior to the Transaction) for shares of common stock of Parent representing twenty percent (20%) of the outstanding common stock of Parent and shares of preferred stock of Parent representing twenty percent (20%) of the outstanding preferred stock of Parent. The Investor's commitment to provide the Investment is subject in all respects to satisfaction of the terms and conditions contained in this commitment letter and in the Outline of Terms and Conditions attached as Exhibit A (the "Term Sheet"). The Investor's commitment to provide the Investment is subject to (i) the negotiation, execution and delivery of definitive documentation thereof, including, without limitation, a Certificate of Designations of the Senior Preferred, in form and substance satisfactory to the Investor, Parent and their respective counsel, (ii) the execution and delivery of a Stockholders' Agreement between the Company, the Investor and certain other parties substantially in the form of Exhibit B hereto, (iii) the conditions precedent to the closing of the Transaction set forth in Sections 6.1, 6.2 and 6.3 (other than 6.3(c)) of the Agreement shall have been satisfied and the parties to the Agreement shall be willing and prepared to consummate the Transaction, (iv) all conditions precedent to the obligations of the Senior Lender, Purchaser Lenders, and Parent Equity Investors to consummate the Senior Financing, Purchaser Debt Financing and Parent Equity Financing (other than any condition requiring the consummation of the contribution of Shares contemplated by this Commitment Letter) shall have been satisfied and the Senior Lender, Purchaser Lenders and Parent Equity Investors shall intend to and shall be willing and prepared to consummate the Senior Financing, the Purchaser Debt Financing and the Parent Equity Financing (as the terms set forth in this subparagraph (iv) are defined in the Agreement), and (v) the satisfaction of the conditions set forth in the Term Sheet attached hereto. The offer made by the Investor in this commitment letter is contingent upon execution of the Agreement, and should the Agreement be executed, the commitment by the Investor to provide the Investment shall expire upon the earlier of (i) the termination of the Agreement and (ii) the Expiration Date (as defined in the Agreement), as may be extended in accordance with the terms of the Agreement. If the terms and conditions of the offer contained herein meet with your approval, please indicate your acceptance by signing and returning a copy of this commitment letter to the Investor. This commitment letter, including the attached Exhibits (i) supersedes all prior discussions, agreements, commitments, arrangements, negotiations or understandings, whether oral or written, of the parties with respect thereto, (ii) shall be governed by the law of the State of New York, (iii) shall be binding upon the parties and their respective successors and assigns, (iv) may not be relied upon or enforced by any other person or entity other than the parties hereto and Purchaser, and (v) may be signed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. If this commitment letter becomes the subject of a dispute, each of the parties hereto hereby waives trial by jury. This commitment letter may be amended, modified or waived only in a writing signed by the parties hereto. Very truly yours, SJF ENTERPRISES, INC. By: /s/ SID CRAIG ------------------------------- Name: Sidney Craig Title: Chairman Agreed and accepted on this 27th day of January, 2002: J HOLDINGS CORP. By: /s/ KEVIN S. PENN ------------------------------- Name: Kevin S. Penn Title: President EXHIBIT A OUTLINE OF TERMS AND CONDITIONS FOR PROPOSED EQUITY FINANCING This Outline of Terms and Conditions is part of the Equity Commitment Letter, dated January 27, 2002 (the "Commitment Letter"), addressed to J Holdings Corp. by SJF Enterprises, Inc. ("SJF"), and is subject to the terms and conditions of the Commitment Letter. Capitalized terms used herein shall have the meanings set forth in the Commitment Letter unless otherwise defined herein. ISSUER: J Holdings Corp. TOTAL ISSUANCE OF PREFERRED: $18 million TOTAL ISSUANCE OF COMMON: $2 million COMMITMENT BY INVESTOR: $3.6 million in senior preferred stock (the "Preferred"), having an aggregate liquidation preference of $3.6 million, and $400,000 in shares of Common Stock (the "Common"), at a price of $0.10 per share. MANDATORY REDEMPTION OF PREFERRED: Five years. PREFERRED Cumulative undeclared dividends (declarable only in cash), DIVIDENDS: payable at the rate of 15% per annum, or such lower rate as would ensure for any time in which ACI remains a holder of the Preferred that the combined interest + dividend rate payable on the Issuer's capital (which shall be an amount equal to the sum of the Purchaser Debt Financing (as defined in the Agreement), Preferred and Common (which includes paid in capital and additional paid in capital)) does not exceed 15% for any annual period (the applicable rate at any time being the "Base Rate"); provided, however, that the foregoing limitation shall only apply to the extent ACI Capital Co., Inc. remains subject to applicable limitations prescribed by the Small Business Administration ("SBA"). The rate paid on the Issuer's capital shall be calculated in a manner consistent with applicable regulations of the SBA. USE OF PROCEEDS: To finance the Transaction and the general working capital needs of the Issuer. OPTIONAL REDEMPTION: At the option of the Issuer, with no penalty. TRANSFERABILITY: Subject to restrictions contained in the Stockholders' Agreement. COVENANTS: Standard for this type of security, including, but not limited to, reporting requirements, change of control restrictions, approval of mergers, acquisitions, equity issuances, payment of dividends, debt incurrence, redemption of equity or debt, amendments to the preferred stock, amendments of equity rights, amendments to the Issuer's charter and bylaws, changes in the Issuer's management, material changes in business strategy, increase in size of Board, etc. Such covenants will not restrict the Issuer's ability to incur debt for the sole purpose of prepaying Preferred. CONDITIONS: Customary conditions precedent, including, without limitation: 1) Negotiation, execution, delivery of definitive documentation. 2) Closing of the Acquisition contemplated by the Agreement. EX-99.1 6 v78658ex99-1.txt EXHIBIT 99.1 EXHIBIT 99.1 JENNY CRAIG TO BE ACQUIRED BY ACI CAPITAL & DB CAPITAL PARTNERS Existing Management Will Continue to Lead Company LA JOLLA, CALIF. - JAN. 28, 2002 -- Jenny Craig, Inc. (OTC Bulletin Board: JCGI) announced today that it has entered into a definitive merger agreement providing for the acquisition of Jenny Craig by an investor group led by ACI Capital Co., Inc., a private investment firm. DB Capital Partners, the private equity arm of Deutsche Bank, is ACI Capital's partner in the transaction. The investor group will also include Sid and Jenny Craig. The merger agreement calls for each Jenny Craig stockholder to receive $5.30 per share in cash, which represents a premium of approximately 68% to Jenny Craig's January 25, 2002 closing price of $3.15. Based on the $5.30 price per share, the transaction is valued at approximately $115 million. Completion of the transaction is subject to customary closing conditions, including approval by the stockholders of Jenny Craig, the securing of regulatory approvals and the receipt of financing. The purchaser has received a senior debt financing commitment from Ableco Finance and commitments from ACI Capital and DB Capital to provide equity and debt capital. The Craigs have also agreed to contribute a portion of their holdings of Jenny Craig stock with a value, based on the $5.30 per share merger price, of $4 million for stock in the acquisition vehicle. In addition, the Craigs and certain of their affiliated entities have agreed to vote their current shareholdings of approximately 67% of the Company's stock in favor of the transaction, subject to the terms and conditions of their voting agreement with the purchaser. The transaction is expected to close in the second quarter of 2002. Jenny Craig is one of the largest weight management firms worldwide with 652 centers in the United States, Canada and abroad. Founded in 1983, the Company offers a comprehensive weight management program that helps clients learn how to eat the foods they want, increase their energy level through simple activity and build more balance in their lives for optimal weight loss and well-being. The program combines personal, one-on-one consultations at Jenny Craig Centres with nutritionally balanced menu plans. During the four quarters ended September 30, 2001, the Company generated $291 million in sales. "ACI Capital and DB Capital have long histories of backing management and investing in growing companies, and we are delighted to be entering into this agreement with them," said Sid Craig, who, with his wife, Jenny Craig, co-founded the Company. "This transaction is good news for our shareholders, clients and employees," he continued. "Shareholders benefit by receiving a premium of 68% above the recent share price. Clients and employees will benefit as we continue to grow our business through investment and expansion." Kevin Penn, a Managing Director of ACI Capital, stated, "We are excited to have the opportunity to invest in one of the dominant global weight management businesses. Jenny Craig is led by a talented management team, and its focus on individual counseling and portion control has resulted in a unique franchise. We look forward to working with management to grow the company's core business." Added Robert Sharp, a Managing Director of DB Capital, "Our investment in Jenny Craig represents the execution of DB Capital's portfolio strategy of investing in growth-oriented companies that have strong brand equity, an experienced management team and a solid customer base. " Jenny Craig will keep its headquarters in Southern California and the current management team will continue to operate the Company post-transaction. In addition, Jenny and Sid Craig, the Company's founders, will remain involved with the Company and Sid Craig, currently Chairman and CEO, will continue to serve on the Company's Board. Kent Kreh, former Chief Executive Officer of Weight Watchers International, will join the Company as Chairman of the Board. Also joining the Board will be Matthew Bronfman, a Managing Director of ACI Capital, and Richard E. Wenz, a Consulting Partner of DB Capital and former President of Safety 1st. "Jenny Craig has an attractive core business," stated Kent Kreh, "including a team of experienced, motivated counselors and one of the top two brands in the industry. I'm pleased to have the chance to work with the Company going forward." The Company's Board of Directors (other than Sid Craig and Jenny Craig, who did not vote on the transaction) unanimously approved the transaction following receipt of the unanimous recommendation of a Special Committee comprised of independent directors of the Company and a fairness opinion from Houlihan Lokey Howard & Zukin Financial Advisors, Inc. that the merger consideration is fair to Jenny Craig's stockholders (other than the Craigs and their affiliates) from a financial point of view. While the merger agreement prohibits Jenny Craig from soliciting competing proposals, it has 60 days to accept a superior proposal, subject to payment of a breakup fee amount of $4.875 million and certain other conditions. Koffler & Company, an investment banking firm headquartered in Los Angeles, acted as financial advisor to Jenny Craig, and Houlihan Lokey acted as financial advisor to the Special Committee. Jenny Craig is being represented by Proskauer Rose LLP, the Special Committee by Latham & Watkins, ACI Capital by Weil, Gotshal & Manges LLP, and DB Capital by Gibson, Dunn & Crutcher LLP. About Jenny Craig Founded in 1983, Jenny Craig, Inc. is one of the largest weight management service companies in the world. The Company offers a comprehensive weight management program that helps clients learn how to eat the foods they want, increase their energy level through simple activity, and build more balance in their lives for optimal weight loss and well-being. The program includes personal, one-on-one consultations at Jenny Craig Centres, with menu plans that are nutritionally balanced according to the recommendations of the USDA Food Guide Pyramid and the U.S. Dietary Guidelines. Jenny Craig Centres are located in the United States, Canada, Australia, New Zealand, 2 and Puerto Rico. At December 31, 2001, the Company owned 542 Centres with an additional 110 Centres owned by franchisees, bringing the total number of Centres in operation to 652. For more information, please visit www.jennycraig.com. About ACI Capital Co., Inc. ACI Capital is a private investment firm with over 40 years of history leading middle-market management buyouts and growth capital investments across a broad spectrum of industries throughout North America. ACI Capital is an active partner with management in building the value of its companies. For more information, please visit www.acicapital.com. About DB Capital Partners, Inc. DB Capital Partners is the private equity arm of Deutsche Bank AG. With over 150 investment professionals operating out of offices in the Americas, Europe, Asia and Australia, DB Capital Partners is a leading manager of private equity assets. Drawing upon the substantial global resources of Deutsche Bank, DB Capital Partners invests in all manner of financial transactions globally including growth financings, recapitalizations, leveraged buyouts, mezzanine financings, venture investing and primary and secondary funds. For more information, please visit www.dbcapitalpartners.com. About Deutsche Bank With assets of almost 1 trillion Euro and over 97,000 employees, Deutsche Bank offers its clients unparalleled financial services throughout the world in over 70 countries. It ranks among the leaders in asset management, capital markets, corporate finance, custody, cash management and private banking. For more information, please visit www.deutsche-bank.com. The Company will file a report on form 8-K with the Securities and Exchange Commission regarding the proposed transaction, which will include a copy of the merger agreement and certain related documents. THIS PRESS RELEASE INCLUDES FORWARD-LOOKING STATEMENTS ABOUT THE COMPANY'S REVENUES, COSTS, EARNINGS, MARGINS AND OTHER FUTURE PLANS AND OBJECTIVES. ANY SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS TO VARY MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE: INCREASED COMPETITION; TECHNOLOGICAL AND SCIENTIFIC DEVELOPMENTS, INCLUDING APPETITE SUPPRESSANTS AND OTHER DRUGS WHICH CAN BE USED IN WEIGHT LOSS PROGRAMS; INCREASES 3 IN COST OF FOOD OR SERVICES; LACK OF MARKET ACCEPTANCE OF ADDITIONAL PRODUCTS AND SERVICES; LEGISLATIVE AND REGULATORY RESTRICTIONS; EFFECTIVENESS OF MARKETING AND ADVERTISING PROGRAMS; PREVAILING DOMESTIC AND FOREIGN ECONOMIC CONDITIONS; AND THE RISK FACTORS SET FORTH FROM TIME TO TIME IN THE COMPANY'S ANNUAL REPORTS AND OTHER REPORTS AND FILINGS WITH THE SEC. 4 -----END PRIVACY-ENHANCED MESSAGE-----

EX-2.1

                                                                     Exhibit 2.1

                          AGREEMENT AND PLAN OF MERGER

                                  by and among

                                J HOLDINGS CORP.,


                               J ACQUISITION CORP.


                                       and

                                JENNY CRAIG, INC.


                                JANUARY 27, 2002



                                TABLE OF CONTENTS




                                                                                             PAGE

                                                                                          
ARTICLE  I

         THE MERGER...........................................................................2
         SECTION 1.1  COMPANY ACTIONS.........................................................2
         SECTION 1.2  THE MERGER..............................................................2
         SECTION 1.3  EFFECTIVE TIME..........................................................3
         SECTION 1.4  CLOSING.................................................................3
         SECTION 1.5  DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION.....................3
         SECTION 1.6  STOCKHOLDERS' MEETING AND PREPARATION OF PROXY STATEMENT................3

ARTICLE II

         CONVERSION OF SECURITIES.............................................................5
         SECTION 2.1  CONVERSION OF CAPITAL STOCK.............................................5
         SECTION 2.2  EXCHANGE OF CERTIFICATES................................................6
         SECTION 2.3  DISSENTING SHARES.......................................................9
         SECTION 2.4  COMPANY OPTION PLANS....................................................9

ARTICLE III

         REPRESENTATIONS AND WARRANTIES
         OF THE COMPANY......................................................................10
         SECTION 3.1  ORGANIZATION...........................................................10
         SECTION 3.2  CAPITALIZATION.........................................................11
         SECTION 3.3  AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY ACTION...................12
         SECTION 3.4  CONSENTS AND APPROVALS; NO VIOLATIONS..................................13
         SECTION 3.5  SEC REPORTS AND FINANCIAL STATEMENTS...................................14
         SECTION 3.6  NO UNDISCLOSED LIABILITIES.............................................15
         SECTION 3.7  ABSENCE OF CERTAIN CHANGES.............................................15
         SECTION 3.8  EMPLOYEE BENEFIT PLANS; ERISA..........................................17
         SECTION 3.9  LABOR MATTERS..........................................................20
         SECTION 3.10  LITIGATION............................................................21
         SECTION 3.11  PERMITS; NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS..................21
         SECTION 3.12  TAXES.................................................................21
         SECTION 3.13  REAL PROPERTY.........................................................25
         SECTION 3.14  ENVIRONMENTAL MATTERS.................................................26
         SECTION 3.15  MATERIAL CONTRACTS....................................................27
         SECTION 3.16  INTELLECTUAL PROPERTY.................................................29
         SECTION 3.17  VOTING REQUIREMENTS...................................................30


                                        i





                                                                                             PAGE

                                                                                          
         SECTION 3.18  STATE TAKEOVER STATUTES...............................................30
         SECTION 3.19  RELATED PARTY TRANSACTIONS............................................30
         SECTION 3.20.  RELATIONSHIPS WITH FRANCHISEES.......................................30
         SECTION 3.21  QUASI-CORPORATION REQUIREMENTS........................................32
         SECTION 3.22 INSURANCE..............................................................32
         SECTION 3.23  INFORMATION IN PROXY STATEMENT........................................32
         SECTION 3.24  OPINION OF FINANCIAL ADVISOR..........................................32
         SECTION 3.25  BROKERS...............................................................32

ARTICLE IV

         REPRESENTATIONS AND WARRANTIES OF
         PARENT AND THE PURCHASER............................................................33
         SECTION 4.1  ORGANIZATION...........................................................33
         SECTION 4.2  AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION.................33
         SECTION 4.3  CONSENTS AND APPROVALS; NO VIOLATIONS..................................34
         SECTION 4.4  INFORMATION IN PROXY STATEMENT.........................................34
         SECTION 4.5  FINANCING..............................................................35
         SECTION 4.6  SHARE OWNERSHIP........................................................36
         SECTION 4.7  PARENT AND THE PURCHASER'S OPERATIONS..................................36
         SECTION 4.8 INVESTIGATION BY PARENT AND THE PURCHASER...............................36
         SECTION 4.9  BROKERS................................................................37

ARTICLE V

         COVENANTS...........................................................................37
         SECTION 5.1  INTERIM OPERATIONS OF THE COMPANY. ....................................37
         SECTION 5.2  ACCESS TO INFORMATION..................................................42
         SECTION 5.3  CONSENTS AND APPROVALS.................................................42
         SECTION 5.4  NO ACTIONS BY PARENT OR PURCHASER......................................42
         SECTION 5.5  NO SOLICITATION........................................................43
         SECTION 5.6  PUBLICITY..............................................................45
         SECTION 5.7  NOTIFICATION OF CERTAIN MATTERS........................................45
         SECTION 5.8  DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION.................46
         SECTION 5.9  FURTHER ASSURANCES.....................................................47
         SECTION 5.10  REASONABLE BEST EFFORTS...............................................48
         SECTION 5.11  FEES AND EXPENSES. ...................................................49
         SECTION 5.12  REPORT ON FORM 8-K....................................................49

ARTICLE VI

         CONDITIONS..........................................................................50
         SECTION 6.1  CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.............50


                                       ii





                                                                                             PAGE

                                                                                          
         SECTION 6.2  CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO EFFECT THE
                  MERGER.....................................................................50
         SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF PARENT AND THE PURCHASER TO
                  EFFECT THE MERGER..........................................................51

ARTICLE VII

         TERMINATION.........................................................................52
         SECTION 7.1  TERMINATION............................................................52
         SECTION 7.2  EFFECT OF TERMINATION..................................................54

ARTICLE VIII
         MISCELLANEOUS.......................................................................55
         SECTION 8.1  AMENDMENT AND MODIFICATION.............................................55
         SECTION 8.2  NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES..........................55
         SECTION 8.3  NOTICES................................................................55
         SECTION 8.4  COUNTERPARTS...........................................................56
         SECTION 8.5  ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES.........................57
         SECTION 8.6  SEVERABILITY...........................................................57
         SECTION 8.7  GOVERNING LAW..........................................................57
         SECTION 8.8  JURISDICTION...........................................................57
         SECTION 8.9  ASSIGNMENT.............................................................58
         SECTION 8.10 ENFORCEMENT............................................................58
         SECTION 8.11 ACTIONS BY THE COMPANY.................................................58


                                       iii



                             INDEX OF DEFINED TERMS




DEFINED TERM                                                                 Page
- ------------                                                                 ----
                                                                           
7.1(c)(i) Expiration Date......................................................52
ACI............................................................................35
Acquisition Proposal...........................................................44
Affiliated Group...............................................................21
Agreement.......................................................................1
Benefit Plan...................................................................17
Business Day....................................................................7
California Code................................................................32
CEI............................................................................32
Certificate of Merger...........................................................3
Certificates....................................................................7
Claim..........................................................................46
Closing.........................................................................3
Closing Date....................................................................3
Closing Documents..............................................................12
COBRA..........................................................................19
Code...........................................................................18
Commitment Letter..............................................................35
Commitment Letters.............................................................35
Company.........................................................................1
Company Board...................................................................2
Company Common Stock............................................................1
Company Franchisees............................................................31
Company Intellectual Property..................................................29
Company Permits................................................................21
Company SEC Documents..........................................................14
Confidentiality Agreement......................................................42
Consulting Agreements...........................................................1
D&O Insurance..................................................................32
DAH.............................................................................1
DBCP...........................................................................35
DGCL............................................................................3
Dissenting Common Stock.........................................................9
DOJ............................................................................48
Effective Time..................................................................3
Employees......................................................................20



                                       iv





DEFINED TERM                                                                 Page
- ------------                                                                 ----
                                                                           
Environmental Law..............................................................27
ERISA..........................................................................17
Exchange Act....................................................................4
Exchange Fund...................................................................6
Expiration Date................................................................52
Financing......................................................................35
Financing Source...............................................................35
Financing Sources..............................................................35
Financings.....................................................................35
Foreign Plan...................................................................20
Franchise Agreements...........................................................28
FTC............................................................................31
GAAP...........................................................................14
Governmental Entity........................................................13, 18
Hazardous Substances...........................................................27
Headquarters Lease.............................................................38
Houlihan.......................................................................32
HSR Act........................................................................13
Indemnified Party..............................................................46
Intellectual Property..........................................................29
IRS............................................................................18
Liens..........................................................................12
Material Contracts.............................................................28
Material Intellectual Property.................................................29
Maximum Premium................................................................47
Merger..........................................................................2
Merger Consideration............................................................6
Name Agreement..................................................................1
Option Plan....................................................................11
Options........................................................................11
Parent..........................................................................1
Parent Equity Commitment Letters...............................................35
Parent Equity Financing........................................................35
Parent Equity Investors........................................................35
Paying Agent....................................................................6
Permitted Liens................................................................17
Personal Service Contract......................................................27
Potential Acquiror.............................................................43
Proxy Statement.................................................................4
Purchaser.......................................................................1



                                        v





DEFINED TERM                                                                 Page
- ------------                                                                 ----
                                                                           
Purchaser Common Stock..........................................................5
Purchaser Debt Commitment Letters..............................................35
Purchaser Debt Financing.......................................................35
Purchaser Lenders .............................................................35
Real Property Leases...........................................................25
Schedules.......................................................................1
SEC.............................................................................3
SEC-Filed Agreements...........................................................27
Secretary of State..............................................................3
Securities Act.................................................................14
Senior Commitment Letter.......................................................35
Senior Financing...............................................................35
Senior Lender..................................................................35
Shares..........................................................................1
SJF.............................................................................1
Special Committee...............................................................2
Special Meeting.................................................................4
Stockholders Agreement..........................................................1
Subsidiary.....................................................................10
Superior Proposal..............................................................44
Surviving Corporation...........................................................2
Tail Policy....................................................................47
Tax Return.....................................................................25
Taxes..........................................................................24
Termination Fee................................................................49
Termination Fee Event..........................................................49
Transactions....................................................................2
UFOCs..........................................................................31
Voting Debt....................................................................11
WARN...........................................................................20




                                       vi



                          AGREEMENT AND PLAN OF MERGER

                  THIS AGREEMENT AND PLAN OF MERGER (together with all Schedules
and Exhibits, as amended from time to time in accordance with the terms hereof,
this "Agreement"), dated as of January 27, 2002, by and among J Holdings Corp.,
a Delaware corporation ("Parent"), J Acquisition Corp., a Delaware corporation
and a wholly owned subsidiary of Parent (the "Purchaser"), and Jenny Craig,
Inc., a Delaware corporation (the "Company").

