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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE
SECURITIES EXCHANGE ACT OF 1934)
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DAVCO RESTAURANTS, INC.
(NAME OF THE ISSUER)
DAVCO RESTAURANTS, INC.
DAVCO ACQUISITION HOLDING INC.
DAVCO MERGER SUB INC.
RONALD D. KIRSTIEN
HARVEY ROTHSTEIN
CITICORP VENTURE CAPITAL, LTD.
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS OF SECURITIES)
238 330 10 4
(CUSIP NUMBER OF CLASS OF SECURITIES)
G. DANIEL O'DONNELL, ESQ. JOSHUA N. KORFF, ESQ.
DECHERT PRICE & RHOADS KIRKLAND & ELLIS
BELL ATLANTIC TOWER CITICORP CENTER
1717 ARCH STREET 153 EAST 53RD STREET
PHILADELPHIA, PENNSYLVANIA 19103 NEW YORK, NEW YORK 10022
(215) 994-4000 (212) 446-4800
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSONS AUTHORIZED TO RECEIVE
NOTICES AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
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This statement is filed in connection with (check the appropriate box):
a. /X/ The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. / / The filing of a registration statement under the Securities Act of
1933.
c. / / A tender offer.
d. / / None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: /X/
CALCULATION OF FILING FEE
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TRANSACTION VALUATION(1) AMOUNT OF FILING FEE(2)
$119,143,300 $23,829
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(1) For purposes of calculation of the filing fee only. Assumes the purchase,
at a purchase price of $20.00 per share of Common Stock, of 5,957,165
shares of Common Stock of the Issuer, representing all of such Common Stock
outstanding on a fully diluted basis (assuming the exercise of options and
warrants to acquire shares of Common Stock and excluding shares of Common
Stock owned by DavCo Acquisition Holding Inc.). The above calculation is
based on the most recent publicly available data for the Issuer.
(2) The amount of the filing fee equals 1/50th of 1% of the transaction value.
/X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing
AMOUNT PREVIOUSLY PAID: $23,829 FILING PARTY: DAVCO RESTAURANTS, INC.
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FORM OR REGISTRATION NO.:PRELIMINARY PROXY STATEMENT
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DATE FILED: NOVEMBER 19, 1997
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INTRODUCTION
This Rule 13E-3 Transaction Statement on Schedule 13E-3 is being filed
with the Securities and Exchange Commission (the "Commission") on behalf of
DavCo Restaurants, Inc., a Delaware corporation (the "Company"), DavCo
Acquisition Holding Inc., a Delaware corporation ("DAC"), DavCo Merger Sub Inc.,
a Delaware corporation ("DAC SUB"), Ronald D. Kirstien, Harvey Rothstein and
Citicorp Venture Capital, Ltd., with respect to a proposed merger pursuant to
which DAC SUB will be merged with and into the Company (the "Merger") and the
Company, as the surviving corporation in the Merger, will become a wholly-owned
subsidiary of DAC. Mr. Kirstien is the President, Chief Executive Officer and
Chairman of the Board of the Company, and is the President and a director of DAC
and DAC SUB. Mr. Rothstein is the Executive Vice President and a director of
the Company, and is Vice President, Secretary and a director of DAC and DAC SUB.
The following cross-reference sheet is being supplied pursuant to
General Instruction F to Schedule 13E-3 and shows the location of the
information required by Schedule 13E-3 in the preliminary Proxy Statement of
the Company attached hereto as Exhibit (d)(3) and filed with the Commission
concurrently herewith. The information set forth in the preliminary Proxy
Statement, including all annexes, schedules and exhibits thereto, is hereby
expressly incorporated by reference as set forth in the following
cross-reference sheet and in the responses to each item of this Schedule
13E-3, and such responses are qualified in their entirety by the provisions
of the preliminary Proxy Statement. The cross-reference sheet indicates the
caption in the preliminary Proxy Statement under which the responses are
incorporated herein by reference. If any such item is inapplicable or the
answer thereto is in the negative and is omitted from the preliminary Proxy
Statement, it is so indicated in the cross-reference sheet.
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CROSS REFERENCE SHEET
Pursuant to General Instruction F to Schedule 13E-3
ALL REFERENCES ARE TO PORTIONS OF THE
SCHEDULE 13E-3 ITEM PROXY STATEMENT WHICH ARE
NUMBER AND CAPTION INCORPORATED HEREIN BY REFERENCE
------------------ -------------------------------------
1. Issuer and Class of Security
Subject to the Transaction
(a)............................ Outside Front Cover Page;
"INTRODUCTION."
(b)............................ Outside Front Cover Page;
"SUMMARY--Record Date; Shares Entitled
to Vote; Quorum;" "INTRODUCTION--Voting
at the Special Meeting."
(c)............................ "SUMMARY--Market Information;" "MARKET
PRICES AND DIVIDENDS ON THE SHARES."
(d)............................ "MARKET PRICES AND DIVIDENDS ON THE
SHARES."
(e)............................ Not applicable.
(f)............................ "SECURITY OWNERSHIP OF THE COMPANY;"
Schedule I to the Proxy Statement.
2. Identity and Background
(a)-(d)........................ "CERTAIN INFORMATION CONCERNING DAC, DAC
SUB AND AFFILIATES;" "CERTAIN
INFORMATION REGARDING THE DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMPANY."
(e)-(f)........................ None.
(g)............................ "CERTAIN INFORMATION REGARDING THE
DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY."
3. Past Contacts, Transactions or
Negotiations
(a)(1)......................... "SUMMARY--The Merger;" "SPECIAL
FACTORS--Interests of Certain Persons in
the Merger;" "THE
MERGER--Indemnification of Directors and
Officers;" "CERTAIN INFORMATION
CONCERNING DAC, DAC SUB AND AFFILIATES."
(a)(2)......................... "SUMMARY--The Merger;" "--Background of
the Merger; Fairness of the Merger;"
"--Interests of
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ALL REFERENCES ARE TO PORTIONS OF THE
SCHEDULE 13E-3 ITEM PROXY STATEMENT WHICH ARE
NUMBER AND CAPTION INCORPORATED HEREIN BY REFERENCE
------------------ -------------------------------------
Certain Persons in the Merger;"
"--Conditions to Consummation of the
Merger;" "--Expenses;""--Financing of
the Merger;" "SPECIAL
FACTORS--Background of the Merger;"
"--Past Contacts with Wendy's;"
"--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "--Purpose
of the Merger;" "--Interests of Certain
Persons in the Merger;" "--Certain
Effects of the Merger;" "THE MERGER;"
"FINANCING OF THE MERGER."
(b)............................ "SUMMARY--The Merger;" "--Background of
the Merger; Fairness of the Merger;"
"--Interests of Certain Persons in the
Merger;" "--Conditions to Consummation
of the Merger;" "--Expenses;"
"--Financing of the Merger;" "SPECIAL
FACTORS--Background of the Merger;"
"--Past Contacts with Wendy's;"
"--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "--Purpose
of the Merger;" "--Interests of Certain
Persons in the Merger;" "--Certain
Effects of the Merger;" "THE MERGER;"
"FINANCING OF THE MERGER."
4. Terms of the Transaction
(a)............................ "SUMMARY;" "INTRODUCTION;" "SPECIAL
FACTORS--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "--Purpose
of the Merger;" "--Interests of Certain
Persons in the Merger;" "--Certain
Effects of the Merger;" "--Risk that the
Merger Will Not be Consummated;"
"--Certain Risks in the Event of
Bankruptcy;" "THE MERGER;" "FINANCING OF
THE MERGER;" "APPRAISAL RIGHTS."
(b)............................ "SUMMARY;" "INTRODUCTION;" "SPECIAL
FACTORS--Purpose of the Merger;"
"--Interests of Certain Persons in the
Merger;" "--Certain Effects of the
Merger;" "THE MERGER;" "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
5. Plans or Proposals of the Issuer
or Affiliate
(a)-(b)........................ "SPECIAL FACTORS--Background of the
Merger;" "--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "--Certain
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ALL REFERENCES ARE TO PORTIONS OF THE
SCHEDULE 13E-3 ITEM PROXY STATEMENT WHICH ARE
NUMBER AND CAPTION INCORPORATED HEREIN BY REFERENCE
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Effects of the Merger;" "--Plans for the
Company After the Merger;" "FINANCING OF
THE MERGER;" "BUSINESS OF THE
COMPANY--Recent Developments."
(c)............................ "SUMMARY--Interests of Certain Persons
in the Merger;" "SPECIAL
FACTORS--Interests of Certain Persons in
the Merger;" "--Certain Effects of the
Merger;" "THE MERGER--Effective Time of
the Merger;" "CERTAIN INFORMATION
CONCERNING DAC, DAC SUB AND AFFILIATES;"
"CERTAIN INFORMATION REGARDING THE
DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY."
(d)-(e)........................ "SUMMARY--Interests of Certain Persons
in the Merger;" "--Expenses;"
"--Financing of the Merger;" "SPECIAL
FACTORS--Purpose of the Merger;"
"--Interests of Certain Persons in the
Merger;" "--Certain Effects of the
Merger;" "--Plan for the Company After
the Merger;" "--Certain Risks in the
Event of Bankruptcy;" "THE MERGER;"
"FINANCING OF THE MERGER;" "MARKET
PRICES AND DIVIDENDS ON THE SHARES;"
"SECURITY OWNERSHIP OF THE COMPANY."
(f)-(g)........................ "SPECIAL FACTORS--Certain Effects of the
Merger;" "ADDITIONAL AVAILABLE
INFORMATION."
6. Source and Amounts of Funds or
Other Considerations
(a)............................ "SUMMARY--Financing of the Merger;"
"FINANCING OF THE MERGER."
(b)............................ "SUMMARY--Expenses;" "THE
MERGER--Expenses;" "FINANCING OF THE
MERGER."
(c)............................ "SUMMARY--Financing of the Merger;"
"FINANCING OF THE MERGER."
(d)............................ Not applicable.
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ALL REFERENCES ARE TO PORTIONS OF THE
SCHEDULE 13E-3 ITEM PROXY STATEMENT WHICH ARE
NUMBER AND CAPTION INCORPORATED HEREIN BY REFERENCE
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7. Purpose(s), Alternatives,
Reasons and Effects
(a)-(c)........................ "SUMMARY;" "SPECIAL FACTORS--Background
of the Merger;" "--Past Contacts with
Wendy's;" "--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "--Purpose
of the Merger;" "--Interests of Certain
Persons in the Merger;" "--Certain
Effects of the Merger;" "CERTAIN
INFORMATION CONCERNING DAC, DAC SUB AND
AFFILIATES."
(d)............................ "SUMMARY;" "INTRODUCTION--Voting at the
Special Meeting;" "--Proxies;" "SPECIAL
FACTORS--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "--Opinion
of Financial Advisor;""--Purpose of the
Merger;" "--Interests of Certain Persons
in the Merger;" "--Certain Effects of
the Merger;" "--Plans for the Company
After the Merger;" "--Certain
Litigation;" "THE MERGER;" "FINANCING OF
THE MERGER;" "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES;" "APPRAISAL RIGHTS;"
"CERTAIN INFORMATION CONCERNING DAC, DAC
SUB AND AFFILIATES."
8. Fairness of the Transaction
(a)-(b)........................ "SUMMARY--Recommendation of the Board of
Directors;" "--Background of the Merger;
Fairness of the Merger;" "--Opinion of
Financial Advisor;" "SPECIAL
FACTORS--Background of the Merger;"
"--Past Contacts with Wendy's;"
"--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "--Opinion
of Financial Advisor;" "--Interests of
Certain Persons in the Merger."
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ALL REFERENCES ARE TO PORTIONS OF THE
SCHEDULE 13E-3 ITEM PROXY STATEMENT WHICH ARE
NUMBER AND CAPTION INCORPORATED HEREIN BY REFERENCE
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(c)............................ "SUMMARY--Vote Required to Approve the
Merger Agreement;" "--Background of the
Merger; Fairness of the Merger;"
"INTRODUCTION--Voting at the Special
Meeting;" "--Proxies;" "SPECIAL
FACTORS--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "THE
MERGER--Stockholder Adoption of the
Merger Agreement;" "--Conditions to
Consummation of the Merger."
(d)............................ "SPECIAL FACTORS--Fairness of the
Merger; Recommendation of the Board of
Directors; Position of DAC."
(e)............................ "SUMMARY--Interests of Certain Persons
in the Merger;" "SPECIAL
FACTORS--Background of the Merger;"
"--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;"
"--Interests of Certain Persons in the
Merger."
(f)............................ "SUMMARY--Background of the Merger;
Fairness of the Merger;" "SPECIAL
FACTORS--Background of the Merger;"
"--Past Contacts with Wendy's;"
"--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC."
9. Reports, Opinions, Appraisals
and Certain Negotiations
(a)-(c)........................ "SUMMARY--Background of the Merger;
Fairness of the Merger;" "--Opinion of
Financial Advisor;" "SPECIAL
FACTORS--Background of the Merger;"
"--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "--Opinion
of Financial Advisor;" "ADDITIONAL
AVAILABLE INFORMATION;" "Annex B to the
Proxy Statement."
10. Interest in Securities of the
Issuer
(a)-(b)........................ "SUMMARY--Interests of Certain Persons
in the Merger;" "INTRODUCTION--Voting at
the Special Meeting;" "SPECIAL
FACTORS--Purpose of the Merger;"
"--Interests of Certain Persons in the
Merger;" "CERTAIN INFORMATION CONCERNING
DAC, DAC SUB AND
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ALL REFERENCES ARE TO PORTIONS OF THE
SCHEDULE 13E-3 ITEM PROXY STATEMENT WHICH ARE
NUMBER AND CAPTION INCORPORATED HEREIN BY REFERENCE
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AFFILIATES;" "CERTAIN TRANSACTIONS IN
THE COMMON STOCK;" "SECURITY OWNERSHIP
OF THE COMPANY."
11. Contracts, Arrangements or
Understandings with Respect
to the Issuer's Securities..... "SUMMARY;" "SPECIAL FACTORS--Background
of the Merger;" "--Purpose of the
Merger;" "--Interests of Certain Persons
in the Merger;" "--Certain Effects of
the Merger;" "THE MERGER;" "FINANCING OF
THE MERGER;" "CERTAIN INFORMATION
CONCERNING DAC, DAC SUB AND AFFILIATES;"
"SECURITY OWNERSHIP OF THE COMPANY."
12. Present Intention and
Recommendation of Certain
Persons with Regard to the
Transaction
(a)-(b)........................ "INTRODUCTION--Voting at the Special
Meeting;" "--Proxies;" "SPECIAL
FACTORS--Fairness of the Merger;
Recommendation of the Board of
Directors; Position of DAC;" "--Purpose
of the Merger."
13. Other Provisions of the
Transaction
(a)............................ "SUMMARY--Appraisal Rights;" "APPRAISAL
RIGHTS;" "Annex C to the Proxy
Statement."
(b)............................ Not applicable.
(c)............................ Not applicable.
14. Financial Information
(a)-(b)........................ "SELECTED HISTORICAL FINANCIAL DATA OF
THE COMPANY;" "INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS."
15. Persons and Assets Employed,
Retained or Utilized
(a)............................ "SUMMARY--Interests of Certain Persons
in the Merger;" "--Expenses;"
"--Financing of the Merger;"
"INTRODUCTION--Voting at the Special
Meeting;" "--Proxies;" "SPECIAL
FACTORS--Background of the Merger;"
"--Opinion of Financial Advisor;"
"--Interests of Certain Persons in the
Merger;" "FINANCING OF THE MERGER;"
"CERTAIN INFORMATION CONCERNING DAC, DAC
SUB AND AFFILIATES."
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ALL REFERENCES ARE TO PORTIONS OF THE
SCHEDULE 13E-3 ITEM PROXY STATEMENT WHICH ARE
NUMBER AND CAPTION INCORPORATED HEREIN BY REFERENCE
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(b)............................ "INTRODUCTION--Voting at the Special
Meeting;" "--Proxies."
16. Additional Information......... Proxy Statement.
17. Material to be Filed as
Exhibits
(a) - (f)...................... Not applicable.
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Item 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The information concerning the Issuer and its principal executive
office set forth on the cover page to the Proxy Statement and in the section
entitled "INTRODUCTION," is incorporated herein by reference.
(b) The information concerning the shares of Common Stock, par value
$.001 per share, of the Issuer (the "Shares") set forth on the cover page to the
Proxy Statement and in the sections entitled "SUMMARY--Record Date; Shares
Entitled to Vote; Quorum" and "INTRODUCTION--Voting at the Special Meeting" is
incorporated herein by reference.
(c) The information concerning the principal market in which the
Shares are traded set forth in the sections entitled "SUMMARY-- Market
Information" and "MARKET PRICES AND DIVIDENDS ON THE SHARES" is incorporated
herein by reference.
(d) The information set forth in the section entitled "MARKET PRICES
AND DIVIDENDS ON THE SHARES" is incorporated herein by reference.
(e) Not applicable.
(f) The information concerning purchases of Shares by the Company
set forth in the section entitled "SECURITY OWNERSHIP OF THE COMPANY" and
Schedule I to the Proxy Statement is incorporated herein by reference.
Item 2. IDENTITY AND BACKGROUND.
(a), (b), (e) and (f) The persons filing this Statement are DavCo
Restaurants, Inc. (the issuer of the class of equity securities that is the
subject of the Rule 13e-3 transaction), DavCo Acquisition Holding Inc., a
Delaware corporation ("DAC"), DavCo Merger Sub Inc., a Delaware corporation and
a wholly owned subsidiary of DAC ("DAC Sub"), Ronald D. Kirstien, Harvey
Rothstein and Citicorp Venture Capital, Ltd., a New York corporation ("CVC").
DAC and DAC Sub are newly formed corporations organized by Mr. Kirstien, Mr.
Rothstein and CVC for the purpose of effecting the 13E-3 transaction described
herein. CVC is an equity investment firm. Each of Mr. Kirstien, Mr. Rothstein,
DAC and DAC Sub has an address of 1657 Crofton Boulevard, Crofton, Maryland
21114 and CVC's address is 399 Park Avenue, 14th Floor-Zone 4, New York, New
York 10043. None of the Company, DAC, DAC Sub, Mr. Kirstien, Mr. Rothstein,
CVC and any executive officer, director or person controlling DAC, DAC Sub or
CVC (i) during the last five years, has been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors), or (ii) during the last
five years, was a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding was or is
subject to a judgment, decree or final order enjoining further violations of, or
prohibiting activities, subject to, federal or state securities laws or finding
any violation of such laws.
(c), (d) and (g) The information concerning DAC, DAC Sub, Mr.
Kirstien and Mr. Rothstein set forth in the sections entitled "CERTAIN
INFORMATION CONCERNING DAC, DAC SUB AND AFFILIATES" and "CERTAIN INFORMATION
REGARDING THE DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY" is incorporated
herein by reference.
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Item 3. PAST CONTACTS, TRANSACTION OR NEGOTIATIONS.
(a)(1) The information set forth in the sections entitled
"SUMMARY--The Merger," "SPECIAL FACTORS--Interests of Certain Persons in the
Merger," "THE MERGER--Indemnification of Directors and Officers" and "CERTAIN
INFORMATION CONCERNING DAC, DAC SUB AND AFFILIATES" is incorporated herein by
reference.
(a)(2) The information set forth in the sections entitled
"SUMMARY--The Merger," "--Background of the Merger; Fairness of the Merger,"
"--Interests of Certain Persons in the Merger," "--Conditions to Consummation of
the Merger," "--Expenses," "--Financing of the Merger," "SPECIAL
FACTORS--Background of the Merger," "--Past Contacts with Wendy's," "--Fairness
of the Merger; Recommendation of the Board of Directors; Position of DAC,"
"--Purpose of the Merger," "--Interests of Certain Persons in the Merger,"
"--Certain Effects of the Merger," "THE MERGER" and "FINANCING OF THE MERGER" is
incorporated herein by reference.
(b) The information set forth in the sections entitled "SUMMARY--The
Merger," "--Background of the Merger; Fairness of the Merger," "--Interests of
Certain Persons in the Merger," "--Conditions to Consummation of the Merger,"
"--Expenses," "--Financing of the Merger," "SPECIAL FACTORS--Background of the
Merger," "--Past Contacts with Wendy's," "--Fairness of the Merger;
Recommendation of the Board of Directors; Position of DAC," "--Purpose of the
Merger," "--Interests of Certain Persons in the Merger," "--Certain Effects of
the Merger," "THE MERGER" and "FINANCING OF THE MERGER" is incorporated herein
by reference.
Item 4. TERMS OF THE TRANSACTION.
(a) The information set forth in the sections entitled "SUMMARY,"
"INTRODUCTION," "SPECIAL FACTORS--Fairness of the Merger; Recommendation of the
Board of Directors; Position of DAC," "--Purpose of the Merger," "--Interests of
Certain Persons in the Merger," "--Certain Effects of the Merger," "--Risk that
the Merger will not be Consummated," "--Certain Risks in the Event of
Bankruptcy," "THE MERGER," "FINANCING OF THE MERGER" and "APPRAISAL RIGHTS" is
incorporated herein by reference.
(b) The information set forth in the sections entitled "SUMMARY,"
"INTRODUCTION," "SPECIAL FACTORS-- Purpose of the Merger," "-- Interests of
Certain Persons in the Merger," "--Certain Effects of the Merger," "THE MERGER"
and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" is incorporated herein by
reference.
Item 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(b) The information set forth in the sections entitled "SPECIAL
FACTORS--Background of the Merger," "--Fairness of the Merger; Recommendation of
the Board of Directors; Position of DAC," "--Certain Effects of the Merger,"
"--Plans for the Company After the Merger," "FINANCING OF THE MERGER" and
"BUSINESS OF THE COMPANY--Recent Developments" is incorporated herein by
reference.
(c) The information set forth in the sections entitled
"SUMMARY--Interests of Certain Persons in the Merger," "SPECIAL
FACTORS--Interests of Certain Persons in the Merger," "--Certain Effects of the
Merger," "THE MERGER--Effective Time of the Merger," "CERTAIN INFORMATION
CONCERNING DAC, DAC SUB AND AFFILIATES" and "CERTAIN
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INFORMATION REGARDING THE DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY" is
incorporated herein by reference.
(d)-(e) The information set forth in the sections
"SUMMARY--Interests of Certain Persons in the Merger," "--Expenses,"
"--Financing of the Merger," "SPECIAL FACTORS--Purpose of the Merger,"
"--Interests of Certain Persons in the Merger," "--Certain Effects of the
Merger," "--Plans for the Company After the Merger," "--Certain Risks in the
Event of Bankruptcy," "THE MERGER," "FINANCING OF THE MERGER," "MARKET PRICES
AND DIVIDENDS ON THE SHARES" and "SECURITY OWNERSHIP OF THE COMPANY" is
incorporated herein by reference.
(f)-(g) The information set forth in the sections "SPECIAL
FACTORS--Certain Effects of the Merger" and "ADDITIONAL AVAILABLE INFORMATION"
is incorporated herein by reference.
Item 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in the sections entitled
"SUMMARY--Financing of the Merger" and "FINANCING OF THE MERGER" is incorporated
herein by reference.
(b) The information set forth in the sections entitled
"SUMMARY--Expenses," "THE MERGER--Expenses" and "FINANCING OF THE MERGER" is
incorporated herein by reference.
(c) The information set forth in the sections entitled
"SUMMARY--Financing of the Merger" and "FINANCING OF THE MERGER" is incorporated
herein by reference.
(d) Not applicable.
Item 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a)-(c) The information set forth in the sections entitled
"SUMMARY," "SPECIAL FACTORS--Background of the Merger," "--Past Contacts with
Wendy's," "--Fairness of the Merger; Recommendation of the Board of Directors;
Position of DAC," "--Purpose of the Merger," "--Interests of Certain Persons in
the Merger," "--Certain Effects of the Merger" and "CERTAIN INFORMATION
CONCERNING DAC, DAC SUB AND AFFILIATES" is incorporated herein by reference.
(D) The information set forth in the sections entitled "SUMMARY,"
"INTRODUCTION--Voting at the Special Meeting," "--Proxies," "SPECIAL
FACTORS--Fairness of the Merger; Recommendation of the Board of Directors;
Position of DAC," "--Opinion of Financial Advisor," "--Purpose of the Merger,"
"--Interests of Certain Persons in the Merger," "--Certain Effects of the
Merger," "--Plans for the Company After the Merger," "--Certain Litigation,"
"THE MERGER," "FINANCING OF THE MERGER," "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," "APPRAISAL RIGHTS" AND "CERTAIN INFORMATION CONCERNING DAC, DAC
SUB AND AFFILIATES" is incorporated herein by reference.
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ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) - (b) The information set forth in the sections entitled
"SUMMARY--Recommendation of the Board of Directors," "--Background of the
Merger; Fairness of the Merger," "--Opinion of Financial Advisor," "SPECIAL
FACTORS--Background of the Merger," "--Past Contacts with Wendy's," "--Fairness
of the Merger; Recommendation of the Board of Directors; Position of DAC,"
"--Opinion of Financial Advisor" and "--Interests of Certain Persons in the
Merger" is incorporated herein by reference.
(c) The information set forth in the sections entitled
"SUMMARY--Vote Required to Approve the Merger Agreement," "--Background of
the Merger; Fairness of the Merger," "INTRODUCTION--Voting at the Special
Meeting," "--Proxies," "SPECIAL FACTORS--Fairness of the Merger;
Recommendation of the Board of Directors; Position of DAC," "THE
MERGER--Stockholder Adoption of the Merger Agreement" and "--Conditions to
Consummation of the Merger" is incorporated herein by reference.
(d) The information set forth in the section entitled "SPECIAL
FACTORS--Fairness of the Merger; Recommendation of the Board of Directors;
Position of DAC" is incorporated herein by reference.
(e) The information set forth in the sections entitled
"SUMMARY--Interests of Certain Persons in the Merger," "SPECIAL
FACTORS--Background of the Merger," "--Fairness of the Merger; Recommendation of
the Board of Directors; Position of DAC" and "--Interests of Certain Persons in
the Merger" is incorporated herein by reference.
(f) The information set forth in the sections entitled
"SUMMARY--Background of the Merger; Fairness of the Merger," "SPECIAL
FACTORS--Background of the Merger," "--Past Contacts with Wendy's" and
"--Fairness of the Merger; Recommendation of the Board of Directors; Position of
DAC" is incorporated herein by reference.
Item 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) - (c) The information set forth in the sections entitled
"SUMMARY--Background of the Merger; Fairness of the Merger," "--Opinion of
Financial Advisor," "SPECIAL FACTORS--Background of the Merger," "--Fairness of
the Merger; Recommendation of the Board of Directors; Position of DAC,"
"--Opinion of Financial Advisor" and "ADDITIONAL AVAILABLE INFORMATION" and in
Annex B to the Proxy Statement is incorporated herein by reference.
Item 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) - (b) The information set forth in the sections entitled
"SUMMARY--Interests of Certain Persons in the Merger," "INTRODUCTION--Voting at
the Special Meeting," "SPECIAL FACTORS--Purpose of the Merger," "--Interests of
Certain Persons in the Merger," "CERTAIN INFORMATION CONCERNING DAC, DAC SUB AND
AFFILIATES," "CERTAIN TRANSACTIONS IN THE COMMON STOCK" and "SECURITY OWNERSHIP
OF THE COMPANY" is incorporated herein by reference.
xii
<PAGE>
Item 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The information set forth in the sections entitled "SUMMARY," "SPECIAL
FACTORS--Background of the Merger," "--Purpose of the Merger," "--Interests of
Certain Persons in the Merger," "--Certain Effects of the Merger," "THE MERGER,"
"FINANCING OF THE MERGER," "CERTAIN INFORMATION CONCERNING DAC, DAC SUB AND
AFFILIATES" and "SECURITY OWNERSHIP OF THE COMPANY" is incorporated herein by
reference.
Item 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a) - (b) The information set forth in the sections entitled
"INTRODUCTION--Voting at the Special Meeting," "--Proxies," "SPECIAL
FACTORS--Fairness of the Merger; Recommendation of the Board of Directors;
Position of DAC" and "--Purpose of the Merger" is incorporated herein by
reference.
Item 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in the sections entitled
"SUMMARY--Appraisal Rights" and "APPRAISAL RIGHTS" and Annex C to the Proxy
Statement is incorporated herein by reference.
(b) Not applicable.
(c) Not applicable.
Item 14. FINANCIAL INFORMATION.
(a) - (b) The information set forth in the section entitled "SELECTED
HISTORICAL FINANCIAL DATA OF THE COMPANY" and the Index to Consolidated
Financial Statements in the Proxy Statement is incorporated herein by reference.
Item 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) The information set forth in the sections entitled
"SUMMARY--Interests of Certain Persons in the Merger," "--Expenses,"
"--Financing of the Merger," "INTRODUCTION--Voting at the Special Meeting,"
"--Proxies," "SPECIAL FACTORS--Background of the Merger,"
"--Opinion of Financial Advisor," "--Interests of Certain Persons in the
Merger," "FINANCING OF THE MERGER" and "CERTAIN INFORMATION CONCERNING DAC, DAC
SUB AND AFFILIATES" is incorporated herein by reference.
(b) The information set forth in the sections entitled
"INTRODUCTION--Voting at the Special Meeting" and "--Proxies" is incorporated
herein by reference.
Item 16. ADDITIONAL INFORMATION.
Proxy Statement.
xiii
<PAGE>
Item 17. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Commitment letter dated as of October 17, 1997 from Global
Alliance Finance Company, L.L.C.
(b)(1) Opinion of Equitable Securities Corporation dated November
6, 1997.
(b)(2) Valuation materials prepared for DavCo Restaurants, Inc. by
Equitable Securities Corporation dated October 1997.
(c)(1) Amended and Restated Agreement and Plan of Merger dated as
of October 21, 1997, among the Issuer, DAC and the DAC Sub.
(d)(1) Preliminary copy of Letter to Stockholders.
(d)(2) Preliminary copy of Notice of Special Meeting of
Stockholders.
(d)(3) Preliminary Proxy Statement.
(d)(4) Form of Proxy.
(d)(5) Press Release by DavCo Restaurants, Inc., dated as of
October 22, 1997.
(e) Section 262 of the General Corporation Law of the State of
Delaware (included as Annex C to the preliminary Proxy
Statement, which is filed herewith as Exhibit (d)(3)).
(f) Not applicable.
xiv
<PAGE>
SIGNATURES
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
DAVCO RESTAURANTS, INC.
By: /S/ RONALD D. KIRSTIEN
--------------------------------
Ronald D. Kirstien
CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE
BOARD
Dated: November 19, 1997
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
DAVCO ACQUISITION HOLDING INC.
By: /S/ HARVEY ROTHSTEIN
--------------------------------
Harvey Rothstein
VICE PRESIDENT
Dated: November 19, 1997
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
DAVCO MERGER SUB INC.
By: /S/ HARVEY ROTHSTEIN
--------------------------------
Harvey Rothstein
VICE PRESIDENT
Dated: November 19, 1997
xv
<PAGE>
SIGNATURES
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
/S/ RONALD D. KIRSTIEN
------------------------------
Ronald D. Kirstien
Dated: November 19, 1997
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
/S/ HARVEY ROTHSTEIN
------------------------------
Harvey Rothstein
Dated: November 19, 1997
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
CITICORP VENTURE CAPITAL, LTD.
By: /S/ BYRON L. KNIEF
------------------------------
Byron L. Knief
SENIOR VICE PRESIDENT
Dated: November 19, 1997
xvi
<PAGE>
EXHIBIT INDEX
Exhibit No. Page
(a)(1) --Commitment Letter, dated as of
October 17, 1997, from Global Alliance
Finance Company, L.L.C.
(b)(1) --Opinion of Equitable Securities Included as Annex B to
Corporation dated November 6, 1997. the preliminary Proxy
Statement, attached
hereto as Exhibit (d)(3)
(b)(2) --Valuation materials prepared for DavCo
Restaurants, Inc. by Equitable Securities
Corporation dated October 1997.
(c)(1) --Amended and Restated Agreement and Plan Included as Annex A to
of Merger, dated as October 21, 1997, by the preliminary Proxy
and among DavCo Acquisition Holding Inc., Statement, attached
a Delaware corporation("DAC"), DavCo Merger hereto as Exhibit (d)(3)
Sub Inc., a Delaware corporation and a
wholly-owned subsidiary of DAC, and DavCo
Restaurants, Inc.
(d)(1) --Preliminary copy of Letter to
Stockholders.
(d)(2) --Preliminary copy of Notice of Special
Meeting of Stockholders.
(d)(3) --Preliminary Proxy Statement.
(d)(4) --Form of Proxy.
(d)(5) --Press Release by DavCo Restaurants,
Inc., dated as of October 22, 1997.
(e) --Section 262 of the Delaware General Included as Annex C to
Corporation Law, as amended. the preliminary Proxy
Statement, attached
hereto as Exhibit (d)(3)
xvii
<PAGE>
Exhibit (a)(1)
GLOBAL ALLIANCE FINANCE COMPANY, L.L.C.
A WHOLLY OWNED SUBSIDIARY OF Deutsche Bank North America
31 West 52nd Street
New York, NY 10019
Direct Line: 212-469-8276
Direct Fax: 212-469-7571
October 17, 1997
DavCo Restaurants, Inc.,
Southern Hospitality Corp. and a
Company to be Formed ("NewCo")
as joint and several co-borrowers
1657 Crofton Blvd.
Crofton, MD 21114
RE: FRANCHISE LOAN FINANCING
Ladies and Gentlemen:
We refer to the Summary of Terms and Conditions (the "Summary of Terms")
for DavCo Restaurants, Inc., Southern Hospitality Corp. and a Company to be
Formed ("NewCo") (the "Borrowers") attached hereto as Exhibit A. Global
Alliance Finance Company, L.L.C. ( "GAFCo" or the "Lender") is pleased to
confirm, based on the terms and conditions contained herein and in the Summary
of Terms, its commitment to provide Loans in an aggregate principal amount of
$180,000,000.00 (the "Loans") to the Borrowers.
Our Commitment is subject to (i) the preparation, execution and delivery of
legal documentation in form and substance satisfactory to us and our counsel
incorporating the terms set forth herein and in the Summary of Terms, and (ii)
the absence of any material adverse change in the business, property, assets,
liabilities, condition (financial or otherwise), or prospects of the Franchise
or Franchisor referred to herein since the date hereof or the Borrowers and its
respective material subsidiaries and affiliates, taken individually and as a
whole, since the date of the financial statements submitted with the loan
application. FUNDING UNDER THIS COMMITMENT WILL NOT BECOME AVAILABLE UNTIL
SATISFACTORY COMPLETION OF THE NEGOTIATION, EXECUTION AND DELIVERY OF SUCH
DOCUMENTATION, AND THE PRIOR SATISFACTION OF THE CONDITIONS PRECEDENT TO FUNDING
CONTAINED IN SUCH DOCUMENTATION.
In consideration of the issuance of our Commitment, you hereby agree that,
for a period of 120 days following your acceptance of this Commitment, you will
not, directly or indirectly, engage in any discussions or negotiations with any
person with respect to any transaction similar to that described herein, unless
and until this Agreement is terminated by GAFCo or GAFCo fails to fund the Loans
in contravention of its commitment hereunder.
You agree to pay all reasonable costs and expenses (including the
reasonable fees and expenses of our outside counsel and local counsel, the
reasonable fees and expenses of third party consultants retained by us and our
reasonable out-of-pocket expenses) arising in connection with the preparation,
execution and delivery of this letter and the definitive financing agreements
and our due diligence efforts with respect thereto regardless of whether the
Loans closes or the effective date of the definitive financing agreements
occurs. You further agree to indemnify and hold harmless us and each director,
officer, employee and affiliate hereof (each an "indemnified person") in
connection with any losses, claims, damage, liabilities or other expenses to
which we or such indemnified persons may become subject, insofar as such
losses, claims, damages, liabilities (or actions or other proceedings commenced
or threatened in respect thereof) or other expenses arise out of or in any way
relate to or result from the Loans or any other transaction contemplated by this
letter or in any way arise from any use or intended use of this letter or the
proceeds of any of the Loans contemplated by this letter, and you agree to
reimburse us and each indemnified person for any legal or other expenses
incurred in connection with investigating, defending or participating in any
such loss, claim, damage, liability or action or other proceeding (whether or
not we or any such person is a party to any action or proceeding out of which
any such expenses arise), provided that you shall have no obligation hereunder
to indemnify us or any indemnified person for any loss, claim, damage, liability
or expense which resulted from the gross negligence or willful misconduct of
GAFCo or such indemnified person. This letter is furnished for your benefit, and
may not be relied upon by any other person or entity. We shall not be
responsible or liable to you or any other person for consequential damages which
may be alleged as a result of this letter.
The provisions of the immediately preceding paragraph shall survive any
termination of this letter.
GAFCo reserves the right to employ the services of any of its affiliates in
providing the services contemplated by this letter and to allocate, in whole or
in part, to such affiliate certain fees payable to GAFCo in such manner as GAFCo
and such
1 A wholly owned subsidiary of Deutsche Bank North America
<PAGE>
affiliate may agree in their sole discretion. You acknowledge that GAFCo may
share with any of its affiliates any information relating to you or the
transaction contemplated by this letter.
In consideration for GAFCo making available the commitment set forth in
this letter, you shall pay to GAFCo, concurrently with your acceptance of this
letter, a portion of commitment fee payable in connection with the credit
facilities contemplated hereby, such portion to be in the amount of $835,000
(such portion of the commitment fee, the "Initial Commitment Fee"). Once paid,
the Initial Commitment Fee shall be deemed to be fully earned and no portion
thereof shall be refundable under any circumstances, except that, if GAFCo shall
determine that it shall not consummate the financing contemplated hereby, GAFCo
shall refund to you the excess, if any, of the Initial Commitment Fee over the
sum of $250,000 plus all of GAFCo's out-of-pocket costs and expenses incurred in
connection with this letter and the transactions contemplated hereby.
If you are in agreement with the foregoing, please sign and return to us
the enclosed copy of this letter. This offer shall terminate at 5:00 P.M., New
York time, on October 23, 1997 unless a signed copy of this letter, together
with your payment of the Initial Commitment Fee, has been delivered to us by
such time. This letter may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when executed
and delivered shall be an original, but all of which shall together constitute
one and the same instrument.
You are not authorized to show or circulate this letter or the Summary of
Terms to any other person or entity (other than your legal and financial
advisors and NewCo's legal and financial advisors in connection with your
evaluation hereof) until such time as you have accepted this letter as provided
in the immediately preceding paragraph. If this letter is not accepted by you
as provided in the immediately preceding paragraph, you are directed to
immediately return this letter (and any copies hereof) to the undersigned.
This Commitment shall not be assignable by you and any purported assignment
shall be null and void. This letter and the Summary of Terms shall be governed
by, and construed in accordance with, the laws of the State of New York
We are pleased to be able to extend this Commitment to you and we look
forward to continued work with you on this transaction.
Very truly yours,
GLOBAL ALLIANCE FINANCE COMPANY, L.L.C.
By:_____________________________ By:_____________________________
Name Name:
Title: Title:
AGREED AND ACCEPTED:
DAVCO RESTAURANTS, INC. COMPANY TO BE FORMED ("NEWCO")
--------------------------------
By:_____________________________ By:_____________________________
Name Name:
Title: Title:
SOUTHERN HOSPITALITY CORP.
By:_____________________________
Name
Title:
One executed counterpart of this Commitment letter, accompanied by a check for
the Initial Commitment Fee made payable to Global Alliance Finance Company,
L.L.C. in the amount of $ 835,000.00 must be received by GAFCo no later than
5:00 p.m. New York time, October 23, 1997 addressed to GAFCo, 31 West 52d
Street, NY, NY 10019 Attn.: Madlyn DeVivo, 23d Floor.
2 A wholly owned subsidiary of Deutsche Bank North America
<PAGE>
Exhibit A to
Commitment Letter
CONFIDENTIAL
SUMMARY OF TERMS AND
CONDITIONS FOR LOANS
This Summary of Terms and Conditions summarizes the principal terms and
conditions relating to the proposed Loans herein referred to. This Summary of
Terms and Conditions does not purport to summarize all the terms, conditions,
covenants, representations, warranties and other provisions which will be
contained in definitive legal documentation for the financing contemplated
hereby. In all cases, the terms of such definitive legal documentation will
supersede the terms summarized herein.
1. PARTIES
BORROWERS: DavCo Restaurants, Inc.,
Southern Hospitality Corp. and a
Company to be Formed ("NewCo")
GUARANTOR: FriendCo Restaurants, Inc.
FRANCHISE: Wendy's Old Fashion Hamburgers
FRANCHISOR: Wendy's International, Inc.
LENDER: Global Alliance Finance Company, L.L.C.
2. LOAN FACILITIES
LOAN AMOUNTS: See Term Sheets attached as Exhibit C
LOAN FACILITIES: Proceeds of the Loans may only be advanced on the date on
which the conditions to the Loans set forth in the
definitive loan agreement (the "Loan Agreement") are
satisfied or waived by the Lender (the "Closing Date"). No
amount of the Loans once repaid may be reborrowed.
AMORTIZATION: The Loans will be subject to consecutive monthly installment
payments in amounts necessary to fully amortize the Loans on
the terms set forth on Exhibit C.
INTEREST RATE AND
PAYMENT TERMS: The first interest payment under the Loan Agreement will be
payable in advance. Thereafter, interest will be payable
monthly in arrears.
LATE PAYMENT FEE: After the continuance of any payment default for 5
consecutive days, a late payment fee of 5% of any overdue
amount shall be due and payable. In the event that such
non-payment continues for 10 days or more, overdue amounts
shall be subject to the late payment fee outlined above and
in addition shall bear interest at an increased interest
rate as provided in the Loan Agreement.
LOAN FEES: The Borrowers shall pay a commitment fee (the "Commitment
Fee") equal to $2,205,000. The Lender acknowledges that the
Borrowers have heretofore paid $750,000 of the Commitment
Fee, and that the Borrowers shall pay an additional $835,000
(referred to in the Commitment letter as the Initial
Commitment Fee) upon the Borrower's acceptance of the
Commitment Letter, each of which payments shall be credited
against the Commitment Fee. The remainder of the Commitment
Fee shall be payable on the Closing Date. Annexed to this
term sheet is a schedule detailing such Commitment Fee.
If the closing of the Loans contemplated hereby shall not
have occurred by April 1, 1998, the Borrowers shall pay to
the Lender a termination fee of one-half of one percent
(1/2%) of the aggregate principal amount of the Loans
contemplated hereby; provided that, at the request of the
Borrowers, upon the payment of such fee GAFCo shall extend
the commitment to make available the Loan Facilities for an
additional 90 days.
1 A wholly owned subsidiary of Deutsche Bank North America
<PAGE>
In addition to the foregoing fees, if prior to the closing
of the Loans contemplated hereby and prior to April 1, 1998,
the Borrowers shall, without the consent of the Lender,
enter into an alternative financing arrangement with one or
more lenders other than the Lender, the Borrowers shall pay
to the Lender a break-up fee of one-half of one percent
(1/2%) of the aggregate principal amount of the Loans
contemplated hereby.
VOLUNTARY
PREPAYMENTS: Loan 1and Loan 2 may be prepaid within the first 12 months,
Loan 3 may be prepaid within the first 24 months following
the Closing Date, and Loans under the Forward Commitment may
be prepaid prior to the date twelve months following the
Closing Date, in each case upon 90 days notice and the
payment of a 1% prepayment penalty of the principal amount
of the Loans. Thereafter, voluntary prepayments of the Loans
shall not be permitted prior to the later of (i) the fifth
anniversary of the Closing Date or (ii) the date that is
half-way between the Closing Date and the Maturity Date.
Thereafter, the Borrowers may, following notice, prepay all
(but not less than all) of the outstanding principal balance
of the Loans on selected prepayment dates and upon the
payment of a yield maintenance-based prepayment penalty.
Loans, the interest rate of which is determined with
reference to LIBOR, may be prepaid only on the last day of
an interest period with respect thereto.
MANDATORY
PREPAYMENTS: The amounts due under the Loans are subject to mandatory
prepayment upon a total loss, constructive total loss or
condemnation of each Restaurant as collateralized under the
Loans.
GUARANTEE: All of the Loans and other obligations under the Loans shall
be fully and unconditionally guaranteed by the Guarantor.
SECURITY: All of the Loans will be secured by a lien on, and perfected
security interest in, all assets of the Borrowers listed on
Exhibit B hereto; provided that each of the Loans and the
Forward Commitment listed on Exhibit C hereto will have a
prior claim to the proceeds of the collateral set forth with
respect to such Loan or Forward Commitment opposite the
appropriate caption "Primary Collateral" on such Exhibit C.
All documentation evidencing the security required pursuant
to the immediately preceding sentence shall be in form and
substance satisfactory to the Lender, and shall effectively
create first priority security interests in the property
covered thereby, with such exceptions as are acceptable to
the Lender in its sole discretion.
CONDITIONS
PRECEDENT: The Loan Agreement will provide for conditions precedent to
the funding of Loans 1, 2 and 3, and for the effectiveness
of the Forward Commitment, typical for these types of
facilities and any other conditions appropriate in the
context of the transaction, but which in any event shall
include (a) the Lender's satisfaction with the terms and
documentation for the merger of NewCo with and into DavCo
Restaurants, Inc. (the "Merger"), and the satisfaction of
all conditions precedent to the Merger, (b) receipt by the
Lender of a solvency letter from a third-party valuation
firm satisfactory to the Lender as to the solvency of the
Borrowers after giving effect to the Merger, the borrowing
of the Loans and the other transactions contemplated hereby,
in form and substance satisfactory to the Lender, (c)
evidence acceptable to the Lender as to the Borrowers'
compliance with and good standing under all of the Franchise
Documents as of the Closing Date, and (d) delivery of
security interest in all material leases and agreements and
other documentation under Exhibit B.. The Lender will
submit a closing memorandum to the Borrowers listing
documents required to be provided by the Borrowers on or
prior to the Closing Date.