                  WHEREAS, Parent and the Purchaser have proposed acquiring all
of the outstanding common stock, par value $.000000005 per share, of the Company
(the "Shares" or "Company Common Stock") at a price of $5.30 per Share in cash;

                  WHEREAS, the Company, Parent and the Purchaser desire to make
certain representations, warranties, covenants, and agreements in connection
with the Merger, subject to, among other provisions hereof, the disclosure
schedules referenced herein (the "Schedules");

                  WHEREAS, as a condition and inducement to Parent's and the
Purchaser's entering into this Agreement and incurring the obligations set forth
herein, Parent, the Purchaser, Sidney Craig, Jenny Craig, SJF Enterprises, Inc.
("SJF"), and DA Holdings, Inc. ("DAH") have entered into a Stockholders Voting
Agreement in the form attached hereto as Exhibit A (the "Stockholders
Agreement");

                  WHEREAS, each of Sidney Craig and Jenny Craig and Purchaser
have entered into Consulting Services Agreements dated the date hereof, which
shall become effective as of the Effective Time (the "Consulting Agreements");

                  WHEREAS, each of Sidney Craig and Jenny Craig and the
Purchaser have entered into Non-Solicitation and Non-Competition Agreements
dated the date hereof, which shall become effective as of the Effective Time;

                  WHEREAS, Sidney and Jenny Craig, Parent and the Company have
entered into an agreement dated the date hereof with respect to the use of the
name "Jenny Craig" and related matters, which shall become effective as of the
Effective Time (the "Name Agreement");



                  WHEREAS, the respective Boards of Directors of Parent, the
Purchaser and the Company (in the case of the Company, with such Board having
considered and acting subsequent to the unanimous recommendation of a special
committee of such Board (the "Special Committee")) have approved, and deem it
advisable and in the best interests of their respective stockholders to
consummate, the acquisition of the Company by Parent and the Purchaser upon the
terms and subject to the conditions set forth herein; and

                  NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements set forth
herein, the parties hereto agree as follows:

                                    ARTICLE I

                                   THE MERGER

                  SECTION 1.1  COMPANY ACTIONS.

                           (a) The Company  hereby  approves of and  consents to
the Merger and represents that the Board of Directors of the Company (the
"Company Board"), at a meeting duly called and held, has, subject to the terms
and conditions set forth herein and acting after having considered the
recommendation of the Special Committee, (i) unanimously approved this Agreement
and the transactions contemplated hereby, including the Merger (as defined in
Section 1.2) (collectively, the "Transactions"), determining that the Merger is
advisable and that the terms of the Merger are fair to, and in the best
interests of, the Company's stockholders and recommending that the Company's
stockholders approve the Merger and this Agreement and (ii) resolved to
recommend that the stockholders of the Company adopt this Agreement and the
Merger.

                  SECTION 1.2 THE MERGER. Upon and subject to the terms and
conditions of this Agreement, at the Effective Time (as defined in Section 1.3
hereof), the Company and the Purchaser shall consummate a merger (the "Merger")
pursuant to which (a) the Purchaser shall be merged with and into the Company
and the separate corporate existence of the Purchaser shall thereupon cease, (b)
the Company shall be the successor or surviving corporation in the Merger (the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of Delaware, and (c) the separate corporate existence of the Company with
all its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger. Pursuant to the Merger, (x) the Certificate of
Incorporation of the Company, as amended as set forth on Exhibit B, shall be the
Certificate of Incorpora-

                                        2



tion of the Surviving Corporation, and (y) the By-laws of the Company shall be
amended effective at the Effective Time to be identical in all respects to the
By-laws of the Purchaser immediately prior to the Effective Time, in each case
until thereafter amended as provided by law, the Certificate of Incorporation
and such By-laws. The Merger shall have the effects set forth in the Delaware
General Corporation Law ("DGCL").

                  SECTION 1.3 EFFECTIVE TIME. Parent, the Purchaser and the
Company shall cause a Certificate of Merger (the "Certificate of Merger") to be
executed and filed on the Closing Date (as defined in Section 1.4) (or on such
other date as Parent and the Company may agree) with the Secretary of State of
the State of Delaware (the "Secretary of State") as provided in the DGCL and
shall make all other filings or recordings required under the DGCL to effectuate
the Merger. The Merger shall become effective on the date of such filing with
the Secretary of State or such time as is agreed upon by the parties and
specified in the Certificate of Merger, and such time is hereinafter referred to
as the "Effective Time."

                  SECTION 1.4 CLOSING. The closing of the Merger (the "Closing")
shall take place at 10:00 a.m., on a date to be specified by the parties, which
shall be no later than the second business day after satisfaction or waiver of
all of the conditions (excluding conditions that cannot, by their terms, be
satisfied until the Closing Date), set forth in Article VI hereof (the "Closing
Date") at the offices of Proskauer Rose LLP, 2049 Century Park East, Suite 3200,
Los Angeles, California 90067, unless another date or place is agreed to in
writing by the parties hereto.

                  SECTION 1.5 DIRECTORS AND OFFICERS OF THE SURVIVING
CORPORATION. The directors of the Purchaser and the officers of the Company at
the Effective Time shall, from and after the Effective Time, be the directors
and officers, respectively, of the Surviving Corporation until their successors
shall have been duly elected or appointed or qualified or until their earlier
death, resignation or removal in accordance with the Surviving Corporation's
Certificate of Incorporation and By-laws.

                  SECTION 1.6  STOCKHOLDERS' MEETING AND PREPARATION OF PROXY
STATEMENT.

                           (a) As promptly  as  practicable  following  the date
hereof, the Company shall, in cooperation with Parent and the Purchaser, prepare
and file with the Securities and Exchange Commission ("SEC") the preliminary
proxy materials relating to

                                        3



the meeting of the Company's stockholders (together with any amendments or
supplements thereto, the "Proxy Statement"). The Proxy Statement shall comply as
to form in all material respects with the applicable provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules
and regulations thereunder, and, subject to Section 5.5, shall include a
statement that the Company Board finds the Merger Agreement to be advisable,
fair to and in the best interests of the Company. The Company shall use its
reasonable best efforts to have the Proxy Statement cleared by the SEC as
promptly as practicable after filing with the SEC. The Company shall, as
promptly as practicable after receipt thereof, provide copies of any written
comments received from the SEC with respect to the Proxy Statement to Parent and
advise Parent of any oral comments with respect to the Proxy Statement received
from the SEC. The Company shall consider all comments provided by Parent in good
faith and no amendment or supplement to the information supplied by Parent for
inclusion in the Proxy Statement shall be made without the approval of Parent,
which approval shall not be unreasonably withheld or delayed. The Company shall
cause the Proxy Statement to be mailed to its stockholders at the earliest
practicable date following clearance of the Proxy Statement by the SEC.

                           (b) The Company  shall,  as  promptly  as  reasonably
practicable following the execution of this Agreement, in accordance with
applicable law (including, without limitation, following clearance of the Proxy
Statement for mailing by the SEC) and its Certificate of Incorporation and
By-laws, duly call, give notice of, convene and hold as soon as reasonably
practicable after the date of this Agreement a meeting of its stockholders for
the purpose of obtaining the necessary approval of the Transactions contemplated
by this Agreement (the "Special Meeting") and shall present this Agreement for
adoption by the Company's stockholders. Without limiting the generality of the
foregoing and subject to Section 5.5, the Company agrees that its obligations
pursuant to the first sentence of this Section 1.6(b) shall not be affected by
the commencement, public proposal, public disclosure or communication to the
Company of an Acquisition Proposal. Regardless of whether the Company Board has
withdrawn, amended or modified its recommendation that its stockholders approve
and adopt this Agreement, unless this Agreement has been terminated pursuant to
the provisions of Article VII, the Company shall be required to hold the Special
Meeting.

                           (c)  Parent  shall   provide  the  Company  with  the
information concerning Parent and the Purchaser required to be included in the
Proxy Statement. Parent shall vote, or cause to be voted, all of the Shares then
beneficially owned by it, the Purchaser or any of its other subsidiaries and
affiliates (including, without limitation, all

                                        4



Shares over which any of them have the power to vote by proxy or otherwise) in
favor of the approval of the Merger and the approval and adoption of this
Agreement. For purposes of this Agreement, the term "affiliate" shall have the
meaning given such term in Rule 12b-2 under the Exchange Act.

                           (d) Parent, the Purchaser and the Company acknowledge
that the stockholders of the Company who are parties to or bound by the
Stockholders Agreement will vote their respective Shares on the approval and
adoption of this Agreement at the Special Meeting, and that none of them will,
without the written approval of the Special Committee, take any action by
written consent or otherwise on the approval or adoption of this Agreement with
respect to such Shares other than at the Special Meeting. Parent and the
Purchaser each agree that they will not vote (or cause to be voted) the Shares
owned by the stockholders of the Company who are parties to or bound by the
Stockholders Agreement, other than at the Special Meeting and will not, without
the written approval of the Special Committee, take any action by written
consent or otherwise with respect to such Shares in lieu of the Special Meeting
or otherwise (or cause any such action to be taken), including without
limitation pursuant to the rights granted to Parent and the Purchaser under the
Stockholders Agreement.

                                   ARTICLE II

                            CONVERSION OF SECURITIES

                  SECTION 2.1 CONVERSION OF CAPITAL STOCK. As of the Effective
Time, by virtue of the Merger and without any action on the part of the holders
of any shares of Company Common Stock or common stock, par value $.00001 per
share, of the Purchaser (the "Purchaser Common Stock"):

                           (a)   Purchaser   Common   Stock.   Each  issued  and
outstanding share of the Purchaser Common Stock shall be converted into and
become one validly issued, fully paid and nonassessable share of common stock,
$.00001 par value per share, of the Surviving Corporation.

                           (b)  Cancellation of Treasury Stock and  Parent-Owned
Stock. All shares of Company Common Stock that are owned by the Company as
treasury stock and any shares of Company Common Stock owned by Parent, the
Purchaser or any other wholly owned Subsidiary (as defined in Section 3.1
hereof) of Parent shall be automatically

                                        5



canceled and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor.

                           (c) Conversion of Shares. Each issued and outstanding
share of Company Common Stock (other than Shares to be cancelled in accordance
with Section 2.1(b) hereof and any Dissenting Common Stock (as defined in
Section 2.3 hereof)), shall be converted into the right to receive $5.30 per
Share, in cash, payable to the holder thereof, without interest (the "Merger
Consideration"), upon surrender of the certificate formerly representing such
share of Company Common Stock in the manner provided in Section 2.2 hereof. All
such shares of Company Common Stock, when so converted, shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease to
exist, and each holder of a certificate which, prior to the Effective Time,
represented any such Shares shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration therefor upon the surrender
of such certificate in accordance with Section 2.2 hereof, without interest.

                  SECTION 2.2  EXCHANGE OF CERTIFICATES.

                           (a) Paying  Agent.  Parent shall  designate a bank or
trust company reasonably acceptable to the Company to act as agent for the
holders of shares of Company Common Stock in connection with the Merger (the
"Paying Agent") to receive in trust the funds to which holders of shares of
Company Common Stock shall become entitled pursuant to Section 2.1(c) (the
"Exchange Fund"). At or immediately after the Effective Time, Parent or the
Purchaser shall deposit or cause to be deposited with the Paying Agent, for the
benefit of the holders of such shares of Company Common Stock, the Exchange Fund
in the amount of the aggregate consideration to which such holders of shares of
Company Common Stock shall be entitled at the Effective Time (or thereafter)
pursuant to Section 2.1(c). The Exchange Fund shall be invested by the Paying
Agent in obligations of, or guaranteed by, the United States of America, or any
agency thereof, and backed by the full faith and credit of the United States of
America, in commercial paper obligations rated A-1 or P-1 or better by Moody's
Investor Services, Inc. or Standard & Poors Corporation, respectively, or in
deposit accounts, certificates of deposit or bankers' acceptances of, repurchase
or reverse repurchase agreements with, or Eurodollar time deposits purchased
from commercial banks with capital, surplus and undivided profits aggregating in
excess of $1,000,000,000 (based on the most recent financial statements of such
bank which are then publicly available at the SEC or otherwise).

                                        6



                           (b)  Exchange  Procedures.   As  soon  as  reasonably
practicable after the Effective Time, but in no event more than three (3)
Business Days (a "Business Day" being any day other than Saturday or Sunday or
any other day commercial banks are not required or authorized to close in the
City of New York) thereafter, Parent shall cause the Paying Agent to mail to
each holder of record of a certificate or certificates, which immediately prior
to the Effective Time represented outstanding shares of Company Common Stock
(the "Certificates"), whose Shares were converted pursuant to Section 2.1 into
the right to receive the Merger Consideration, (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of the Certificates to the
Paying Agent and shall be in such form and have such other provisions as Parent
and the Company may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for payment of the
Merger Consideration. Upon surrender of a Certificate for cancellation to the
Paying Agent and such other documents as may be reasonably required by the
Paying Agent, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor the
Merger Consideration, without interest, for each share of Company Common Stock
formerly represented by such Certificate and the Certificate so surrendered
shall forthwith be cancelled. If payment of the Merger Consideration is to be
made to a person other than the person in whose name the surrendered Certificate
is registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or shall be otherwise in proper form for
transfer and that the person requesting such payment shall have paid any
transfer and other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the Certificate
surrendered or shall have established to the satisfaction of the Surviving
Corporation that such tax either has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.2, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive the Merger Consideration in cash as contemplated by this Section 2.2.
For purposes of this agreement, the term "person" or "Person" shall mean any
individual, corporation, partnership, limited liability company or other entity.

                           (c) Transfer  Books; No Further  Ownership  Rights in
Company Common Stock. At the Effective Time, the stock transfer books of the
Company shall be closed and thereafter there shall be no further registration of
transfers of shares of Company Common Stock on the records of the Company. From
and after the Effective Time, the holders of Certificates evidencing ownership
of shares of Company Common Stock outstanding immediately prior to the
Effective Time shall cease to have any rights with respect

                                        7



to such Shares, except as otherwise provided for herein or by applicable law.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be cancelled and exchanged as provided in
this Article II.

                           (d)  Termination  of Fund; No Liability.  At any time
following six (6) months after the Effective Time, the Surviving Corporation
shall be entitled to require the Paying Agent to deliver to it any funds
(including any earnings received with respect thereto) which had been made
available to the Paying Agent and which have not been disbursed to holders of
Certificates, and thereafter such holders shall be entitled to look to the
Surviving Corporation (subject to abandoned property, escheat or other similar
laws) only as general creditors thereof with respect to the payment of any
Merger Consideration that may be payable upon surrender of any Certificates such
stockholder holds, as determined pursuant to this Agreement, without any
interest thereon. Notwithstanding the foregoing, neither the Surviving
Corporation nor the Paying Agent shall be liable to any person or entity in
respect of any Merger Consideration from the Exchange Fund delivered, in good
faith, to a public official pursuant to any applicable abandoned property,
escheat or similar law.

                           (e) Investment of the Exchange Fund. The Paying Agent
shall, subject to compliance with Section 2.2(a), invest any cash included in
the Exchange Fund as directed by the Surviving Corporation from time to time.
Any interest and other income resulting from such investments shall promptly be
paid to the Surviving Corporation.

                           (f) Lost Certificates.  If any Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such person of a bond in
such form and amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such Certificate,
the Paying Agent will deliver in exchange for such lost, stolen or destroyed
Certificate the applicable Merger Consideration with respect to the shares of
Company Common Stock formerly represented thereby pursuant to this Agreement.

                           (g)  Withholding  of  Tax.  The  Purchaser  shall  be
entitled to deduct and withhold from the Merger Consideration otherwise payable
pursuant to this Agreement to any former holder of shares of Company Common
Stock such amount as the Purchaser or the Paying Agent is required to deduct and
withhold pursuant to applicable rules under the Code, or any provision of state,
local or foreign law. To the extent that amounts are so withheld by the
Purchaser, such withheld amounts shall be treated for all purposes of this

                                        8



Agreement as having been paid to the former holder of shares of Company Common
Stock in respect of which such withholding was made.

                  SECTION 2.3 DISSENTING SHARES. Notwithstanding any provision
of this Agreement to the contrary, if and to the extent required by the DGCL,
shares of Company Common Stock which are issued and outstanding immediately
prior to the Effective Time and which are held by holders of such shares of
Company Common Stock who have properly exercised appraisal rights with respect
thereto (the "Dissenting Common Stock") in accordance with Section 262 of the
DGCL, shall not be exchangeable for the right to receive the Merger
Consideration, and holders of such shares of Dissenting Common Stock shall be
entitled only to such dissenters rights as are granted by Section 262 of the
DGCL unless and until such holders fail to perfect or effectively withdraw or
otherwise lose their rights to appraisal and payment under the DGCL. If, after
the Effective Time, any such holder fails to perfect or effectively withdraws or
loses such right, such shares of Dissenting Common Stock shall automatically be
converted into and become exchangeable for the right to receive the Merger
Consideration, without any interest thereon. Notwithstanding anything to the
contrary contained in this Section 2.3, if the Merger is rescinded or abandoned
or (ii) the stockholders of the Company revoke the authority to effect the
Merger, then the right of any stockholder to be paid the fair value of such
stockholder's Dissenting Common Stock pursuant to Section 262 of the DGCL shall
cease. The Company shall (i) give Parent prompt notice of any demands received
by the Company for appraisals of shares of Dissenting Common Stock, withdrawals
of such demands and any other instruments served upon the Company pursuant to
the DGCL and (ii) use its best efforts to keep Parent informed of and to allow
Parent to provide comments in respect of all negotiations and proceedings with
respect to demands for appraisal under the DGCL, and will not settle any such
proceeding without Parent's written consent, which consent shall not be
unreasonably withheld or delayed. The Company shall not, except with the prior
written consent of Parent, make any payment with respect to any demands for
appraisals or offer to settle or settle any such demands.

                  SECTION 2.4 COMPANY OPTION PLANS. Pursuant to Section 5(f) of
the Option Plan (as defined in Section 3.2), upon the exercise of any Option (as
defined in Section 3.2) at or after the Effective Time, the holder of such
Option shall be entitled to receive, in lieu of each Share as to which such
Option shall then be exercisable but on the same terms and conditions of
exercise set forth in such Option and in the Option Plan, including, without
limitation, the expiration of periods of time prior to any such Option

                                        9



becoming exercisable, an amount in cash equal to the Merger Consideration less
the exercise price per Share.

                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

                                 OF THE COMPANY

                  The Company represents and warrants to Parent and the
Purchaser as follows:

                  SECTION 3.1 ORGANIZATION. Each of the Company and its
Subsidiaries (as defined in this Section 3.1) is a corporation or other legal
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its incorporation or organization and has all requisite
corporate or other power and authority to own, lease and operate its properties
and to carry on its business as it is now being conducted, except where the
failure to be so organized, existing and in good standing or to have such power
or authority would not, and would not reasonably be expected to, have a material
adverse effect on the Company and its Subsidiaries, taken as a whole. As used in
this Agreement, the word "Subsidiary" means, with respect to any party, any
corporation or other organization, whether incorporated or unincorporated, of
which (i) such party or any other Subsidiary of such party is a general partner
(excluding such partnerships where such party or any Subsidiary of such party do
not have a majority of the voting interest in such partnership) or (ii) at
least a majority of the securities or other interests having by their terms
ordinary voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of its Subsidiaries, or by such party and one or more of its
Subsidiaries. As used in this Agreement, any reference to any event, change or
effect having a material adverse effect on or with respect to any entity (or
group of entities taken as a whole) means such event, change or effect is
materially adverse to the consolidated financial condition, businesses, assets
or results of operations of such entity (or, if used with respect thereto, of
such group of entities taken as a whole). The Company and each of its
Subsidiaries is duly qualified or licensed to do business and in good standing
in each jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so duly qualified or licensed and in
good standing would not, and would not reasonably be expected to, in the
aggregate, have a material adverse effect on the Company and its Subsidiaries,
taken as a whole. The Company has heretofore

                                       10



made available to Parent accurate and complete copies of the certificate of
incorporation and by-laws (or other similar organizational and governing
documents), as currently in effect, of the Company and each of its Subsidiaries.

                  SECTION 3.2 CAPITALIZATION. (a) The authorized capital stock
of the Company consists of 100,000,000 shares of Company Common Stock. As of the
date hereof, (i) 27,580,260 shares of Company Common Stock are issued, (ii)
20,688,971 shares of Company Common Stock are outstanding, (iii) 6,891,289
shares of Company Common Stock are held as treasury stock, (iv) 3,000,000 Shares
are reserved for issuance pursuant to the Company's Stock Option Plan adopted in
October 1991, as amended (the "Option Plan"), and (v) 2,152,100 employee stock
options to purchase 2,152,100 Shares ("Options") granted under the Option Plan
are outstanding. Schedule 3.2 sets forth true and complete information with
respect to each holder of Options regarding the current exercise price, the date
of grant, the term, the vesting schedule, whether the holder is an employee of
the Company on the date of this Agreement, and the number of Options granted.
All the outstanding shares of the Company Common Stock are, and all Shares which
may be issued pursuant to the exercise of outstanding Options when issued in
accordance with the respective terms thereof shall be, duly authorized, validly
issued, fully paid and non-assessable and not subject to preemptive rights.
There are no bonds, debentures, notes, or other indebtedness having general
voting rights (or convertible into securities having such rights) ("Voting
Debt") of the Company or any of its Subsidiaries issued and outstanding. No
restrictions or conditions to the exercise or the sale of the Options exist
other than as set forth in the Option Plan or any option agreement entered into
in connection with grants of Options under the Option Plan. The vesting of any
Option shall not accelerate solely as a consequence of the Merger or any of the
other Transactions contemplated by this Agreement. All outstanding Options have
been issued pursuant to registration under or valid exemptions from the
Securities Act (as defined in Section 3.5) and all applicable state securities
law. Except as set forth above, on Schedule 3.2 and for the transactions
contemplated by this Agreement, as of the date hereof, (x) there are no shares
of capital stock of the Company authorized, issued, reserved for issuance or
outstanding, (y) the Company and its Subsidiaries have not issued or, except as
provided in Section (6)(a) of the Option Plan, agreed to issue any warrants,
options, equity equivalents, interests in ownership or earnings of the Company
or other similar equity rights (including phantom stock or stock appreciation
rights), pre-emptive rights, agreements, arrangements or commitments of any
character obligating the Company or any of its Subsidiaries to issue, transfer
or sell or cause to be issued, transferred or sold any shares of capital stock
or Voting Debt of, or other equity interest in, the Company or any of its
Subsidiaries or

                                       11



securities convertible into or exchangeable for such shares or equity interests
and (z) there are no outstanding contractual obligations of the Company or any
of its Subsidiaries to repurchase, redeem or otherwise acquire any Shares, or
capital stock of the Company or any Subsidiary or affiliate of the Company.

                           (b) Exhibit 21 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2001 includes a list of all of the
Subsidiaries of the Company. All the outstanding shares of capital stock of, or
other equity interests in, each Subsidiary (i) have been duly authorized,
validly issued and are fully paid and nonassessable, (ii) are owned directly or
indirectly by the Company, free and clear of all pledges, claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens") and (iii) are free from any contractual restriction on
the right to vote, sell or otherwise dispose of such capital stock or other
ownership interests. Other than the Company's Subsidiaries, the Company does not
directly or indirectly beneficially own any equity securities in any other
entity. To its knowledge, other than as set forth in the Company SEC Documents
(as defined in Section 3.5) as of the date hereof, no person or "group"
beneficially owns more than 5% of the outstanding Company Common Stock with the
terms "beneficially owns" and "group" when used in this Agreement having the
meanings ascribed to them under Rule 13d-3 and Rule 13d-5 under the Exchange
Act.