The Loans under the Forward Commitment will be available
subject to the satisfaction of such conditions precedent as
are typical for such extensions of credit, including without
limitation satisfaction of the condition set forth on
Exhibit C with respect to the Forward Commitment opposite
the caption "Unit Seasoning Requirements".
REPRESENTATIONS
AND WARRANTIES: The Loan Agreement will provide for representations and
warranties of the Borrowers typical for these types of
facilities and any other representations and warranties
appropriate in the context of the transaction.
2 A wholly owned subsidiary of Deutsche Bank North America
<PAGE>
COVENANTS: The Loan Agreement will provide for covenants of the
Borrowers typical for these types of facilities and any
other covenants appropriate in the context of the
transaction including, but not limited to, restrictions on
mergers and asset sales/purchases, debt obligations, liens,
contingent obligations, termination, waivers or amendments
of Franchise Documents; name changes; transactions with
affiliates; distributions and dividends; use of proceeds and
other covenants to be identified upon negotiation of the
documentation.
The Borrowers will also be required to use their best
efforts to cooperate with the Lender in arranging a
securitization of the Loans, including, without limitation,
providing such information to the Lender with respect to the
Borrowers and their respective businesses as the Lender may
reasonably require to include in a placement memorandum to
be prepared in connection with such transaction, to make
officers of the Borrowers available to potential investors
in such transaction, and to coordinate any other financing
transactions with such securitization.
EVENTS OF DEFAULT: The Loan Agreement will provide for Events of Default
typical for these types of facilities and any other
covenants appropriate in the context of the transaction
including Events of Default related to payment defaults,
misrepresentations, covenant defaults; material defaults
under Franchise Documents and other material contracts;
cross-defaults to other material indebtedness; failure to
have perfected liens of purported priority; termination of
Loan Documents or Franchise Documents; bankruptcy; adverse
judgments; abandonment of the Franchise; change of control
of the Borrowers without Lender consent; and other defaults
to be identified upon negotiation of the documentation.
ASSUMPTION: The Loans may be assumed in full, but not in part, subject
to approval by the Lender (and any other required party) of
both the Borrower who is to assume the Loans and the
transaction, and payment of a 1.50% assumption fee of the
principal amount of the Loans and any related costs and
expenses.
APPLICABLE LAW: The Loan Agreement and related and security documents
(collectively, the "Loan Documents") will be governed by the
laws of the State of New York, except that certain security
documents may be governed by the laws of the state where the
collateral is located to the extent necessary to grant the
Lender a perfected security interest.
DOCUMENTATION: The Commitment of the Lender hereunder is subject to the
negotiation and execution of definitive Loan Documents in
form and substance satisfactory to the Lender in its sole
discretion.
COSTS AND EXPENSES: The Borrowers shall pay all closing costs and reimburse the
Lender for all fees and other expenses incurred in
connection with the closing of the Loans (including, but not
limited to all consultant's fees, recording fees and taxes,
lien searches and legal fees). All such costs will be
deducted from the amounts to be drawn by the Borrowers under
the Loans.
3 A wholly owned subsidiary of Deutsche Bank North America
<PAGE>
Exhibit B to
Commitment Letter
DESCRIPTION OF SECURITY
The Loans will be secured by a lien on, and perfected security interest in,
all assets of the Borrowers, including, without limitation, all equipment,
inventory, contract rights (other than rights under any contracts to the extent
that such contracts by their terms prohibit the collateral assignment thereof),
accounts, cash and other personal property of the Borrowers and the Borrower's
real property interest (whether leasehold or fee) in the site on which the
Restaurants are located (and all related fixtures, easements and other rights
relating to the site). Such liens and security interests must constitute first
liens on all property related to the Restaurant and all other assets of the
Borrowers; PROVIDED that, in the case of property related to other franchises
owned by the Borrowers, such liens may, in the discretion of the Lender, be
junior and subordinate to any liens granted by the Borrowers to other lenders
who financed such other franchises. The Loans will be cross-collateralized and
cross-defaulted, but certain collateral will be subject to prior application to
certain of the Loans as described in the Term Sheet opposite the caption
"Primary Collateral."
The Lender may, in its discretion, require if the Borrowers leases the site
on which the Restaurant is located, landlord estoppels from the lessor
(containing provisions in form and substance satisfactory to the Lender). A
lenders title insurance policy covering the site will also be required in an
amount and form satisfactory to the Lender.
1 A wholly owned subsidiary of Deutsche Bank North America
<PAGE>
Exhibit C to
Commitment Letter
Loan 1
------
LOAN AMOUNT: $20,000,000 for designated locations consisting of 15
Restaurants.
INTEREST RATE: The interest rate will be fixed at closing based upon the
30-year US Treasury Rate plus 325 basis points p.a.
TERM AND
AMORTIZATION: Up to a 20-year term with equal monthly payments sufficient
to amortize the principal balance over the term of the loan.
PRIMARY COLLATERAL: First-fee mortgage on 15 Restaurants. Perfected first
security interest in all of the assets relating to and
including the 15 Restaurants.
Loan 2
------
LOAN AMOUNT: $104,000,000 for designated locations consisting of 124
Restaurants.
INTEREST RATE: The interest rate will be fixed at closing based upon the
10-year US Treasury Rate plus 350 basis points p.a.
TERM AND
AMORTIZATION: Up to a 15-year term with equal monthly payments sufficient
to amortize the principal balance over the term of the loan.
PRIMARY COLLATERAL: Perfected first security interest in all of the assets
relating to and including the 124 Restaurants.
2 A wholly owned subsidiary of Deutsche Bank North America
<PAGE>
Exhibit C to
Commitment Letter
Continued
Loan 3
------
LOAN AMOUNT: $26,000,000 for designated locations consisting of 38
Restaurants.
INTEREST RATE: The interest rate will be based upon the one-month LIBOR
plus 350 basis points p.a. Rate setting will be monthly.
If the loan is converted to an amortizing loan within 2
years, the interest rate will be fixed at 10-year US
Treasury plus 350 basis points p.a.
TERM AND
AMORTIZATION: Up to a two- (2-) year term with interest-only monthly
payments during the term of the loan. Principal reduction
will occur upon the sale of Restaurants during life of the
loan. At the end of the two- (2-) year floating period, the
then outstanding principal balance of the loan will be
converted to a 15-year term loan, subject to no material
adverse change in the condition of the Borrowers.
PRIMARY COLLATERAL: First-fee mortgages on any real estate and improvements
owned by the Borrowers under the Restaurants. Perfected
first security interest in all assets of the 38 Restaurants.
LOAN ORIGINATION
FEE: 0.75% due upon execution of this proposal letter (the
"Deposit"), and 0.75% of the loan balance if converted to a
term loan after two (2) years.
Forward Commitment
------------------
TOTAL COMMITMENT
AMOUNT: $30,000,000.
TERM OF
COMMITMENT: Two (2) years.
MULTIPLE DRAW
OPTION: $30,000,000 subject to a maximum of 75% of the business and
realty value of the included newly constructed or acquired
Restaurants, as determined by Deloitte & Touche, LLP.
UNIT SEASONING
REQUIREMENTS: To be eligible for financing, the Restaurants pledged as
collateral for each loan must demonstrate sufficient cash
flow to provide for a minimum combined Fixed Charge Coverage
Ratio of 1.20:1 for each of three consecutive months (not
including the Franchises' opening month).
INTEREST RATE: A fixed-rate to be determined based upon the term of each
loan. The spread for each loan will be subject to change
based on the then prevailing market conditions.
TERM AND
AMORTIZATION: Up to a 15-year term on newly constructed or acquired
Restaurants secured by the equipment and business value, and
up to a 20-year term on newly constructed or acquired
Restaurants secured by real estate and Furniture, Fixtures
& Equipment. The monthly payment for each loan will be
sufficient to amortize the principal balance over the term
of the loan.
PRIMARY COLLATERAL: To be determined prior to the drawing of funds and based
upon the assets of the individual Restaurants to be included
in each financing. In addition, Loans originated under the
Forward Commitment will be cross-collateralized and
cross-defaulted with Loan 1, Loan 2 and Loan 3.
LOAN ORIGINATION
FEE: One time 0.50% of the principal amount of the Total
Commitment Amount to be paid upon Commitment and 1.25% of
each Loan Amount to be paid when funds are drawn.
3 A wholly owned subsidiary of Deutsche Bank North America
EXHIBIT (b)(2)
================================================================================
------------------------------------------
VALUATION MATERIALS PREPARED FOR:
DAVCO RESTAURANTS, INC.
OCTOBER 1997
------------------------------------------
The following information is confidential and proprietary to Equitable
Securities Corporation. The information has been prepared solely for the benefit
of DavCo Restaurants, Inc. and is provided upon the understanding that any
person accepting it will not, without the prior permission of Equitable
Securities, utilize the information for any purpose other than as described
herein.
================================================================================
<PAGE>
================================================================================
TABLE OF CONTENTS
TAB PAGE
- --- ----
1. EXECUTIVE SUMMARY
TRANSACTION DESCRIPTION..............................................1
SCOPE OF ENGAGEMENT..................................................3
VALUATION CONSIDERATIONS.............................................7
2. PROFILE OF DAVCO RESTAURANTS, INC.
HISTORY OF THE COMPANY..............................................12
DESCRIPTION OF THE COMPANY..........................................13
HISTORICAL FINANCIAL STATEMENTS.....................................14
HISTORICAL OPERATING STATISTICS.....................................19
HISTORICAL REGIONAL OPERATING INFORMATION...........................20
ESTIMATED IMPACT OF MDF DISPOSITION.................................22
3. VALUATION ANALYSIS
TRANSACTION PRICING MATRIX..........................................26
ANALYSIS OF COMPARABLE PUBLICLY-TRADED COMPANIES....................28
PRECEDENT TRANSACTIONS FOR CONTROL ACQUISITIONS IN THE
RESTAURANT INDUSTRY.............................................39
PREMIUM ANALYSIS FOR CONTROL ACQUISITIONS IN THE RESTAURANT
INDUSTRY........................................................43
PRECEDENT TRANSACTIONS FOR ACQUISITIONS OF REMAINING
MINORITY INTEREST...............................................45
PREMIUM ANALYSIS FOR ACQUISITIONS OF REMAINING MINORITY
INTEREST........................................................49
DISCOUNTED CASH FLOW ANALYSIS.......................................51
LEVERAGED BUYOUT ANALYSIS ..........................................53
LEVERAGED RECAPITALIZATION ANALYSIS.................................56
VALUATION SUMMARY AND CONCLUSION....................................57
EXHIBITS
A. COMPANY STOCK PERFORMANCE CHARTS
B. COMPANY'S RELATIVE STOCK PRICE PERFORMANCE
C. WEIGHTED AVERAGE COST OF CAPITAL ANALYSIS
D. DETAILED LEVERAGED BUYOUT ANALYSIS
================================================================================
<PAGE>
================================================================================
--------------------------------------
EXECUTIVE SUMMARY
--------------------------------------
================================================================================
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
TRANSACTION DESCRIPTION
o We understand that an investor group which includes certain affiliates of
Citicorp Venture Capital, Ltd. ("CVC") and members of management
(collectively, the "Affiliated Shareholders") which together control
approximately 55.3% of the total fully-diluted shares outstanding has
offered to pay $20 in cash for each share of DavCo Restaurants, Inc.
("DavCo" or the "Company") that it does not already own (the "Proposed
Transaction").
o We have been informed that a newly-formed company to be known as DavCo
Acquisition Holding Inc. ("DAC" or "Newco") will establish a wholly-owned
subsidiary, DavCo Merger Sub Inc. ("DAC Sub"), which will be merged with
and into DavCo, with DavCo being the surviving entity. As a result, DavCo
will become a wholly-owned subsidiary of DAC.
o For purposes of our analysis, we have assumed, with guidance from Company
management and the Company's auditors that the transaction will be
accounted for under the purchase method of accounting for business
combinations and that the transaction will be taxable to the selling
shareholders.
o Equitable Securities Corporation ("Equitable") has been retained by the
Company to render an opinion as investment bankers (the "Opinion") as to
the fairness, from a financial point of view, of the consideration to be
paid to the Company's shareholders other than those shareholders affiliated
with the acquiring entity (the "Non-Affiliated Shareholders") under the
terms of the Proposed Transaction.
o Furthermore, we understand that the Affiliated Shareholders have expressed
their intention to vote their shares in favor of the Proposed Transaction
only if the holders of a majority of the shares held by the Non-Affiliated
Shareholders that are voted at the special stockholder's meeting, vote to
approve the Proposed Transaction.
================================================================================
Page 1 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
TRANSACTION DESCRIPTION (CONTINUED)
TERMS AND CONDITIONS
- --------------------------------------------------------------------------------
Proposal o Newco will acquire, through a cash merger, all of
the issued and outstanding shares of DavCo that it
does not already own in a taxable transaction
which will be accounted for under the purchase
method of accounting for business combinations
- --------------------------------------------------------------------------------
Conditions to Closing o Negotiation of a definitive merger agreement
o Approval of the Proposed Transaction or the
expiration of waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of
1976
o Receipt of financing proceeds by Newco
o Receipt of shareholder approvals
o The holders of not more than 5% of DavCo's common
shares exercise their dissenters' rights with
respect to the Proposed Transaction
- --------------------------------------------------------------------------------
Date of Closing o To be determined, although anticipated January
1998
- --------------------------------------------------------------------------------
================================================================================
Page 2 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
SCOPE OF ENGAGEMENT
o In connection with our engagement, Equitable has reviewed, among other
things:
- Draft of the Agreement and Plan of Merger between DavCo
Acquisition Holding Inc. and DavCo Restaurants, Inc.;
- Certain audited historical financial data for the Company for the
fiscal years ended September 28, 1996; September 30, 1995;
September 24, 1994 and September 25, 1993;
- Certain audited historical financial information for the
Predecessor Company for the fiscal year ended September 26, 1992;
- Certain unaudited historical financial data for the Company for
the quarterly periods ended June 28, 1997; March 29, 1997 and
December 28, 1996;
- Certain historical budgets of the Company and its operating
divisions;
- Certain projected financial information for the Company for the
fiscal years 1997 through 2003;
- Wendy's International, Inc. Unit Franchise Agreement, along with
Wendy's International, Inc. Development Agreement for Washington
D.C. and Virginia;
- The Purchase and Sale Agreement between Friendly's Ice Cream
Corporation and FriendCo Restaurants, Inc. dated July 10, 1997;
- Franchise Agreement between Friendly's Restaurants Franchise,
Inc. and FriendCo Restaurants, Inc. dated July 10, 1997;
- Development Agreement between Friendly's Ice Cream Corporation
and FriendCo Restaurants, Inc. dated July 10, 1997; and
- Certain published equity research information on the Company.
================================================================================
Page 3 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
SCOPE OF ENGAGEMENT (CONTINUED)
o We held discussions with senior management of the Company and its various
divisions concerning the historical and current operations of the business,
its financial condition and prospects, as well as the present strategic and
operating issues facing the Company.
o We conducted on-site visits to select facilities of the Company in each of
the Mid-Atlantic market, the Southern market and the Midwest market to
inspect the physical characteristics of the properties, to assess the
quality and range of the products and services offered at these properties
and to meet with on-site management of the facilities.
o We have assumed (i) the accuracy of the Company's audited historical
financial statements as prepared by DavCo's management and subject to audit
by Arthur Anderson LLP, (ii) the accuracy of the Company's unaudited
interim historical financial statements as prepared by DavCo's management
and (iii) the financial forecasts which we examined were reasonably
prepared on bases reflecting the best currently available estimates and
good faith judgments of the management of DavCo.
o We have also assumed that:
- All material liabilities (contingent or otherwise) of the Company are
as set forth in the financial statements of the Company or as
otherwise disclosed by DavCo; and
- The Opinion is based upon balance sheet data as of June 28, 1997, and
income statement/cash flow data through the nine months ended June 28,
1997 and estimates for the full fiscal year ending September 27, 1997.
================================================================================
Page 4 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
SCOPE OF ENGAGEMENT (CONTINUED)
o Based upon our review of the Company's historical and projected operating
performance and certain other qualitative factors associated with the
Company, we utilized a broad variety of valuation techniques to determine a
range of fair value for the public equity interest of the Company. This
valuation assumes that approximately 44.7% of the Company's issued and
outstanding shares on a fully-diluted basis will be acquired in a single,
"arms-length" transaction by an investor group which already holds a
controlling interest in the Company.
o Our methodologies included:
- A review and comparison of trading multiples for comparable
publicly-traded companies including other quick serve operators
(franchisors) as well as franchisees in a variety of formats;
- A review of recently completed and announced precedent transaction
multiples for control acquisitions in the restaurant industry (i.e.,
multiples of revenues, book value, EBITDA, EBIT, net income and prices
paid per store);
- A review of recently completed and announced precedent transaction
multiples for acquisitions of remaining public minority interests
across a broad range of industries (i.e., multiples of revenues, book
value, EBITDA, EBIT and net income);
- A review of the premiums paid relative to recent public market trading
prices for a variety of transactions including control acquisitions in
the restaurant industry as well as acquisitions of remaining public
minority interests;
- Performing a discounted cash-flow analysis of the Company including
sensitivity analyses utilizing a range of assumptions;
- Performing a stand-alone leveraged buy-out analysis of the Company,
employing capitalization assumptions consistent with the proposal
received from the Company's lender;
- Performing a leveraged recapitalization analysis of the Company,
including an assessment of the likely tax implications of such a
transaction;
================================================================================
Page 5 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
SCOPE OF ENGAGEMENT (CONTINUED)
- Assessing the likelihood that an unaffiliated third party would offer
a superior transaction to the minority shareholders for the purchase
of their 44.7% interest in the Company; and,
- In all cases, our analysis took into consideration the potential sale
of the Company's Midwest operations which did not materially change
our conclusions.
================================================================================
Page 6 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
VALUATION CONSIDERATIONS
TRANSACTION ISSUES
o One important characteristic of the Proposed Transaction is the fact that
the universe of potential third party buyers may be limited due to DavCo's
unique relationship with Wendy's International, Inc. ("Wendy's" or the
"Franchisor") and the limitations the Development and Franchise Agreements
place on the business operations, geographical expansion, management
appointments and the transfer of the Company's capital stock.
o The Company historically has been prohibited from engaging in any business
other than the development, operation and ownership of Wendy's restaurants
without the consent of the Franchisor. This prohibition was replaced in
April 1997 by a new prohibition restricting involvement in competitive QSR
restaurants (specifically concepts serving hamburgers, chili or chicken
breast sandwiches).
o The Company's agreements with the Franchisor would require that any
potential control buyer go through a potentially time consuming and complex
approval process with Wendy's.
o Any acquisition by the Company of an existing Wendy's restaurant requires
the consent of the Franchisor and is also subject to Wendy's right of first
refusal.
================================================================================
Page 7 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
VALUATION CONSIDERATIONS (CONTINUED)
BUSINESS ISSUES
Strengths Risks
--------------------------------------- --------------------------------------
Platform for future growth Increasingly severe competition and
pricing pressure
Relatively predictable cash flow Increasing labor costs due to federal
characteristics/ unlevered balance minimum wage legislation and labor
sheet scarcity
Ability to leverage earnings through Recent negative publicity regarding
unit expansion the safety, cleanliness of QSR food
Unique, long-lived, exclusive Area Uncertain price behavior for beef,
Franchise Agreement paper and other essential commodities
Attractive demographics in core Mid Franchisor limitation on acquisitions
Atlantic market and potential future growth strategies
Operating benefits of new central Limited geographical diversification
grill design in Wendy's concept
Continued positive consumer perception Increased difficulty of identifying
of food / service offering cost effective real estate locations
Consumer acceptance of new menu Uncertain store level impact of new
introductions menu changes
Potential growth and diversification Non-exclusive agreements in certain
benefits from FriendCo transaction territories / uncertain impact of new
Unit Franchise Agreement
Seasoned management team and sound Restrictions on transferability of
operating infrastructure Franchise Agreement
================================================================================
Page 8 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
VALUATION CONSIDERATIONS (CONTINUED)
TRADING ISSUES
o Since the Company's public offering on August 10, 1993, DVC's stock price
performance has lagged behind the returns posted by the broader Indices:
Cumulative Return
8/10/93 - 9/4/97(1)
-------------------------------
--------------------------------------------------------
DavCo Restaurants 11.5%
--------------------------------------------------------
S&P 500 Index 106.4
Dow Jones Industrials 119.1
QSR Index 70.9
Franchisee Index 24.2
------------------------------------------------
Source: Bloomberg L.P.
(1) Closing price of DavCo Common shares one day prior to
announcement of the Proposed Transaction.
o The indicated deal price exceeds the trading price of the Company's common
shares over the entire trading history:
High Low Average
------------- ------------- -------------
1993 $17.25 $11.25 $13.83
1994 18.50 12.25 16.16
1995 14.50 8.63 12.90
1996 9.88 6.69 8.46
1997 ytd(1) 13.88 8.75 10.50
- -----------------------------
Source: Bloomberg L.P.
(1) Includes period up to and including one day prior to announcement of the
Proposed Transaction.
================================================================================
Page 9 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
VALUATION CONSIDERATIONS (CONTINUED)
TRADING ISSUES (CONTINUED)
o The disappointing trading performance of DavCo's shares is likely
attributable to a variety of factors including:
- Limited equity research coverage;
- Limited float due to the heavily concentrated insider ownership;
- Liquidity concerns and low trading volume;
- Absence of a "take-over" premium due to limitation on transfer of
common stock;
- Limitations on growth of core business; and
- Restrictions on new business initiatives.
o The relatively low trading volume of DavCo and the resulting perceived
illiquidity has severely reduced potential institutional interest in the
shares of the Company.
<TABLE>
<CAPTION>
Float as a % of Average Daily Average Daily Trading Volume
Shares Outstanding Trading Volume(1) as a % of Total Shares Outstanding
------------------ ----------------- ----------------------------------
<S> <C> <C> <C>
Au Bon Pain Co. 99.2% 54,330 0.54%
Consolidated Products, Inc. 74.0 24,488 0.15
Krystal Company 67.7 14,762 0.20
McDonald's Corp. 99.9 2,335,592 0.34
Sbarro, Inc. 62.9 32,052 0.16
Wendy's International 82.7 554,871 0.42
- ---------------------------------------------------------------------------------------------------------------
DavCo Restaurants 44.6 6,500 0.10
- ---------------------------------------------------------------------------------------------------------------
Family Steak Houses of Florida 90.2 25,341 0.23
Main Street & Main Inc. 81.2 43,555 0.44
Morgan's Foods Inc. 99.9 3,452 0.12
NPC International 33.4 51,938 0.21
Apple South, Inc. 74.8 425,346 1.11
DenAmerica Corp. 35.2 14,712 0.11
PJ America 99.9 36,052 0.60
- ---------- ---- ------ ----
Average 74.7% 258,785 0.34%
</TABLE>
- ----------------------------
(1) Source - Bloomberg L.P. - Data sampled over one year time period.
================================================================================
Page 10 EQUITABLE SECURITIES CORPORATION
<PAGE>
================================================================================
--------------------------------------
PROFILE OF DAVCO RESTAURANTS, INC.
--------------------------------------
================================================================================
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
EXECUTIVE SUMMARY
================================================================================
VALUATION CONSIDERATIONS (CONTINUED)
TRADING ISSUES (CONTINUED)
These factors have in turn contributed to a lack of published equity
research on the stock and generally poor visibility for the issue:
Number of
Equity Analysts Reports Published
Covering the Stock in 1997
------------------ -----------------
Au Bon Pain Co. 9 4
Consolidated Products, Inc. 10 17
Krystal Company 1 1
McDonald's Corp. 40 108
Sbarro, Inc. 3 10
Wendy's International 30 73
-------------------------------------------------------------------------
DavCo Restaurants 3 5
-------------------------------------------------------------------------
Family Steak Houses of Florida 0 0
Main Street & Main Inc. 1 5
Morgan's Foods Inc. 0 0
NPC International 6 5
Apple South, Inc. 18 72
DenAmerica Corp. 3 1
PJ America 6 23
------------------ -----------------
Average 11 27
------------------------
Source - Bloomberg L.P.
o Given these Company-specific issues and the market dynamics for trading in
DavCo's stock, we believe it is unlikely that the market-determined price
of the shares would fully reflect the value of the Company, absent an
extraordinary transaction.
o The Company's share repurchase program initiated in 1996 has not materially
impacted the price of the stock.
================================================================================
Page 11 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PROFILE OF DAVCO RESTAURANTS, INC.
================================================================================
HISTORY OF THE COMPANY
o In 1976, the Company opened its first Wendy's restaurant, seven years after
the first Wendy's opened in Columbus, Ohio.
o The Company obtained the exclusive right to operate Wendy's restaurants in
the Baltimore and Washington, D.C. metropolitan areas and northern Virginia
in 1978 and on the eastern shore of Maryland in 1982.
o On August 31, 1987 the Company, then a subsidiary of Po Folks Restaurants,
was operating 102 Wendy's restaurants in Maryland, Washington D.C. and
Virginia and 41 Wendy's restaurants in metropolitan St. Louis.
o In December 1987, Management, CVC and one of its affiliates sponsored a
transaction pursuant to which Management acquired 100% of the Company's
outstanding common equity and CVC acquired convertible preferred stock
representing 70% of the Company's common equity on a fully diluted basis
(the "Original Acquisition").
o Prior to the Original Acquisition, the Company sold its St. Louis
restaurants to an unaffiliated third party, however, the Company remained
contingently obligated on the leases of certain restaurants.
o In January 1991, the Company, in part to protect against potential exposure
on the leases, reacquired most of the St. Louis restaurants and certain
other restaurants in central Illinois (total of 56 restaurants).
o The Company changed its name from FFFG Holding Corporation to DavCo
Restaurants, Inc. on June 2, 1993.
o In August 1993, immediately prior to the initial public offering, the
Company effected a merger and reclassification, in which (i) the common
stock was created, (ii) each previously outstanding share of the Company's
Class B common stock and the Company's Class C common stock was converted
into 39.023 shares of common stock and (iii) the Company's Class A common
stock was eliminated.
================================================================================
Page 12 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PROFILE OF DAVCO RESTAURANTS, INC.
================================================================================
DESCRIPTION OF THE COMPANY
o Currently, DavCo Restaurants, Inc., a Delaware corporation, operates 229
"Wendy's Old Fashioned Hamburgers" restaurants, making it the world's
largest franchisee of Wendy's International, Inc. The Company maintains
exclusive franchise territories in metropolitan Baltimore, Washington D.C.,
the eastern shore of Maryland and portions of northern Virginia (the
"Mid-Atlantic"), where it operates 138 Wendy's restaurants. The Company
also operates 53 Wendy's restaurants in metropolitan St. Louis and central
Illinois (the "Midwest") through a wholly-owned subsidiary MDF, Inc. and 38
Wendy's restaurants in metropolitan Nashville, Tennessee (the "South"). The
Company does not maintain exclusive franchise territories in the Midwest or
the South.
o In July 1997, DavCo's wholly-owned subsidiary FriendCo Restaurants, Inc.
("FriendCo") signed agreements, mainly the Purchase and Sale Agreement, the
Development Agreement, and the Franchise Agreement with Friendly's Ice
Cream Corporation and its affiliates. These agreements set forth the terms
under which FriendCo has purchased certain assets and rights to 34 existing
restaurants, and will manage under contract, with an option to purchase, 14
additional Friendly's Restaurants in Maryland, northern Virginia, Delaware
and the District of Columbia.
================================================================================
Page 13 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
HISTORICAL FINANCIAL STATEMENTS
================================================================================
INCOME STATEMENT
<TABLE>
<CAPTION>
Fiscal Years Ended
Trailing 12 ---------------------------------------------
June 28, September 28, September 30, September 24,
(in 000's except per share data) 1997 1996 1995 1994
- --------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Restaurant Sales $ 221,387 $ 206,903 $ 208,671 $ 163,355
Costs and expenses
Cost of restaurant sales 134,390 126,309 125,242 96,875
Restaurant operating expenses 44,556 42,408 41,373 32,771
Franchise royalties 8,863 8,277 8,346 6,535
General and administrative 8,328 7,407 7,881 6,524
Depreciation and amortization 8,880 8,918 8,539 6,092
Loss on write down of impaired long-lived assets 5,513 5,513 -- --
- --------------------------------------------------------------------------------------------------------------------
210,530 198,832 191,381 148,797
- --------------------------------------------------------------------------------------------------------------------
Operating income 10,857 8,071 17,290 14,558
Interest expense (4,896) (5,048) (5,775) (3,784)
Interest income 39 36 205 241
Other income, net 1,088 1,105 1,146 250
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,088 4,164 12,866 11,265
Provision for income taxes (3,118) (1,773) (4,451) (4,231)
- --------------------------------------------------------------------------------------------------------------------
Net income 3,970 2,391 8,415 7,034
====================================================================================================================
Earnings per common share
Net income per common share 0.57 0.34 1.18 0.98
====================================================================================================================
Weighted average number of shares outstanding
assuming full dilution 6,974 7,052 7,157 7,204
====================================================================================================================
Adjusted EPS (1) 1.04 0.81 1.18 0.98
====================================================================================================================
</TABLE>
(1) 1996 and LTM EPS adjusted for FAS 121 write down.
================================================================================
Page 14 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
HISTORICAL FINANCIAL STATEMENTS
================================================================================
BALANCE SHEET -- ASSETS
<TABLE>
<CAPTION>
Fiscal Years Ended
Trailing 12 ------------------------------------------
June 28, September 28, September 30, September 24,
(in 000's except per share data) 1997 1996 1995 1994
- -------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,003 $ 1,948 $ 331 $ 4,301
Receivables 741 652 572 332
Refundable income taxes 12 -- 1,175 369
Inventories 1,489 1,421 1,307 1,277
Prepaid expenses 1,211 1,034 1,593 1,108
Deferred tax assets 1,008 1,004 786 2,230
- ----------------------------------------------------------------------------------------------
Total Current Assets 5,464 6,059 5,764 9,617
- ----------------------------------------------------------------------------------------------
Property and equipment, net 54,931 49,521 41,661 33,521
Leased properties, net 35,229 37,918 43,828 44,300
- ----------------------------------------------------------------------------------------------
Other Assets:
Franchise rights, net 3,323 3,551 4,095 4,154
Goodwill, net 18,210 18,730 19,639 20,285
Deferred tax asset 1,156 1,156 -- --
Other 165 623 713 1,551
- ----------------------------------------------------------------------------------------------
Total Other Assets 22,854 24,060 24,447 25,990
- ----------------------------------------------------------------------------------------------
Total Assets $118,478 $117,558 $115,700 $113,428
==============================================================================================
</TABLE>
================================================================================
Page 15 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
HISTORICAL FINANCIAL STATEMENTS
================================================================================
BALANCE SHEET -- LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Fiscal Years Ended
Trailing 12 ------------------------------------------
June 28, September 28, September 30, September 24,
(in 000's except per share data) 1997 1996 1995 1994
- -------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable $ 5,347 $ 5,615 $ 6,397 $ 5,490
Accrued advertising and royalty fees 2,337 2,588 2,230 1,942
Accrued salaries and wages 3,340 2,732 2,583 2,326
Accrued expenses 9,024 7,997 7,248 7,905
Short-term borrowings 4,755 6,768 -- --
Current portion of long-term debt 2,056 3,055 3,685 2,852
Current portion of capital
lease obligations 3,085 3,174 3,094 2,686
Income taxes payable 1,880 -- -- 626
- ----------------------------------------------------------------------------------------------------------
Total Current Liabilities 31,824 31,929 25,237 23,827
Long-term debt, less current portion 10,544 11,699 14,778 17,928
Capital lease obligations, less current portion 26,085 28,404 31,083 32,838
Deferred taxes payable -- -- 383 3,031
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 68,453 72,032 71,481 77,624
- ----------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, $.001 par value; 11,400,000
shares authorized and 6,587,628 issued 7 7 7 7
Treasury stock, at cost, 132,017 shares (1,320) (1,084) -- --
Additional paid-in capital 31,101 31,101 31,101 31,101
Warrants outstanding 3,000 3,000 3,000 3,000
Retained earnings 17,237 12,502 10,111 1,696
- ----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 50,025 45,526 44,219 35,804
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $118,478 $117,558 $115,700 $113,428
==========================================================================================================
</TABLE>
================================================================================
Page 16 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
HISTORICAL FINANCIAL STATEMENTS
================================================================================
CASH FLOW STATEMENT
<TABLE>
<CAPTION>
Fiscal Years Ended
Trailing 12 ------------------------------------------
June 28, September 28, September 30, September 24,
(in 000's except per share data) 1997 1996 1995 1994
- -------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 3,970 $ 2,391 $ 8,415 $ 7,034
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Loss on write-down of impaired long-lived assets 5,513 5,513 -- --
Depreciation and amortization 8,880 8,918 8,539 6,092
Net (gain) loss on disposition of assets (279) (356) (420) 52
Deferred tax (benefit) provision (3,124) (1,757) (1,204) 460
Amortization of debt discount -- -- 36 18
Net change in operating assets and liabilities:
Increase in receivables (104) (80) (240) (58)
Decrease (increase) in refundable income taxes 3,105 1,175 (806) 1,176
(Increase) decrease in inventories (194) (114) (30) 1
Decrease (increase) in prepaid expenses 424 559 (520) 68
(Decrease) increase in accounts payable and
accrued expenses 106 (33) 771 (451)
Increase in accrued advertising and royalty fees 622 358 33 229
Increase (decrease) in accrued salaries and wages 1,914 149 (9) 19
Increase (decrease) in income taxes payable 562 -- (626) 640
- ----------------------------------------------------------------------------------------------------------
Net Cash Flows Provided By Operating Activities $ 21,395 $ 16,723 $ 13,939 $ 15,280
- ----------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Page 17 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
HISTORICAL FINANCIAL STATEMENTS
================================================================================
CASH FLOW STATEMENT (CONTINUED)
<TABLE>
<CAPTION>
Fiscal Years Ended
Trailing 12 ------------------------------------------
June 28, September 28, September 30, September 24,
(in 000's except per share data) 1997 1996 1995 1994
- -------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows From Investing Activities:
Increase in other assets 203 ($ 272) ($ 100) ($ 103)
Property and equipment acquired
and constructed (11,054) (14,243) (13,384) (15,144)
Proceeds from disposition of assets 528 528 500 --
Payment for acquisition of company,
net of cash acquired -- -- -- (17,497)
Purchases of restricted asset, net of sales -- -- -- (1,236)
Proceeds from redemption of restricted asset -- -- 1,236 --
- ----------------------------------------------------------------------------------------------------------
Net Cash Flows Used In Investing Activities (10,323) ($13,987) ($11,478) ($33,980)
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Repayments of capital lease obligations (3,221) ($ 3,094) ($ 2,608) ($ 2,143)
Purchase of treasury stock (430) (1,084) -- --
Repayments of long-term obligations (2,860) (3,709) (2,317) (764)
Proceeds from long-term debt -- -- -- 18,250
Short-term borrowings (3,889) 6,768 -- --
- ----------------------------------------------------------------------------------------------------------
Net Cash Flows (Used In) Provided by
Financing Activities (10,400) ($ 1,119) ($ 4,925) $ 15,343
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 672 $ 1,617 ($ 2,734) ($ 3,357)
Cash and cash equivalents, beginning of period 331 331 3,065 6,422
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,003 $ 1,948 $ 331 $ 3,065
==========================================================================================================
Supplemental Cash Flow Information:
Cash paid for interest 5,012 5,419 5,885 4,085
==========================================================================================================
Cash paid for income taxes, net of refunds 3,738 2,358 7,433 1,911
==========================================================================================================
</TABLE>
================================================================================
Page 18 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
HISTORICAL OPERATING STATISTICS
================================================================================
<TABLE>
<CAPTION>
Fiscal Years Ended
Trailing 12 ------------------------------------------
June 28, September 28, September 30, September 24,
(in 000's except per share data) 1997 1996 1995 1994
- -------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Company Restaurant Sales (in thousands) $221,387 $206,903 $208,671 $163,355
Same Store Sales 0.5% (3.9%) (0.8%) --
Average Sales Per Restaurant 963,809 933,300 984,800 971,600
Weighted Average Number of Restaurants Open 229.7 221.7 211.9 168.1
Average Guest Count Per Restaurant 304,700 303,900 330,300 324,900
Average Guest Check Per Restaurant(1) 3.33 3.07 2.98 2.99
Costs and Expenses: (in thousands)
Costs of Restaurant Sales $134,390 $126,309 $125,242 $ 96,875
Restaurants Operating Expenses 44,556 42,408 41,373 32,771
General and Administrative Expenses 8,328 7,407 7,881 6,524
Depreciation and Amortization 8,880 8,918 8,539 6,092
</TABLE>
(1) LTM numbers may be inflated and not directly comparable to prior periods
as a result of the introduction of chicken nuggets, a value added product
<TABLE>
<CAPTION>
Fiscal Years Ended
Trailing 12 ------------------------------------------
June 28, September 28, September 30, September 24,
(in 000's except per share data) 1997 1996 1995 1994
- -------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Restaurant Sales 100.0% 100.0% 100.0% 100.0%
Costs of Restaurant Sales 60.7 61.0 60.0 59.3
Restaurant Operating Expenses 20.1 20.5 19.8 20.1
Restaurant Operating Profit 19.2 18.5 20.2 20.6
Franchise Royalties 4.0 4.0 4.0 4.0
General and Administrative 3.8 3.6 3.8 4.0
Depreciation and Amortization 4.3 4.3 4.1 3.7
Loss on Write Down of Assets -- 2.7 -- --
Management Stock Expense -- -- -- --
----------- ------------ ------------ ------------
Operating Income 7.1% 3.9% 8.3% 8.9%
----------- ------------ ------------ ------------
</TABLE>
================================================================================
Page 19 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
HISTORICAL REGIONAL OPERATING INFORMATION
================================================================================
MID-ATLANTIC REGION
<TABLE>
<CAPTION>
Estimated Fiscal Years Ended
-------------------------------------------------------------------
September 30, September 28, September 30, September 24, September 25,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues: (sales in 000s)
Total Regional Sales $ 152,455 $ 137,881 $ 138,548 $ 129,846 $ 119,658
Average Sales Per Restaurant 1,121 1,073 1,131 1,138 1,110
Weighted Average Number of
Restaurants Open 136.0 128.5 122.5 114.1 107.8
Same Store Sales 3.3% (3.7%) (2.2%) -- --
Costs and Expenses:
Costs of Restaurant Sales $89,706 58.8% $81,487 59.1% $80,912 58.4% $74,921 57.7% $69,402 58.0%
Costs of Food & Supplies 50,290 33.0% 45,776 33.2% 45,305 32.7% 42,589 32.8% 40,085 33.5%
Payroll & Benefits Expense 39,416 25.9% 35,711 25.9% 35,607 25.7% 32,461 25.0% 29,197 24.4%
Restaurants Operating Expenses 29,508 19.4% 26,887 19.5% 27,017 19.5% 24,930 19.2% 23,812 19.9%
</TABLE>
MIDWEST REGION
<TABLE>
<CAPTION>
Estimated Fiscal Years Ended
-------------------------------------------------------------------
September 30, September 28, September 30, September 24, September 25,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues: (sales in 000s)
Total Regional Sales $ 33,258 $ 34,048 $ 34,958 $ 33,512 $ 33,047
Average Sales Per Restaurant 615 616 644 621 615
Weighted Average Number of
Restaurants Open 54.1 55.3 54.3 54.0 53.7
Same Store Sales (1.9%) (4.0%) (1.2%) -- --
Costs and Expenses:
Costs of Restaurant Sales $22,170 66.7% $23,017 67.6% $23,387 66.9% $21,917 65.4% $22,009 66.6%
Costs of Food & Supplies 11,572 34.8% 12,189 35.8% 12,410 35.5% 11,796 35.2% 12,393 37.5%
Payroll & Benefits Expense 10,598 31.9% 10,827 31.8% 10,977 31.4% 10,121 30.2% 9,617 29.1%
Restaurants Operating Expenses 8,336 25.1% 8,512 25.0% 8,005 22.9% 7,875 23.5% 7,898 23.9%
</TABLE>
================================================================================
Page 20 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
HISTORICAL REGIONAL OPERATING INFORMATION
================================================================================
SOUTHERN REGION
<TABLE>
<CAPTION>
Estimated Fiscal Years Ended
------------------------------
September 30, September 28, September 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues: (sales in 000s)
Total Regional Sales $ 36,428 $ 34,970 $ 35,167
Average Sales Per Restaurant 959 923 1,002
Weighted Average Number of
Restaurants Open 38.0 37.9 35.1
Same Store Sales 4.6% (4.3%) 2.6%
Costs and Expenses:
Costs of Restaurant Sales $22,834 62.7% $21,856 62.5% $20,924 59.5%
Costs of Food & Supplies 12,222 33.6% 11,645 33.3% 11,113 31.6%
Payroll & Benefits Expense 10,612 29.1% 10,246 29.3% 9,812 27.9%
Restaurants Operating Expenses 6,694 18.4% 6,959 19.9% 6,436 18.3%
</TABLE>
================================================================================
Page 21 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ESTIMATED IMPACT OF MDF DISPOSITION
================================================================================
PROCEEDS OF MDF DISPOSITION
DavCo has entered into a preliminary agreement whereby the Company will sell 46
of the Midwest division's 53 restaurants. The results of this sale are detailed
in the following tables.
($ in thousands, except multiples)
--------------------------------------------------
1996 Pre-G&A EBITDA (1) $2,156
Buyer's Assumed G&A Expenses 1,200
-----
Adjusted EBITDA 956
Negotiated Price 4,750
Plus Capitalized Leases Pass Through 4,385
-----
Estimated Value of Store Cash & Inventory 252
---
Estimated Total Sale Proceeds 9,387
Price Per Store $ 204
--------------------------------------------------
Source: Company projections.
ESTIMATED SHUTDOWN COSTS
DavCo plans to keep seven of the MDF stores. These seven remaining stores to be
retained by the Company are expected to incur the following expected shutdown
expenses.
($ in thousands)
--------------------------------------------------
Buyout of Leases $ 1,796
Write-Off of Operating Assets 331
De-Identification Cost 70
Advertising/Other Expenses 251
Total Estimated Shutdown Costs 2,448
Offset Capital Lease Obligation (1,134)
Net Shutdown Costs $ 1,314
--------------------------------------------------
Source: Company projections.
=========================
Company is recognizing in
Fiscal Year 1997 a $1.3
million reserve for asset
disposal.
=========================
- -----
(1) Actual 1997 EBITDA before taking reserve is approximately $800,000
================================================================================
Page 22 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ESTIMATED IMPACT OF MDF DISPOSITION
================================================================================
ACCOUNTING IMPACT OF MDF DISPOSITION
($ in thousands)
--------------------------------------------------
1997F - Reserve for Asset Disposal $1,314
1998F - Estimated Total Proceeds 5,002
(Excluding Capitalized Leases)
1998F - Book Value of Assets Held
for Disposition $3,772
------
1998F - Net Gain $1,230
--------------------------------------------------
Source: Company projections.
CASH IMPACT OF MDF DISPOSITION
($ in thousands)
--------------------------------------------------
Cash Proceeds
Cash Purchase Price $4,750
Cash and Inventory $252
----
Sub Total $5,002
Less
Current "Cash" Liabilities 3,698
Non-Current "Cash" Liabilities 574
---
Sub Total 4,272
Less:
Cash Exit Costs 2,117
-----
Net Cash Impact ($1,386)
--------------------------------------------------
Source: Company projections.
================================================================================
Page 23 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ESTIMATED IMPACT OF MDF DISPOSITION
================================================================================
IMPACT ON CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES
The following general and administrative expense amounts were previously
allocated to the MDF Division:
($ in thousands) Per Year Allocation
--------------------------------------------------
G&A Salaries $110,000
Equipment Rental $ 30,000
Computer Supplies $ 6,500
--------
Total $146,500
--------------------------------------------------
Source: Company projections.
The sale of the MDF division is anticipated to result in no corporate level
savings or headcount reduction as the salaries and expenses from the division
will be reallocated in the same amounts to the FriendCo stores.
================================================================================
Page 24 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ESTIMATED IMPACT OF MDF DISPOSITION
================================================================================
PROFORMA MDF RESULTS
The following is a summary of the Company's steady state pro forma projected
results with and without the MDF division. These numbers include the FriendCo
expansion program but do not include proforma results of FriendCo in 1997 nor
EBITDA contribution from DavCo Oil over the three year period.
No MDF Sale
($ in thousands) 1997 1998 1999
-------------------------------------------------------
Sales $229,096 $259,368 $278,530
Operating Income 16,443 20,562 24,062
EBIT 17,383 21,493 25,074
EBITDA 26,253 29,912 33,244
Total Assets (1) 130,646 140,616 N/A
Shareholder's Equity (1) 52,476 59,868 N/A
-------------------------------------------------------
Source: Company projections and budget.
MDF Sale
($ in thousands) 1997 1998 1999
------------------------------------------------------
Sales $229,096 $228,235 $246,744
Operating Income 16,443 20,257 23,616
EBIT 17,383 21,017 24,453
EBITDA 26,253 28,313 31,612
Total Assets (1) 130,646 131,691 N/A
Shareholder's Equity (1) 52,476 60,500 N/A
------------------------------------------------------
Source: Company projections and budget.
- ----------
(1) Balance sheet numbers adjusted to net the effect of the Proposed
Transaction.