                           (c)  There  are  no  stockholder  agreements,  voting
trusts or other agreements or understandings to which the Company or any of its
Subsidiaries is a party with respect to the voting or registration of the
capital stock of the Company or any of its Subsidiaries. None of the Company or
its Subsidiaries is required to redeem, repurchase or otherwise acquire shares
of capital stock of the Company, or any of its Subsidiaries, respectively, as a
result of the transactions contemplated by this Agreement.

                  SECTION 3.3 AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY
ACTION. (a) The Company has full corporate power and authority to execute,
deliver and perform its obligations under this Agreement and the other
agreements to be executed by the Company as contemplated hereunder
(collectively, the "Closing Documents") and, subject, in the case of the Merger,
to obtaining the vote of a majority of the outstanding shares of Company Common
Stock in favor of the adoption of this Agreement (the "Required Company Vote").
The execution, delivery and performance by the Company of this Agreement and the
other Closing Documents, and the consummation by it of the Transactions, have
been duly authorized by the Company Board and, except for obtaining the approval
of its stockholders as contemplated by Section 1.6 hereof, no other corporate

                                       12



action on the part of the Company is necessary to authorize the execution and
delivery by the Company of this Agreement and the other Closing Documents and
the consummation by it of the Transactions. This Agreement has been duly
executed and delivered by the Company and assuming due and valid authorization,
execution and delivery hereof by the other parties thereto, is a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.

                           (b) The Special Committee has unanimously recommended
to the Company Board that the Company enter into this Agreement. The Company
Board, having considered and acting subsequent to the recommendation of the
Special Committee, has approved and taken all corporate action required to be
taken by the Company Board for the consummation of the transactions contemplated
by this Agreement and has resolved (i) that this Agreement and the Transactions,
taken together, are advisable and fair to, and in the best interests of, the
Company and its stockholders; and (ii) to recommend that the stockholders of the
Company approve and adopt this Agreement. The Company Board has directed that
this Agreement be submitted to the stockholders of the Company for adoption by
such stockholders.

                  SECTION 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as
set forth on Schedule 3.4 and except for filings, permits, authorizations,
consents and approvals as may be required under, and other applicable
requirements of, the Exchange Act, the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act"), state or foreign laws relating to takeovers, state
securities or blue sky laws and the DGCL, neither the execution, delivery or
performance of this Agreement by the Company nor the consummation by the
Company of the Transactions contemplated hereby nor compliance by the Company
with any of the provisions hereof shall (i) conflict with or result in any
breach of any provision of the certificate of incorporation or by-laws or
similar organizational documents of the Company or of any of its Subsidiaries,
(ii) require on the part of the Company or, to the extent required under any
agreement between the Company and the Company Franchisees (as defined in Section
3.20), the Company Franchisees, any filing with, or permit, authorization,
consent or approval of, any Governmental Entity (as defined in Section 3.8),
(iii) result in a violation or breach of, or constitute (with or without due
notice or lapse

                                       13



of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or loss of benefit or creation of any Lien) under,
any of the terms, conditions or provisions of any Material Contract (as defined
in Section 3.15) or (iv) violate any judgment, order, writ, injunction, decree,
statute, rule or regulation applicable to the Company or any of its
Subsidiaries, or to the Company's knowledge, any judgment, order or decree
applicable to Company Franchisees or any of their properties or assets,
excluding from the foregoing clauses (ii), (iii) and (iv) where the failure to
obtain such permits, authorizations, consents or approvals or to make such
filings, or the existence of such violations, breaches or defaults, would not,
and would not reasonably be expected to, individually or in the aggregate, have
a material adverse effect on the Company and its Subsidiaries, taken as a whole,
and would not materially impair or delay the ability of the Company to
consummate the transactions contemplated hereby.

                  SECTION 3.5 SEC REPORTS AND FINANCIAL STATEMENTS. The Company
has filed with the SEC all forms, reports, schedules, statements and other
documents required to be filed by it since June 30, 1999 (as such documents have
been amended since the time of their filing, collectively, the "Company SEC
Documents"). As of their respective dates or, if amended, as of the date of the
last such amendment, the Company SEC Documents, including, without limitation,
any financial statements or schedules included therein, complied in all material
respects with the Securities Act of 1933, as amended (the "Securities Act"), or
the Exchange Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such Company SEC Documents, and did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the Company's Subsidiaries is required to file any forms,
reports or other documents with the SEC pursuant to Sections 12 or 15 of the
Exchange Act. The financial statements of the Company included in the Company
SEC Documents have been prepared from, and are in accordance with, the books and
records of the Company and its consolidated subsidiaries, comply in all
material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with United States generally accepted accounting principles ("GAAP")
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position and the consolidated results of operations and cash flows of the
Company and its consolidated subsidiaries as at the dates thereof or for the
periods presented therein.

                                       14



                  SECTION 3.6 NO UNDISCLOSED LIABILITIES. Except (a) as
disclosed in the Company SEC Documents or on Schedule 3.6, (b) for liabilities
and obligations incurred in the ordinary course of business since the date of
the most recent financial statements included in the Company SEC Documents, and
(c) for liabilities and obligations incurred in connection with the consummation
of the Transactions, (x) since September 30, 2001, neither the Company nor any
of its Subsidiaries has incurred any material liabilities required to be
reflected on a consolidated balance sheet of the Company and its Subsidiaries
(including the notes thereto) prepared in accordance with GAAP and (y) neither
the Company nor any of its Subsidiaries has any liabilities which would, or
would reasonably be expected to, have a material adverse effect on the Company
and its Subsidiaries, taken as a whole.

                   SECTION 3.7 ABSENCE OF CERTAIN CHANGES. Except as disclosed
in the Company SEC Documents or on Schedule 3.7, since June 30, 2001, the
Company and its Subsidiaries have conducted their respective businesses in the
ordinary course of business and there has not been (i) any event, change or
effect that has resulted, or would reasonably be expected to result, in a
material adverse effect on the Company and its Subsidiaries, taken as a whole;
(ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to the equity
interests of the Company or any Subsidiary of the Company (other than a
wholly-owned Subsidiary); (iii) any change by the Company or any of its
Subsidiaries in accounting principles or methods, except insofar as may be
required by GAAP; (iv) any split, combination, or reclassification of any of the
Company's capital stock or any redemption or other acquisition by the Company or
any of its Subsidiaries of any shares of its capital stock, or any issuance or
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for shares of the Company's capital stock, except for
issuances under the Company's Option Plan; (v) (A) any granting by the Company
or any of its Subsidiaries to any employee, director or executive officer of the
Company or any Subsidiary of any increase in cash compensation, bonus or other
benefits, except for normal increases in the ordinary course of business, (B)
any granting by the Company or any of its Subsidiaries to any such employee,
director or executive officer of any increase in severance or termination pay,
except in the ordinary course of business or (C) any entry by the Company or any
of its Subsidiaries into, or any amendment of, any employment, deferred
compensation, consulting, severance, termination or indemnification agreement
with any such employee, director or executive officer other than in the ordinary
course of business; (vi) any Tax (as defined in Section 3.12) election that
individually or in the aggregate would, or would reasonably be expected to, have
a material adverse effect on the Company and its

                                       15



Subsidiaries, taken as a whole, or on any of its Tax attributes, or any
settlement or compromise of any material Tax liability other than settlements by
the Company of Tax disputes referenced on Schedule 3.12; (vii) any amendment to
any term of any outstanding security of the Company or any of its Subsidiaries
that would materially increase the obligations of the Company or such
Subsidiaries under such security; (viii) any entry into any agreement,
commitment or transaction by the Company or any of its Subsidiaries which would
require the expenditure by the Company of more than $250,000 in any twelve-
month period, except for agreements, commitments or transactions entered into in
the ordinary course of business in connection with purchases of food or related
products or advertising services or products, including, without limitation,
media purchases; (ix) (A) any incurrence or assumption by the Company or any
Subsidiary of any indebtedness for borrowed money in an aggregate amount
exceeding $100,000 (other than any renewals, replacements or extensions that do
not increase the aggregate commitments thereunder) or (B) any guarantee,
endorsement, or other incurrence or assumption of liability in an aggregate
amount exceeding $100,000 (whether directly, contingently or otherwise) by the
Company or any of its Subsidiaries for the obligations of any other Person
(other than any wholly owned Subsidiary of the Company); other than in the case
of (A) or (B) (x) in the ordinary course of business or (y) in connection with
(1) any acquisition or capital expenditure permitted by Section 5.1 or (2) the
Transactions; (x) any creation or assumption by the Company or any of its
Subsidiaries of any Lien on any asset of the Company or any of its Subsidiaries
other than Permitted Liens (as defined herein) or those Liens created or assumed
in the ordinary course of business consistent with past practice; (xi) any
making of any loan, advance or capital contribution to or investment in any
Person by the Company or any of its Subsidiaries other than loans, advances, or
capital contributions to or investments in wholly owned Subsidiaries of the
Company or in Company Franchisees; (xii) (A) any contract or agreement entered
into by the Company or any of its Subsidiaries on or prior to the date hereof
and after July 1, 1998 relating to any acquisition or disposition of any
business involving a purchase or sale price in excess of $50,000 in the
aggregate (other than loan purchases or sales and other than acquisitions of
franchises of the Company or a Subsidiary of the Company) or (B) any
modification, amendment, assignment, termination or relinquishment by the
Company or any of its Subsidiaries on or prior to the date hereof of any
contract which requires payments in excess of $250,000 in any twelve-month
period or is not terminable upon six (6) months' or less notice without penalty
in accordance with its terms; (xiii) any settlement or compromise of any
individual claim, action, suit, litigation, proceeding, arbitration,
investigation, audit or controversy requiring a payment in excess of $25,000;
(xiv) any loss, casualty or damage (whether or not covered by insurance) to the
assets of the Company or

                                       16



any of its Subsidiaries in excess of $50,000; (xv) any entering into of any
license, distribution, marketing or sales agreement, in each case on an
exclusive basis, which involves payments in excess of $50,000 in any
twelve-month period and is not terminable upon six (6) months' or less notice
without penalty in accordance with its terms, other than such of the foregoing
that are entered into in the ordinary course of business in connection with
purchases of food or related products or advertising services or products,
including, without limitation, media purchases; or (xvi) any agreement to do any
of the foregoing. As used in this Agreement, "Permitted Liens" means (a) Liens
for Taxes (i) not yet due and payable or (ii) being contested in good faith, if
a reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made therefor, (b) statutory liens of landlords, liens of
carriers, warehouse person, mechanics and other liens imposed by law incurred in
the ordinary course of business, (c) Liens incurred or deposits made in
connection with workers' compensation, unemployment insurance and other similar
types of social security programs or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return of money bonds and similar obligations, in
each case in the ordinary course of business, consistent with past practice, (d)
purchase money liens incurred in the ordinary course of business, consistent
with past practice, (e) easements, rights-of-way, restrictions and other similar
charges of encumbrances, in each case, which do not materially interfere with
the ordinary conduct of business of the Company and its Subsidiaries and do not
materially detract from the value of the property to which such encumbrance
relates; (f) other Liens incurred in the ordinary course of business; (g) Liens
for indebtedness or liabilities permitted to be created hereunder; and (h) other
liens that would not result in a material liability of the Company and its
Subsidiaries, taken as a whole.

                  SECTION 3.8 EMPLOYEE BENEFIT PLANS; ERISA. (a) Schedule 3.8
sets forth a true and complete list of all "employee benefit plans" within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and all other employee benefit arrangements or payroll
practices, including, without limitation, bonus, profit sharing, consulting or
other compensation arrangements, pension, severance, deferred compensation,
incentive, equity or equity-based compensation, stock purchase, sick leave,
vacation pay, health, life and disability plans, together with any employment,
termination or change in control agreements maintained, sponsored or contributed
to by the Company and Subsidiaries (each a "Benefit Plan"). True, correct and
complete copies of the following documents with respect to each of the Benefit
Plans have been made available or delivered to Parent by the Company or its
Subsidiaries: (i) any plans and related trust documents, and amendments thereto;
(ii) the most recent Forms 5500 and

                                       17



schedules thereto; (iii) the last IRS (as defined herein) determination letter;
(iv) the most recent financial statements and actuarial valuations; (v) summary
plan descriptions; (vi) written communications to employees relating to the
Benefit Plans solely in the event that the communication specifies rights and
benefits not described in the Benefit Plan document and such communication
creates a material liability; and (vii) written descriptions of all non-written
agreements relating to the Benefit Plans. The only trades or businesses (whether
or not incorporated) since January 1, 1994, which are or have been under common
control, or which are or have ever been treated as a single employer, with the
Company or its Subsidiaries are the Company and its Subsidiaries. Except for
noncompliance and any failures to maintain and operate any Benefit Plan as would
not, individually or in the aggregate, result in a material liability to the
Company or its Subsidiaries, taken as a whole: (i) each Benefit Plan has been
maintained and operated in accordance with its terms and with applicable law,
including, without limitation, ERISA, the Internal Revenue Code of 1986, as
amended (the "Code") and the COBRA (as defined herein); (ii) each Benefit Plan
intended to qualify under Section 401(a) of the Code and each related trust
intended to be exempt from federal income tax under Section 501 of the Code (or
similar provisions for Tax-registered or Tax-favored plans of foreign
jurisdictions) has received a determination letter from the United States
Internal Revenue Service (the "IRS") (or, if applicable, any required approvals
of foreign governmental authorities for Tax-registered or Tax-favored plans of
foreign jurisdictions) to the effect that the Benefit Plan is qualified under
Section 401(a) of the Code (or similar provisions for Tax-registered or
Tax-favored plans of foreign jurisdictions), which may be a favorable
determination letter issued to a prototype sponsor, or has time remaining within
which to apply for a determination letter; (iii) no claim, lawsuit, arbitration
or other action has been threatened, asserted or instituted against any Benefit
Plan (other than non-material routine claims for benefits, and appeals of such
claims); and (iv) no Benefit Plan is under audit or investigation by the IRS,
the United States Department of Labor or any other Governmental Entity. No
Benefit Plan is a "multiemployer plan," as defined in Section 3(37) of ERISA. As
used in this Agreement, "Governmental Entity" means any federal, state, local,
municipal or foreign or other government or subdivision, branch, department or
agency thereof or any governmental or quasi-governmental authority of any
nature, including any court or other tribunal.

                  (b) All contributions (including all employer contributions
and employee salary reduction contributions) required to have been made under
any of the Benefit Plans or by law, to any funds or trusts established
thereunder or in connection therewith have been made by the due date thereof
(including any valid extension) or have been accrued on

                                       18



the balance sheet of the Company as of September 30, 2001 included in the
Company SEC Documents to the extent required under GAAP.

                 (c) No Benefit Plan is subject to Title IV of ERISA or Section
412 of the Code.

                  (d) Neither the Company nor any of its Subsidiaries nor, to
the knowledge of the Company or its Subsidiaries, any "party in interest" or
"disqualified person" with respect to the Benefit Plans has engaged in a
non-exempt "prohibited transaction" within the meaning of Section 4975 of the
Code or Section 406 of ERISA.

                  (e) None of the Benefit Plans which are "welfare benefit
plans" within the meaning of Section 3(1) of ERISA provide for continuing
benefits or coverage for any participant or any beneficiary of a participant
post-termination of employment except as may be required under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and at the
expense of the participant or the participant's beneficiary.

                  (f) Except as described on Schedule 3.8 or in the items listed
thereon, neither the execution and delivery of this Agreement nor the
consummation of the Transactions will (i) result in any payment becoming due to
any employee (current, former or retired) of the Company or any of its
Subsidiaries, (ii) increase any benefits otherwise payable under any Benefit
Plan or (iii) result in the acceleration of the time of payment or vesting of
any such benefits.

                  (g) Neither the Company nor any of its Subsidiaries has any
contract, plan or commitment to create any additional Benefit Plan or to modify
any existing Benefit Plan.

                  (h) Except with respect to the Option Plan, no stock or other
security issued by the Company or any of its Subsidiaries forms or has formed a
material part of the assets of any Benefit Plan.

                  (i) Any individual who performs services for the Company or
any of its Subsidiaries (other than through a contract with an organization
other than such individual) and who is not treated as an employee for federal
income tax purposes by the Company or any of its Subsidiaries is not an employee
for such purposes, except where treatment of such person as an employee would
not result in a material liability to the Company and its Subsidiaries, taken as
a whole.

                                       19



                  (j) With respect to each Benefit Plan that covers employees
outside of the United States ("Foreign Plan"), except as would not result in a
material liability to the Company and its Subsidiaries, taken as a whole:

                           (i) all employer and employee  contributions  to each
Foreign Plan required by law or by the terms of such Foreign Plan have been
made, or, if applicable, accrued in accordance with normal accounting practices.

                           (ii) the fair  market  value  of the  assets  of each
funded Foreign Plan, the liability of each insurer for any Foreign Plan funded
through insurance or the book reserve established for any Foreign Plan, together
with any accrued contributions, is sufficient to procure or provide for the
accrued benefit obligations, as of the Effective Time, with respect to all
current or former participants in such plan according to the actuarial
assumptions and valuations most recently used to determine employer
contributions to such Foreign Plan and no transaction contemplated by this
Agreement shall cause such assets or insurance obligations to be less than such
benefit obligations; and

                           (iii) each Foreign Plan required to be registered has
been registered and has been maintained in good standing with applicable
regulatory authorities.

                  SECTION 3.9 LABOR MATTERS. Except as set forth in Schedule
3.9, (i) to the knowledge of the Company, none of the employees of the Company
or its Subsidiaries (the "Employees") is represented in his or her capacity as
an employee of the Company by any labor organization; (ii) the Company and its
Subsidiaries have not recognized any labor organizations nor has any labor
organization been elected as the collective bargaining agent of any employees,
nor has the Company entered into any collective bargaining agreement or union
contract recognizing any labor organization as the bargaining agent of any
Employees; (iii) to the knowledge of the Company, there is no union organization
activity involving any of the Employees pending; (iv) there is no picketing
pending, or to the knowledge of the Company, threatened, and there are no
strikes, slowdowns, work stoppages, or lockouts involving any of the Employees
pending, or to the knowledge of the Company, threatened that individually or in
the aggregate would result in a material liability; and (v) there has been no
"mass layoff" or "plant closing" as defined by the federal Worker Adjustment and
Retraining Notification Act ("WARN") with respect to the Company within the six
(6) months prior to the Effective Time.

                                       20



                  SECTION 3.10 LITIGATION. Except as disclosed in the Company
SEC Documents or on Schedule 3.10, (i) there is no suit, action, demand,
injunction, order, decree, investigation or proceeding pending or, to the
knowledge of the Company or its Subsidiaries, threatened against the Company or
any of its Subsidiaries or any of their properties or assets which would have,
or would reasonably be expected to have, a material adverse effect on the
Company and its Subsidiaries, taken as a whole, or would be reasonably likely to
impair or delay the ability of the Company to perform its material obligations
under this Agreement and (ii) to the knowledge of the Company, there is no
action, suit, proceeding or investigation pending or threatened against any
current or former officer, director, employee or agent of the Company or any of
its Subsidiaries (in his or her capacity as such) which does or would reasonably
be expected to give rise to a claim for contribution or indemnification against
the Company or any of its Subsidiaries, except, in each case, as would not, and
would not reasonably be expected to, have a material adverse effect on the
Company and its Subsidiaries, taken as a whole.

                  SECTION 3.11 PERMITS; NO DEFAULT; COMPLIANCE WITH APPLICABLE
LAWS. Except as set forth on Schedule 3.11, (a) the Company and its Subsidiaries
hold all permits, licenses, variances, exemptions, orders, registrations and
approvals of all Governmental Entities which are required for the operation of
the business of the Company and its Subsidiaries as currently conducted
(collectively, the "Company Permits"), except where the failure to have any such
Company Permit, individually or in the aggregate, would not, and would not
reasonably be expected to, cause a material adverse effect on the Company and
its Subsidiaries, taken as a whole, and (b) neither the Company nor any of its
Subsidiaries is in default or violation of any term, condition or provision of
(i) its respective certificates of incorporation or by-laws or similar
organizational documents, (ii) any Material Contract or any agreement with any
Company Franchisee listed on Schedule 3.20, (iii) any federal, state, local or
foreign statute, law, ordinance, rule, regulation, judgment, decree, order,
concession, grant or franchise or other approval applicable to the Company or
any of its Subsidiaries, including, without limitation, in respect of employment
and labor matters, or (iv) any Company Permits, excluding from the foregoing
clauses (ii), (iii) and (iv), defaults or violations which would not, and would
not reasonably be expected to, have a material adverse effect on the Company and
its Subsidiaries, taken as a whole.

                  SECTION 3.12  TAXES.  Except as set forth on Schedule 3.12:

                           (a) The Company and its Subsidiaries or any
consolidated, combined, unitary or affiliated group ("Affiliated Group") of
which the Company or any of


                                       21



its Subsidiaries is, or was, a member have (i) duly filed (or there has been
filed on their behalf) with the appropriate governmental authorities all income,
franchise and other material Tax Returns (as defined in Section 3.12(q))
required to be filed by them on or prior to the date hereof, and such Tax
Returns are true, correct and complete in all material respects, and (ii) duly
paid in full or made adequate provision in accordance with GAAP (or there has
been paid or provision has been made on their behalf) for the payment of all
Taxes (as defined in Section 3.12(q)) due with respect to such Tax Returns.

                           (b) No federal,  state or local audits are  presently
pending or, to the knowledge of the Company, threatened with regard to any Tax
Return of the Company or its Subsidiaries, or any Affiliated Group. All
deficiencies asserted or assessments made as a result of any examinations by any
taxing authority of the Tax Returns of the Company, any Subsidiary or Affiliated
Group have been fully paid.

                           (c) There are no  outstanding  consents to extend the
statutory period of limitations applicable to the assessment of any income,
franchise or other material Taxes or any deficiencies of Taxes asserted against
the Company or any of its Subsidiaries or any Affiliated Group, and no power of
attorney granted by either the Company or any of its Subsidiaries or any
Affiliated Group with respect to any Taxes is currently in force.

                           (d) Neither  the Company nor any of its  Subsidiaries
is a party to any agreement providing for the allocation or sharing of Taxes.

                           (e) The Company and its  Subsidiaries  have  complied
with all applicable laws, rules and regulations relating to the payment and
withholding of Taxes and have duly and timely withheld from employee salaries,
wages and other compensation and have paid over to the appropriate taxing
authorities all amounts required to be so withheld and paid over for all periods
under all applicable laws, except where failure to comply would not result in a
material liability of the Company and its Subsidiaries, taken as a whole.

                           (f)  Purchaser  has had access to complete  copies of
(A) all income or franchise Tax Returns of the Company and its Subsidiaries (or,
in the case of Tax Returns filed for an Affiliated Group, the portion of such
consolidated Tax Returns relating to the Company or any Subsidiary) for the
years ending June 30, 1998, June 30, 1999 and June 30, 2000 and (B) any audit
report issued within the last three years relating to any income, franchise or
other material Taxes due from or with respect to the Company, any Subsidiary or
Affiliated Group. Listed on Schedule 3.12 are all taxable years for which

                                       22



examinations are ongoing or statute of limitations periods have been extended in
respect of United States federal Tax Returns.

                           (g) Since July 1,  1997,  no claim has been made by a
taxing authority in a jurisdiction where the Company, any Subsidiary or
Affiliated Group does not file Tax Returns that it is or may be subject to
taxation by that jurisdiction.