================================================================================
Page 25 EQUITABLE SECURITIES CORPORATION
<PAGE>
================================================================================
------------------------------------------
VALUATION ANALYSIS
------------------------------------------
================================================================================
<PAGE>
================================================================================
TRANSACTION PRICING MATRIX
================================================================================
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Price per Share $18.00 $18.50 $19.00 $19.50 $20.00 $20.50 $21.00 $21.50
- -----------------------------------------------------------------------------------------------------------------------------------
(000s) except per share data
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares Outstanding 6,428.821 $115,719 $118,933 $122,148 $125,362 $128,576 $131,791 $135,005 $138,220
Warrants 441.026 $7,938 $8,159 $8,379 $8,600 $8,821 $9,041 $9,262 $9,482
Options 687.118 $6,157 $6,500 $6,844 $7,187 $7,531 $7,874 $8,218 $8,561
Average exercise price $9.040
Equity Purchase Price $129,814 $133,592 $137,371 $141,149 $144,928 $148,706 $152,485 $156,263
Debt Assumed
LT Debt $23,673 $23,673 $23,673 $23,673 $23,673 $23,673 $23,673 $23,673
Cap Leases(1) $27,272 $27,272 $27,272 $27,272 $27,272 $27,272 $27,272 $27,272
------- ------- ------- ------- ------- ------- ------- -------
Total $50,945 $50,945 $50,945 $50,945 $50,945 $50,945 $50,945 $50,945
- -----------------------------------------------------------------------------------------------------------------------------------
Implied Firm Value $180,759 $184,537 $188,316 $192,094 $195,873 $199,651 $203,430 $207,208
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Firm Value : EBITDA
1996 $23,607 7.7x 7.8x 8.0x 8.1x 8.3x 8.5x 8.6x 8.8x
TR12 $26,338 6.9 7.0 7.1 7.3 7.4 7.6 7.7 7.9
Projected 1997(2)(5) $27,921 6.5 6.6 6.7 6.9 7.0 7.2 7.3 7.4
Projected 1998(2) $30,124 6.0 6.1 6.3 6.4 6.5 6.6 6.8 6.9
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Firm Value : EBIT
1996 $14,689 12.3x 12.6x 12.8x 13.1x 13.3x 13.6x 13.8x 14.1x
TR12 $17,458 10.4 10.6 10.8 11.0 11.2 11.4 11.7 11.9
Projected 1997(2)(5) $18,657 9.7 9.9 10.1 10.3 10.5 10.7 10.9 11.1
Projected 1998(2) $21,705 8.3 8.5 8.7 8.9 9.0 9.2 9.4 9.5
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Firm Value : Revenues
1996 $206,903 0.9x 0.9x 0.9x 0.9x 0.9x 1.0x 1.0x 1.0x
TR12 $221,387 0.8 0.8 0.9 0.9 0.9 0.9 0.9 0.9
Projected 1997(2)(5) $253,535 0.7 0.7 0.7 0.8 0.8 0.8 0.8 0.8
Projected 1998(2) $259,368 0.7 0.7 0.7 0.7 0.8 0.8 0.8 0.8
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Firm Value : Stores(2)
1996 228 $792.8 $809.4 $825.9 $842.5 $859.1 $875.7 $892.2 $908.8
TR12 229 789.3 805.8 822.3 838.8 855.3 871.8 888.3 904.8
Projected 1997(2) 263 687.3 701.7 716.0 730.4 744.8 759.1 773.5 787.9
Projected l998(2) 264 684.7 699.0 713.3 727.6 741.9 756.3 770.6 784.9
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Price : EPS / Net Income
1996(3) $0.81 / $5,699 22.3x 22.9x 23.5x 24.1x 24.7x 25.4x 26.0x 26.6x
TR12(3) $1.04 / $7,278 17.3 17.8 18.3 18.8 19.2 19.7 20.2 20.7
Projected 1997(4)(5) $1.15 / $7,565 15.7 16.1 16.5 17.0 17.4 17.8 18.3 18.7
Projected 1998(4) $1.30 / $8,357 13.8 14.2 14.6 15.0 15.4 15.8 16.2 16.5
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Value : Book Equity
1996 $45,526 2.9x 2.9x 3.0x 3.1x 3.2x 3.3x 3.3x 3.4x
TR12 $50,025 2.6 2.7 2.7 2.8 2.9 3.0 3.0 3.1
Projected 1997(2)(5) $54,552 2.4 2.4 2.5 2.6 2.7 2.7 2.8 2.9
Projected 1998(2) N/A N/A N/A N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------
Price per Share $22.00
- ---------------------------------------------
(000s) except per share data
- ---------------------------------
Shares Outstanding $141,434
Warrants $9,703
Options $8,905
Average exercise price
Equity Purchase Price $160,042
Debt Assumed
LT Debt $23,673
Cap Leases(1) $27,272
-------
Total $50,945
- ---------------------------------------------
Implied Firm Value $210,987
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
Firm Value : EBITDA
1996 8.9x
TR12 8.0
Projected 1997(2)(5) 7.6
Projected 1998(2) 7.0
- ---------------------------------------------
- ---------------------------------------------
Firm Value : EBIT
1996 14.4x
TR12 12.1
Projected 1997(2)(5) 11.3
Projected 1998(2) 9.7
- ---------------------------------------------
- ---------------------------------------------
Firm Value : Revenues
1996 1.0x
TR12 1.0
Projected 1997(2)(5) 0.8
Projected 1998(2) 0.8
- ---------------------------------------------
- ---------------------------------------------
Firm Value : Stores(2)
1996 $925.4
TR12 921.3
Projected 1997(2) 802.2
Projected l998(2) 799.2
- ---------------------------------------------
- ---------------------------------------------
Equity Price : EPS / Net Income
1996(3) 27.2x
TR12(3) 21.2
Projected 1997(4)(5) 19.1
Projected 1998(4) 16.9
- ---------------------------------------------
- ---------------------------------------------
Equity Value : Book Equity
1996 3.5x
TR12 3.2
Projected 1997(2)(5) 2.9
Projected 1998(2) N/A
- ---------------------------------------------
- ---------------------------------------------
- --------------------------------------------------------------------------------
Equity purchase price calculated as: Shares outstanding times the offered
price
+ Warrants outstanding times the offered
price
+ Options outstanding times the offered
price net of the average exercise cost.
- --------------------------------------------------------------------------------
(1) 1997 year end capital lease amount adjusted by $1.1 million to reflect
close of 7 MDF stores.
(2) Projection Source: Company projections with pro-forma effects of FriendCo
acquisition.
(3) 1996 and LTM results adjusted for FASB 121 write-off.
(4) Earnings estimates provided by First Call.
(5) 1997 numbers adjusted to reflect full year of operations for FriendCo
operations.
================================================================================
Page 26 EQUITABLE SECURITIES CORPORATION
<PAGE>
================================================================================
TRANSACTION PRICING MATRIX
MDF Sale
================================================================================
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Price per Share $18.00 $18.50 $19.00 $19.50 $20.00 $20.50 $21.00 $21.50
- ----------------------------------------------------------------------------------------------------------------------------------
(000s) except per share data
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares Outstanding 6,428.821 $115,719 $118,933 $122,148 $125,362 $128,576 $131,791 $135,005 $138,220
Warrants 441.026 $7,938 $8,159 $8,379 $8,600 $8,821 $9,041 $9,262 $9,482
Options 687.118 $6,157 $6,500 $6,844 $7,187 $7,531 $7,874 $8,218 $8,561
Average exercise price $9.040
Equity Purchase Price $129,814 $133,592 $137,371 $141,149 $144,928 $148,706 $152,485 $156,263
Debt Assumed
LT Debt $23,673 $23,673 $23,673 $23,673 $23,673 $23,673 $23,673 $23,673
Cap Leases(1) $22,887 $22,887 $22,887 $22,887 $22,887 $22,887 $22,887 $22,887
------- ------- ------- ------- ------- ------- ------- -------
Total $46,560 $46,560 $46,560 $46,560 $46,560 $46,560 $46,560 $46,560
- ----------------------------------------------------------------------------------------------------------------------------------
Implied Firm Value $176,374 $180,152 $183,931 $187,709 $191,488 $195,266 $199,045 $282,823
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Firm Value : EBITDA
1996 $23,607 7.5x 7.6x 7.8x 8.0x 8.1x 8.3x 8.4x 8.6x
TR12 $26,338 6.7 6.8 7.0 7.1 7.3 7.4 7.6 7.7
Projected 1997(2)(5) $27,921 6.3 6.5 6.6 6.7 6.9 7.0 7.1 7.3
Protected 1998(2) $28,525 6.1 6.3 6.4 6.6 6.7 6.8 7.0 7.1
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Firm Value : EBIT
1996 $14,689 12.0x 12.3x 12.5x 12.8x 13.0x 13.3x 13.6x 13.8x
TR12 $17,458 10.1 10.3 10.5 10.8 11.0 11.2 11.4 11.6
Projected 1997(2)(5) $18,657 9.5 9.7 9.9 10.1 10.3 10.5 10.7 10.9
Projected 1998(2) $21,229 8.3 8.5 8.7 8.8 9.0 9.2 9.4 9.6
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Firm Value : Revenues
1996 $206,903 0.9x 0.9x 0.9x 0.9x 0.9x 0.9x 1.0x 1.0x
TR12 $221,387 0.8 0.8 0.8 0.8 0.9 0.9 0.9 0.9
Projected 1997(2)(5) $253,535 0.7 0.7 0.7 0.7 0.8 0.8 0.8 0.8
Projected 1998(2) $228,235 0.8 0.8 0.8 0.8 0.8 0.9 0.9 0.9
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Firm Value : Stores
1996 228 $773.6 $790.1 $806.7 $823.3 $839.9 $856.4 $873.0 $889.6
TR12 229 770.2 786.7 803.2 819.7 836.2 852.7 869.2 885.7
Projected 1997(2) 263 670.6 685.0 699.4 713.7 728.1 742.5 756.8 771.2
Projected 1998(2) 218 809.1 826.4 843.7 861.1 878.4 895.7 913.0 930.4
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Equity Price : EPS / Net Income
1996(3) $0.81 / $5,699 22.3x 22.9x 23.5x 24.1x 24.7x 25.4x 26.0x 26.6x
TR12(3) $1.04 / $7,278 17.3 17.8 18.3 18.8 19.2 19.7 20.2 20.7
Projected 1997(4)(5) $1.15 / $7,565 15.7 16.1 16.5 17.0 17.4 17.8 18.3 18.7
Projected 1998(2) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Equity Value : Book Equity
1996 $45,526 2.9x 2.9x 3.0x 3.1x 3.2x 3.3x 3.3x 3.4x
TR12 $50,025 2.6 2.7 2.7 2.8 2.9 3.0 3.0 3.1
Projected 1997(2)(5) $54,552 2.4 2.4 2.5 2.6 2.7 2.7 2.8 2.9
Protected 1998(2) N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------
Price per Share $22.00
- --------------------------------------------
(000s) except per share data
- ---------------------------------
Shares Outstanding $141,434
Warrants $9,703
Options $8,905
Average exercise price
Equity Purchase Price $160,042
Debt Assumed
LT Debt $23,673
Cap Leases(1) $22,887
-------
Total $46,560
- --------------------------------------------
Implied Firm Value $206,602
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------
Firm Value : EBITDA
1996 8.8x
TR12 7.8
Projected 1997(2)(5) 7.4
Protected 1998(2) 7.2
- --------------------------------------------
- --------------------------------------------
Firm Value : EBIT
1996 14.1x
TR12 11.8
Projected 1997(2)(5) 11.1
Projected 1998(2) 9.7
- --------------------------------------------
- --------------------------------------------
Firm Value : Revenues
1996 1.0x
TR12 0.9
Projected 1997(2)(5) 0.8
Projected 1998(2) 0.9
- --------------------------------------------
- --------------------------------------------
Firm Value : Stores
1996 $906.1
TR12 902.2
Projected 1997(2) 785.6
Projected 1998(2) 947.7
- --------------------------------------------
- --------------------------------------------
Equity Price : EPS / Net Income
1996(3) 27.2x
TR12(3) 21.2
Projected 1997(4)(5) 19.1
Projected 1998(2) N/A
- --------------------------------------------
- --------------------------------------------
Equity Value : Book Equity
1996 3.5x
TR12 3.2
Projected 1997(2)(5) 2.9
Protected 1998(2) N/A
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------------------------------------------
Equity purchase price calculated as: Shares outstanding times the offered
price
+ Warrants outstanding times the offered
price
+ Options outstanding times the offered
price net of the average exercise cost.
- --------------------------------------------------------------------------------
Assumes sale of MDF division in fiscal year 1998.
(1) Net of $5.5 million in capital leases to close of 7 MDF stores ($1.1
million), and the pass through nature of the remaining $4.4 million in
leases for stores sold.
(2) Projection Source: Company projections with pro-forma effects of FriendCo
acquisition.
(3) 1996 and LTM results adjusted for FASB 121 write-off.
(4) Earnings estimates provided by First Call.
(5) 1997 numbers adjusted to reflect full year of operations for FriendCo and
do not reflect the loss of MDF revenues and income in 1997.
================================================================================
Page 27 EQUITABLE SECURITIES CORPORATION
<PAGE>
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY-TRADED COMPANIES
================================================================================
DESCRIPTION OF RESTAURANT COMPARABLES
QUICK SERVICE RESTAURANTS
Au Bon Pain Company, Inc. - is a chain of 289 bakery cafes, 231 of which are
company-owned and operated. The Company, which does business under the names "Au
Bon Pain" and "Saint Louis Bread Company," positions its bakery cafes to serve
customers where they work and shop. Au Bon Pain has bakery cafes throughout the
United States and in Santiago, Chile.
Consolidated Products, Inc. - operates 208 company-owned and franchised
restaurants throughout Southern and Midwestern states. The restaurants operate
under the name of "Steak n Shake," which offers steakburgers, french fries,
milkshakes and breakfast. The Company also operates casual, sports, Mexican and
western restaurants as well as coffee shops throughout the South.
The Krystal Company - develops, operates and franchises "Krystal" and "Krystal
Kwik" quick service hamburger restaurants. The Company owns, franchises and
operates 249 restaurants in the United States. The Company has been acquired by
Port Royal Holdings, Inc. effective September 27, 1997, in a transaction valued
at $145 million.
McDonald's Corporation - develops, operates, franchises and services a worldwide
system of restaurants. These restaurants prepare, assemble, package and sell a
limited menu of quickly-prepared, moderately-priced foods. There are over 21,000
restaurants in the United States and 102 countries worldwide. Food items include
hamburgers, chicken, salads, breakfast foods and beverages.
Sbarro Inc. - develops and operates a chain of family-style, cafeteria-type
Italian restaurants under the "Sbarro" and "Sbarro The Italian Eatery" names.
The Company currently owns 820 and franchises 214 restaurants in the United
States and abroad.
Wendy's International, Inc. - operates, develops and franchises a system of fast
food restaurants. The restaurants offer hamburgers, salads and chicken
sandwiches. The Company operates or franchises approximately 4,933 "Wendy's" and
"Tim Hortons" restaurants in the United States and 33 countries and territories.
================================================================================
Page 28 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY-TRADED COMPANIES
================================================================================
DESCRIPTION OF RESTAURANT COMPARABLES
FRANCHISEES
Apple South, Inc. - operates 400 restaurants through six divisions. The
Company's restaurants include: "Applebee's Neighborhood Grill and Bar," "Don
Pablo's Mexican Kitchen," "McCormick & Schmick's," "Canyon Cafe" and "Harrigan's
Grill and Bar."
DenAmerica Corp. - operates approximately 307 family-oriented, full-service
restaurants. The Company runs 188 "Denny's" restaurants in 31 states in the
West, Midwest and Southeast. DenAmerica also operates other family-style
restaurants throughout the nation, including 93 restaurants under the name
"Black-eyed Pea."
Family Steak Houses of Florida, Inc. - is the exclusive franchisee of "Ryan's
Family Steak House" restaurants in Florida. The Company operates 25 restaurants
in northern and central Florida. Family Steak Houses' restaurants feature
scatter bars or a self-service "Mega Bar," bakery dessert bars and table service
of meals and drinks. The Company serves steaks, seafood and chicken entrees.
Main Street & Main Inc. - operates restaurants throughout the United States. The
Company operates 46 "T.G.I. Friday's" restaurants and one "Front Row Sports
Grill Restaurant." "T.G.I. Friday's" restaurants offer full-service, casual
dining, with a wide selection of freshly prepared, popular foods and drinks.
Morgan's Foods, Inc. - operates 40 "Kentucky Fried Chicken" restaurants in five
states. The Company also operates six "East Side Mario's" restaurants in
Cleveland, Akron and Columbus, Ohio.
NPC International, Inc. - is a "Pizza Hut" franchisee operating over 600
restaurants and delivery kitchens in 20 states. Through its subsidiary,
Romacorp, Inc., the Company is owner/franchisor of "Tony Roma's-Famous for
Ribs." Romacorp operates 40 "Tony Roma's" units and, through its affiliates,
franchises another 140 including 49 international facilities.
PJ America Inc. - is a franchisee of "Papa John's" pizza restaurants. The
Company currently operates 46 Papa John's restaurants in Alabama, Virginia and
Texas and has the rights to develop restaurants in Vancouver, Canada and certain
parts of California and the Puerto Rico.
================================================================================
Page 29 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY TRADED COMPANIES
================================================================================
SUMMARY FINANCIAL AND STATISTICAL MARKET DATA
(Dollar amounts in thousands except per share)
<TABLE>
<CAPTION>
Total Firm Value as a Multiple of TR12:
10/16/97 Total Equity --------------------------------------
Closing Firm Market Net
Company Name Price Value Value Revenues EBITDA EBIT
- ------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------
Quick Service Restaurants
- -------------------------
Au Bon Pain Co. $ 8.75 $ 185,748 $ 102,969 $ 243,394 $ 19,700 $ 3,020
0.8 x 9.4 x N/M
Consolidated Products, Inc. 20.31 388,929 335,870 257,876 41,758 28,103
1.5 x 9.3 x 13.8 x
Krystal Company 14.50 148,324 108,403 248,186 20,388 9,317
0.6 x 7.3 x 15.9 x
McDonald's Corp. 45.38 36,961,358 31,218,758 11,045,600 3,441,200 2,683,300
3.3 x 10.7 x 13.8 x
Sbarro, Inc. 27.38 559,556 559,556 340,968 85,191 61,778
1.6 x 6.6 x 9.1 x
Wendy's International 22.75 3,242,898 2,996,266 1,994,449 376,249 282,980
1.6 x 8.6 x 11.5 x
- -----------------------------------------------------------------------------------------------------------
Average QSR Multiple 1.6 x 8.7 x 12.8 x
Average QSR Multiple Excluding High & Low 1.4 x 8.7 x 13.0 x
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Equity Value as a Multiple of: 1998 P/E
------------------------------------------ as a % of
TR12 CY1997 CY1998 Book Trendline
Company Name P/E P/E P/E Value Growth
- ------------------------- ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
- -------------------------
Quick Service Restaurants
- -------------------------
Au Bon Pain Co. ($ 0.28) N/M $ 0.33 $ 89,925 20.0%
N/M N/M 26.5 x 1.1 x 132.6%
Consolidated Products, Inc. 1.06 1.05 1.24 70,829 20.2%
19.2 x 19.4 x 16.4 x 4.7 x 81.1%
Krystal Company 0.46 0.44 0.55 45,630 11.0%
31.5 x 33.0 x 26.4 x 2.4 x 239.7%
McDonald's Corp. 2.31 2.43 2.72 8,760,300 13.5%
19.6 x 18.7 x 16.7 x 3.6 x 123.6%
Sbarro, Inc. 1.89 1.99 2.18 209,866 12.3%
14.5 x 13.8 x 12.6 x 2.7 x 101.8%
Wendy's International 1.26 1.37 1.58 1,151,873 16.0%
18.1 x 16.6 x 14.4 x 2.6 x 90.0%
- ------------------------------------------------------------------------------------------------
Average QSR Multiple 20.6 x 20.3 x 18.8 x 2.8 x 128.1%
Average QSR Multiple Excluding High & Low 19.0 x 18.2 x 18.5 x 2.8 x 112.0%
- ------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Page 30 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY TRADED COMPANIES
================================================================================
SUMMARY FINANCIAL AND STATISTICAL MARKET DATA
(Dollar amounts in thousands except per share)
<TABLE>
<CAPTION>
Total Firm Value as a Multiple of TR12:
10/16/97 Total Equity --------------------------------------
Closing Firm Market Net
Company Name Price Value Value Revenues EBITDA EBIT
- ------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
-----------
Franchisees
-----------
Restricted Operators
Davco Restaurants $ 18.06 $ 162,646 $ 116,121 $ 221,387 $ 26,338 $ 17,458
0.7 x 6.2 x 9.3 x
Family Steak Houses of FL 0.69 23,872 7,584 37,809 3,165 1,496
0.6 x 7.5 x N/M
Main Street & Main Inc. 3.50 63,346 34,893 114,173 6,984 1,578
0.6 x 9.1 x N/M
Morgan's Foods, Inc. 2.81 21,964 8,243 38,303 2,365 529
0.6 x 9.3 x N/M
NPC International(1) 14.63 570,242 360,765 325,476 43,227 36,043
1.8 x 13.2 x 15.8 x
High Growth Consolidators
Apple South Inc. 19.00 1,129,897 728,764 657,086 88,990 62,677
1.7 x 12.7 x 18.0 x
DenAmerica Corp. 2.00 129,810 26,876 314,606 21,533 12,779
0.4 x 6.0 x 10.2 x
PJ America Inc. 16.25 93,951 93,951 29,417 4,332 3,518
3.2 x 21.7 x 26.7 x
- ----------------------------------------------------------------------------------------------------------
Average Restricted Operators Multiple 0.8 x 9.1 x 12.6 x
Average Restricted Operators Multiple Excluding High & Low 0.6 x 8.6 x 12.6 x
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
High Growth Consolidators Average Multiple 1.8 x 13.5 x 18.3 x
High Growth Consolidators Average Multiple Excluding High & Low 1.7 x 12.7 x 18.0 x
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Equity Value as a Multiple of: 1998 P/E
------------------------------------------ as a % of
TR12 CY1997 CY1998 Book Trendline
Company Name P/E P/E P/E Value Growth
- ------------------------- ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
-----------
Franchisees
-----------
Restricted Operators
Davco Restaurants $ 1.04 $ 1.15 $ 1.30 $ 50,025 15.0%
17.4 x 15.7 x 13.9 x 2.3 x 92.9%
Family Steak Houses of FL (0.01) N/A N/A 12,137 N/A
N/M N/A N/A 0.6 x N/A
Main Street & Main Inc. (0.75) 0.12 0.15 20,543 20.0%
N/M 29.2 x 23.3 x 1.7 x 116.7%
Morgan's Foods, Inc. (0.09) N/A N/A 3,255 N/A
N/M N/A N/A 2.5 x N/A
NPC International(1) 0.72 0.98 1.19 101,637 46.5%
20.3 x 14.9 x 12.3 x 3.5 x 26.4%
High Growth Consolidators
Apple South Inc. 0.74 1.00 1.26 203,582 25.5%
25.7 x 19.0 x 15.l x 3.6 x 59.3%
DenAmerica Corp. N/M 0.25 N/A 21,313 N/A
N/M 8.0 x N/A 1.3 x N/A
PJ America Inc. 0.53 0.68 0.81 22,520 27.0%
30.7 x 23.9 x 20.1 x 4.2 x 74.3%
- ------------------------------------------------------------------------------------------------
Average Restricted Operators Multiple 18.8 x 19.9 x 16.5 x 2.1 x 78.6%
Average Restricted Operators Multiple
Excluding High & Low 18.8 x 15.7 x 13.9 x 2.2 x 92.9%
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
High Growth Consolidators Average Multiple 28.2 x 17.0 x 17.6 x 3.0 x 66.8%
High Growth Consolidators Average Multiple
Excluding High & Low 28.2 x 19.0 x 17.6 x 3.6 x 66.8%
- ------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) NPC International earnings estimates are for FY '98 and '99.