                           (h) Since July 1, 1997,  neither  the Company nor any
Subsidiary or Affiliated Group has (A) filed a consent pursuant to Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code), (B) agreed to or is required to make any adjustments
pursuant to Section 481(a) of the Code or any similar provision of state, local
or foreign law by reason of a change in accounting method or has any knowledge
that the IRS has proposed any such adjustment or change in accounting method, or
has any application pending with any taxing authority requesting permission for
any change in accounting method, (C) executed or entered into a closing
agreement pursuant to Section 7121 of the Code or any similar provision of
state, local or foreign law, or (D) requested any extension of time within which
to file any income, franchise or other material Tax Return, which Tax Return has
since not been filed.

                           (i) Since  July 1,  1997,  no  property  owned by the
Company or any Subsidiary is (i) property required to be treated as being owned
by another Person pursuant to the provisions of Section 168(f)(8) of the
Internal Revenue Code of 1954, as amended and in effect immediately prior to the
enactment of the Tax Reform Act of 1986, (ii) "tax-exempt use property" within
the meaning of Section 168(h)(1) of the Code or (iii) "tax-exempt bond financed
property" within the meaning of Section 168(g) of the Code.

                           (j) Since  January 1, 1997,  the Company has not been
and the Company does not anticipate becoming, a "United States real property
holding company" within the meaning of Section 897 of the Code.

                           (k)  There  is  no  contract,   agreement,   plan  or
arrangement between the Company or its Subsidiaries and any Employee covering
any person that, individually or collectively, would give rise to the payment of
any amount that would not be deductible by reason of Section 280G of the Code,
or would constitute compensation that is not deductible by reason of the
limitation set forth in Section 162(m) of the Code.

                                       23



                           (l) Since  July 1,  1997,  the  Company  has not been
subject to any private letter ruling of the IRS or comparable rulings of other
taxing authorities.

                           (m) There are no Liens other than Permitted  Liens as
a result  of any  unpaid  Taxes  upon any of the  assets of the  Company  or any
Subsidiary.

                           (n) Since July 1, 1997 and, to the  knowledge  of the
Company, prior thereto, neither the Company, any Subsidiary, nor any Affiliated
Group reported any item on any Tax Return in a manner which (A) if not sustained
would be reasonably likely, absent disclosure, to give rise to a penalty for
substantial understatement of federal income Tax under Section 6662 of the Code
(or any predecessor statute or any corresponding provision of any such
predecessor statute, or state, local, or foreign Tax law), and (B) has not
adequately been disclosed on such Tax Return in accordance with Section
6662(d)(2)(B) of the Code (or corresponding provision of any such predecessor
statute, or state, local, or foreign Tax law) and in each case where any such
item, if not sustained, would, or would reasonably be expected to, result in a
material liability of the Company and its Subsidiaries, taken as a whole.

                           (o)  The Company has not constituted either a
"distributing corporation" or a "controlled corporation" within the meaning of
Section 355(a)(1)(A) of the Code in a distribution qualifying for tax free
treatment under Section 355 of the Code (A) in the two years prior to the date
of this Agreement or (B) in a distribution that could otherwise constitute part
of a "plan" or "series of transactions" (within the meaning of Section 355(e) of
the Code) in conjunction with this Agreement.

                           (p) Other than with  respect to Taxes of the  Company
and its Subsidiaries, neither the Company nor any of its Subsidiaries is liable
for Taxes of any other person under Treasury Regulation Section 1.1502-6 (or any
similar provision of state, local or foreign Tax law).

                           (q) For  purposes of this  Agreement,  "Taxes"  shall
mean any and all taxes, charges, fees, levies or other assessments, including,
without limitation, income, gross receipts, excise, real or personal property,
sales, withholding, social security, occupation, use, service, service use,
license, net worth, payroll, franchise, transfer and recording taxes, fees and
charges, imposed by the IRS or any taxing authority (domestic or foreign),
including, without limitation, any state, county, local or foreign government
or any subdivision or taxing agency thereof (including a United States
possession)), whether computed on a

                                       24



separate, consolidated, unitary, combined or any other basis; and such term
shall include any interest, penalties or additional amounts attributable to, or
imposed upon, or with respect to, any such taxes, charges, fees, levies, or
other assessments. For purposes of this Agreement, "Tax Return" shall mean any
report, return, document, declaration, or other information or filing required
to be supplied to any taxing authority or jurisdiction (domestic or foreign)
with respect to Taxes.

                  SECTION 3.13  REAL PROPERTY.

                           (a) Except as set forth on Schedule 3.13(a),  neither
the Company nor any of its Subsidiaries owns in fee any real property. Each of
the Company and its Subsidiaries has good and valid title to each parcel of real
property owned by it free and clear of all Liens, except (A) Taxes and general
and special assessments not in default and payable without penalty and interest,
and (B) other Liens which do not materially interfere with the Company's or any
of its Subsidiaries' use and enjoyment of such real property or materially
detract from or diminish the value thereof.

                           (b)  Schedule  3.13(b)  sets  forth the  location  of
premises occupied by the Company or its Subsidiaries pursuant to leases,
subleases and other agreements (the "Real Property Leases") under which the
Company or any of its Subsidiaries uses or occupies or has the right to use or
occupy, now or in the future, any real property. Parent has had access to
written copies of all Real Property Leases (and all modifications, amendments
and supplements thereto and all side letters to which the Company or any of its
Subsidiaries is a party affecting the obligations of any party thereunder) and
such documents constitute and represent the Company's and its Subsidiaries'
liabilities and obligations under Real Property Leases in all material respects.
Except as set forth on Schedule 3.13(b), to the knowledge of the Company, each
Real Property Lease whose term has not expired constitutes the valid and legally
binding obligation of the Company or the applicable Subsidiary of the Company,
enforceable in accordance with its terms, and is in full force and effect. To
the knowledge of the Company, all rent payable by the Company and its
Subsidiaries as tenants under each Real Property Lease whose term has not
expired has been paid when due. The Company has not received any written notice
of termination or uncured default of a material nature on the part of the
Company or any such Subsidiary in all cases other than such circumstances that
would not, and would not reasonably be expected to, cause a material adverse
effect on the Company and its Subsidiaries, taken as a whole. Each of the
Company and its Subsidiaries has a good and valid leasehold interest in each
parcel of real property leased by it pursuant to unexpired written Real Property

                                       25



Leases free and clear of all Liens, except (A) Taxes and general and special
assessments not in default and payable without penalty and interest, and (B)
other Liens which do not materially interfere with the Company's or any of its
Subsidiaries' use and enjoyment of such real property or materially detract from
or diminish the value thereof.

                           (c) Except as set forth on Schedule 3.13(c), no party
to any Real Property Lease has given written notice to the Company or any of its
Subsidiaries of or made a claim in writing against the Company or any of its
Subsidiaries with respect to any material breach or default thereunder.

                  SECTION 3.14  ENVIRONMENTAL MATTERS.

                           (a) Except (i) as set forth in Schedule 3.14 and (ii)
as set forth in the Company SEC Documents:

                                (i) since July 1, 1997, neither the Company nor
                any of its Subsidiaries has received any written communication
                from any person or entity (including any Governmental Entity)
                stating or alleging that the Company or any Subsidiary is a
                potentially responsible party under an Environmental Law (as
                defined in Section 3.14(b)) with respect to any actual or
                alleged environmental contamination; to the Company's knowledge,
                no Governmental Entity is conducting or has conducted any
                environmental remediation or environmental investigation which
                could reasonably be expected to result in liability for the
                Company or any Subsidiary under any Environmental Law; and
                neither the Company nor any Subsidiary has received any request
                for information under any Environmental Law from any
                Governmental Entity with respect to any actual or alleged
                environmental contamination, except, in each case, for
                communications, environmental remediation and investigations and
                requests for information which would not, and would not
                reasonably be expected to, individually or in the aggregate,
                have a material adverse effect on the Company and its
                Subsidiaries, taken as a whole; and

                                (ii) since July 1, 1997, the Company has not
                received any written communication, notice, notification,
                demand, request for information, citation, summons, or order
                from any person or entity (including any Governmental Entity)
                stating or alleging that the Company may have violated any
                Environmental Law, or that the Company has caused or contributed
                to any environmental contamination that has caused any property
                damage or personal injury under any

                                       26



                Environmental Law, except, in each case, for statements and
                allegations of violations and statements and allegations of
                responsibility for property damage and personal injury which
                would not, and would not reasonably be expected to, individually
                or in the aggregate, cause a material adverse effect on the
                Company and its Subsidiaries, taken as a whole.

                                (iii) since July 1, 1997, the Company has not
                received written notice that a Hazardous Substance (as defined
                herein) has been discharged, disposed of, dumped, injected,
                pumped, deposited, spilled, leaked, emitted or released at, on
                or under any property owned, leased or operated by the Company
                or any of its Subsidiaries in violation of an Environmental Law,
                which circumstance, individually or in the aggregate, would
                cause the Company or its Subsidiaries to have liability which
                would, or would reasonably be expected to, have a material
                adverse effect on the Company and its Subsidiaries, taken as a
                whole.

                           (b) For purposes of this Section 3.14, "Environmental
Law" means all applicable foreign, state, federal and local laws, regulations
and rules, including common law, judgments, decrees and orders relating to
pollution, the preservation of the environment, contaminants, wastes or
chemicals or toxic, radioactive, ignitable, corrosive, reactive or otherwise
Hazardous Substances, wastes or materials, and the release of materials into the
environment.

                           (c) For  purposes of this  Section  3.14,  "Hazardous
Substances" means any pollutant, contaminant, waste or chemical or any toxic,
radioactive, corrosive, reactive, or otherwise hazardous substance, waste or
material, or any substance having any constituent elements displaying any of the
foregoing characteristics, including, without limitation, petroleum, its
derivatives, byproducts, and other hydrocarbons, or. any substance, waste or
material regulated under any Environmental Laws.

                  SECTION 3.15  MATERIAL CONTRACTS.

                           (a)  Except  as set  forth on  Schedule  3.15 or with
respect to agreements filed as exhibits to the Company SEC Documents (the
"SEC-Filed Agreements"), neither the Company nor any Subsidiary is a party to
any (i) (A) employment, severance, personal services or consulting contract
("Personal Service Contract") which requires payments in any twelve-month period
in excess of $100,000 and may not be canceled without penalty on notice to the
other party of less than six months, or

                                       27



(B) non-competition contract or (C) other contract requiring the Company to
indemnify an employee, director or officer of the Company or a Subsidiary
(including, without limitation, any contract to which the Company or any of its
Subsidiaries is a party involving Employees but excluding any Personal Service
Contract); (ii) licensing, merchandising, product design or development or
distribution agreement; (iii) contract granting a right of first refusal or
first negotiation; (iv) partnership or joint venture agreement; (v) agreement
for the acquisition, sale or lease of material properties or assets of the
Company (by merger, purchase or sale of assets or stock or otherwise) entered
into since July 1, 1997, excluding any agreements for the purchase and sale of
franchises of the Company or its Subsidiaries; (vi) contract or agreement with
any Governmental Entity; (vii) loan or credit agreement, mortgage, indenture or
other agreement or instrument (other than leases entered into the ordinary cause
of business) evidencing indebtedness for borrowed money by the Company or any of
its Subsidiaries or any such agreement pursuant to which indebtedness for
borrowed money may be incurred; (viii) agreement that purports to limit, curtail
or restrict the ability of the Company or any of its Subsidiaries to compete in
any geographic area or line of business (excluding any contracts granting
franchises by the Company or its Subsidiaries which are listed on Schedule
3.20(b) (the "Franchise Agreements")); (ix) contract or agreement that would be
required to be filed as an exhibit to a Form 10-K filed by the Company with the
SEC on the date hereof; (x) manufacturing or distributorship agreement; or (xi)
commitment or agreement to enter into any of the foregoing; in each of the cases
described in (ii), (v), (x) or, to the extent relating to such clauses, (xi)
above where such agreement or contract requires payments in any twelve month
period in excess of $250,000 and may not be canceled without penalty on notice
to the other party of less than six (6) months (and in all cases excluding any
agreement or contract entered into in the ordinary course of business in
connection with purchases of food or related products or advertising services or
products, including without limitation, media purchases) (together with the
Franchise Agreements and the SEC-Filed Agreements, the "Material Contracts")).

                           (b) To the knowledge of the Company,  (i) each of the
Material Contracts constitutes the valid and legally binding obligation of the
Company or its Subsidiaries, as applicable, enforceable in accordance with its
terms, and is in full force and effect, (ii) there is no material default under
any Material Contract so listed either by the Company or by any other party
thereto, and (iii) no event has occurred that with the lapse of time or the
giving of notice or both would constitute a material default thereunder by the
Company or any other party. No party to any such Material Contract has given
written notice to the Company of or made a claim in writing against the Company
with respect to any material breach or material default thereunder.

                                       28



                  SECTION 3.16  INTELLECTUAL PROPERTY.

                           (a) The Company and its  Subsidiaries  own,  free and
clear of any Liens, or have the valid and enforceable right to use, the
Intellectual Property (as defined in Section 3.16(d) below) currently used in
the conduct of their businesses as currently conducted, with such exceptions
that would not, or would not reasonably be expected to, individually or in the
aggregate, cause a material adverse effect on the Company and its Subsidiaries,
taken as a whole ("Company Intellectual Property").

                           (b)  Except as set  forth in  Schedule  3.16,  to the
knowledge of the Company: (i) the Material Intellectual Property (as defined in
Section 3.16(d) below) is registered or applications have been filed in the
jurisdictions set forth on Schedule 3.16, the registrations are subsisting and
unexpired, and the registrations and applications are free of all Liens and have
not been abandoned in the jurisdiction set forth on such Schedule 3.16; (ii) no
judgment, decree, injunction, rule or order has been rendered by any
Governmental Entity which would limit, cancel or question the validity of, or
the Company's or its Subsidiaries' rights in and to, the Material Intellectual
Property in the United States (including its territories and possessions),
Canada, Australia, and New Zealand; (iii) the Company has not received any
written notice of any claims by any person that the Company or Company
Intellectual Property has infringed or is infringing the rights of any third
party in any Intellectual Property; and (iv) neither the Company nor any of its
Subsidiaries has received written notice of any pending or threatened suit,
action or adversarial proceeding that seeks to limit, cancel or question the
validity of, or the Company's or any such Subsidiary's rights in and to, the
Material Intellectual Property in the United States (including its territories
and possessions), Canada, Australia, and New Zealand.

                           (c) The  consummation  of the  Merger  and the  other
Transactions will not result in a the loss by the Company or its Subsidiaries of
any rights to the Company Intellectual Property.

                           (d) "Material  Intellectual  Property" shall have the
meaning set forth on Schedule 3.16. "Intellectual Property" shall mean all
rights, privileges and priorities provided under federal, state and foreign law
relating to intellectual property, including, without limitation, all (x)(1)
inventions, discoveries, processes, formulae, designs, methods, techniques,
procedures, concepts, developments, technology, new and useful improvements
thereof and know-how relating thereto, whether or not patented or eligible for
patent

                                       29



protection; (2) copyrights and copyrightable works, including computer
applications, programs, software, databases and related items; (3) trademarks
(registered or unregistered), service marks, trade names, trade dress, corporate
names, domain names and all common-law rights relating thereto; (4) trade
secrets and other confidential information; (y) registrations, applications and
recordings for any of the foregoing; and (z) licenses or other similar
agreements granting the rights to use any of the foregoing, as well as all
goodwill symbolized by any of the foregoing.

                  SECTION 3.17 VOTING REQUIREMENTS. The affirmative vote of the
holders of a majority of the outstanding shares of the Company Common Stock at
the Special Meeting is the only vote of the holders of any class or series of
the Company's capital stock necessary to approve and adopt this Agreement and
the Transactions.

                  SECTION 3.18 STATE TAKEOVER STATUTES. The Company Board has
approved this Agreement and the consummation of the Transactions and such
approval constitutes approval of the Merger and the other Transactions by the
Company Board under the provisions of Section 203 of the DGCL such that Section
203 does not apply to the Merger and the other Transactions.

                  SECTION 3.19 RELATED PARTY TRANSACTIONS. Except for those
arrangements, agreements and contracts set forth on Schedule 3.19 or described
in the Company SEC Documents, there are no written arrangements, agreements and
contracts currently in effect entered into by the Company or any of its
Subsidiaries with any person who is an executive officer, director or affiliate
of the Company or any of its Subsidiaries, or any entity of which any of the
foregoing is an affiliate, other than those arrangements, agreements and
understandings which (i) are terminable by the Company upon no more than 30
days' prior notice without payment of any premium or penalty or (ii) would not,
individually or in the aggregate, reasonably be expected to create or result in
a liability to the Company in excess of $60,000.

                  SECTION 3.20.  RELATIONSHIPS WITH FRANCHISEES.

                           (a)  Except as set  forth on  Schedule  3.20(a),  the
consummation of the Transactions will not give any franchisee the right to
terminate its relationship with the Company or any of its Subsidiaries or reduce
the amount of royalties payable by such franchisee to the Company or any of its
Subsidiaries.

                                       30



                           (b) Schedule  3.20(b)  contains a true,  complete and
accurate list of all franchisees of the Company and its Subsidiaries ("Company
Franchisees") as of the date hereof and the states or other jurisdictions in
which such franchisees are located and a true and accurate list of the Franchise
Agreements.

                           (c)  Schedule  3.20(c) sets forth a true and complete
list of (i) all states and countries in which the Company Franchisees are
located and in which the Company or its Subsidiaries have received an official
written notice from the appropriate state officials that the offer to sell and
the sale of their franchises are exempt from the registration provisions of such
jurisdiction's franchise registration law; and (ii) all other states in which
the Company Franchises are located and in which the Company and its Subsidiaries
have offered to sell or have sold their franchises based upon a claimed
exemption from the registration provisions of such state's applicable franchise
registration laws. True and correct copies of all written notices of
registrations and all written notices of exemption, as described in clauses (a)
and (b) above, have been furnished to the Parent, and such registration and
exemption notices are in full force and effect as of the date hereof except as
set forth in Schedule 3.20; in each case, except as would not, and would not
reasonably be expected to, cause a material adverse effect in the Company and
its Subsidiaries, taken as a whole.

                           (d) The Company has  delivered to the Parent true and
correct copies of the Company's Uniform Franchise Offering Circulars ("UFOCs"),
which are currently being used in connection with the offers to sell and the
sales of its franchises. The UFOCs currently used by the Company and its
Subsidiaries (i) comply in all material respects with all applicable federal,
state and foreign laws and regulations pertaining to offers to sell and the sale
of franchises in jurisdictions in which they are being used, including, without
limitation, in the United States, the Uniform Franchise Offering Circular
Guidelines adopted by the North American Securities Administrators Association
on April 25, 1993 and approved by the Federal Trade Commission on December 30,
1993 ("FTC") as an alternative to the FTC disclosure statement; and (ii) do not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; in all cases, except where any failure to comply or an untrue
statement or omission would not, or would not reasonably be expected to, cause a
material adverse effect on the Company and its Subsidiaries, taken as a whole.

                                       31



                  SECTION 3.21 QUASI-CORPORATION REQUIREMENTS. The Company does
not meet the requirements set forth in Section 2115(a) of the California
Corporations Code (the "California Code") and is not subject to the provisions
of the California Code identified in Section 2115(b) thereof.

                  SECTION 3.22 INSURANCE. Schedule 3.22 sets forth a true and
complete list of directors and officers liability ("D&O Insurance") and general
liability insurance policies maintained by the Company or any of its
Subsidiaries (including the providers of such insurance policies) and all claims
made under such policies since July 1, 1999 other than claims made under workers
compensation policies resulting in any payment by such insurance company in an
amount greater than $50,000 for such claims or for all claims arising out of the
same or similar incidents (in all cases including all outstanding claims as of
the date hereof seeking payment in excess of $50,000 and the status thereof).
All such insurance policies are in full force and effect, all premiums due and
payable thereunder have been paid; and none of the Company or any of its
Subsidiaries is in material default thereunder.

                  SECTION 3.23 INFORMATION IN PROXY STATEMENT. The Proxy
Statement shall not at the date it is filed with the SEC, at any time that it is
amended or supplemented, at the time it is first mailed to stockholders and at
the time of the meeting of stockholders to be held in connection with the
Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading , except that no representation or warranty is made by the Company
with respect to information that Parent or the Purchaser supplied to the Company
for inclusion therein or for incorporation by reference therein.

                  SECTION 3.24 OPINION OF FINANCIAL ADVISOR. The Company Board
and the Special Committee have received the opinion of Houlihan Lokey Howard &
Zukin ("Houlihan"), dated the date of this Agreement, to the effect that, as of
such date, the Merger Consideration is fair from a financial point of view to
holders of Shares (other than Craig Enterprises, Inc. ("CEI") and its affiliates
and Parent and its affiliates), a signed copy of which opinion has been or will
promptly be delivered to Parent.

                  SECTION 3.25 BROKERS. Except for Houlihan and Koffler &
Company, whose fees and expenses shall be paid by the Company in accordance with
the Company's agreement with such firm, no broker, investment banker, financial
advisor or other person is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in

                                       32



connection with the Transactions based upon arrangements made by or on behalf of
the Company. A true and correct copy of the agreements between the Company and
each of Houlihan and Koffler & Company have been delivered to Parent.

                                   ARTICLE IV

                        REPRESENTATIONS AND WARRANTIES OF
                            PARENT AND THE PURCHASER

                  Parent and the Purchaser jointly and severally represent and
warrant to and agree with the Company as follows:

                  SECTION 4.1 ORGANIZATION. Each of Parent and the Purchaser is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite corporate or
other power and authority to own, lease and operate its properties and to carry
on its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power or authority
would not, and would not reasonably be expected to, have a material adverse
effect on Parent, the Purchaser and Parent's other Subsidiaries, taken as a
whole. Parent and each of its Subsidiaries is duly qualified or licensed to do
business and in good standing in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification or licensing necessary, except where the failure to be so
duly qualified or licensed and in good standing would not, and would not
reasonably be expected to, in the aggregate, have a material adverse effect on
Parent and its Subsidiaries, taken as a whole. Parent and the Purchaser have
heretofore delivered to the Company accurate and complete copies of the
certificate of incorporation and by-laws (or other similar organizational and
governing documents), as currently in effect, of Parent and the Purchaser.

                  SECTION 4.2 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY
ACTION. Each of Parent and the Purchaser has full corporate power and authority
to execute, deliver and perform its obligations under this Agreement and to
consummate the Transactions. The execution, delivery and performance by Parent
and the Purchaser of this Agreement and the consummation of the Transactions
have been duly authorized by their respective Boards of Directors and by Parent
as the sole stockholder of the Purchaser and no other corporate action on the
part of Parent and the Purchaser is necessary to authorize the execution and
delivery by Parent and the Purchaser of this Agreement and the consummation by
them of the Transactions. This Agreement has been duly executed and

                                       33



delivered by Parent and the Purchaser, as the case may be, and, assuming due and
valid authorization, execution and delivery hereof by the Company, is a valid
and binding obligation of each of Parent and the Purchaser, as the case may be,
enforceable against them in accordance with its respective terms, except that
(i) such enforcement may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific perfor-
mance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.

                  SECTION 4.3 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for
filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Exchange Act, the HSR Act,
state or foreign laws relating to takeovers, state securities or blue sky laws
and the DGCL, neither the execution, delivery or performance of this Agreement
by Parent and the Purchaser nor the consummation by Parent and the Purchaser of
the Transactions nor compliance by Parent and the Purchaser with any of the
provisions hereof (i) shall conflict with or result in any breach of any
provision of the respective certificate of incorporation or by-laws or similar
organizational documents of Parent, any of its Subsidiaries or the Purchaser,
(ii) require on the part of Parent or the Purchaser any filing with, or permit,
authorization, consent or approval of, any Governmental Entity, (iii) result in
a violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration or loss of benefit or creation of any Lien) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument or obligation to which Parent,
any of its Subsidiaries or the Purchaser is a party or by which any of them or
any of their properties or assets may be bound or (iv) violate any judgment
order, writ, injunction, decree, statute, rule or regulation applicable to
Parent, any of its Subsidiaries or the Purchaser or any of their properties or
assets, excluding from the foregoing clauses (ii), (iii) or (iv) where the
failure to obtain such permits, authorizations, consents or approvals or to make
such filings, or the existence of such violations, breaches or defaults, would
not, and would not reasonably be expected to, individually or in the aggregate,
cause a material adverse effect on Parent, its Subsidiaries or the Purchaser
taken as a whole and would not materially impair or delay the ability of Parent
or the Purchaser to consummate the Transactions.

                  SECTION 4.4 INFORMATION IN PROXY STATEMENT. None of the
information supplied by Parent or the Purchaser for inclusion or incorporation
by reference in the Proxy Statement shall, at the date it is filed with the SEC,
at any time it is amended or supplemented, at the time it is first mailed to
stockholders and at the time of the meeting of

                                       34



stockholders to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.

                  SECTION 4.5 FINANCING. (a) Third-Party Commitment Letters.
Parent has delivered to the Company a true and complete executed commitment
letter dated as of December 28, 2001 from Ableco Finance LLC (the "Senior
Lender") pursuant to which the Senior Lender has committed to provide senior
debt financing (the "Senior Financing") to Parent on the terms and subject to
the conditions set forth in such commitment letter pursuant to which the Senior
Lender's financing commitment expires on May 31, 2002 (the "Senior Commitment
Letter").

                  (b) Parent and Purchaser Financing Commitments. Parent has
delivered to the Company (i) true and complete commitment letters from ACI
Capital Co., Inc. ("ACI") and Deutsche Bank Capital Partners ("DBCP") (the
"Purchaser Lenders") pursuant to which the Purchaser Lenders have committed to
provide subordinated debt financing (the "Purchaser Debt Financing") to
Purchaser on the terms and subject to the conditions set forth in such
commitment letters (the "Purchaser Debt Commitment Letters") and (ii) true and
complete commitment letters from ACI and DBCP (the "Parent Equity Investors",
and together with the Senior Lender, and the Purchaser Lenders, the "Financing
Sources" and, each, a "Financing Source") pursuant to which the Parent Equity
Investors have committed to provide equity financing (the "Parent Equity
Financing", and together with the Senior Financing and the Purchaser Debt
Financing, the "Financings", and, each a "Financing") to Parent on the terms and
subject to the conditions set forth in such commitment letters (the "Parent
Equity Commitment Letters", and, together with the Senior Commitment Letter and
the Purchaser Debt Commitment Letters, the "Commitment Letters", and, each a
"Commitment Letter"). In addition, Parent has delivered to the Company a true
and complete commitment letter from SJF pursuant to which SJF has agreed to
contribute Shares to the Parent on the terms and subject to the conditions set
forth in such commitment letter.

                  (c) Financing Sources Generally. The obligations of the
Financing Sources to consummate the Financings are not subject to any condition
other than set forth in the applicable Commitment Letter. Parent is not aware of
any facts or circumstances that would cause Parent or the Financing Sources to
be unable to consummate the Financings in accordance with the terms of the
Commitment Letters. Parent agrees to promptly notify the Company if at any time
prior to the Effective Date it no longer believes in good faith that it

                                       35



will be able to consummate the Financings on substantially the terms described
in the Commitment Letters. As of the date hereof, each of the Commitment Letters
is in full force and effect and has not been amended in any material respect. To
the knowledge of Parent and the Purchaser, the Financings will be sufficient to
consummate the Merger and to pay all fees and expenses related to any of the
foregoing. The financing and other fees that are due and payable under the
Commitment Letters have been paid in full.

                  SECTION 4.6 SHARE OWNERSHIP. None of Parent, the Purchaser or
any of their respective affiliates or "associates" (as such term is defined
under Rule 12b-2 under the Exchange Act) beneficially own any Shares, other
than, if applicable, SJF or any affiliate thereof.

                  SECTION 4.7 PARENT AND THE PURCHASER'S OPERATIONS. Parent and
the Purchaser were formed solely for the purpose of engaging in the transactions
contemplated hereby and have not engaged in any business activities or conducted
any operations other than in connection with the transactions contemplated
hereby.

                  SECTION 4.8 INVESTIGATION BY PARENT AND THE PURCHASER. Parent
and the Purchaser have conducted their own independent review and analysis of
the businesses, assets, condition, operations and prospects of the Company and
its Subsidiaries. In entering into this Agreement, Parent and the Purchaser have
relied solely upon their own investigation and analysis and upon the
representations, warranties, comments and agreements of the Company set forth in
this Agreement, and Parent and the Purchaser:

                  (a) acknowledge that, other than as set forth in this
Agreement, none of the Company, its Subsidiaries or any of their respective
directors, officers, employees, affiliates, agents or representatives (including
without limitation Koffler & Company) makes any representation or warranty,
either express or implied, as to the accuracy or completeness of any of the
information provided or made available to Parent or the Purchaser or their
agents or representatives; and

                  (b) agrees, to the fullest extent permitted by law that except
for the liability of the Company in accordance with the terms of this Agreement
for the representations and warranties of the Company included in this Agreement
and except with respect to fraud, that none of the Company, its Subsidiaries or
any of their respective directors, officers, employees, stockholders,
affiliates, agents or representatives (including without limitation Koffler &
Company) shall have any liability or responsibility whatsoever to Parent or the
Purchaser on any basis (including without limitation in contract, tort or
otherwise) based

                                       36



upon any information provided or made available, or statements made, to Parent
or the Purchaser. Notwithstanding anything to the contrary contained in this
Agreement, no investigation of the Company by the Purchaser or its
representatives or advisors prior to or after the date of this Agreement shall
diminish, obviate or cure any of the representations or warranties of the
Company contained in this Agreement.

                  SECTION 4.9 BROKERS. Except as set forth on Schedule 4.9, no
broker, investment banker, financial advisor or other person is entitled to any
broker's, finder's financial advisor's or other similar fee or commission in
connection with the Transactions based upon arrangements made by or on behalf of
Parent or the Purchaser.

                                    ARTICLE V

                                    COVENANTS

                  SECTION 5.1 INTERIM OPERATIONS OF THE COMPANY. The Company
covenants and agrees that, except (i) as expressly permitted by this Agreement,
(ii) as disclosed in any of the Schedules, or (iii) as agreed in writing by
Parent, after the date hereof, and prior to the Effective Time:

                           (a) the business of the Company and its  Subsidiaries
shall be conducted in the ordinary course of business consistent with past
practice and in compliance in all material respects with all applicable laws and
regulations and the Company shall use its reasonable best efforts to preserve
intact their current business organizations, to keep available the services of
their current officers and other key employees and to preserve their
relationships with those persons having business dealings with them to the end
that their goodwill and ongoing businesses shall be unimpaired at the Effective
Time;

                           (b) the Company  shall not,  directly or  indirectly,
(i) sell, transfer or pledge or agree to sell, transfer or pledge any Company
Common Stock or capital stock of any of its Subsidiaries beneficially owned by
it, either directly or indirectly other than pursuant to the exercise of Options
outstanding on the date hereof and disclosed on Schedule 3.2 or Options received
by non-employee directors after the date hereof pursuant to the third sentence
of Section 6(a) of the Option Plan; (ii) amend its Certificate of Incorporation
or By-laws or similar organizational documents; or (iii) split, combine or re-
classify the outstanding Company Common Stock or any outstanding capital stock
of any of the Subsidiaries of the Company;

                                       37



                           (c) neither  the Company nor any of its  Subsidiaries
shall: (i) declare, set aside or pay any dividend or other distribution payable
in cash, stock or property with respect to its capital stock other than
dividends from a wholly-owned Subsidiary to another Subsidiary or to the
Company; (ii) issue, sell, pledge, dispose of or encumber any shares of, or
securities convertible into or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of capital stock of any
class of the Company or its Subsidiaries, other than shares of Company Common
Stock issued pursuant to the exercise of Options outstanding on the date hereof
and disclosed on Schedule 3.2 or Options received by non-employee directors
after the date hereof pursuant to the third sentence of Section 6(a) of the
Option Plan; (iii) transfer, lease, license, sell, mortgage, pledge, dispose of,
or encumber any material assets or properties with an aggregate value exceeding
$500,000; (iv) incur or modify any material indebtedness or other material
liability, in an amount exceeding $2,000,000, provided that the Company may
borrow money for use in the ordinary and usual course of business; (v) acquire
or agree to acquire by merger or consolidation, or purchase a substantial
portion of the stock or assets of, any business or any Person; or (vi) redeem,
purchase or otherwise acquire directly or indirectly any of its capital stock;

                           (d) neither  the Company nor any of its  Subsidiaries
shall (i) enter into any contract or agreement that if in existence as of the
date hereof would constitute a Material Contract, other than in the ordinary
course of business consistent with past practice; (ii) enter into any contract,
agreement, commitment or arrangement providing for, or amend any contract,
agreement, commitment or arrangement to provide for, the taking of any action
that would be prohibited hereunder; (iii) modify, amend or terminate the Name
Agreement or any of its Material Contracts or, except in the ordinary course of
business and consistent with past practice, waive, release or assign any
material rights or claims (absolute, accrued, asserted or unasserted, contingent
or otherwise) in a manner materially adverse to the Company or Subsidiary party
thereto; (iv) pay, discharge or satisfy any claim, liability or obligation
exceeding $250,000 (absolute, accrued, asserted or unasserted, contingent or
otherwise) other than the payment, discharge or satisfaction in the ordinary
course of business of liabilities reflected or reserved against in the
consolidated financial statements of the Company and its Subsidiaries or
incurred in the ordinary course of business; or (v) waive the benefits of, or
agree to modify in any manner, any confidentiality, standstill or similar
agreement to which the Company or any of its Subsidiaries is a party, provided,
however, that the Company may enter into a lease in connection with the
relocation (to a location within a fifty mile radius of the present location) of
its headquarters (the "Headquarters Lease") on such terms and provisions as the
Company shall determine provided that the annual lease rental payable to the
landlord under such lease does not exceed one million five

                                       38



hundred thousand dollars ($1,500,000) (excluding the effect of common area
maintenance charges, operating expense pass-throughs, or similar charges,
including, without limitation, insurance, tax and other costs required to be
paid by the Company and excluding the effect of any rental increases based upon
a "cpi" factor or percentage increase in lieu thereof). The Company will keep
Parent reasonably apprised of its relocation efforts and of the proposed terms
of any such lease, and will consult in good faith with Parent with respect
thereto;

                           (e) neither  the Company nor any of its  Subsidiaries
shall permit any material insurance policy naming it as a beneficiary or a loss
payable payee to be cancelled or terminated without notice to Parent, except in
the ordinary course of business and consistent with past practice;

                           (f) neither  the Company nor any of its  Subsidiaries
shall: (i) assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any other
Person other than a Subsidiary, or in the case of a Subsidiary, the Company or a
Subsidiary, except in the ordinary course of business consistent with past
practice; or (ii) make any loans, advances or capital contributions to, or
investments in, any other Person (other than to Subsidiaries of the Company),
other than in the ordinary course of business consistent with past practice;

                           (g) neither  the Company nor any of its  Subsidiaries
shall materially change any of the accounting  policies or procedures used by it
unless required by GAAP or applicable law;

                           (h) neither  the Company nor any of its  Subsidiaries
shall adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company or any of its Subsidiaries (other than the Merger);

                           (i) except as permitted hereunder neither the Company
nor any of its Subsidiaries shall take, or agree to commit to take, any action
that would make any representation or warranty of the Company contained herein
inaccurate in any material respect at, or as of any time prior to, the
Effective Time (except for representations made as of a specific date) or would
be reasonably likely to result in any of the conditions to the Merger set forth
in Article VI not being satisfied, or that would materially impair the ability
of the Company, Parent, the Purchaser or the holders of the Shares to consummate
the Merger in accordance with the terms hereof or materially delay such
consummation;

                                       39



                           (j) neither  the Company nor any of its  Subsidiaries
shall make, or commit to make, any capital expenditure or expenditures which (1)
exceed $1,000,000 in the aggregate excluding capital expenditures pursuant to
(2) or (3) below; (2) exceed $1,000,000 in the aggregate in connection with any
refurbishment of any Company-owned centres; and (3) exceed One Hundred Fifty
Thousand Dollars ($150,000) in the aggregate in connection with the leasehold
improvements relating to the Headquarters Lease and the written consent of
Parent, which shall not be unreasonably withheld, shall be required for any
capital expenditures in connection with the Headquarters Lease which exceed One
Hundred Fifty Thousand Dollars ($150,000);

                           (k) neither  the Company nor any of its  Subsidiaries
shall make or revoke any Tax election, or change (or make a request to any
taxing authority to change) its Tax accounting methods, policies, practice or
procedures, except in each case as required by GAAP or shall settle or
compromise any Tax liability where the payment required by the Company or its
Subsidiaries to compromise or settle such amount exceeds $100,000, in any case
other than settlements or compromises of the matters disclosed on Schedule 3.12;

                           (l) (i)  establish  any new  compensation  or benefit
plan or arrangement which would require payments in excess of $100,000 in any
twelve- month period, or (ii) enter into any employment, consulting, retention,
termination, severance or change in control agreement with an executive officer
where liability could exceed $100,000;

                           (m) neither  the Company nor any of its  Subsidiaries
shall revalue in any material respect any of its assets, including, without
limitation, writing down the value of inventory or writing-off notes or accounts
receivable other than in the ordinary and usual course of business consistent
with past practice or as required by GAAP;

                           (n) neither  the Company nor any of its  Subsidiaries
shall settle or compromise any pending or threatened suit, action or claim
relating to the transactions contemplated hereby without Parent's prior written
consent which will not be unreasonably withheld where the aggregate amount paid
by the Company in settlement (including, without limitation, by funding the
retention amount under the applicable insurance policy) and all expenses
incurred in connection with all such suits, actions or claims would not exceed
five hundred thousand dollars ($500,000) and the Company, Parent and Purchaser
and their affiliates are released as part of such settlement, or any other suit,
action or claim which would require a payment by the Company or a Subsidiary in
excess of $300,000 in the case of claims arising out of or in connection with
the employment of the claimant or $100,000 in all other cases or would result in
an agreement or covenant by the Company or Subsidiaries

                                       40



which would, or would  reasonably be expected to, have a material adverse effect
on the Company and its Subsidiaries, taken as a whole;

                           (o) neither  the Company nor any of its  Subsidiaries
shall enter into any agreement or arrangement that limits or otherwise restricts
the Company or any of its Subsidiaries or any successor thereto or that could,
after the Effective Time, limit or restrict the Surviving Corporation and its
affiliates (including Parent) or any successor thereto, from engaging or
competing in any line of business or in any geographic area other than
agreements pursuant to which the Company or a Subsidiary grants franchises to
operate weight loss centres;

                           (p) neither  the Company nor any of its  Subsidiaries
shall make any change to, or amend in any way, the employment contracts,
salaries or other compensation of any officer, director, employee, agent, or
other similar representative of the Company or any of its Subsidiaries whose
annual compensation exceeds $100,000 or, in the case of directors, $25,000,
other than changes or amendments that (i) are made in the ordinary course of
business and consistent with past practice, (ii) do not and will not result in
increases of more than 10% in the salary of any such Person, and (iii) do not
and will not exceed, in the aggregate, the lesser of (A) 5% of the total
salaries, wages and other compensation of all Employees whose annual
compensation exceeds $100,000, taken as a whole or (B) $75,000 in the aggregate;
provided that in no event shall there be any increase in compensation for any of
the individuals listed on Schedule 5.1(a);

                           (q) neither  the Company nor any of its  Subsidiaries
shall amend, alter, or terminate partially or completely, any Benefit Plan
relating to or affecting any Employee where the incremental additional cost to
the Company or any Subsidiary of any such action would exceed $100,000 in the
twelve-month period following the taking of such action;

                           (r) neither  the Company nor any of its  Subsidiaries
shall (i) enter into any labor or collective bargaining agreement, (ii) amend,
alter or terminate any collective bargaining agreement to which it is a party in
any manner that would, or would reasonably be expected to, have a material
adverse effect on the Company and its Subsidiaries, taken as a whole; and

                           (s) neither  the Company nor any of its  Subsidiaries
shall authorize or enter into an agreement to do any of the foregoing.



                                       41



                  SECTION 5.2 ACCESS TO INFORMATION. Upon reasonable written
notice, the Company shall (and shall cause each of its Subsidiaries to) afford
to the officers, employees, accountants, counsel, financing sources and other
representatives of Parent, access, during normal business hours, to all its
properties, books, contracts, commitments and records and, during such period,
the Company shall (and shall cause each of its Subsidiaries to) furnish promptly
to Parent (a) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of federal securities laws and (b) all other information concerning its
business, properties and personnel as Parent may reasonably request. Unless
otherwise required by law, Parent shall hold any such information which is
nonpublic in confidence in accordance with the provisions of the Confidentiality
Agreement between the Company and Parent, dated June 14, 2001 (the
"Confidentiality Agreement").

                  SECTION 5.3 CONSENTS AND APPROVALS. Each of the Company,
Parent and the Purchaser shall take all actions necessary to comply promptly
with all legal requirements which may be imposed on it with respect to this
Agreement and the transactions contemplated hereby (which actions shall include,
without limitation, furnishing all information required under the HSR Act and in
connection with approvals of or filings with any other Governmental Entity) and
shall promptly cooperate with and furnish information to each other in
connection with any such requirements imposed upon any of them or any of their
Subsidiaries or affiliates in connection with this Agreement and the
Transactions. Each of the Company, on the one hand, and Parent and the
Purchaser, on the other hand, shall, and shall cause its Subsidiaries to, take
all actions necessary to obtain (and shall cooperate with each other in
obtaining) any consent, authorization, order or approval of, or any exemption
by, any Governmental Entity or other public or private third party required to
be obtained or made by such party, or any of their respective Subsidiaries, in
connection with the Merger or the taking of any action contemplated thereby or
by this Agreement.

                  SECTION 5.4 NO ACTIONS BY PARENT OR PURCHASER. Except as
permitted hereunder, neither the Parent nor the Purchaser shall take or agree to
commit to take any action that would be reasonably likely to result in any of
the conditions to the Merger set forth in Article VI not being satisfied, or
that would materially impair the ability of the Company, Parent, the Purchaser
or the holders of the Shares to consummate the Merger in accordance with the
terms hereof or materially delay such consummation.

                                       42



                  SECTION 5.5  NO SOLICITATION.

                           (a) The Company and its Subsidiaries shall
immediately cease and shall instruct and use their best efforts to cause each of
their respective affiliates, directors, officers, employees, agents and
representatives (including without limitation any investment banker, financial
advisor, attorney, accountant or other representative retained by it or any of
its Subsidiaries) to immediately cease any discussions or negotiations with any
other parties that may be ongoing with respect to any Acquisition Proposal (as
defined below). The Company and its Subsidiaries shall not, and shall instruct
and use their best efforts to cause their respective officers, directors,
employees and investment bankers, attorneys or other agents retained by or
acting on behalf of the Company or any of its Subsidiaries not to, (i) initiate,
solicit or encourage, directly or indirectly, any inquiries, any expressions of
interest or the making of any proposal that constitutes or is reasonably likely
to lead to any Acquisition Proposal, (ii) except as permitted below, engage in
negotiations or discussions with, or furnish any information, data or assistance
to any third party relating to an Acquisition Proposal, or (iii) except as
permitted below, enter into any agreement with respect to any Acquisition
Proposal or approve any Acquisition Proposal.

                           (b) Notwithstanding anything to the contrary
contained in this Agreement, the Company and the Company Board and any committee
thereof (i) provided the Company has complied with its obligations under Section
5.5 (including Section 5.5(g)) may participate in discussions or negotiations
(including, as a part thereof, making any counterproposal) with or furnish
information (provided that such information has been previously delivered to
Parent and Parent is notified of any such information so furnished) to any third
party making an unsolicited Acquisition Proposal after the date hereof and prior
to the 7.1(c)(i) Expiration Date (as defined below) (a "Potential Acquiror") if
the Company Board or the Special Committee determines (A) in good faith that
such Acquisition Proposal constitutes or is reasonably likely to lead to a
Superior Proposal (as defined below) and (B) in good faith, after consultation
with its outside legal counsel, that the failure to participate in such
discussions or negotiations or to furnish such information would be inconsistent
with the Board's or committee's fiduciary duties under applicable law, and (ii)
shall be permitted to take and disclose to the Company's stockholders a position
with respect to any tender or exchange offer by a third party, or amend or
withdraw such position, pursuant to Rules 14d-9 and 14e-2 of the Exchange Act.
In the event the Company is participating in discussions or negotiations with a
Potential Acquiror in accordance with the terms of this Section 5.5, the
Potential Acquiror shall be permitted access to and the right to negotiate with
Sidney Craig and Jenny Craig and their affiliates. Prior to entering into
negotiations with a Potential Acquiror, the Company shall enter into a
confidentiality agreement with the Potential

                                       43



Acquiror containing provisions not less favorable in any material respect to the
Company than the provisions of the Confidentiality Agreement.

                           (c) Except as permitted by this Section 5.5,  neither
the Company Board nor any committee thereof will (i) approve, recommend or
propose publicly to approve or recommend, any Acquisition Proposal or (ii) cause
the Company to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to any Acquisition
Proposal. Notwithstanding the foregoing, in the event that the Company Board or
a committee thereof determines (i) in good faith, after consultation with its
outside legal counsel, that a failure to withdraw or modify its recommendation
would be inconsistent with the Board's or committee's fiduciary duties under
applicable law and (ii) that the pending Acquisition Proposal is a Superior
Proposal, the Company Board may (x) withdraw or adversely modify its approval or
recommendation of the Transactions, (y) approve or recommend such Superior
Proposal or (z) terminate this Agreement in accordance with Section 7.1(c)(i).

                           (d)  For  purposes  of this  Agreement,  "Acquisition
Proposal" shall mean any inquiry, offer or proposal, whether in writing or
otherwise, made by a third party who is not an affiliate of Sidney Craig or
Jenny Craig (i) to acquire (including by way of lease, exchange, sale, mortgage,
pledge or otherwise, in a single transaction or series of related transactions)
the Company or any of its material Subsidiaries, (ii) to acquire 20% or more of
the equity interest in, the Company or its material Subsidiaries, or (iii) with
respect to a merger, consolidation or other business combination, sale of shares
of capital stock, sale of assets, tender offer or exchange offer or liquidation
or dissolution or similar transaction involving the Company or its material
Subsidiaries (other than the transactions contemplated by this Agreement).

                           (e) The term "Superior  Proposal" means any bona fide
proposal to acquire, directly or indirectly, more than a majority of the Shares
then outstanding or all or substantially all the assets of the Company, and
otherwise on terms which the Company Board, having considered and subsequent to
the recommendation of the Special Committee, determines in good faith to be more
favorable to the Company's stockholders than the Merger (after receipt of advice
from its financial advisor), for which financing, to the extent required, is
then committed.

                           (f) In addition to the obligations of the Company set
forth in this Section 5.5, the Company shall promptly and in any event within 24
hours advise Parent orally and in writing of any Acquisition Proposal or request
for information relating to the

                                       44



Company or any of its Subsidiaries, or for access to the properties, books or
records of the Company or any of its Subsidiaries by any person that is
considering making, or has made, an Acquisition Proposal and shall keep Parent
informed, on a prompt basis of the status and material terms thereof and, if in
writing, promptly deliver or cause to be delivered to Parent a copy of such
inquiry or proposal.