================================================================================
Page 31 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY TRADED COMPANIES
================================================================================
(dollar amounts in thousands except per share data)
SUMMARY OPERATIONAL RESULTS
<TABLE>
<CAPTION>
Net Revenues EBITDA Net Income EBITDA Margins
------------------------- ---------------- ----------------- ------------------ ----------------
Quick Service Restaurants TR12 CAGR(1) TR12 CAGR(1) TR12 CAGR(1) TR12 Avg.(2)
------------------------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Au Bon Pain Co. $ 243,394 13.8% $ 19,700 (17.4%) $ (3,268) N/M 8.1% 10.1%
Consolidated Products, Inc. 257,876 19.3% 41,758 23.8% 15,311 34.7% 16.2% 15.3%
Krystal Company 248,186 (0.8%) 20,388 (12.7%) 3,400 (44.4%) 8.2% 8.7%
McDonald's Corp. 11,045,600 13.3% 3,441,200 8.8% 1,633,300 13.3% 31.2% 32.3%
Sbarro, Inc. 340,968 5.5% 85,191 5.4% 38,391 6.4% 25.0% 24.7%
Wendy's International 1,994,449 9.2% 376,249 14.6% 168,823 16.6% 18.9% 17.9%
- ------------------------------------------------------------------------------------------------------------------
Average $ 2,355,079 10.1% $ 664,081 3.7% $ 309,326 5.3% 17.9% 18.2%
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net Margins EBIT/Interest Coverage Return on Avg. Equity
------------------------- ----------- ---------------------- Debt / Total ---------------------
Quick Service Restaurants TR12 Avg.(2) TR12 Avg.(2) Capitalization TR12 Avg.(2)
------------------------- ------ ------- ------ ------- -------------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Au Bon Pain Co. (1.3%) 0.9% 0.5 x 3.0 x 47.7% (3.6%) (0.6%)
Consolidated Products, Inc. 5.9% 5.3% 7.8 6.2 13.6% 23.8% 27.3%
Krystal Company 1.4% 1.6% 2.2 2.4 46.7% 7.5% 6.4%
McDonald's Corp. 14.8% 14.7% 7.6 7.4 39.6% 18.7% 19.0%
Sbarro, Inc. 11.3% 10.9% N/M N/M 0.0% 18.5% 18.2%
Wendy's International 8.5% 8.0% 51.6 31.7 17.6% 15.3% 16.8%
- ------------------------------------------------------------------------------------------------------------
Average 6.7% 6.9% 13.9 x 10.1 x 27.5% 13.4% 14.5%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Computed over the previous three fiscal years.
(2) Average margin for the previous three fiscal years and the trailing 12
months.
================================================================================
Page 32 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY TRADED COMPANIES
================================================================================
SUMMARY OPERATIONAL RESULTS
<TABLE>
<CAPTION>
Net Revenues EBITDA Net Income EBITDA Margins
------------------------- ---------------- ----------------- ------------------ ----------------
Quick Service Restaurants TR12 CAGR(1) TR12 CAGR(1) TR12 CAGR(1) TR12 Avg.(2)
------------------------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------
Restricted Operators
--------------------
Davco Restaurants $ 221,387 12.5% $ 26,338 6.3% $ 7,278 (10.0%) 11.9% 12.3%
Family Steak Houses of FL 37,809 (8.0%) 3,165 (4.4%) (72) N/M 8.4% 9.3%
Main Street & Main Inc. 114,173 5.0% 6,984 (15.0%) (5,765) N/M 6.1% 7.2%
Morgan's Foods, Inc. 38,303 (15.3%) 2,365 (25.3%) (2,051) N/M 6.2% 6.5%
NPC International 325,476 (3.6%) 43,227 17.8% 18,014 81.8% 13.3% 12.1%
- -----------------------------------------------------------------------------------------------------------------
Average $ 147,430 (1.9%) $ 16,416 (4.1%) $ 3,481 35.9% 9.2% 9.5%
- -----------------------------------------------------------------------------------------------------------------
-------------------------
High Growth Consolidators
-------------------------
Apple South Inc. $ 657,086 34.8% $ 88,990 56.6% $ 29,616 21.8% 13.5% 12.8%
DenAmerica Corp. 314,606 125.9% 21,533 134.6% 656 822.0% 6.8% 7.7%
PJ America Inc. 29,417 62.1% 4,332 73.5% 2,210 42.4% 14.7% 13.1%
- -----------------------------------------------------------------------------------------------------------------
Average $ 333,703 74.2% $ 38,285 88.3% $ 10,827 295.4% 11.7% 11.2%
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Net Margins EBIT/Interest Coverage Return on Avg. Equity
----------- ---------------------- Debt / Total ---------------------
Quick Service Restaurants TR12 Avg.(2) TR12 Avg.(2) Capitalization TR12 Avg.(2)
------------------------- ------ ------- ------ ------- -------------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
--------------------
Restricted Operators
--------------------
Davco Restaurants 3.3% 3.6% 3.6 x 3.4 x 48.2% 15.2% 16.3%
Family Steak Houses of FL (0.2%) 0.5% 1.0 1.2 57.3% (0.6%) 4.1%
Main Street & Main Inc. (5.0%) (3.2%) 0.5 1.9 58.1% (31.1%) (23.9%)
Morgan's Foods, Inc. (5.4%) (2.9%) 0.4 0.5 80.8% (62.6%) (33.5%)
NPC International 5.5% 4.6% 5.0 5.1 67.3% 18.2% 19.8%
- -------------------------------------------------------------------------------------------------------------
Average (0.4%) 0.5% 2.1 x 2.4 x 62.3% (12.1%) (0.9%)
- -------------------------------------------------------------------------------------------------------------
-------------------------
High Growth Consolidators
-------------------------
Apple South Inc. 4.5% 5.5% 3.9 x 5.4 x 47.3% 15.0% 15.2%
DenAmerica Corp. 0.2% 0.4% 1.0 1.3 82.4% 3.0% 28.3%
PJ America Inc. 7.5% 7.1% 40.6 22.8 0.0% 10.0% 26.4%
- -----------------------------------------------------------------------------------------------------------------
Average 4.1% 4.3% 15.2 x 9.8 x 43.2% 9.4% 23.3%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Computed over the previous three fiscal years.
(2) Average margin for the previous three fiscal years and the trailing 12
months.
================================================================================
Page 33 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY TRADED COMPANIES
================================================================================
HISTORICAL STOCK PRICE PERFORMANCE
<TABLE>
<CAPTION>
Closing Stock Price Avg Daily
------------------------------ Dollar Percentage Trading
Company Ticker 9/12/96 10/16/97 Change Change Volume
- -------------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------
Quick Service Restaurants
- -------------------------
Au Bon Pain Co. ABPCA/Nasdaq $6.75 $8.75 $2.00 29.6% 38,091
Consolidated Products, Inc. COP/NYSE 15.00 20.31 5.31 35.4% 24,748
Krystal Company KRYS/Nasdaq 5.25 14.50 9.25 176.2% 30,606
McDonald's Corp. MCD/NYSE 47.25 45.38 (1.88) (4.0%) 2,348,000
Sbarro, Inc. SBA/AMEX 24.38 27.38 3.00 12.3% 36,666
Wendy's International WEN/NYSE 21.25 22.75 1.50 7.1% 698,043
- -------------------------
Franchisees
- -------------------------
Restricted Operators
Davco Restaurants DVC/AMEX $9.00 $18.06 $9.06 100.7% 8,249
Family Steak Houses of FL RYFL/Nasdaq 0.56 0.69 0.13 22.8% 17,124
Main Street & Main Inc. MAIN/Nasdaq 2.63 3.50 0.87 33.1% 44,460
Morgan's Foods, Inc.(1) MR/Nasdaq 3.00 2.81 (0.19) (6.3%) 6,849
NPC International NPCI/Nasdaq 8.75 14.63 5.88 67.1% 66,166
High Growth Consolidators
Apple South Inc. APSO/Nasdaq $21.63 $19.00 ($2.63) (12.2%) 415,528
DenAmerica Corp. DEN/AMEX 3.63 2.00 (1.63) (44.9%) 12,888
PJ America Inc.(2) PJAM/Nasdaq 12.50 16.25 3.75 30.0% 39,966
- ------------------------------------------------------------------------------------------------------------------------------
Greatest Decrease-- Minimum (44.9%) 6,849
Average 31.9% 270,527
Greatest Increase-- Maximum 176.2% 2,348,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Morgan's Foods announced a 1-for-6 stock split on July 15, 1997.
(2) PJ America Inc. had an initial public offering of 1.8 million shares on
October 25, 1996, the shares were priced at $12.50.
================================================================================
Page 34 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY TRADED COMPANIES
================================================================================
HISTORICAL MARKET VALUE
<TABLE>
<CAPTION>
Market Value (000s)
Closing Stock Price -------------------------------------------------------
------------------------------ Dollar Percentage
Company Ticker 9/12/96 10/16/97 9/12/96 10/16/97 Change Change
- -------------------------- ------------ ------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------
Quick Service Restaurants
- -------------------------
Au Bon Pain Co. ABPCA/Nasdaq $6.75 $8.75 $78,956 $102,969 $24,013 30.4%
Consolidated Products, Inc. COP/NYSE 15.00 20.31 209,706 335,870 126,164 60.2%
Krystal Company KRYS/Nasdaq 5.25 14.50 39,332 108,403 69,071 175.6%
McDonald's Corp. MCD/NYSE 47.25 45.38 33,049,090 31,218,758 (1,830,332) (5.5%)
Sbarro, Inc. SBA/AMEX 24.38 27.38 496,712 559,556 62,844 12.7%
Wendy's International WEN/NYSE 21.25 22.75 2,737,085 2,996,266 259,181 9.5%
- -------------------------
Franchisees
- -------------------------
Restricted Operators
Davco Restaurants DVC/AMEX $9.00 $18.06 $58,299 $116,121 $57,822 99.2%
Family Steak Houses of FL RYFL/Nasdaq 0.56 0.69 6,100 7,584 1,484 24.3%
Main Street & Main Inc. MAIN/Nasdaq 2.63 3.50 20,913 34,893 13,980 66.8%
Morgan's Foods, Inc.(1) MR/Nasdaq 3.00 2.81 8,908 8,243 (665) (7.5%)
NPC International NPCI/Nasdaq 8.75 14.63 215,926 360,765 144,839 67.1%
High Growth Consolidators
Apple South Inc. APSO/Nasdaq $21.63 $19.00 $832,776 $728,764 ($104,012) (12.5%)
DenAmerica Corp. DEN/AMEX 3.63 2.00 48,639 26,876 (21,764) (44.7%)
PJ America Inc.(2) PJAM/Nasdaq 12.50 16.25 72,289 93,951 21,663 30.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Average $2,705,338 $2,621,358 $(83,979) 36.1%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Morgan's Foods announced a 1-for-6 stock split on July 15, 1997.
(2) PJ America Inc. had an initial public offering of 1.8 million shares on
October 25, 1996, the shares were priced at $12.50.
================================================================================
Page 35 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY-TRADED COMPANIES
================================================================================
QSR RESTAURANTS
- ------------------------------------------------------------------
Net Revenues Values
------------ ------
Industry Multiples 1.4 x
- ------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value(2)
- -----------------------
TR 12 $221,387 $255,588 $33.82
1997 253,535 300,100 39.71
- ------------------------------------------------------------------
- --------------------------------------------------------------------------
Net Income TR12 1997 Values Values
---------- ---- ---- ------ ------
Industry Multiples 19.0 x 18.2 x TR 12 1997
- --------------------------------------------------------------------------
DavCo Financial Results (1) Implied Equity Value
- -----------------------
TR 12 $7,278 $137,941 $132,739 $18.25 $17.56
1997 7,565 143,385 137,977 18.97 18.26
- --------------------------------------------------------------------------
- -----------------------------------------------------
EBIT Values
---- ------
Industry Multiples 13.0 x
- -----------------------------------------------------
DavCo Financial Results(1) Implied Equity Value(2)
- -----------------------
TR 12 $17,458 $176,439 $23.35
1997 18,657 192,055 25.41
- -----------------------------------------------------
- -----------------------------------------------------
Book Value Values
---------- ------
Industry Multiples 2.8 x
- -----------------------------------------------------
DavCo Financial Results(1) Implied Equity Value
- -----------------------
TR 12 $50,025 $140,155 $18.55
1997 54,552 152,839 20.22
- -----------------------------------------------------
- -----------------------------------------------------
EBITDA Values
------ ------
Industry Multiples 8.7 x
- -----------------------------------------------------
DavCo Financial Results(1) Implied Equity Value(2)
- -----------------------
TR 12 $26,338 $177,122 $23.44
1997 27,921 190,829 25.25
- -----------------------------------------------------
- ---------------------------------------
Average Implied Value $23.57
- ---------------------------------------
- ----------
(1) Projected financials derived from Company projections to include pro forma
FriendCo in 1997.
(2) Assumes that there is $50,945 in outstanding debt.
- --------------------------------------------------------------------------------
General Comments
- --------------------------------------------------------------------------------
DavCo has historically traded at a significant discount to QSR operators for a
variety of reasons including: absence of stable franchise revenues, limited
ability to grow outside of existing territories, below average revenue growth
and narrower margins. In addition, DavCo suffers from a lack of liquidity and
limited research coverage that limits its trading in the marketplace. Based on
historical trading data, the Company has traded at a discount ranging from 24.5%
to 41.5% QSR operators.
- --------------------------------------------------------------------------------
- -----------------------------------
Implied Valuation Range
- -----------------------------------
$13.75 - $18.00
per share
- -----------------------------------
================================================================================
Page 36 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY-TRADED COMPANIES
================================================================================
HIGH GROWTH CONSOLIDATORS/FRANCHISEE RESTAURANTS
- -----------------------------------------------------------------
Net Revenues Values
------------ ------
Industry Multiples 1.7 x
- -----------------------------------------------------------------
DavCo Financial Results (1) Implied Equity Value(2)
-------------
TR 12 $221,387 $329,743 $43.63
1997 253,535 385,023 50.95
- -----------------------------------------------------------------
- ---------------------------------------------------------------------------
Net Income TR12 1997 Values Values
---------- ---- ---- ------ ------
Industry Multiples 28.2 x 19.0 x TR 12 1997
- ---------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value
--------------------------
TR 12 $7,278 $205,001 $138,278 $27.13 $18.30
1997 7,565 213,091 143,735 28.20 19.02
- ---------------------------------------------------------------------------
- -----------------------------------------------------
EBIT Values
---- ------
Industry Multiples 18.0 x
- -----------------------------------------------------
DavCo Financial Results (1) Implied Equity Value(2)
-------------
TR 12 $17,458 $263,776 $34.90
1997 18,657 285,390 37.77
- -----------------------------------------------------
- -----------------------------------------------------
Book Value Values
---------- ------
Industry Multiples 3.6 x
- -----------------------------------------------------
DavCo Financial Results (1) Implied Equity Value
-------------
TR 12 $50,025 $179,075 $23.70
1997 54,552 195,280 25.84
- -----------------------------------------------------
- -----------------------------------------------------
EBITDA Values
------ ------
Industry Multiples 12.7 x
- -----------------------------------------------------
DavCo Financial Results (1) Implied Equity Value(2)
-------------
TR 12 $26,338 $283,466 $37.51
1997 27,921 303,565 40.17
- -----------------------------------------------------
- -----------------------------------------------------
Average Implied Value $32.26
- -----------------------------------------------------
- ----------
(1) Projected financials derived from Company projections to include pro forma
FriendCo in 1997.
(2) Assumes that there is $50,945 in outstanding debt.
- --------------------------------------------------------------------------------
General Comments
- --------------------------------------------------------------------------------
DavCo has also traded at a significant discount to the average growth oriented,
consolidating franchisee. In comparison to the reference group, the Company has
limited growth opportunities due to the maturity of the burger segment, the
heavy saturation of the market relative to other concepts, and limits on
geographical expansion opportunities. Additionally, DavCo has lagged this group
in revenue and income growth historically. Relative illiquidity and limited
equity coverage are also a factor. Based on historical trading data, the Company
has traded at a discount ranging from 41.7% to 54.8% versus high growth
consolidators in the franchisee category.
- --------------------------------------------------------------------------------
- -----------------------
Implied Valuation Range
- -----------------------
$14.50 - $19.00
per share
- -----------------------
================================================================================
Page 37 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
ANALYSIS OF COMPARABLE PUBLICLY-TRADED COMPANIES
================================================================================
FRANCHISEE RESTAURANTS/RESTRICTED OPERATORS
- ---------------------------------------------------------
Net Revenues Values
------------ ------
Industry Multiples 0.6 x
- ---------------------------------------------------------
DavCo Financial Results (1) Implied Equity Value(2)
-------------
TR 12 $221,387 $92,180 $12.20
1997 253,535 112,963 14.95
- ---------------------------------------------------------
- --------------------------------------------------------------------
Net Income TR12 1997 Values Values
---------- ---- ---- ------ ------
Industry Multiples 18.8 x 15.7 x TR 12 1997
- --------------------------------------------------------------------
DavCo Financial Results (1) Implied Equity Value
------------------------
TR 12 $7,278 $137,115 $114,061 $18.14 $15.09
1997 7,565 142,526 118,562 18.86 15.69
- --------------------------------------------------------------------
- -----------------------------------------------------
EBIT Values
---- ------
Industry Multiples 12.6 x
- -----------------------------------------------------
DavCo Financial Results (1) Implied Equity Value(2)
-------------
TR 12 $17,458 $168,481 $22.29
1997 18,657 183,551 24.29
- -----------------------------------------------------
- --------------------------------------------------
Book Value Values
---------- ------
Industry Multiples 2.2 x
- --------------------------------------------------
DavCo Financial Results (1) Implied Equity Value
----------
TR 12 $50,025 $109,258 $14.46
1997 54,552 119,145 15.77
- --------------------------------------------------
- ---------------------------------------------------
EBITDA Values
------ ------
Industry Multiples 8.6 x
- ---------------------------------------------------
DavCo Financial Results (1) Implied Equity Value(2)
-----------
TR 12 $26,338 $176,444 $23.35
1997 27,921 190,110 25.16
- ---------------------------------------------------
- ---------------------------------------------------
Average Implied Value $18.35
- ---------------------------------------------------
- --------------
(1) Projected financials derived from Company projections to include pro forma
FriendCo in 1997.
(2) Assumes that there is $50,945 in outstanding debt.
- --------------------------------------------------------------------------------
General Comments
- --------------------------------------------------------------------------------
DavCo has historically traded at a discount to the "restricted" franchisee
group. Nonetheless, we believe that the operations and financial performance of
the restricted franchisees most closely resembles the business and financial
characteristics of DavCo and therefore this category serves as the most useful
reference group of comparable companies. While DavCo has outperformed the group
on many operating measures, its low visibility, limited liquidity and the lack
of a "take over premium" in the stock have prevented the shares from trading at
a premium to the group. Based on historical trading data, the Company has traded
at a discount of ranging from 6.7% to 22.7% to restricted operators in the
franchisee category.
- --------------------------------------------------------------------------------
- -----------------------
Implied Valuation Range
- -----------------------
$14.00 - $17.25
per share
- -----------------------
================================================================================
Page 38 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PRECEDENT TRANSACTIONS FOR CONTROL ACQUISITIONS IN THE RESTAURANT INDUSTRY
================================================================================
<TABLE>
<CAPTION>
Equity Value as a
Value of Multiple of:
-------------------
Date Date Transaction Book Net
Announced Effective Target Name Acquiror Name ($ in millions) Value Income
- ----------- --------- ------------------------------- ------------------------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
4/27/94 6/17/94 * Canteen Corp. (TW Services Inc.) Compass Group PLC $450.0 N/A N/A
Synopsis: Compass Group acquired Canteen, a unit of the
Flagstar subsidiary of Gollust Tierney & Oliver, for
$450 million. In January 1994, Flagstar announced it was
seeking a buyer for 270 restaurants as part of the
company's restructuring.
8/23/94 (1)Ground Round Restaurants Citicorp Venture Capital 157.0 N/A 27.3 x
Synopsis: An investor group led by 399 Ventures,
Citicorp Venture Capital subsidiary, and management,
terminated its definitive agreement to acquire Ground
Round for $157.02 million in a leveraged buyout due to
financing difficulties.
9/26/94 Southern Hospitality DavCo Restaurants 25.3 N/A N/A
Synopsis: DavCo purchased the stock of Southern for
approximately $16.0 mil, which included $2.0 mil in
employment contracts. Southern was a 33 unit Wendy's
franchisee based in Nashville, TN.
8/1/95 * WestSphere Capital Chase Manhattan 32.5 N/A N/A
Synopsis: A company formed by Chase Manhattan and
management purchased the stock of Southern California
Food Services from WestSphere for $32.5 mil. Southern
was a 62 unit Wendy's franchisee based in Knoxville, TN.
4/21/95 4/2/96 * Denwest Restaurant Corp. American Family Restaurants 114.5 N/A N/M
Synopsis: American Family merged with Denwest in a
reverse stock swap valued at $52.0 mil. The
consideration consisted of 6.9 mil common shares in the
new company, DenAmerica, valued at $27.8 mil and $24.3
mil in notes and warrants.
9/5/95 9/9/96 (1)TPI Enterprises Inc. Shoney's Inc. 160.1 1.6 x N/A
Synopsis: Shoney's acquired TPI in a stock swap valued
at $160.1 mil, which included the assumption of $95.0
mil in liabilities. TP common shareholders received .28
SH common share and .32 SH warrant for each TP share
held.
11/6/95 (1)NPC International Inc. Investor Group, CEO Gene Bicknell 166.3 2.6 x N/A
Synopsis: A management led investor group, including CEO
Gene Bicknell, withdrew its offer to acquire the
remaining 38% interest, or 9.12 mil common shares which
it did not already own in a leveraged buyout
transaction.
7/10/96 11/22/96 (1)Volunteer Capital Corp. Wendy's International Inc. 30.8 N/A N/A
Synopsis: Volunteer sold its Wendy's franchised
restaurant division to Wendy's Int'l for approximately
$30.8 mil. The division included 52 units in four
states.
<CAPTION>
Firm
Firm Value as a Multiple of: Value
-----------------------------
Date Date In Stores
Announced Effective Target Name Acquiror Name Sales EBIT EBITDA ($ in 000's)
- ----------- --------- ------------------------------- ---------------------------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
4/27/94 6/17/94 * Canteen Corp. (TW Services Inc.) Compass Group PLC 0.4 x 11.8 x N/A $281.3
Synopsis: Compass Group acquired Canteen, a unit of the
Flagstar subsidiary of Gollust Tierney & Oliver, for
$450 million. In January 1994, Flagstar announced it was
seeking a buyer for 270 restaurants as part of the
company's restructuring.