                           (g) The  Company  covenants  and agrees  that it will
take all reasonable actions in respect of enforcement of the provisions of any
confidentiality and standstill provisions contained in agreements to which the
Company is a party or to which the Company is subject; provided however, that
notwithstanding anything to the contrary in this Agreement, if requested by a
third party, the Company may waive, to the extent provided below, any standstill
or similar provision in favor of the Company in any agreement with such third
party if the Company Board subsequent to the recommendation of the Special
Committee reasonably believes that there is a reasonable likelihood that such
third party will submit an Acquisition Proposal that could constitute a Superior
Proposal (any such waiver to be limited to permitting such third party to make
such Acquisition Proposal on a confidential basis to the Company Board), and any
such waiver shall not be construed as a breach of this Section 5.5.

                           (h) The parties hereto  acknowledge and agree that in
connection with an Acquisition Proposal the Company may engage Houlihan to
provide additional services for such reasonable and customary additional fees as
Houlihan and the Company shall agree.

                  SECTION 5.6 PUBLICITY. The initial press release with respect
to the execution of this Agreement shall be a joint press release reasonably
acceptable to Parent and the Company. Thereafter, so long as this Agreement is
in effect, neither the Company, Parent nor any of their respective affiliates
shall issue or cause the publication of any press release or other announcement
with respect to the Merger, this Agreement or the other Transactions
contemplated hereby without the prior consultation of the other party, except as
may be required by law or by any listing agreement with a national securities
exchange.

                  SECTION 5.7 NOTIFICATION OF CERTAIN MATTERS. The Company shall
give prompt notice to Parent and Parent shall give prompt notice to the Company,
of (i) the occurrence, or non-occurrence of any event the occurrence, or
non-occurrence of which would cause any representation or warranty contained in
this Agreement to be untrue or inaccurate in any material respect at or prior to
the Effective Time or (ii) any material failure of the Company or Parent, as the
case may be, to comply with or satisfy any covenant,

                                       45



condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section 5.7
shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.

                  SECTION 5.8 DIRECTORS' AND OFFICERS' INSURANCE AND
INDEMNIFICATION. (a) From and after the Effective Time, Parent and Surviving
Corpora tion shall, jointly and severally, indemnify, defend and hold harmless
any person who is now, or has been at any time prior to the date hereof, or who
becomes prior to the Effective Time, an officer, director, employee or agent
(the "Indemnified Party") of the Company or any of its Subsidiaries against all
losses, claims, damages, liabilities, costs and expenses (including attorneys'
fees and expenses), judgments, fines, losses, and amounts paid in settlement in
connection with any actual or threatened action, suit, claim, proceeding or
investigation (each a "Claim") to the extent that any such Claim is based on, or
arises out of, (i) the fact that such person is or was a director, officer,
employee or agent of the Company or any Subsid iaries or is or was serving at
the request of the Company or any of its Subsidiaries as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, or (ii) this Agreement, or any of the transactions
contemplated hereby, in each case to the extent that any such Claim pertains to
any matter or fact arising, existing, or occurring prior to or at the Effective
Time, regardless of whether such Claim is asserted or claimed prior to, at or
after the Effective Time, and, in each case, to the full extent permitted under
Delaware law or the Company's Certificate of Incorporation, By-laws or indemnifi
cation agreements, if any, in effect at the date hereof, including provisions
relating to ad vancement of expenses incurred in the defense of any action or
suit. Without limiting the foregoing, in the event any Indemnified Party becomes
involved in any capacity in any Claim, at or prior to the Effective Time the
Surviving Corporation shall, from time to time, promptly upon any request
therefor, advance to such Indemnified Party its legal and other expenses
(including the cost of any investigation and preparation incurred in connection
therewith), subject to the provision by such Indemnified Party of an undertaking
to reimburse the amounts so advanced in the event of a final non-appealable
determination by a court of competent jurisdiction that such Indemnified Party
is not entitled to indemnification.

                           (b) All rights to indemnification and all limitations
of liability existing in favor of the Indemnified Party as provided under
Delaware law or the Company's Certificate of Incorporation, By-laws or
indemnification agreements, if any, in effect at the date hereof shall survive
the Merger and shall continue in full force and effect, without any amendment
thereto, for a period of seven years from the Effective Time; provided that, in
the event any Claim or Claims are asserted or made within such seven year
period, all rights to indemnification in respect of any such Claim or Claims
shall continue until disposition of any

                                       46



and all such Claims; provided further, that any determination required to be
made with respect to whether an Indemnified Party's conduct complies with the
standards set forth under Delaware law, the Company's Certificate of
Incorporation or By-laws or such agreements, if any, as the case may be, shall
be made by independent legal counsel selected by the Indemnified Party and
reasonably acceptable to Parent and; provided further, that nothing in this
Section 5.8 shall impair any rights or obligations of any present or former
directors or officers of the Company.

                           (c) In the event the Surviving  Corporation or any of
their successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger, or (ii) transfers or conveys all or substantially
all of its properties and assets to any person, then, and in each such case, to
the extent necessary to effectuate the purposes of this Section 5.8, proper
provision shall be made so that the successors and assigns of the Surviving
Corporation assume the obligations set forth in this Section 5.8 and none of the
actions described in clauses (i) or (ii) shall be taken until such provision is
made.

                           (d) The  Surviving  Corporation  shall  maintain  the
Company's existing D&O policy covering acts or omissions occurring at or prior
to the Effective Time for a period of not less than six years after the
Effective Date by acquiring within ten (10) days after the Effective Time from
the Company's current insurer a Run-Off Policy providing such coverage in
accordance with the draft Run-Off Endorsement ("Auto-Seller / Buyer Merger -
Premium Preset") which has been provided to Purchaser (the "Tail Policy"). If
the Surviving Corporation does not acquire the Tail Policy, the Surviving
Corporation will acquire insurance equivalent thereto from insurers of equal or
better quality; provided that the Surviving Corporation shall not be required to
expend on an annual basis more than 175% of the annual premium paid by the
Company for its current premium year (the "Maximum Premium"); and provided
further, that if the annual cost of such insurance would exceed the Maximum
Premium, the Surviving Corporation shall acquire the maximum level of coverage
which can be acquired for the Maximum Premium. The Company represents to the
Parent that the annual premium for its current premium year is seven hundred
thousand dollars ($700,000).

                  SECTION 5.9 FURTHER ASSURANCES. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use its
respective reasonable best efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
Transactions contemplated by this Agreement. If at any time after the

                                       47



Closing Date any further action is necessary or desirable to carry out the
purposes of this Agreement, the parties hereto shall take or cause to be taken
all such necessary action, including, without limitation, the execution and
delivery of such further instruments and documents as may be reasonably
requested by the other party for such purposes or otherwise to consummate and
make effective the transactions contemplated hereby.

                  SECTION 5.10  REASONABLE BEST EFFORTS.

                           (a)  Subject  to the  terms  and  conditions  of this
Agreement each party will use its reasonable best efforts to take, or cause to
be taken, all actions and to do, or cause to be done, and to assist and
cooperate with the other parties in doing, all things necessary, proper or
advisable under applicable laws to consummate the Merger and the other
transactions contemplated by this Agreement as soon as practicable after the
date hereof, including without limitation, in the case of Parent and the
Purchaser to consummate the Financings. In furtherance and not in limitation of
the foregoing, each party hereto agrees to make or cause its applicable
affiliate to make an appropriate filing of a Notification and Report Form
pursuant to the HSR Act with respect to the transactions contemplated hereby as
promptly as practicable after the date hereof and to supply as promptly as
practicable any additional information and documentary material that may be
requested pursuant to the HSR Act and to take all other actions necessary to
cause the expiration or termination of the applicable waiting periods under the
HSR Act as soon as practicable.

                           (b) Each of Parent,  the  Purchaser  and the  Company
shall, in connection with the efforts referenced in this Section 5.10 to obtain
all requisite approvals and authorizations for the transactions contemplated by
this Merger Agreement under the HSR Act or any other applicable law, use its
reasonable best efforts to (A) make all appropriate filings and submissions with
any Governmental Entity that may be necessary, proper or advisable under
applicable laws in respect of any of the Transactions contemplated by this
Agreement, (B) cooperate in all respects with each other in connection with any
such filing or submission and in connection with any investigation or other
inquiry, including any proceeding initiated by a private party, (C) promptly
inform the other party of any communication received by such party from, or
given by such party to, the Antitrust Division of the Department of Justice
("DOJ") or any other Governmental Entity and of any material communication
received or given in connection with any proceeding by a private party, in each
case regarding any of the transactions contemplated hereby (D) and consult with
each other in advance of any meeting or conference with the DOJ or any such
other Governmental Entity or, in connection with any proceeding by a private
party, with any other Person.

                                       48



                           (c) In case at any time  after  Closing  any  further
action is necessary or desirable to carry out the purposes of this Agreement,
the parties to this Agreement (or as applicable, their officers and directors)
shall take all such necessary action as may be reasonable in the context
thereof. Parent and the Purchaser acknowledge and agree that the Company is not
obligated to seek any consents, waivers or approvals with respect to any of the
agreements, contracts or instruments listed in the Disclosure Schedules to this
Agreement, including, without limitation, the leases and agreements listed in
Schedule 3.4 hereto, and the receipt of any such consent, waiver or approval
shall not be a condition to Parent's and Purchaser's obligations hereunder;
provided, however, that the Company shall use reasonable efforts to obtain
consents, waivers or approvals with respect to the leases and agreements listed
on Schedule 3.4 hereto, or any other lease or agreement under which consent is
required as a result of the consummation of the transactions contemplated
hereby, in each case to the extent requested by the Purchaser in writing.

                  SECTION 5.11  FEES AND EXPENSES.

                           (a) Except as provided in this Section 5.11, all fees
and expenses incurred in connection with the Merger, this Agreement and the
Transactions shall be paid by the party incurring such fees or expenses, whether
or not the Merger is consummated.

                           (b) In the event that (i) this Agreement is
terminated (A) by the Company pursuant to Section 7.1(c)(i) or (B) by the Parent
pursuant to Section 7.1(d)(i)(B) or (C) (or Section 7.1(d)(i)(D) to the extent
the resolution takes the action described in Section 7.1(d)(i)(B) or (C)) and
(ii) if the Company is not entitled to terminate this Agreement by reason of
Section 7.1(b)(i), Section 7.1(b)(ii), Section 7.1(c)(ii) or Section 7.1(c)(iii)
(a "Termination Fee Event"), then the Company shall pay to the Parent a fee of
Four Million Eight Hundred Seventy Five Thousand Dollars ($4,875,000) (the
"Termination Fee"). The Termination Fee shall be payable by the Company
immediately upon the termination if the Company terminates this Agreement
pursuant to Section 7.1(c)(i) and shall be payable by the Company within two (2)
business days of either Termination Fee Event described in Section 5.11(b)(i)(B)
above, in each case by wire transfer of immediately available funds to the
account set forth on Schedule 5.11(b).

                  SECTION 5.12 REPORT ON FORM 8-K. The Company will, within two
(2) business days of execution and delivery hereof, file with the SEC a Report
on Form 8-K reporting the execution and delivery of this Agreement and attaching
this Agreement and other material Transaction documents as exhibits thereto.
Parent will be promptly provided a copy of such report and a reasonable
opportunity to comment thereon.

                                       49



                                   ARTICLE VI

                                   CONDITIONS

                  SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT
THE MERGER. The respective obligation of each party to effect the Merger shall
be subject to the satisfaction on or prior to the Closing Date of each of the
following conditions:

                           (a) Stockholder  Approval.  This Agreement shall have
been approved and adopted by the requisite vote of the holders of Company Common
Stock;

                           (b) HSR Act.  Any waiting  period  applicable  to the
Merger under the HSR Act shall have expired or been terminated;

                           (c) Statutes;  Consents. (i) No statute, rule, order,
decree or regulation shall have been entered, enacted, promulgated or enforced
by any foreign or domestic Governmental Entity or authority of competent
jurisdiction which prohibits the consummation of the Merger and (ii) all foreign
or domestic governmental consents, orders and approvals required for the
consummation of the Merger and the transactions contemplated hereby shall have
been obtained and shall be in effect at the Effective Time other than consents,
orders or approvals which are individually and in the aggregate, immaterial; and

                           (d) Injunctions. There shall be no order or
preliminary or permanent injunction of a foreign or United States federal or
state court or other Governmental Entity of competent jurisdiction in effect
precluding, restraining, enjoining or prohibiting consummation of the Merger.

                  SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO
EFFECT THE MERGER. The obligation of the Company to effect the Merger shall be
further subject to the satisfaction at or prior to the Effective Time of the
following conditions:

                           (a) the  representations and warranties of Parent and
the Purchaser shall be true and accurate in all material respects as of the date
hereof, and true and accurate as of the Effective Time as if made at and as of
such time (except for those representations and warranties that address matters
only as of a particular date or only with respect to a specific period of time
which need only be true and accurate as of such date or with respect to such
period) and except where the failure of such representations and warranties to
be so true and accurate (without giving effect to any limitation as to
materiality or material adverse

                                       50



effect set forth therein) would not, and would not reasonably be expected to,
individually or in the aggregate, have a material adverse effect on Parent), and
the Company shall have received a certificate of an executive officer of each of
Parent and Purchaser to such effect; and

                           (b)  each of  Parent  and the  Purchaser  shall  have
performed in all material respects all of the respective obligations hereunder
required to be performed by Parent or the Purchaser, as the case may be, at or
prior to the Effective Time and the Company shall have received a certificate of
an executive officer of each of Parent and Purchaser to such effect.

                  SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF PARENT AND THE
PURCHASER TO EFFECT THE MERGER. The obligation of Parent and the Purchaser to
effect the Merger shall be further subject to the satisfaction at or prior to
the Effective Time of the following conditions:

                           (a) the representations and warranties of the Company
shall be true and accurate in all material respects as of the date hereof, and
true and accurate as of the Effective Time as if made at and as of such time
(except for those representations and warranties that address matters only as of
a particular date or only with respect to a specific period of time which need
only be true and accurate as of such date or with respect to such period and
except where the failure of such representations and warranties to be so true
and accurate (without giving effect to any limitation as to materiality or
material adverse effect set forth therein) would not, and would not reasonably
be expected to, individually or in the aggregate, have a material adverse effect
on the Company and its Subsidiaries taken as a whole), and Parent and the
Purchaser shall have received a certificate of an executive officer of the
Company to such effect;

                           (b) the Company shall have  performed in all material
respects all of the obligations hereunder required to be performed by the
Company at or prior to the Effective Time and Parent and the Purchaser shall
have received a certificate of an executive officer of the Company to such
effect;

                           (c) Parent shall have  received the Senior  Financing
for the Transactions on terms substantially as set forth in the Senior
Commitment Letter and SJF shall have consummated or be prepared to consummate
the transactions set forth in the SJF Commitment Letter.

                                       51



                                   ARTICLE VII

                                   TERMINATION

                  SECTION 7.1 TERMINATION. Anything herein or elsewhere to the
contrary notwithstanding, this Agreement may be terminated at any time prior to
the Effective Time, whether before or after stockholder approval thereof:

                           (a) By the mutual consent of the Parent and the
Company.

                           (b) By either of the Company or the Parent:

                                    (i) if any Governmental  Entity of competent
jurisdiction shall have issued an order, decree, preliminary or permanent
injunction, statute, law, ordinance, regulation or ruling or taken any other
action (which order, decree, preliminary or permanent injunction, statute, law,
ordinance, regulation, ruling or other action the parties hereto shall use their
respective reasonable best efforts to prevent or lift), in each case permanently
restraining, enjoining or otherwise prohibiting the Transactions and such order,
decree, ruling or other action shall have become final and non-appealable; or

                                    (ii) the Effective Time shall not have
occurred on or prior to May 31, 2002 (the "Expiration Date") provided that if
the expiration date and the date by which the Senior Financing must be closed as
set forth in the Senior Commitment Letter are extended to a date on or prior to
June 30, 2002, the Expiration Date shall be extended to the same date, (provided
further that the right to terminate this Agreement under this Section 7.1(b)(ii)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date).

                           (c)  By the Company:

                                    (i)  prior to the  earlier  of (A) 5:00 P.M.
Pacific Time on the first business day at least sixty (60) calendar days after
public announcement of the Merger (the "7.1(c)(i) Expiration Date") or (B)
receipt of the Required Company Vote, in each case in order to accept a Superior
Proposal, if the Company Board shall have immediately thereafter approved, and
the Company shall immediately thereafter enter into, a definitive agreement
providing for the implementation of a Superior Proposal; provided, however, that
(1) the Company is not then in breach of Section 5.5, (2) the Company has
notified the Parent in writing that it is prepared to enter into an agreement
with respect to a Superior

                                       52



Proposal and the material terms thereof, (3) during the three-business day
period after the Company's notice contemplated by (2) above, (A) the Company
shall have offered to negotiate with (and, if accepted, negotiate with), and
shall have caused its respective financial and legal advisors to have offered to
negotiate with (and, if accepted, negotiate with) Parent to attempt to make such
adjustments in the terms and conditions of this Agreement as would enable the
Company to proceed with the Transactions and (B) the Board of Directors of the
Company, subsequent to the recommendation of the Special Committee, shall have
concluded, after considering the results of such negotiations and the revised
proposals made by the Parent, if any, that any Superior Proposal giving rise to
the Company's notice continues to be a Superior Proposal, (4) such termination
is within ten (10) business days following the three-business day period
referred to above and (5) no termination pursuant to this Section 7.1(c)(i)
shall be effective unless the Company has made payment of the Termination Fee
required by Section 5.11(b) by sending the wire transfer of the Termination Fee
to the account set forth on Schedule 5.11(b);

                                    (ii) if a breach by Parent or the  Purchaser
of any representation or warranty contained in Article IV hereof has occurred,
which breach, in the aggregate, would give rise to a failure of a condition set
forth in Section 6.2(a) and cannot be or has not been cured within thirty (30)
days after the giving of written notice to Parent or the Purchaser of such
breach;

                                    (iii) if a breach by Parent or the Purchaser
of any of the covenants or agreements contained herein has occurred, which
breach, in the aggregate would give rise to a failure of a condition set forth
in Section 6.2(b) and cannot be or has not been cured within thirty (30) days
after the giving of written notice to Parent or the Purchaser of such breach; or

                                    (iv) a material  adverse effect with respect
to Parent or the Purchaser shall have occurred and be continuing at the time of
termination, and cannot be or has not been cured within thirty (30) days after
the giving of written notice to Parent or the Purchaser of such occurrence.

                           (d)  By the Parent:

                                    (i) if,  prior to the  Effective  Time,  the
Company Board shall have (A) withdrawn, or modified or changed in a manner
adverse to Parent or the Purchaser its approval or recommendation of the Merger,
(B) recommended a Superior Proposal, (C) failed to call the Special Meeting
within five (5) days, or failed to hold the Special Meeting

                                       53



within forty-five (45) days, after the date the SEC clears the Proxy Statement
for mailing to the Company's stockholders following receipt of an Acquisition
Proposal; provided, however, that such 45-day period shall be extended by such
period of time as the Company may reasonably require to prepare, file and clear
with the SEC, and circulate to stockholders of the Company (and, if required, to
adjourn, postpone or reschedule any previously called or established Special
Meeting or Special Meeting date), any amendment or supplement to the Proxy
Statement that may, in the reasonable judgment of the Company, after
consultation with its outside counsel, be required under applicable law,
including, without limitation, the Exchange Act and the DGCL; or (D) resolved to
do any of the foregoing; or

                                    (ii)  if a  breach  by  the  Company  of any
representation or warranty contained in Article III has occurred, which breach,
in the aggregate, would give rise to a failure of a condition set forth in
Section 6.3(a) and cannot be or has not been cured within thirty (30) days after
the giving of written notice to the Company of such breach;

                                    (iii) if a breach by the  Company  of any of
the covenants or agreements contained herein has occurred, which breach, in the
aggregate would give rise to a failure of a condition set forth in Section
6.3(b) and cannot be or has not been cured within thirty (30) days after the
giving of written notice to the Company of such breach; or

                                    (iv)  if  a  material  adverse  effect  with
respect to the Company shall have occurred since the date hereof and be
continuing at the time of termination, and cannot be or has not been cured
within thirty (30) days after the giving of written notice to the Company of
such occurrence.

                  SECTION 7.2 EFFECT OF TERMINATION. In the event of the
termination of this Agreement by either the Company, Parent or the Purchaser, as
provided in Section 7.1, written notice thereof shall forthwith be given to the
other party or parties specifying the provision hereof pursuant to which such
termination is made, and this Agreement shall forthwith become null and void and
have no effect, and there shall be no liability on the part of Parent, the
Purchaser or the Company other than the provisions of the final sentence of
Section 5.2 and the provisions of Section 5.11 and this Section 7.2 and Sections
8.3, 8.5, 8.6, 8.7, 8.8 and 8.10; provided, however, that nothing herein shall
relieve any party from liability for damages resulting from a breach of this
Agreement by such party.

                                       54



                                  ARTICLE VIII

                                  MISCELLANEOUS

                  SECTION 8.1 AMENDMENT AND MODIFICATION. Subject to applicable
law, this Agreement may be amended, modified and supplemented in any and all
respects, whether before or after any vote of the stockholders of the Company
contemplated hereby, by written agreement of the parties hereto, by action taken
by their respective Boards of Directors (with the further approval of the
Special Committee if such amendment, modification or supplement would adversely
affect the Company), at any time prior to the Closing Date with respect to any
of the terms contained herein; provided, however, that after the approval of
this Agreement by the stockholders of the Company, no such amendment,
modification or supplement shall reduce or change the Merger Consideration.

                  SECTION 8.2 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES.
None of the representations and warranties in this Agreement or in any schedule,
instrument or other document delivered pursuant to this Agreement shall survive
the Effective Time. This Section 8.2 shall not limit any covenant or agreement
of the parties which by its terms contemplates performance after the Effective
Time.

                  SECTION 8.3 NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or sent by an overnight courier service, such as
FedEx, to the parties at the following addresses (or at such other address for a
party as shall be specified by like notice):

                           (a) if to Parent or the Purchaser, to:

                               ACI Capital Co., Inc.
                               900 Third Avenue
                               26th Floor
                               New York, New York 10022
                               Attention: Kevin S. Penn, Managing Director
                               Telephone No.: (212) 634-3350
                               Telecopy No.:  (212) 634-3351


                                       55



                               with a copy to:

                               Weil, Gotshal & Manges LLP
                               767 Fifth Avenue
                               New York, New York  10153
                               Attention:  Howard Chatzinoff, Esq.
                               Telephone No.:  (212) 310-8340
                               Telecopy No.:    (212) 310-8007

                               and

                           (b) if to the Company, to:

                               Sidney Craig

                               Chairman and Chief Executive Officer
                               11355 North Torrey Pines Road
                               La Jolla, California 92037
                               Telephone No.: (858) 812-7000
                               Telecopy No.:  (858) 812-2730

                               with a copies to:

                               Proskauer Rose LLP
                               2049 Century Park East, Suite 3200
                               Los Angeles, California 90067
                               Telephone No.: (310) 557-2900
                               Telecopy No.:  (310) 557-2193
                               Attention:  Thomas W. Dollinger, Esq.; and

                               Latham & Watkins
                               633 West Fifth Street, Suite 4000
                               Los Angeles, California 90071
                               Telephone No.:  (213) 485-1234
                               Telecopy No.:  (213) 891-8763
                               Attention:  Paul D. Tosetti, Esq.

                  SECTION 8.4  COUNTERPARTS.  This  Agreement may be executed in
two or more  counterparts,  all of which  shall be  considered  one and the same
agreement and shall


                                       56



become effective when two or more counterparts have been signed by each of the
parties and delivered to the other parties, it being understood that all parties
need not sign the same counterpart.

                  SECTION 8.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES.
This Agreement and the Confidentiality Agreement (including the documents and
the instruments referred to herein and therein): (a) constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof, and (b)
except as provided in Section 5.8 and Article II, are not in tended to confer
upon any person other than the parties hereto any rights or remedies hereunder.

                  SECTION 8.6 SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions of
this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.

                  SECTION 8.7 GOVERNING LAW. This Agreement shall be governed
and construed in accordance with the laws of the State of Delaware without
giving effect to the principles of conflicts of law thereof or of any other
jurisdiction.

                  SECTION 8.8  JURISDICTION.

                           (a) Any legal  action or  proceeding  with respect to
this Agreement or any matters arising out of or in connection with this
Agreement or otherwise, and any action for enforcement of any judgment in
respect thereof shall be brought exclusively in the Unites States federal courts
in the State of Delaware or any Delaware state court, and, by execution and
delivery of this Agreement, the Company, Parent and the Purchaser each hereby
accepts for itself and in respect of its property, generally and
unconditionally, the exclusive jurisdiction of the aforesaid courts and
appellate courts thereof. The Company, Parent and the Purchaser irrevocably
consent to service of process out of any of the aforementioned courts in any
such action or proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, or by recognized international express carrier
or delivery service, to the Company, Parent or the Purchaser at their respective
addresses referred to in Section 8.3 hereof.

                                       57



                           (b) The Company, Parent and the Purchaser each hereby
irrevocably waives any objection which it may now or hereafter have to the
laying of venue of any of the aforesaid actions or proceedings arising out of or
in connection with this Agreement or otherwise brought in the courts referred to
above and hereby further irrevocably waives and agrees, to the extent permitted
by applicable law, not to plead or claim in any such court that any such action
or proceeding brought in any such court has been brought in an inconvenient
forum. Nothing herein shall affect the right of any party hereto to serve
process in any other manner permitted by law.

                  SECTION 8.9 ASSIGNMENT. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, except that the Purchaser may assign, in
its sole discretion, any or all of its rights, interests and obligations
hereunder to Parent or to any direct or indirect wholly owned Subsidiary of
Parent. Subject to the preceding sentence, this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.

                  SECTION 8.10 ENFORCEMENT. The parties agree that irreparable
damage would occur in the event that this Agreement was not performed in
accordance with their specific terms. It is accordingly agreed that the parties
shall be entitled to specific performance of the terms hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.

                  SECTION 8.11 ACTIONS BY THE COMPANY. Any action requiring the
approval of the Company Board which is to be taken or which is made or required
to be taken or made by or for the benefit of the Company pursuant to, in
connection with, or in furtherance of this Agreement shall, prior to the
Effective Time, be made or taken, as applicable, upon the recommendation of and
with the approval of the Special Committee (in addition to any other action
required by law).

                                       58



                  IN WITNESS WHEREOF, Parent, the Purchaser and the Company have
caused this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.

                                      J HOLDINGS CORP.


                                      By:/s/ KEVIN S. PENN
                                         --------------------------------
                                            Name:  Kevin S. Penn
                                            Title: President

                                      J ACQUISITION CORP.


                                      By:/s/ KEVIN S. PENN
                                         -------------------------------
                                            Name:  Kevin S. Penn
                                            Title: President

                                      JENNY CRAIG, INC.,
                                      a Delaware corporation

                                      By:/s/ SID CRAIG
                                         -------------------------------
                                            Name:  Sidney Craig
                                            Title: Chairman and Chief Executive
                                                   Officer

EX-10.1

                                                                    EXHIBIT 10.1


                         STOCKHOLDERS' VOTING AGREEMENT

        STOCKHOLDERS' VOTING AGREEMENT, dated as of January 27, 2002, among
J Holdings Corp., a Delaware corporation ("Parent"), J Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of Parent (the "Purchaser"),
Jenny Craig, Inc., a Delaware corporation (the "Company"), and the stockholders
named in Exhibit A hereto (each, a "Stockholder" and collectively, the
"Stockholders").

        WHEREAS, simultaneously herewith, Parent and the Purchaser are entering
into an Agreement and Plan of Merger, dated as of the date hereof (as amended
from time to time, the "Merger Agreement"), with the Company, which
contemplates, among other things, that the Purchaser will merge with and into
the Company pursuant to the merger contemplated by the Merger Agreement (the
"Merger"); capitalized terms used but not otherwise defined herein shall have
the meanings set forth in the Merger Agreement, whether or not such Merger
Agreement shall be in effect from time to time;

        WHEREAS, as of the date hereof, each Stockholder owns beneficially and,
to the extent indicated on Exhibit A hereto, of record the number of shares of
Company Common Stock set forth opposite such Stockholder's name on Exhibit A
hereto (all such shares owned by the Stockholders and any shares of Company
Common Stock hereafter acquired by any Stockholder prior to the termination of
this Agreement, whether upon the exercise of options, warrants or rights, the
conversion or exchange of convertible or exchangeable securities, or by means of
purchase, dividend, distribution or otherwise being referred to herein as the
"Shares"); and

        WHEREAS, as a condition to the willingness of Parent and the Purchaser
to enter into the Merger Agreement, Parent and the Purchaser have requested that
each Stockholder agree, and in order to induce Parent and the Purchaser to enter
into the Merger Agreement, each Stockholder has agreed, jointly and severally,
to enter into this Agreement;

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

                                   ARTICLE I

                                VOTING AGREEMENT

        SECTION 1.1 Voting Agreement. Each Stockholder hereby agrees that,
during the period commencing on the date hereof and continuing until the first
to occur of the Effective Time or the termination of the Merger Agreement in
accordance with its terms, at any meeting of the stockholders of the Company,
however called, each Stockholder shall vote his, her or its Shares (a) in favor
of the approval and adoption of the Merger Agreement, the Merger and all the
transactions contemplated by the Merger Agreement and this Agreement and any
other actions required in furtherance thereof and hereof,



(b) against any action or agreement that would result in a breach in any respect
of any covenant, representation or warranty or any other obligation or agreement
of the Company under the Merger Agreement; and (c) except as otherwise expressly
agreed to in writing in advance by the Parent, against: (A) any extraordinary
corporate transaction, such as a merger, consolidation or other business
combination involving the Company or any of its Subsidiaries (other than the
Merger and the transactions contemplated by the Merger Agreement); (B) a sale,
lease or transfer of a material amount of assets of the Company or any of its
Subsidiaries, or a reorganization, recapitalization, dissolution or liquidation
of the Company or any of its Subsidiaries; (C) any change in a majority of the
persons who constitute the board of directors of the Company; (D) any change in
the present capitalization of the Company or any amendment of the Company's
certificate of incorporation or bylaws; (E) any other material change in the
Company's corporate structure or business; or (F) any other action involving the
Company or any of its Subsidiaries which is intended, or could reasonably be
expected, to impede, interfere with, delay, postpone, or adversely affect the
Merger and the transactions contemplated by the Merger Agreement, including,
without limitation, any action to approve or facilitate any Acquisition
Proposal. No Stockholder shall enter into any agreement or understanding with
any person or entity the effect of which would be inconsistent with or violative
of the provisions and agreements contained in this Agreement, including, without
limitation, in this Section 1.1.

        SECTION 1.2 Irrevocable Proxy. Each Stockholder hereby irrevocably
constitutes and appoints each of Kevin Penn, Ezra Field and Parent, during the
period commencing on the date hereof and continuing until the earlier of (x) the
Effective Time or (y) the termination of the Merger Agreement in accordance with
its terms, as his, her or its attorney and proxy pursuant to the provisions of
Section 212(c) of the Delaware General Corporation Law ("DGCL"), with full power
of substitution, to vote and otherwise act with respect to the Shares which such
Stockholder is entitled to vote at any meeting of stockholders of the Company
(whether annual or special and whether or not an adjourned or postponed meeting)
on, and only on, the matters described in Section 1.1 and to execute and deliver
any and all consents, instruments or other agreements or documents in order to
take any and all such actions required to be taken by Stockholder as set forth
in this Agreement. THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE, AND COUPLED
WITH AN INTEREST. Each Stockholder hereby revokes all other proxies and powers
of attorney with respect to such Stockholder's Shares that it may have
heretofore appointed or granted, and no subsequent proxy or power of attorney
shall be given or written consent executed (and if given or executed, shall not
be effective) by such Stockholder with respect thereto. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of a
Stockholder and any obligation of such Stockholder under this Agreement shall be
binding upon the heirs, personal representatives, successors and assigns of such
Stockholder, and shall not terminate until the earlier of the Effective Time or
the termination of the Merger Agreement in accordance with its terms. Each
Stockholder hereby authorizes all that each such proxy may lawfully do or cause
to be done by virtue hereof. Such irrevocable proxy is executed and intended to
be irrevocable in accordance with the provisions of


                                       2


Section 212(e) of the Delaware General Corporation Law. Each Stockholder
represents, severally as to itself and not jointly, that any proxies heretofore
given in respect of such Stockholder's Shares or any other voting securities of
the Company are not irrevocable and hereby revokes any and all previous proxies
with respect to the Shares or any other voting securities of the Company. The
Stockholders acknowledge and agree that any proxy holder may vote the Shares at
the Special Meeting.

        Notwithstanding anything herein to the contrary, this Agreement shall
not apply or in any way bind or restrict The Sid and Jenny Craig Foundation or
the Foundation Shares (as defined in Exhibit A).

                                   ARTICLE II

                                     CAPTURE

        SECTION 2.1 Capture. In order to induce Parent and the Purchaser to
enter into the Merger Agreement, during the term of this Agreement, each of the
Stockholders agrees to the matters set forth in this Article II with respect to
such Stockholder's Shares:

                (a) Capture. The Stockholders agree, jointly and severally, to
pay to Parent on demand, in cash, an amount equal to fifty percent (50%) of the
first $13,838,600 of Stockholder Profit (as defined below) and twenty percent
(20%) of all such Stockholder Profit in excess of $13,838,600 of such
Stockholder Profit from the consummation after a Capture Termination (as defined
below) of any Acquisition Proposal (a "Capture Acquisition Proposal") that is
consummated within twelve (12) months of a Capture Termination Date (as defined
below), if any, or as to which a definitive agreement is entered into within
twelve (12) months of a Capture Termination Date, if any, and consummated on or
prior to June 30, 2003. The Capture Termination Date is the date of termination
of the Merger Agreement as the result of a Capture Termination. A "Capture
Termination" means a termination of the Merger Agreement (1) by the Company
pursuant to Section 7.1(c)(i) of the Merger Agreement or (2) by Parent pursuant
to Section 7.1(d)(i)(B) or Section 7.1(d)(i)(C) of the Merger Agreement (or
Section 7.1(d)(i)(D) to the extent the resolution takes the action described in
Section 7.1(d)(i)(B) or (C) of the Merger Agreement); provided that, in any such
case, at the time of such termination, the Company is not entitled to terminate
the Merger Agreement by reason of Section 7.1(b)(i), Section 7.1(b)(ii), Section
7.1(c)(ii) or Section 7.1(c)(iii) of the Merger Agreement. The "Stockholder
Profit" of any Stockholder from the consummation of any Capture Acquisition
Proposal shall equal (A) the aggregate consideration received by such
Stockholder pursuant to such Capture Acquisition Proposal, valuing any non-cash
consideration (including any direct or indirect residual interest in the
Company) at its fair market value on the day immediately preceding the date of
such consummation plus (B) the fair market value, on the date of disposition, of
all Shares of such Stockholder disposed of after the Capture Termination Date
and prior to the date of consummation of the Capture Acquisition Proposal less
(C) Seventy-Three Million Three Hundred Forty-Four Thousand Five Hundred Eighty
Dollars ($73,344,580) (the "Original Merger Consideration"). Notwithstanding
anything herein to the contrary,


                                       3


(x) no capture amount pursuant to this Section 2.1(a) shall be payable by any of
the Stockholders hereunder unless a Capture Acquisition Proposal is consummated
on or prior to June 30, 2003 and (y) no such amount shall be payable other than
at the time of consummation of the Capture Acquisition Proposal.

                        (i) In the event that (x) prior to the Effective Time,
an Acquisition Proposal shall have been made and (y) the Effective Time of the
Merger shall have occurred and the Parent for any reason shall have increased
the amount of the Original Merger Consideration in connection with such
Acquisition Proposal, each Stockholder shall pay to the Parent on demand an
amount in cash equal to the product of (A) the number of Shares of such
Stockholder and (B) fifty percent (50%) of the first $1.00 of Excess
Consideration (as defined below) and twenty percent (20%) of such Excess
Consideration in excess of $1.00. The term "Excess Consideration" means the
excess, if any, of (1) the per share cash consideration or the per share fair
market value of any non-cash consideration, determined as of the Effective Time
of the Merger as the case may be, actually received by the Stockholder as a
result of the Merger, over (2) $5.30.

                (b) For purposes of Section 2.1(a) hereof, the fair market value
of any non-cash consideration consisting of:

                        (i) securities listed on a national securities exchange
or traded on the NASDAQ/NMS shall be equal to the average closing price per
share of such security as reported on such exchange or NASDAQ/NMS for the five
trading days after the date of determination; and

                        (ii) consideration which is other than cash or
securities of the form specified in clause (i) of this Section 2.1(b) shall be
determined by a nationally recognized independent investment banking firm
mutually agreed upon by the parties within ten Business Days of the event
requiring selection of such banking firm; provided, however, that if the parties
are unable to agree within two Business Days after the date of such event as to
the investment banking firm, then the parties shall each select one firm, and
those firms shall select a third investment banking firm, which third firm shall
make such determination; provided further, that the fees and expenses of such
investment banking firm shall be borne equally by the Parent, on the one hand,
and the Stockholders, on the other hand. The determination of the investment
banking firm shall be binding upon the parties.

                (c) Any payment under this Section 2.1 shall (x) if paid in
cash, be paid by wire transfer of same day funds to an account designated by the
Parent and (y) if paid through a mutually agreed transfer of securities, be paid
through delivery of such securities, suitably endorsed for transfer.


                                       4


                                  ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

        SECTION 3.1 Representations and Warranties of the Stockholders. The
Stockholders, jointly and severally, represent and warrant to the Parent as
follows:

                (a) Each entity Stockholder is duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation and
has the requisite corporate power and authority to enter into and deliver this
Agreement and to carry out its obligations hereunder. Each individual
Stockholder has the requisite power, authority and legal capacity to enter into
and deliver this Agreement and to carry out its obligations hereunder. This
Agreement has been duly executed and delivered by each Stockholder and, assuming
its due authorization, execution and delivery by Parent and the Purchaser, is a
legal, valid and binding obligation of such Stockholder, enforceable against
such Stockholder in accordance with its terms.

                (b) The execution and delivery of this Agreement by each
Stockholder does not, and the performance of this Agreement by each Stockholder
will not, (i) conflict with or violate any applicable statutes, laws,
ordinances, rules or regulations or (ii) conflict with or violate any contract
or other instrument to which the Stockholder is a party or by which such
Stockholder is bound, including, without limitation, any voting agreement,
stockholders agreement or voting trust.

                (c) The execution and delivery of this Agreement by each
Stockholder does not, and the performance of this Agreement by such Stockholder
will not, require any Stockholder to obtain any consent, approval, authorization
or permit of, or to make any filing with or notification to, any person or
Governmental Entity, except as may be required by the Exchange Act and the HSR
Act.

                (d) There is no suit, action, investigation or proceeding
pending or, to the knowledge of each Stockholder, threatened, against such
Stockholder at law or in equity before or by any Governmental Entity that could
reasonably be expected to impair the ability of such Stockholder to perform its
obligations hereunder, and there is no judgment, decree, injunction, rule, order
or writ of any Governmental Entity to which such Stockholder is or its assets
are subject that could reasonably be expected to impair the ability of such
Stockholder to perform its obligations hereunder.

                (e) Each Stockholder owns beneficially and of record the shares
of Company Common Stock set forth opposite such Stockholder's name on Exhibit A
hereto (with respect to such Stockholder, the "Existing Shares"). The Existing
Shares constitute all the shares of Company Common Stock owned beneficially and
of record by such Stockholder. Each Stockholder has sole voting power, sole
power of disposition, sole power to demand appraisal rights and all other
stockholder rights with respect to all of its Existing Shares, with no
restrictions, other than restrictions on disposition pursuant to


                                       5


applicable securities laws, on such Stockholder's rights of voting or
disposition pertaining thereto.

                (f) Each Stockholder acknowledges that such Stockholder is an
informed and sophisticated investor and, together with such Stockholder's
advisors, has undertaken such investigation as they have deemed necessary,
including the review of the Merger Agreement and this Agreement, to enable such
Stockholder to make an informed and intelligent decision with respect to the
Merger Agreement and this Agreement and the transactions contemplated thereby
and hereby. No Stockholder will seek rescission or revocation of this Agreement
or seek to withdraw or revoke any vote, irrevocable proxy or irrevocable
instruction delivered by it or on its behalf in connection therewith.

                (g) Except as applicable in connection with the transactions
contemplated hereby, each Stockholder's Shares and the certificates representing
such Shares are now, and at all times during the term hereof will be, held by
such Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever, except for any such encumbrances or proxies
arising hereunder in favor of the Parent.

        SECTION 3.2 Survival. Notwithstanding anything otherwise provided for
herein, each Stockholder's representations and warranties contained in this
Article III shall be true and correct as of the date Parent or the Purchaser, as
the case may be, consummates the Merger.

                                   ARTICLE IV

                          COVENANTS OF THE STOCKHOLDERS

        SECTION 4.1 No Solicitation. Each Stockholder shall cease, and shall
instruct and use its best efforts to cause each of their respective affiliates,
directors, officers, employees, agents and representatives (including without
limitation any investment banker, financial advisor, attorney, accountant or
other representative retained by such Stockholder) to immediately cease, any
discussions or negotiations with any other parties that may be ongoing with
respect to any Acquisition Proposal. Each Stockholder will not, directly or
indirectly, and will instruct and use its best efforts to cause each of their
respective officers, directors, employees, investment bankers, attorneys and
other agents retained by or acting on behalf of such Stockholder not to,
directly or indirectly (i) initiate, solicit, or encourage, any inquiries, any
expression of interest or the making of any proposal which constitutes or is
reasonably likely to constitute any Acquisition Proposal, (ii) engage in
negotiations or discussions with, or furnish any information, data or assistance
to any third party relating to any Acquisition Proposal or (iii) enter into any
agreement with respect to any Acquisition Proposal or approve any Acquisition
Proposal. Anything in this Section 4.1 to the contrary notwithstanding, nothing
in this Section 4.1 shall limit in any way a Stockholder who is an officer or
director of the Company from exercising any of his rights or performing any of
his duties as an officer or director of the Company. Notwithstanding anything to
the contrary contained herein, Sidney Craig,


                                       6


Jenny Craig and each other Stockholder may, at the request of the Board or the
Special Committee thereof, provided the Board or Special Committee is acting in
accordance with the provisions of Section 5.5(b) of the Merger Agreement,
participate in negotiations or discussions and furnish information, data or
assistance to a third party in connection with an Acquisition Proposal.

        SECTION 4.2 Restriction on Transfer. Until and unless this Agreement has
been terminated, each Stockholder shall not, except as expressly provided for in
this Agreement (a) sell, exchange, pledge, encumber or otherwise transfer or
dispose of, or agree to sell, exchange, pledge, encumber or otherwise transfer
or dispose of, any of its Shares, or any interest therein, (b) deposit its
Shares into a voting trust or enter into a voting agreement or arrangement with
respect to such Shares or grant any proxy with respect thereto or (c) enter into
any agreement, arrangement, understanding, or undertaking to do any of the
foregoing. Notwithstanding the foregoing, each Stockholder may transfer Shares
owned by such Stockholder to any corporation, partnership or limited liability
company of which all of the issued and outstanding voting and equity securities
are beneficially owned by Craig Enterprises, Inc. ("CEI"), but only if all of
the issued and outstanding voting and equity securities of CEI are beneficially
owned by Sidney Craig and/or Jenny Craig. Any such transferee shall agree in
writing to be bound by this Agreement as if he, she or it were a signatory
hereto, and no such transfer shall relieve any Stockholder of his, her or its
obligations hereunder. CEI hereby agrees that it shall not transfer nor cause or
permit any such transferee to transfer any Shares in violation of this Section
4.2 and hereby agrees to take any necessary action in order to comply with the
provisions of this Section 4.2. No transfer in violation of this Agreement shall
be made or recorded on the books of the Company and any such transfer shall be
void and of no force or effect. Notwithstanding anything to the contrary herein,
SJF Enterprises, Inc. ("SJF") may consummate the SJF Contribution (as defined in
the Merger Agreement) in accordance with the terms of its Commitment Letter to
Parent, of even date herewith.

        SECTION 4.3 Waiver of Appraisal Rights. Each Stockholder hereby waives
any appraisal or other rights to dissent from the Merger that such Stockholder
may have.

        SECTION 4.4 Reliance by Parent. Each Stockholder understands and
acknowledges that Parent is entering into, and causing the Purchaser to enter
into, the Merger Agreement in reliance upon such Stockholder's execution and
delivery of this Agreement.

        SECTION 4.5 Further Assurances. From time to time, at the other party's
request and without further consideration, each party hereto shall execute and
deliver such additional documents and take all such further lawful action as may
be necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this Agreement.

        SECTION 4.6 Stockholder Capacity. No person executing this Agreement who
is or becomes during the term hereof a director or officer of the Company makes
any


                                       7


agreement or understanding herein in his or her capacity as such director or
officer. Each Stockholder signs solely in his or her capacity as the record and
beneficial owner of such Stockholder's Shares.

        SECTION 4.7 Stop Transfer. Each Stockholder agrees with, and covenants
to, the Parent that during the term of this Agreement, such Stockholder shall
not request that the Company register the transfer (book-entry or otherwise) of
any certificate or uncertificated interest representing any of such
Stockholder's Shares, unless such transfer is made in compliance with this
Agreement (including the provisions of Article 2 hereof). In the event of a
stock dividend or distribution, or any change in the Company Common Stock by
reason of any stock dividend, split-up, recapitalization, combination, exchange
of shares or the like, the term "Shares" shall be deemed to refer to and include
the Shares as well as all such stock dividends and distributions and any shares
into which or for which any or all of the Shares may be changed or exchanged.

        SECTION 4.8 Termination. This Agreement shall terminate upon the earlier
of (a) the Effective Time or (b) the termination of the Merger Agreement in
accordance with its terms; provided, however, that the obligations of the
Stockholders set forth in Article II hereof shall survive a Capture Termination
and shall be enforceable in accordance with the terms of Article II hereof;
provided, further, however, that nothing in this Section 4.8 shall relieve the
parties hereto of any liability for a breach of or a default under this
Agreement.

        SECTION 4.9 No Written Consent. Parent, Purchaser and the Stockholders
agree that the Stockholders will vote their respective Shares on the approval
and adoption of this Agreement at a meeting of the stockholders of the Company,
and that the Stockholders will not take any action by written consent or
otherwise on the approval or adoption of this Agreement with respect to such
Shares other than at the Special Meeting. Parent and Purchaser each agree that
they will not vote (or cause to be voted) the Shares owned by the Stockholders,
other than at a meeting of the stockholders of the Company and will not take any
action by written consent or otherwise with respect to such Shares in lieu of a
meeting or otherwise (or cause any such action to be taken).