8/23/94 (1)Ground Round Restaurants Citicorp Venture Capital 0.7 x 12.7 x 6.3 x 776.7
Synopsis: An investor group led by 399 Ventures,
Citicorp Venture Capital subsidiary, and management,
terminated its definitive agreement to acquire Ground
Round for $157.02 million in a leveraged buyout due to
financing difficulties.
9/26/94 Southern Hospitality DavCo Restaurants 0.8 x N/A 5.7 x 766.7
Synopsis: DavCo purchased the stock of Southern for
approximately $16.0 mil, which included $2.0 mil in
employment contracts. Southern was a 33 unit Wendy's
franchisee based in Nashville, TN.
8/1/95 * WestSphere Capital Chase Manhattan 0.5 x 5.7 x N/A 524.0
Synopsis: A company formed by Chase Manhattan and
management purchased the stock of Southern California
Food Services from WestSphere for $32.5 mil. Southern
was a 62 unit Wendy's franchisee based in Knoxville, TN.
4/21/95 4/2/96 * Denwest Restaurant Corp. American Family Restaurants 1.8 x 15.4 x 11.5 x 638.8
Synopsis: American Family merged with Denwest in a
reverse stock swap valued at $52.0 mil. The
consideration consisted of 6.9 mil common shares in the
new company, DenAmerica, valued at $27.8 mil and $24.3
mil in notes and warrants.
9/5/95 9/9/96 (1)TPI Enterprises Inc. Shoney's Inc. 0.6 x N/M 7.5 x 423.7
Synopsis: Shoney's acquired TPI in a stock swap valued
at $160.1 mil, which included the assumption of $95.0
mil in liabilities. TP common shareholders received .28
SH common share and .32 SH warrant for each TP share
held.
11/6/95 (1)NPC International Inc. Investor Group, 0.5 x 4.7 x 3.1 x 336.0
CEO Gene Bicknell
Synopsis: A management led investor group, including CEO
Gene Bicknell, withdrew its offer to acquire the
remaining 38% interest, or 9.12 mil common shares which
it did not already own in a leveraged buyout
transaction.
7/10/96 11/22/96 (1)Volunteer Capital Corp. Wendy's International Inc. 0.6 x 4.3 x 3.7 x 592.0
Synopsis: Volunteer sold its Wendy's franchised
restaurant division to Wendy's Int'l for approximately
$30.8 mil. The division included 52 units in four
states.
</TABLE>
- --------------------------
*Source: Securities Data Corp.
(1) Transaction values have been adjusted to reflect assumption of debt
including capitalized leases where applicable.
================================================================================
Page 39 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PRECEDENT TRANSACTIONS FOR CONTROL ACQUISITIONS IN THE RESTAURANT INDUSTRY
================================================================================
<TABLE>
<CAPTION>
Equity Value as a
Value of Multiple of:
-------------------
Date Date Transaction Book Net
Announced Effective Target Name Acquiror Name ($ in millions) Value Income
- ----------- --------- ------------------------------- ------------------------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
8/28/96 10/2/96 * Casa Bonita CKE Restaurants Inc. $42.0 N/A N/A
Synopsis: CKE acquired Casa Bonita, a unit of
Unigate, for $42.0 mil in cash. The transaction
included CB's 109 Taco Bueno restaurants, 2 CB theme
restaurants and 3 Crystal's pizzerias.
2/13/97 5/16/97 * Arby's Inc. Restaurants RTM Restaurant Group 71.0 N/A N/A
Synopsis: RTM acquired 355 restaurants of Arby's, a
unit of Triarc, for approximately $71.0 mil. The
consideration included the assumption of liabilities
and an option for Triarc to acquire a 20% stake in
RTM.
3/25/97 (1)Rally's Hamburgers Inc. Checker's Drive-In Restaurants 178.5 6.0 x N/M
Synopsis: Checker's terminated its signed letter of
intent to merge with Rally's in a stock swap
transaction. RH shareholders were to receive 3 CKD
shares for each RH share held.
4/27/97 7/15/97 (1)Hardees Food Systems, Inc. CKE Restaurants Inc. 327.0 1.0 x N/M
Synopsis: CKE Restaurants completed the acquisition
of Hardees Food Systems, Inc from Imasco Holdings,
Inc. in July 1997 for $327.0 in cash.
7/3/97 9/29/97 (1)Krystal Company (2) Port Royal Holdings Inc. 145.4 2.4 x N/M
Synopsis: Port Royal Holdings agreed to acquire all
the outstanding common stock of Krystal for $14.50 in
cash per share, or a total value of $145.4 mil,
including the assumption of $37.0 mil in liabilities.
8/4/97 (1)Perkins Family Restaurants LP Restaurant Company 130.9 2.2 x 9.7 x
Synopsis: Restaurant Company offered to acquire the
remaining 52% interest, or 5.4 mil common shares that
it did not already own, for $13.00 per share.
9/23/97 * 30 Burger King Restaurants AmeriKing Corp. 25.0 N/A N/A
Synopsis: AmeriKing announced the acquisition of 30
Burger King restaurants in the Charlotte, NC market
for $25.0 mil in cash.
9/23/97 (1)El Chico Restaurants Inc. Investor Group 65.0 1.7 x 16.3 x
Synopsis: An investor group led by Cracken Harkey &
Company, agreed to acquire all the outstanding common
stock of El Chico for $12.75 per share, or a total
value of $47.3 mil.
<CAPTION>
Firm
Firm Value as a Multiple of: Value
-----------------------------
Date Date Per Stores
Announced Effective Target Name Acquiror Name Sales EBIT EBITDA ($ in 000's)
- ----------- --------- ------------------------------- ------------------------------ -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
8/28/96 10/2/96 * Casa Bonita CKE Restaurants Inc. 0.5 x N/A N/A $568.8
Synopsis: CKE acquired Casa Bonita, a unit of
Unigate, for $42.0 mil in cash. The transaction
included CB's 109 Taco Bueno restaurants, 2 CB theme
restaurants and 3 Crystal's pizzerias.
2/13/97 5/16/97 * Arby's Inc. Restaurants RTM Restaurant Group 0.3 x N/A N/A 200.0
Synopsis: RTM acquired 355 restaurants of Arby's, a
unit of Triarc, for approximately $71.0 mil. The
consideration included the assumption of liabilities
and an option for Triarc to acquire a 20% stake in
RTM.
3/25/97 (1)Rally's Hamburgers Inc. Checker's Drive-In Restaurants 1.2 x N/M 9.3 x 373.4
Synopsis: Checker's terminated its signed letter of
intent to merge with Rally's in a stock swap
transaction. RH shareholders were to receive 3 CKD
shares for each RH share held.
4/27/97 7/15/97 (1)Hardees Food Systems, Inc. CKE Restaurants Inc. 0.4 x N/M 11.4 x 103.7
Synopsis: CKE Restaurants completed the acquisition
of Hardees Food Systems, Inc from Imasco Holdings,
Inc. in July 1997 for $327.0 in cash.
7/3/97 9/29/97 (1)Krystal Company (2) Port Royal Holdings Inc. 0.6 x N/M 5.2 x 582.3
Synopsis: Port Royal Holdings agreed to acquire all
the outstanding common stock of Krystal for $14.50 in
cash per share, or a total value of $145.4 mil,
including the assumption of $37.0 mil in liabilities.
8/4/97 (1)Perkins Family Restaurants LP Restaurant Company 0.5 x 6.9 x 3.7 x 151.7
Synopsis: Restaurant Company offered to acquire the
remaining 52% interest, or 5.4 mil common shares that
it did not already own, for $13.00 per share.
9/23/97 * 30 Burger King Restaurants AmeriKing Corp. 0.7 x N/A N/A 833.3
Synopsis: AmeriKing announced the acquisition of 30
Burger King restaurants in the Charlotte, NC market
for $25.0 mil in cash.
9/23/97 (1)El Chico Restaurants Inc. Investor Group 0.6 x 13.9 x 6.7 x 677.1
Synopsis: An investor group led by Cracken Harkey &
Company, agreed to acquire all the outstanding common
stock of El Chico for $12.75 per share, or a total
value of $47.3 mil.
</TABLE>
- ------------------------
Source: Securities ata Corp.
(1) Transaction values have been adjusted to reflect the assumption of debt
including capitalized leases where applicable.
(2) Adjusted for non-recurring items as well as excess cash, pension surplus
and certain other adjustments for liquid assets.
================================================================================
Page 40 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PRECEDENT TRANSACTIONS FOR CONTROL ACQUISITIONS IN THE RESTAURANT INDUSTRY
================================================================================
<TABLE>
<CAPTION>
Equity Value as a
Value of Multiple of:
-------------------
Date Date Transaction Book Net
Announced Effective Target Name Acquiror Name ($ in millions) Value Income
- ----------- --------- ------------------------------ ------------------------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
9/26/97 (1)Sagebrush, Inc. WSMP, Inc $43.7 2.9 x 15.4
Synopsis: WSMP signed a letter of intent to acquire
Sagebrush for $43.7 mil in a stock swap.
9/26/97 (1)Skyline Chili Inc. Fleet Equity Partners 30.2 2.1 x 21.9 x
Synopsis: Skyline reached an agreement with Fleet
Equity Partners to be acquired for $6.75 per share,
for a total value of $30.2 mil.
9/5/97 (1)DavCo Restaurants Management led Investor Group 195.9 2.9 x 19.2 x
Synopsis: A management led investor group plans to
acquire all the remaining shares that it does not
already own for $20.00 in a leveraged buyout
transaction.
- --------------------------------------------------------------------------------------------------------------------------------
Average Multiple 2.6 x 17.7 x
Average Multiple Excluding High & Low 2.4 17.4
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Firm
Firm Value as a Multiple of: Value
-----------------------------
Date Date Per Stores
Announced Effective Target Name Acquiror Name Sales EBIT EBITDA ($ in 000's)
- ----------- --------- ------------------------------- ------------------------------ -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
9/26/97 (1)Sagebrush, Inc. WSMP, Inc 0.9 x 9.9 x 7.0 x 1,280.0
Synopsis: WSMP signed a letter of intent to acquire
Sagebrush for $43.7 mil in a stock swap.
9/26/97 (1)Skyline Chili Inc. Fleet Equity Partners 1.1 x 12.0 x 7.2 x $299.0
Synopsis: Skyline reached an agreement with Fleet
Equity Partners to be acquired for $6.75 per share,
for a total value of $30.2 mil.
9/5/97 (1)DavCo Restaurants Management led Investor Group 0.9 x 11.2 x 7.4 x 744.8
Synopsis: A management led investor group plans to
acquire all the remaining shares that it does not
already own for $20.00 in a leveraged buyout
transaction.
- --------------------------------------------------------------------------------------------------------------------------------
Average Multiple 0.7 x 9.7 x 6.8 x $578.7
Average Multiple Excluding High & Low 0.7 9.7 6.7 555.0
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------
Source: Securities Data Corp.
(1) Transaction values have been adjusted to reflect the assumption of debt
including capitalized leases where applicable.
================================================================================
Page 41 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PRECEDENT TRANSACTIONS FOR CONTROL ACQUISITIONS IN THE RESTAURANT INDUSTRY
================================================================================
PRECEDENT TRANSACTIONS FOR THE RESTAURANT INDUSTRY
- --------------------------------------------------------------------------------
Net Revenues Values
------------ ------
Industry Multiples 0.7 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value(2)
------------------
TR12 $221,387 $96,019 $12.71
1997 253,535 117,360 15.53
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Income Values
---------- ------
Industry Multiples 17.4 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value
------------------
TR 12 $7,278 $126,452 $16.73
1997 7,565 131,442 17.39
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EBIT Values
---- ------
Industry Multiples 9.7 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value(2)
------------------
TR 12 $17,458 $117,816 $15.59
1997 18,657 129,406 17.12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Book Value Values
---------- ------
Industry Multiples 2.4 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value
------------------
TR 12 $50,025 $118,484 $15.68
1997 54,552 129,206 17.10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EBITDA Values
------ ------
Industry Multiples 6.7 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value(2)
------------------
TR 12 $26,338 $124,675 $16.50
1997 27,921 135,230 $17.89
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Value per Store
-----------------------
Industry Average $555.0
- --------------------------------------------------------------------------------
Stores Implied Equity Value(2)
------------------
TR 12 229 $76,150 $10.08
1997 (3) 263 95,020 $12.57
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Implied Value $15.41
- --------------------------------------------------------------------------------
Average without Store Value Calculation $16.22
- --------------------------------------------------------------------------------
- ----------
(1) Projected financials derived from Company projections to include pro forma
FriendCo in 1997.
(2) Assumes that there is $50,945 in outstanding debt.
(3) Store numbers for 1997 based on Company projection to include FriendCo.
- --------------------------------------------------------------------------------
General Comments
- --------------------------------------------------------------------------------
The multiples offered in the Proposed Transaction exceed the average multiples
observed in the marketplace across the full range of customary variables.
In addition, the price offered exceeds, by a large margin, the prices the
Company has offered and received in its previous acquisitions and divestitures.
- --------------------------------------------------------------------------------
- -----------------------------------
Implied Valuation Range
- -----------------------------------
$14.00 - $16.50
per share
- -----------------------------------
================================================================================
Page 42 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PREMIUM ANALYSIS FOR CONTROL ACQUISITIONS IN THE RESTAURANT INDUSTRY
================================================================================
<TABLE>
<CAPTION>
Value of
Date Date Transaction
Announced Effective Target Name Acquiror Name ($ in millions)
- ------------ -------------- --------------------------------- --------------------------------- -------------
<S> <C> <C> <C> <C>
4/27/94 6/17/94 Canteen Corp. (TW Services Inc.) Compass Group PLC $450.0
8/23/94 Ground Round Restaurants Citicorp Venture Capital 157.0
4/21/95 4/2/96 Denwest Restaurant Corp. American Family Restaurants 114.5
9/5/95 9/9/96 TPI Enterprises Inc. Shoney's Inc. 160.1
11/6/95 NPC International Inc. Investor Group, CEO Gene Bicknell 166.3
8/28/96 10/2/96 Casa Bonita CKE Restaurants Inc. 42.0
2/13/97 5/16/97 Arby's Inc. Restaurants RTM Restaurant Group 71.0
3/25/97 Rally's Hamburgers Inc. Checker's Drive-In Restaurants 178.5
7/3/97 9/29/97 Krystal Company Port Royal Holdings Inc. 145.4
8/4/97 Perkins Family Restaurants LP Restaurant Company 130.9
9/23/97 El Chico Restaurants Investor Group 65.0
9/26/97 Sagebrush Inc. WSMP Inc. 43.7
9/26/97 Skyline Chili Inc. Fleet Equity Partners 30.2
9/5/97 DavCo Restaurants Management led Investor Group 195.9
- ----------------------------------------------------------------------------------------------------------------------
Average Premium
Average Premium Excluding High & Low
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
----------------------------------------
Date Date Premium Prior to Announcement Date
----------------------------------------
Announced Effective Target Name 1 Day 1 Week 4 Weeks
- ------------ -------------- --------------------------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
4/27/94 6/17/94 Canteen Corp. (TW Services Inc.) N/A N/A N/A
8/23/94 Ground Round Restaurants 41.2% 50.0% 33.3%
4/21/95 4/2/96 Denwest Restaurant Corp. N/A N/A N/A
9/5/95 9/9/96 TPI Enterprises Inc. (32.9%) (35.5%) (20.4%)
11/6/95 NPC International Inc. 44.0% 44.0% 33.3%
8/28/96 10/2/96 Casa Bonita N/A N/A N/A
2/13/97 5/16/97 Arby's Inc. Restaurants N/A N/A N/A
3/25/97 Rally's Hamburgers Inc. 59.7% 65.9% 39.1%
7/3/97 9/29/97 Krystal Company 132.0% 169.8% 176.2%
8/4/97 Perkins Family Restaurants LP 28.7% 26.6% 31.8%
9/23/97 El Chico Restaurants 64.5% 75.9% 104.0%
9/26/97 Sagebrush Inc. 12.9% 10.5% 18.1%
9/26/97 Skyline Chili Inc. 1.8% 1.8% 5.8%
9/5/97 DavCo Restaurants 49.5% 49.5% 53.8%
- ----------------------------------------------------------------------------------------------------------
Average Premium 40.1% 45.8% 47.5%
Average Premium Excluding High & Low 37.8% 40.5% 39.9%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
Source: Securities Data Corp.
================================================================================
Page 43 EQUITABLE SECURITIES CORPORATION
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PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PREMIUM ANALYSIS FOR CONTROL ACQUISITIONS IN THE RESTAURANT INDUSTRY
================================================================================
Premium Premium Premium
1 Day 1 Week 4 Week
------- ------- -------
Average Industry Premiums Paid 37.8% 40.5% 39.9%
DavCo
Closing Price Prior to
announcement date $13.38 $13.38 $13.00
------ ------ ------
- --------------------------------------------------------------------------------
Implied Value Per Share $18.43 $18.79 $18.19
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
General Comments
- --------------------------------------------------------------------------------
Recent transaction data indicates an average premium paid of 37.8% to 40.5% over
time periods that range from one day to four weeks from the announcement of the
transaction.
Thus the premium of 49.5% to 53.8% offered in the Proposed Transaction exceeds
the observed per share premiums paid in the marketplace for both franchisors and
franchisees.
- --------------------------------------------------------------------------------
- -----------------------------------
Implied Valuation Range
- -----------------------------------
$18.00 - $19.00
per share
- -----------------------------------
================================================================================
Page 44 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PRECEDENT TRANSACTIONS FOR ACQUISITIONS OF REMAINING MINORITY INTEREST
================================================================================
<TABLE>
<CAPTION>
Equity Value as a
Value of Multiple of:
-------------------
Date Date Transaction Book Net
Announced Effective Target Name Acquiror Name ($ in millions) Value Income
- ----------- --------- ------------------------------- ------------------------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
2/17/94 9/15/94 Scripps Howard Broadcasting EW Scripps $115.9 2.8 x 8.3 x
Synopsis: EW Scripps a 77.6% subsidiary of EW Scripps Trust,
offered to acquire the remaining 14% interest in Scripps
Broadcasting that it did not already own. Consideration was to
consist of 3.45 class A common shares for each SHB share held.
3/1/94 10/12/94 FoxMeyer Corp. National Intergroup Inc. 79.7 0.9 x 17.1 x
Synopsis: National Intergroup acquired the remaining 19.5% or
5.5 mil common shares of FoxMeyer that it did not already own.
Consideration consisted of .904 common shares of NI for each
share of FM.
8/24/94 3/24/95 Castle & Cooke Homes Inc. Dole Food Company Inc. 81.5 N/A 14.1 x
Synopsis: Dole completed a tender offer to acquire the
remaining 17% stake in CC which it did not already own for
$15.75 in cash per share for 5.0 mil shares.
11/2/94 9/27/95 Pacific Telecom PacifiCorp 159.0 1.8 x 18.5 x
PacifiCorp acquired the remaining 13% interest, or 5.3 mil
common shares that it did not already own for $30.00 in cash
per share, or a total of $159.0 mil.
12/28/94 4/28/95 Fleet Mortgage Group Inc. Fleet Financial Group Inc. 188.1 2.1 x 18.0 x
Synopsis: Fleet Financial completed it merger with Fleet
Mortgage in a transaction value at $188.1 mil. Earlier, FFG
had completed its tender offer for the remaining 19% interest
of FMG it did not already own for $20.00 in cash per share for
7.9 mil common shares.
2/7/95 7/12/95 Rust International Inc. WMX Technologies Inc. 50.5 1.4 x 20.4 x
Synopsis: WMX Technologies acquired the remaining 3.61% stake
it did not already own in Rust Int'l, a majority-owned unit of
its Chemical Waste management subsidiary, by purchasing 3.1
mil common shares at $16.35 in cash per common share.
4/5/95 8/2/95 Club Med Inc. Club Mediterranee SA 153.4 1.3 x 15.4 x
Synopsis: Club Mediterranee merged with Club Med in a
transaction valued at $153.4 mil concurrent with the
completion of its tender offer for the remaining 4.8 mil
shares, or 33% stake it did not already own. The consideration
included $32.00 in cash per common share and included 4.7 mil
common shares.
<CAPTION>
Firm Value as a Multiple of: Minority
----------------------------
Date Date Interest
Announced Effective Target Name Acquiror Name Sales EBIT EBITDA Acquired
- ----------- --------- ------------------------------- ------------------------------ ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
2/17/94 9/15/94 Scripps Howard Broadcasting EW Scripps 2.1 x 8.4 x 5.8 x 14.0%
Synopsis: EW Scripps a 77.6% subsidiary of EW Scripps Trust,
offered to acquire the remaining 14% interest in Scripps
Broadcasting that it did not already own. Consideration was to
consist of 3.45 class A common shares for each SHB share held.
3/1/94 10/12/94 FoxMeyer Corp. National Intergroup Inc. 0.1 x 7.7 x 5.7 x 19.5%
Synopsis: National Intergroup acquired the remaining 19.5% or
5.5 mil common shares of FoxMeyer that it did not already own.
Consideration consisted of .904 common shares of NI for each
share of FM.
8/24/94 3/24/95 Castle & Cooke Homes Inc. Dole Food Company Inc. 2.1 x 8.5 x 8.3 x 17.0%
Synopsis: Dole completed a tender offer to acquire the
remaining 17% stake in CC which it did not already own for
$15.75 in cash per share for 5.0 mil shares.
11/2/94 9/27/95 Pacific Telecom PacifiCorp 1.7 x 8.3 x 4.6 x 13.0%
PacifiCorp acquired the remaining 13% interest, or 5.3 mil
common shares that it did not already own for $30.00 in cash
per share, or a total of $159.0 mil.
12/28/94 4/28/95 Fleet Mortgage Group Inc. Fleet Financial Group Inc. 2.4 x 10.6 x 4.5 x 19.0%
Synopsis: Fleet Financial completed it merger with Fleet
Mortgage in a transaction value at $188.1 mil. Earlier, FFG
had completed its tender offer for the remaining 19% interest
of FMG it did not already own for $20.00 in cash per share for
7.9 mil common shares.
2/7/95 7/12/95 Rust International Inc. WMX Technologies Inc. 0.8 x 12.0 x 7.7 x 3.6%
Synopsis: WMX Technologies acquired the remaining 3.61% stake
it did not already own in Rust Int'l, a majority-owned unit of
its Chemical Waste management subsidiary, by purchasing 3.1
mil common shares at $16.35 in cash per common share.
4/5/95 8/2/95 Club Med Inc. Club Mediterranee SA 0.8 x 14.2 x 8.2 x 33.0%
Synopsis: Club Mediterranee merged with Club Med in a
transaction valued at $153.4 mil concurrent with the
completion of its tender offer for the remaining 4.8 mil
shares, or 33% stake it did not already own. The consideration
included $32.00 in cash per common share and included 4.7 mil
common shares.
</TABLE>
- ----------
Source: Securities Data Corp.