                                       8


                                   ARTICLE V

                                   DEFINITIONS

        SECTION 5.1 Definitions. For the purpose of this Agreement,
"beneficially own" or "beneficial ownership" with respect to any securities
shall mean having "beneficial ownership" of such securities (as determined
pursuant to Rule 13d-3 under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in writing, subject to
any fiduciary duty in the case of securities not held of record.

                                   ARTICLE VI

                                  MISCELLANEOUS

        SECTION 6.1 Severability. If any term or other provision of this
Agreement is or is deemed to be invalid, illegal or incapable of being enforced
by any applicable rule of law or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of this Agreement is not affected in
any manner materially adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually
acceptable manner so that the terms of this Agreement remain as originally
contemplated to the fullest extent possible.

        SECTION 6.2 Entire Agreement. This Agreement constitutes the entire
understanding between Parent, the Purchaser and each Stockholder with respect to
the subject matter hereof and thereof and supersedes all prior agreements and
understandings, both written and oral, between Parent, the Purchaser and each
Stockholder with respect to the subject matter hereof and thereof.

        SECTION 6.3 Certain Events. Each Stockholder agrees that this Agreement,
including without limitation the proxy granted pursuant to Section 1.2, and the
obligations hereunder shall attach to such Stockholder's Shares and shall be
binding upon any person to which legal or beneficial ownership of such Shares
shall pass, whether by operation of law or otherwise, including, without
limitation, such Stockholder's heirs, guardians, representatives, administrators
or successors. Notwithstanding any transfer of Shares, the transferor shall
remain liable for the performance of all obligations under this Agreement of the
transferor.

        SECTION 6.4 Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same instrument.


                                       9


        SECTION 6.5 Mutual Drafting. Each party hereto has participated in the
drafting of this Agreement, which each party acknowledges is the result of
extensive negotiations between the parties.

        SECTION 6.6 Assignment. This Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the other
parties hereto, provided that Parent may assign its rights hereunder to any
direct or indirect wholly owned subsidiary of Parent, but no such assignment
shall relieve Parent of its obligations hereunder if such assignee does not
perform such obligations.

        SECTION 6.7 Amendments. This Agreement may not be amended, supplemented,
waived or otherwise modified or terminated, except upon the execution and
delivery of a written agreement executed by the parties hereto.

        SECTION 6.8 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by delivery in person, facsimile
transmission, registered or certified mail (postage prepaid, return receipt
requested), or courier service providing proof of delivery to the respective
parties at the following addresses (or to such other address for a party as
shall be specified in a notice given in accordance with this Section 6.8).

               If to Parent or the Purchaser:

                      J Holdings Corp.
                      J Acquisition Corp.
                      900 Third Avenue
                      26th Floor
                      New York, New York  10022
                      Telecopy No.:  (212) 634-3351
                      Attention:  Kevin S. Penn

               with copies to:

                      Weil, Gotshal & Manges LLP
                      767 Fifth Avenue
                      New York, New York 10153
                      Telecopy No.:  (212) 310-8007
                      Attention: Howard Chatzinoff, Esq.


               If to the Stockholders:

                      16092 San Dieguito Road
                      Rancho Santa Fe, CA 92067
                      Telecopy No.:  (619) 756-0641


                                       10


                      Attention:

               with a copy to:

                      Proskauer Rose LLP
                      2049 Century Park East, Suite 3200
                      Los Angeles, California  90067
                      Telecopy No.:  (310) 557-2900
                      Attention:  Thomas W. Dollinger, Esq.

               If to the Company:

                      Jenny Craig, Inc.
                      11355 North Torrey Pines Road
                      La Jolla, CA  92037
                      Telecopy No.:  (858) 812-2730
                      Attention:


        SECTION 6.9 No Third Party Beneficiaries. This Agreement is not intended
to be for the benefit of, and shall not be enforceable by, any person or entity
not a party hereto; provided however, that the parties hereto acknowledge that
the Company is intended to be a beneficiary of, and shall be entitled to rely
on, the covenants and agreements contained in Section 4.9 hereof.

        SECTION 6.10 Specific Performance. Each of the parties hereto
acknowledges that a breach by it of any agreement contained in this Agreement
will cause the other party to sustain damage for which it would not have an
adequate remedy at law for money damages, and therefore each of the parties
hereto agrees that in the event of any such breach the aggrieved party shall be
entitled to the remedy of specific performance of such agreement and injunctive
and other equitable relief in addition to any other remedy to which it may be
entitled, at law or in equity.

        SECTION 6.11 Remedies Cumulative. All rights, powers and remedies
provided under this Agreement or otherwise available in respect hereof at law or
in equity shall be cumulative and not alternative, and the exercise of any
thereof by any party shall not preclude the simultaneous or later exercise of
any other right, power or remedy by such party.

        SECTION 6.12 No Waiver. The failure of any party hereto to exercise any
right, power or remedy provided under this Agreement or otherwise available in
respect hereof at law or in equity, or to insist upon strict compliance by any
other party hereto with its obligations hereunder, and any custom or practice of
the parties at variance with the terms hereof, shall not constitute a waiver by
such party of its rights to exercise any such or other right, power or remedy or
to demand such compliance.


                                       11


        SECTION 6.13 Governing Law.

                (a) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without giving effect to the
principles of conflicts of law.

                (b) Each party hereby irrevocably submits to the exclusive
jurisdiction of the Court of Chancery in the State of Delaware in any action,
suit or proceeding arising in connection with this Agreement, and agrees that
any such action, suit or proceeding shall be brought only in such court (and
waives any objection based on forum non conveniens or any other objection to
venue therein); provided, however, that such consent to jurisdiction is solely
for the purpose referred to in this subsection (b) and shall not be deemed to be
a general submission to the jurisdiction of such court or in the State of
Delaware other than for such purposes.

        SECTION 6.14 Waiver of Jury Trial. EACH OF PARENT, PURCHASER AND THE
STOCKHOLDERS HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE)
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, PURCHASER
OR THE STOCKHOLDERS IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND
ENFORCEMENT THEREOF.

        SECTION 6.15 Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.

                         [Signatures on Following Page]


                                       12


        IN WITNESS WHEREOF, Parent, the Purchaser and each Stockholder have
caused this Agreement to be duly executed as of the date first above written.

                                             J HOLDINGS CORP.



                                             By: /s/ KEVIN S. PENN
                                                 -------------------------------
                                                 Name: Kevin S. Penn
                                                 Title: President

                                             J ACQUISITION CORP.



                                             By: /s/ KEVIN S. PENN
                                                 -------------------------------
                                                 Name: Kevin S. Penn
                                                 Title: President


                                                 /s/ SID CRAIG
                                                 -------------------------------
                                                 Sidney Craig


                                                 /s/ JENNY CRAIG
                                                 -------------------------------
                                                 Jenny Craig


                                             CRAIG ENTERPRISES, INC.



                                             By: /s/ SID CRAIG
                                                 -------------------------------
                                                 Name: Sidney Craig
                                                 Title: Chairman


                                       13


                                             SJF ENTERPRISES, INC.



                                             By: /s/ SID CRAIG
                                                 -------------------------------
                                                 Name:  Sidney Craig
                                                 Title: Chairman

                                             DA HOLDINGS, INC.



                                             By: /s/ SID CRAIG
                                                 -------------------------------
                                                 Name:  Sidney Craig
                                                 Title: Chairman


                                             JENNY CRAIG, INC.



                                             By: /s/ SID CRAIG
                                                 -------------------------------
                                                 Name:  Sidney Craig
                                                 Title: Chairman and Chief
                                                        Executive Officer

                                             [Solely with Respect to Sections
                                             4.2, 4.7 and 4.9 hereof]


                                       14


                                    Exhibit A



Name                                           Shares
- ----                                           ------
                                            

Sidney Craig(1)                                13,838,600

Jenny Craig(1)                                 13,838,600

Craig Enterprises, Inc. (1)                    13,838,600

SJF Enterprises, Inc.(2)                       13,838,600

DA Holdings, Inc.                              1,950,000



(1)  13,838,600 of these shares are beneficially owned by SJF Enterprises, Inc.
     ("SJF"), and 373,900 are owned beneficially and directly by The Sidney and
     Jenny Craig Foundation (the "Foundation Shares"). Sidney and Jenny Craig
     own all of the outstanding voting and equity securities of Craig
     Enterprises, Inc. which owns all of the outstanding voting and equity
     securities of SJF.

(2)  Of the 13,838,600 shares beneficially owned by SJF, 11,888,600 are owned
     directly by SJF and 1,950,000 are owned directly by DA Holdings, Inc., all
     of the outstanding voting and equity securities of which are owned by SJF.


                                       15

EX-10.2

                                                                    EXHIBIT 10.2

January 27, 2002


J HOLDINGS CORP.
900 Third Avenue, 26th Floor
New York, NY  10022

Re: Equity Capital Commitment

Gentlemen:

        Reference is made to that certain Agreement and Plan of Merger (the
"Agreement"), dated as of the date hereof, by and among J Holdings Corp.
("Parent"), J Acquisition Corp. ("Purchaser") and Jenny Craig, Inc. (the
"Company"), which agreement contemplates the acquisition by Parent of 100% of
the outstanding shares of the Company (such acquisition, together with
agreements related thereto or contemplated thereby, representing the
"Transaction"). In connection therewith, SJF Enterprises, Inc. or an affiliate
thereof (the "Investor") is pleased to advise you that it hereby commits to
contribute to Parent 754,717 shares of the common stock of the Company (the
"Investment"), to be exchanged (immediately prior to the Transaction) for shares
of common stock of Parent representing twenty percent (20%) of the outstanding
common stock of Parent and shares of preferred stock of Parent representing
twenty percent (20%) of the outstanding preferred stock of Parent. The
Investor's commitment to provide the Investment is subject in all respects to
satisfaction of the terms and conditions contained in this commitment letter and
in the Outline of Terms and Conditions attached as Exhibit A (the "Term Sheet").

        The Investor's commitment to provide the Investment is subject to (i)
the negotiation, execution and delivery of definitive documentation thereof,
including, without limitation, a Certificate of Designations of the Senior
Preferred, in form and substance satisfactory to the Investor, Parent and their
respective counsel, (ii) the execution and delivery of a Stockholders' Agreement
between the Company, the Investor and certain other parties substantially in the
form of Exhibit B hereto, (iii) the conditions precedent to the closing of the
Transaction set forth in Sections 6.1, 6.2 and 6.3 (other than 6.3(c)) of the
Agreement shall have been satisfied and the parties to the Agreement shall be
willing and prepared to consummate the Transaction, (iv) all conditions
precedent to the obligations of the Senior Lender, Purchaser Lenders, and Parent
Equity Investors to consummate the Senior Financing, Purchaser Debt Financing
and Parent Equity Financing (other than any condition requiring the consummation
of the contribution of Shares contemplated by this Commitment Letter) shall have
been satisfied and the Senior Lender, Purchaser Lenders and Parent Equity
Investors shall intend to and shall be willing and prepared to consummate the
Senior Financing, the Purchaser Debt Financing and the Parent Equity Financing
(as the terms set forth in this subparagraph (iv) are defined in the Agreement),
and (v) the satisfaction of the conditions set forth in the Term Sheet attached
hereto.



        The offer made by the Investor in this commitment letter is contingent
upon execution of the Agreement, and should the Agreement be executed, the
commitment by the Investor to provide the Investment shall expire upon the
earlier of (i) the termination of the Agreement and (ii) the Expiration Date (as
defined in the Agreement), as may be extended in accordance with the terms of
the Agreement.

        If the terms and conditions of the offer contained herein meet with your
approval, please indicate your acceptance by signing and returning a copy of
this commitment letter to the Investor.

        This commitment letter, including the attached Exhibits (i) supersedes
all prior discussions, agreements, commitments, arrangements, negotiations or
understandings, whether oral or written, of the parties with respect thereto,
(ii) shall be governed by the law of the State of New York, (iii) shall be
binding upon the parties and their respective successors and assigns, (iv) may
not be relied upon or enforced by any other person or entity other than the
parties hereto and Purchaser, and (v) may be signed in multiple counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument. If this commitment letter becomes the
subject of a dispute, each of the parties hereto hereby waives trial by jury.
This commitment letter may be amended, modified or waived only in a writing
signed by the parties hereto.



                                             Very truly yours,
                                             SJF ENTERPRISES, INC.

                                             By: /s/ SID CRAIG
                                                 -------------------------------
                                                 Name:  Sidney Craig
                                                 Title:  Chairman

Agreed and accepted on this
27th day of January, 2002:

J HOLDINGS CORP.



By: /s/ KEVIN S. PENN
    -------------------------------
    Name: Kevin S. Penn
    Title:  President



                                    EXHIBIT A

          OUTLINE OF TERMS AND CONDITIONS FOR PROPOSED EQUITY FINANCING

This Outline of Terms and Conditions is part of the Equity Commitment Letter,
dated January 27, 2002 (the "Commitment Letter"), addressed to J Holdings Corp.
by SJF Enterprises, Inc. ("SJF"), and is subject to the terms and conditions of
the Commitment Letter. Capitalized terms used herein shall have the meanings set
forth in the Commitment Letter unless otherwise defined herein.

ISSUER:               J Holdings Corp.

TOTAL ISSUANCE
OF PREFERRED:         $18 million

TOTAL ISSUANCE
OF COMMON:            $2 million

COMMITMENT
BY INVESTOR:          $3.6 million in senior preferred stock (the "Preferred"),
                      having an aggregate liquidation preference of $3.6
                      million, and $400,000 in shares of Common Stock (the
                      "Common"), at a price of $0.10 per share.

MANDATORY
REDEMPTION
OF PREFERRED:         Five years.

PREFERRED             Cumulative undeclared dividends (declarable only in cash),
DIVIDENDS:            payable at the rate of 15% per annum, or such lower rate
                      as would ensure for any time in which ACI remains a holder
                      of the Preferred that the combined interest + dividend
                      rate payable on the Issuer's capital (which shall be an
                      amount equal to the sum of the Purchaser Debt Financing
                      (as defined in the Agreement), Preferred and Common (which
                      includes paid in capital and additional paid in capital))
                      does not exceed 15% for any annual period (the applicable
                      rate at any time being the "Base Rate"); provided,
                      however, that the foregoing limitation shall only apply to
                      the extent ACI Capital Co., Inc. remains subject to
                      applicable limitations prescribed by the Small Business
                      Administration ("SBA"). The rate paid on the Issuer's
                      capital shall be calculated in a manner consistent with
                      applicable regulations of the SBA.

USE OF PROCEEDS:      To finance the Transaction and the general working capital
                      needs of the Issuer.

OPTIONAL
REDEMPTION:           At the option of the Issuer, with no penalty.

TRANSFERABILITY:      Subject to restrictions contained in the Stockholders'
                      Agreement.

COVENANTS:            Standard for this type of security, including, but not
                      limited to, reporting requirements, change of control
                      restrictions, approval of mergers, acquisitions, equity
                      issuances, payment of dividends, debt incurrence,
                      redemption of equity or debt, amendments to the preferred
                      stock, amendments of equity rights, amendments to the
                      Issuer's charter and bylaws, changes in the Issuer's
                      management, material changes in business strategy,
                      increase in size of Board, etc. Such covenants will not
                      restrict the Issuer's ability to incur debt for the sole
                      purpose of prepaying Preferred.



CONDITIONS:

                      Customary conditions precedent, including, without
                      limitation:
                      1) Negotiation, execution, delivery of definitive
                         documentation.
                      2) Closing of the Acquisition contemplated by the
                         Agreement.

EX-99.1

                                                                    EXHIBIT 99.1


         JENNY CRAIG TO BE ACQUIRED BY ACI CAPITAL & DB CAPITAL PARTNERS
                Existing Management Will Continue to Lead Company

LA JOLLA, CALIF. - JAN. 28, 2002 -- Jenny Craig, Inc. (OTC Bulletin Board: JCGI)
announced today that it has entered into a definitive merger agreement providing
for the acquisition of Jenny Craig by an investor group led by ACI Capital Co.,
Inc., a private investment firm. DB Capital Partners, the private equity arm of
Deutsche Bank, is ACI Capital's partner in the transaction. The investor group
will also include Sid and Jenny Craig. The merger agreement calls for each Jenny
Craig stockholder to receive $5.30 per share in cash, which represents a premium
of approximately 68% to Jenny Craig's January 25, 2002 closing price of $3.15.
Based on the $5.30 price per share, the transaction is valued at approximately
$115 million.

Completion of the transaction is subject to customary closing conditions,
including approval by the stockholders of Jenny Craig, the securing of
regulatory approvals and the receipt of financing. The purchaser has received a
senior debt financing commitment from Ableco Finance and commitments from ACI
Capital and DB Capital to provide equity and debt capital. The Craigs have also
agreed to contribute a portion of their holdings of Jenny Craig stock with a
value, based on the $5.30 per share merger price, of $4 million for stock in the
acquisition vehicle. In addition, the Craigs and certain of their affiliated
entities have agreed to vote their current shareholdings of approximately 67% of
the Company's stock in favor of the transaction, subject to the terms and
conditions of their voting agreement with the purchaser. The transaction is
expected to close in the second quarter of 2002.

Jenny Craig is one of the largest weight management firms worldwide with 652
centers in the United States, Canada and abroad. Founded in 1983, the Company
offers a comprehensive weight management program that helps clients learn how to
eat the foods they want, increase their energy level through simple activity and
build more balance in their lives for optimal weight loss and well-being. The
program combines personal, one-on-one consultations at Jenny Craig Centres with
nutritionally balanced menu plans. During the four quarters ended September 30,
2001, the Company generated $291 million in sales.

"ACI Capital and DB Capital have long histories of backing management and
investing in growing companies, and we are delighted to be entering into this
agreement with them," said Sid Craig, who, with his wife, Jenny Craig,
co-founded the Company. "This transaction is good news for our shareholders,
clients and employees," he continued. "Shareholders benefit by receiving a
premium of 68% above the recent share price. Clients and employees will benefit
as we continue to grow our business through investment and expansion."



Kevin Penn, a Managing Director of ACI Capital, stated, "We are excited to have
the opportunity to invest in one of the dominant global weight management
businesses. Jenny Craig is led by a talented management team, and its focus on
individual counseling and portion control has resulted in a unique franchise. We
look forward to working with management to grow the company's core business."
Added Robert Sharp, a Managing Director of DB Capital, "Our investment in Jenny
Craig represents the execution of DB Capital's portfolio strategy of investing
in growth-oriented companies that have strong brand equity, an experienced
management team and a solid customer base. "

Jenny Craig will keep its headquarters in Southern California and the current
management team will continue to operate the Company post-transaction. In
addition, Jenny and Sid Craig, the Company's founders, will remain involved with
the Company and Sid Craig, currently Chairman and CEO, will continue to serve on
the Company's Board. Kent Kreh, former Chief Executive Officer of Weight
Watchers International, will join the Company as Chairman of the Board. Also
joining the Board will be Matthew Bronfman, a Managing Director of ACI Capital,
and Richard E. Wenz, a Consulting Partner of DB Capital and former President of
Safety 1st.

"Jenny Craig has an attractive core business," stated Kent Kreh, "including a
team of experienced, motivated counselors and one of the top two brands in the
industry. I'm pleased to have the chance to work with the Company going
forward."

The Company's Board of Directors (other than Sid Craig and Jenny Craig, who did
not vote on the transaction) unanimously approved the transaction following
receipt of the unanimous recommendation of a Special Committee comprised of
independent directors of the Company and a fairness opinion from Houlihan Lokey
Howard & Zukin Financial Advisors, Inc. that the merger consideration is fair to
Jenny Craig's stockholders (other than the Craigs and their affiliates) from a
financial point of view. While the merger agreement prohibits Jenny Craig from
soliciting competing proposals, it has 60 days to accept a superior proposal,
subject to payment of a breakup fee amount of $4.875 million and certain other
conditions. Koffler & Company, an investment banking firm headquartered in Los
Angeles, acted as financial advisor to Jenny Craig, and Houlihan Lokey acted as
financial advisor to the Special Committee. Jenny Craig is being represented by
Proskauer Rose LLP, the Special Committee by Latham & Watkins, ACI Capital by
Weil, Gotshal & Manges LLP, and DB Capital by Gibson, Dunn & Crutcher LLP.

About Jenny Craig

Founded in 1983, Jenny Craig, Inc. is one of the largest weight management
service companies in the world. The Company offers a comprehensive weight
management program that helps clients learn how to eat the foods they want,
increase their energy level through simple activity, and build more balance in
their lives for optimal weight loss and well-being. The program includes
personal, one-on-one consultations at Jenny Craig Centres, with menu plans that
are nutritionally balanced according to the recommendations of the USDA Food
Guide Pyramid and the U.S. Dietary Guidelines. Jenny Craig Centres are located
in the United States, Canada, Australia, New Zealand,


                                       2


and Puerto Rico. At December 31, 2001, the Company owned 542 Centres with an
additional 110 Centres owned by franchisees, bringing the total number of
Centres in operation to 652. For more information, please visit
www.jennycraig.com.

About ACI Capital Co., Inc.

ACI Capital is a private investment firm with over 40 years of history leading
middle-market management buyouts and growth capital investments across a broad
spectrum of industries throughout North America. ACI Capital is an active
partner with management in building the value of its companies. For more
information, please visit www.acicapital.com.

About DB Capital Partners, Inc.

DB Capital Partners is the private equity arm of Deutsche Bank AG. With over 150
investment professionals operating out of offices in the Americas, Europe, Asia
and Australia, DB Capital Partners is a leading manager of private equity
assets. Drawing upon the substantial global resources of Deutsche Bank, DB
Capital Partners invests in all manner of financial transactions globally
including growth financings, recapitalizations, leveraged buyouts, mezzanine
financings, venture investing and primary and secondary funds. For more
information, please visit www.dbcapitalpartners.com.

About Deutsche Bank

With assets of almost 1 trillion Euro and over 97,000 employees, Deutsche Bank
offers its clients unparalleled financial services throughout the world in over
70 countries. It ranks among the leaders in asset management, capital markets,
corporate finance, custody, cash management and private banking. For more
information, please visit www.deutsche-bank.com.

The Company will file a report on form 8-K with the Securities and Exchange
Commission regarding the proposed transaction, which will include a copy of the
merger agreement and certain related documents.

THIS PRESS RELEASE INCLUDES FORWARD-LOOKING STATEMENTS ABOUT THE COMPANY'S
REVENUES, COSTS, EARNINGS, MARGINS AND OTHER FUTURE PLANS AND OBJECTIVES. ANY
SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE
ACTUAL RESULTS TO VARY MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY ARE: INCREASED COMPETITION; TECHNOLOGICAL AND SCIENTIFIC
DEVELOPMENTS, INCLUDING APPETITE SUPPRESSANTS AND OTHER DRUGS WHICH CAN BE USED
IN WEIGHT LOSS PROGRAMS; INCREASES


                                       3



IN COST OF FOOD OR SERVICES; LACK OF MARKET ACCEPTANCE OF ADDITIONAL PRODUCTS
AND SERVICES; LEGISLATIVE AND REGULATORY RESTRICTIONS; EFFECTIVENESS OF
MARKETING AND ADVERTISING PROGRAMS; PREVAILING DOMESTIC AND FOREIGN ECONOMIC
CONDITIONS; AND THE RISK FACTORS SET FORTH FROM TIME TO TIME IN THE COMPANY'S
ANNUAL REPORTS AND OTHER REPORTS AND FILINGS WITH THE SEC.


                                       4