================================================================================
Page 45 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PRECEDENT TRANSACTIONS FOR ACQUISITIONS OF REMAINING MINORITY INTEREST
================================================================================
<TABLE>
<CAPTION>
Equity Value as a
Value of Multiple of:
-------------------
Date Date Transaction Book Net
Announced Effective Target Name Acquiror Name ($ in millions) Value Income
- ----------- --------- ------------------------------- ------------------------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
5/9/95 3/27/96 Riverwood International Corp. RIC Holdings Inc. $2,436.2 2.6 x N/M
Synopsis: RIC Holdings, an investor group comprised of
management, Clayton Dubiler & Rice, 1818 Fund, and Exor Group,
acquired all the outstanding shares of Riverwood for $20.25 in
cash per share, or a total value of $2.4 billion, including
the assumption of $1.1 billion in liabilities, in a leveraged
buyout transaction.
5/19/95 12/6/95 Bic Corp. (BIC SA) BIC SA 212.6 3.9 x 18.7 x
Synopsis: BIC acquired the remaining 22% stake it did not
already own in BIC corp. for $40.50 in cash per share.
11/6/95 NPC International Inc. Investor Group, CEO Gene Bicknell 166.3 2.6 x N/A
Synopsis: A management led investor group, including CEO gene
Bicknell, withdrew its offer to acquire the remaining 38%
interest, or 9.12 mil common shares which it did not already
own in a leveraged buyout transaction.
7/6/95 8/4/95 Arcus Inc. (Armored Transport) United Acquisition Company 48.4 2.8 x 12.4 x
Synopsis: United Acquisition acquired Arcus, a 94.8% held unit
of ATI Systems Int'l, for $6.33 per share, for a total of
$48.4 mil in a leveraged buyout transaction.
3/29/96 4/26/96 Great American Mgmt & Invt Inc. Equity Holdings 63.3 1.9 x 2.7 x
Synopsis: Equity Holdings acquired the remaining interest in
its Great American unit in a transaction valued at $63.2 mil.
Earlier, EH completed its unsolicited tender offer to acquire
the remaining 1.1 mil common shares in GAMI for $50.00 in cash
per share, raising its interest to 97%.
7/3/96 9/5/97 Golden Poultry Company Inc. Gold Kist Inc. 52.1 2.0 x 13.0 x
Gold Kist acquired the remaining 25% stake, or 3.7 mil common
shares that it did not already own in Golden Poultry for
$14.25 per share.
8/26/96 12/31/96 Bankers Life Holding (Conseco) Conseco Inc. 120.8 1.3 x 7.5 x
Synopsis: Conseco acquired the remaining 11.5% stake, or 5.8
mil common shares which it did not already own in Bankers Life
for $25.00 in Conseco common shares per BLH share, or a total
value of $120.8 mil.
<CAPTION>
Firm Value as a Multiple of: Minority
----------------------------
Date Date Interest
Announced Effective Target Name Acquiror Name Sales EBIT EBITDA Acquired
- ----------- --------- ------------------------------- ------------------------------ ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
5/9/95 3/27/96 Riverwood International Corp. RIC Holdings Inc. 1.7 x 11.4 x 7.9 x N/A
Synopsis: RIC Holdings, an investor group comprised of
management, Clayton Dubiler & Rice, 1818 Fund, and Exor Group,
acquired all the outstanding shares of Riverwood for $20.25 in
cash per share, or a total value of $2.4 billion, including
the assumption of $1.1 billion in liabilities, in a leveraged
buyout transaction.
5/19/95 12/6/95 Bic Corp. (BIC SA) BIC SA 2.0 x 11.1 x 8.7 x 22.0%
Synopsis: BIC acquired the remaining 22% stake it did not
already own in BIC corp. for $40.50 in cash per share.
11/6/95 NPC International Inc. Investor Group, CEO Gene Bicknell 0.5 x 4.7 x 3.1 x 38.0%
Synopsis: A management led investor group, including CEO gene
Bicknell, withdrew its offer to acquire the remaining 38%
interest, or 9.12 mil common shares which it did not already
own in a leveraged buyout transaction.
7/6/95 8/4/95 Arcus Inc. (Armored Transport) United Acquisition Company 1.2 x 7.7 x 5.3 x N/A
Synopsis: United Acquisition acquired Arcus, a 94.8% held unit
of ATI Systems Int'l, for $6.33 per share, for a total of
$48.4 mil in a leveraged buyout transaction.
3/29/96 4/26/96 Great American Mgmt & Invt Inc. Equity Holdings 0.4 x 7.0 x 4.1 x N/A
Synopsis: Equity Holdings acquired the remaining interest in
its Great American unit in a transaction valued at $63.2 mil.
Earlier, EH completed its unsolicited tender offer to acquire
the remaining 1.1 mil common shares in GAMI for $50.00 in cash
per share, raising its interest to 97%.
7/3/96 9/5/97 Golden Poultry Company Inc. Gold Kist Inc. 0.3 x 7.7 x 4.9 x 25.0%
Gold Kist acquired the remaining 25% stake, or 3.7 mil common
shares that it did not already own in Golden Poultry for
$14.25 per share.
8/26/96 12/31/96 Bankers Life Holding (Conseco) Conseco Inc. 0.7 x 3.1 x 2.2 x 11.5%
Synopsis: Conseco acquired the remaining 11.5% stake, or 5.8
mil common shares which it did not already own in Bankers Life
for $25.00 in Conseco common shares per BLH share, or a total
value of $120.8 mil.
</TABLE>
- ----------
Source: Securities Data Corp.
================================================================================
Page 46 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PRECEDENT TRANSACTIONS FOR ACQUISITIONS OF REMAINING MINORITY INTEREST
================================================================================
<TABLE>
<CAPTION>
Equity Value as a
Value of Multiple of:
-------------------
Date Date Transaction Book Net
Announced Effective Target Name Acquiror Name ($ in millions) Value Income
- ----------- --------- ------------------------------- ------------------------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
9/9/96 9/23/96 Crocker Realty Trust Highwoods Properties Inc. $76.1 1.9 x N/M
Synopsis: Highwoods Properties acquired the remaining 23%
stake which it did not already own in Crocker for
approximately $76.1 mil.
9/26/96 1/24/97 General Physics Corp. National Patent Development 26.1 2.7 x 28.9 x
Synopsis: national acquired the remaining 48% stake it did not
already own in General in a stock swap value at $26.1 million.
GP shareholders received .6 NPD shares for each GP share held,
subject to a collar agreement.
10/10/96 11/27/96 WCI Steel Inc. (Renco Group Renco Group Inc. 56.5 5.0 x N/M
Inc.)
Synopsis: Renco acquired the remaining 15.53% stake in WCI.
Earlier RC completed its tender offer to acquire 5.7 mil
common shares for $10.00 in cash per share.
11/12/96 6/12/97 Leslie's Poolmart Investor Group 112.8 2.3 x 24.4 x
Synopsis: A management led investor group acquired all the
outstanding common stock of Leslie's for $14.50 in cash per
share, in a leveraged buyout transaction.
11/27/96 3/27/97 Central Tractor Farm & Country JW Childs Equity Partners LP 56.7 1.7 x 16.7 x
Synopsis: JWC acquired the remaining 34.6% which it did not
already own, in Central Tractor for $14.25 in cash per share.
Earlier, JWC raised its stake to 65.4% from 9.9% in CTF by
acquiring 5.8 mil common shares from Butler Capital and its
affiliates.
1/21/97 7/9/97 Mafco Consolidated Group (Mafco) Mafco Holdings Inc. 116.8 3.3 x 6.5 x
Synopsis: Mafco acquired the remaining 15% interest which it
did not already own in Mafco Consolidated for $33.50 in cash
per share for a total of $116.8 mil.
6/2/97 7/15/97 Acordia Inc. (Anthem Inc.) Anthem Inc. 172.7 2.6 x 17.4 x
Synopsis: Anthem acquired the remaining 33.2%, or 4.32 mil
common shares that it did not already own in Acordia, for
$40.00 in cash per share, or a total value of $172.7 million
9/5/97 DavCo Restaurants Management led Investor Group 195.9 2.9 x 19.2 x
Synopsis: A management led investor group plans to acquire all
the remaining shares that it does not already own for $20.00
in a leveraged buyout transaction.
- -----------------------------------------------------------------------------------------------------------------------------
Average Multiple 2.4 x 15.5 x
Average Multiple Excluding High & Low 2.3 x 15.5 x
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Firm Value as a Multiple of: Minority
-----------------------------
Date Date Interest
Announced Effective Target Name Acquiror Name Sales EBIT EBITDA Acquired
- ----------- --------- ------------------------------- ------------------------------ -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
9/9/96 9/23/96 Crocker Realty Trust Highwoods Properties Inc. 4.8 x 12.3 x 8.2 x 23.0%
Synopsis: Highwoods Properties acquired the remaining 23%
stake which it did not already own in Crocker for
approximately $76.1 mil.
9/26/96 1/24/97 General Physics Corp. National Patent Development 0.5 x 10.9 x 8.0 x 48.0%
Synopsis: national acquired the remaining 48% stake it did not
already own in General in a stock swap value at $26.1 million.
GP shareholders received .6 NPD shares for each GP share held,
subject to a collar agreement.
10/10/96 11/27/96 WCI Steel Inc. (Renco Group Renco Group Inc. 0.6 x 15.4 x 7.5 x 15.5%
Inc.)
Synopsis: Renco acquired the remaining 15.53% stake in WCI.
Earlier RC completed its tender offer to acquire 5.7 mil
common shares for $10.00 in cash per share.
11/12/96 6/12/97 Leslie's Poolmart Investor Group 0.6 x 10.4 x 7.4 x N/A
Synopsis: A management led investor group acquired all the
outstanding common stock of Leslie's for $14.50 in cash per
share, in a leveraged buyout transaction.
11/27/96 3/27/97 Central Tractor Farm & Country JW Childs Equity Partners LP 0.5 x 8.8 x 7.1 x 34.6%
Synopsis: JWC acquired the remaining 34.6% which it did not
already own, in Central Tractor for $14.25 in cash per share.
Earlier, JWC raised its stake to 65.4% from 9.9% in CTF by
acquiring 5.8 mil common shares from Butler Capital and its
affiliates.
1/21/97 7/9/97 Mafco Consolidated Group (Mafco) Mafco Holdings Inc. 2.6 x 11.1 x 9.7 x 15.0%
Synopsis: Mafco acquired the remaining 15% interest which it
did not already own in Mafco Consolidated for $33.50 in cash
per share for a total of $116.8 mil.
6/2/97 7/15/97 Acordia Inc. (Anthem Inc.) Anthem Inc. 0.8 x 5.9 x 4.0 x 33.2%
Synopsis: Anthem acquired the remaining 33.2%, or 4.32 mil
common shares that it did not already own in Acordia, for
$40.00 in cash per share, or a total value of $172.7 million
9/5/97 DavCo Restaurants Management led Investor Group 0.9 x 11.2 x 7.4 x 44.7%
Synopsis: A management led investor group plans to acquire all
the remaining shares that it does not already own for $20.00
in a leveraged buyout transaction.
- ---------------------------------------------------------------------------------------------------------------------------------
Average Multiple 1.3 x 9.5 x 6.4 x 23.9%
Average Multiple Excluding High & Low 1.2 x 9.5 x 6.4 x 23.6%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
Source: Securities Data Corp.
================================================================================
Page 47 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PRECEDENT TRANSACTIONS FOR ACQUISITIONS OF REMAINING MINORITY INTEREST
================================================================================
- --------------------------------------------------------------------------------
Net Revenues Values
------------ ------
Industry Multiples 1.2 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value(2)
------------------
TR 12 $221,387 $205,377 $27.18
1997 253,535 242,598 32.10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Income Values
---------- ------
Industry Multiples 15.5 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value
------------------
TR 12 $7,278 $112,613 $14.90
1997 7,565 117,057 15.49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EBIT Values
---- ------
Industry Multiples 9.5 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value(2)
------------------
TR 12 $17,458 $114,819 $15.19
1997 18,657 126,203 16.70
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Book Value Values
---------- ------
Industry Multiples 2.3 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value
------------------
TR 12 $50,025 $115,344 $15.26
1997 54,552 125,782 16.64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EBITDA Values
------ ------
Industry Multiples 6.4 x
- --------------------------------------------------------------------------------
DavCo Financial Results(1) Implied Equity Value(2)
------------------
TR 12 $26,338 $117,992 $15.61
1997 27,921 128,146 16.96
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Implied Value $18.60
- --------------------------------------------------------------------------------
- ----------
(1) Projected financials derived from Company projections to include pro forma
FriendCo in 1997.
(2) Assumes that there is $50,945 in outstanding debt.
- --------------------------------------------------------------------------------
General Comments
- --------------------------------------------------------------------------------
Multiples in this sampling imply an average cash flow multiple of 6.4x and an
EBIT multiple of 9.5x. The multiples implied under the terms of the Proposed
Transaction exceed these levels at 7.4x and 11.2x, respectively. Furthermore,
the data also indicates that the Proposed Transaction involves a premium to the
sample multiple of earnings.
By necessity, this information covers a variety of companies and industries.
DavCo's industry is both more mature and the segment is more heavily saturated
with strong industry participants than many of the industries included. For this
reason, a discount to these observed multiples would normally be warranted.
- --------------------------------------------------------------------------------
- -----------------------------------
Implied Valuation Range
- -----------------------------------
$16.00 - $18.75
per share
- -----------------------------------
================================================================================
Page 48 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PREMIUM ANALYSIS FOR ACQUISITIONS OF REMAINING MINORITY INTEREST
================================================================================
<TABLE>
<CAPTION>
Value of
Date Date Transaction
Announced Effective Target Name Acquiror Name ($ in millions)
- ---------- ----------- --------------------------------- --------------------------------- --------------
<S> <C> <C> <C> <C>
2/17/94 9/15/94 Scripps Howard Broadcasting EW Scripps $115.9
3/1/94 10/12/94 FoxMeyer Corp. National Intergroup Inc. 79.7
8/24/94 3/24/95 Castle & Cooke Homes Inc. Dole Food Company Inc. 81.5
11/2/94 9/27/95 Pacific Telecom PacifiCorp 159.0
12/28/94 4/28/95 Fleet Mortgage Group Inc. Fleet Financial Group Inc. 188.1
2/7/95 7/12/95 Rust International Inc. WMX Technologies Inc. 50.5
4/5/95 8/2/95 Club Med Inc. Club Mediterranee SA 153.4
5/9/95 3/27/96 Riverwood International Corp. RIC Holdings Inc. 2436.2
5/19/95 12/6/95 Bic Corp. (BIC SA) BIC SA 212.6
7/6/95 8/4/95 Arcus Inc. (Armored Transport) United Acquisition Company 48.4
11/6/95 NPC International Inc. Investor Group, CEO Gene Bicknell 166.3
3/29/96 4/26/96 Great American Mgmt & Invt Inc. Equity Holdings 63.3
7/3/96 9/5/97 Golden Poultry Company Inc. Gold Kist Inc. 52.1
8/26/96 12/31/96 Bankers Life Holding (Conseco) Conseco Inc. 120.8
9/9/96 9/23/96 Crocker Realty Trust Highwoods Properties Inc. 76.1
9/26/96 1/24/97 General Physics Corp. National Patent Development 26.1
10/10/96 11/27/96 WCI Steel Inc. (Renco Group Renco Group Inc. 56.5
Inc.)
11/12/96 6/12/97 Leslie's Poolmart Investor Group 112.8
11/27/96 3/27/97 Central Tractor Farm & Country JW Childs Equity Partners LP 56.7
1/21/97 7/9/97 Mafco Consolidated Group (Mafco) Mafco Holdings Inc. 116.8
6/2/97 7/15/97 Acordia Inc. (Anthem Inc.) Anthem Inc. 172.7
9/5/97 DavCo Restaurants Management led Investor Group 195.9
- ----------------------------------------------------------------------------------------------------------------
Average Premium
Average Premium Excluding High & Low
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Date Date Premium Prior to Announcement Date
------------------------------------------
Announced Effective Target Name 1 Day 1 Week 4 Weeks
- ---------- ----------- --------------------------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
2/17/94 9/15/94 Scripps Howard Broadcasting N/A N/A N/A
3/1/94 10/12/94 FoxMeyer Corp. 7.1% 9.1% 11.2%
8/24/94 3/24/95 Castle & Cooke Homes Inc. 35.5% 41.6% 55.6%
11/2/94 9/27/95 Pacific Telecom 23.7% 23.7% 23.7%
12/28/94 4/28/95 Fleet Mortgage Group Inc. 19.4% 18.5% 18.5%
2/7/95 7/12/95 Rust International Inc. 27.0% 39.1% 39.1%
4/5/95 8/2/95 Club Med Inc. 41.4% 39.9% 44.6%
5/9/95 3/27/96 Riverwood International Corp. (1.8%) 0.6% 17.4%
5/19/95 12/6/95 Bic Corp. (BIC SA) 13.3% 12.5% 28.6%
7/6/95 8/4/95 Arcus Inc. (Armored Transport) 1.3% 1.3% 1.3%
11/6/95 NPC International Inc. 44.0% 44.0% 33.3%
3/29/96 4/26/96 Great American Mgmt & Invt Inc. 2.6% 4.2% 3.6%
7/3/96 9/5/97 Golden Poultry Company Inc. 52.0% 50.0% 39.2%
8/26/96 12/31/96 Bankers Life Holding (Conseco) 14.9% 10.5% 11.7%
9/9/96 9/23/96 Crocker Realty Trust 18.8% 20.3% 21.8%
9/26/96 1/24/97 General Physics Corp. 16.6% 31.6% 36.0%
10/10/96 11/27/96 WCI Steel Inc. (Renco Group 17.6% 29.0% 77.8%
Inc.)
11/12/96 6/12/97 Leslie's Poolmart 26.1% 31.8% 31.8%
11/27/96 3/27/97 Central Tractor Farm & Country 17.5% 17.5% 18.8%
1/21/97 7/9/97 Mafco Consolidated Group (Mafco) 23.5% 23.5% 27.6%
6/2/97 7/15/97 Acordia Inc. (Anthem Inc.) 12.7% 11.5% 26.0%
9/5/97 DavCo Restaurants 49.5% 49.5% 53.8%
- -------------------------------------------------------------------------------------------------------
Average Premium 22.0% 24.3% 29.6%
Average Premium Excluding High & Low 21.7% 24.2% 28.6%
- -------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
Source: Securities Data Corp.
================================================================================
Page 49 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
PREMIUM FOR ACQUISITION OF REMAINING MINORITY INTEREST
================================================================================
Premium Premium Premium
1 Day 1 Week 4 Week
------- ------- -------
Average Industry Premiums Paid 21.7% 24.2% 28.6%
DavCo
Closing price prior to
announcement date $13.38 $13.38 $13.00
------ ------ ------
- --------------------------------------------------------------------------------
Implied Value Per Share $16.28 $16.61 $16.71
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
General Comments
- --------------------------------------------------------------------------------
The range of premia indicated for the purchase of the "remaining" minority
interest is 21.7% to 28.6%.
DavCo's premium of 49.5% to 53.8% far exceeds the group average for the
transactions identified.
- --------------------------------------------------------------------------------
- -----------------------------------
Implied Valuation Range
- -----------------------------------
$16.00 - $17.00
per share
- -----------------------------------
================================================================================
Page 50 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
DISCOUNTED CASH FLOW ANALYSIS
================================================================================
11/10/97 20:42 (Dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings Before Interest & Taxes(1) $ 21,705 $ 25,296 $ 30,898 $ 36,961 $ 42,897
Income Tax Effect 40.0% 40.0% 40.0% 40.0% 40.0%
-------- -------- -------- -------- --------
Net Operating Earnings Less Taxes 13,023 15,178 18,539 22,177 25,738
Plus Depreciation/Amortization 8,419 8,170 9,037 10,092 11,347
-------- -------- -------- -------- --------
Cash Flow From Operations 21,442 23,348 27,576 32,269 37,085
Change in Net Working Capital 308 742 1,521 1,497 1,558
Capital Expenditures (13,260) (18,025) (39,296) (38,072) (38,353)
-------- -------- -------- -------- --------
Free Cash Flow $ 8,490 $ 6,065 $(10,199) $ (4,306) $ 290
========================================================
</TABLE>
- --------------------------------------------------------------------------------
Present Value of Equity(4)
Discount Terminal Value Multiple
---------------------------------------------------------------------
Rate 4.0 x 5.0 x 6.0 x 7.0 x 8.0 x
- --------- ---------------------------------------------------------------------
10.7% $11.20 $15.04 $18.88 $22.72 $26.56
11.7% 10.70 14.35 18.01 21.66 25.32
12.7% 10.22 13.70 17.18 20.66 24.14
- --------------------------------------------------------------------------------
Terminal Value as a Multiple of EBITDA(2)
4.0 x 5.0 x 6.0 x 7.0 x 8.0 x
- ------------- -------------- -------------- -------------- --------------
$ 203,217 $ 254,021 $ 304,825 $ 355,629 $ 406,433
Outstanding Obligations(3) $ 59,213
- --------------------------------------------------------------------------------
Example of DCF Calculation
- --------------------------------------------------------------------------------
Free Cash Flow
--------------
1998 $ 8,490
1999 6,065
2000 (10,199)
2001 (4,306)
2002 290
Terminal Value (6.0 x) 245,612
Discount Rate(4) 11.7%
Discounted Value $ 136,072
Net Value $ 136,072
==========
Fully-diluted Shares O/S 7,557
Net Value Per Share $ 18.01
- --------------------------------------------------------------------------------
- ----------
(1) Numbers adjusted to include the effects of DavCo Oil EBITDA.
(2) Based on multiples of EBITDA observed in restaurant transactions with
financial buyers. Range of multiples was 3.1 x to 7.8 x, with an average
of 5.3 x.
All EBITDA terminal values are net of maintenance capital expenditures in
the terminal year (2002) of $2,403 and estimated transaction costs of 2%.
(3) Includes estimated long-term debt and capitalized leases from year 2002
net of excess cash.
(4) See detailed Weighted Average Cost of Capital Analysis.
================================================================================
Page 51 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
DISCOUNTED CASH FLOW ANALYSIS
Sale of MDF
================================================================================
11/10/97 20:40 (Dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings Before Interest & Taxes(1) $ 21,229 $ 24,676 $ 30,175 $ 36,172 $ 42,067
Income Tax Effect 40.0% 40.0% 40.0% 40.0% 40.0%
-------- -------- -------- -------- --------
Net Operating Earnings Less Taxes 12,737 14,806 18,105 21,703 25,240
Plus Depreciation/Amortization 7,296 7,159 8,096 9,184 10,446
-------- -------- -------- -------- --------
Cash Flow From Operations 20,033 21,965 26,201 30,887 35,686
Change in Net Working Capital 863 1,220 1,931 1,849 1,858
Capital Expenditures (12,800) (17,556) (38,817) (37,583) (37,855)
-------- -------- -------- -------- --------
Free Cash Flow $ 8,096 $ 5,629 $(10,685) $ (4,847) $ (311)
========================================================
</TABLE>
- --------------------------------------------------------------------------------
Present Value of Equity(4)
Discount Terminal Value Multiple
---------------------------------------------------------------------
Rate 4.0 x 5.0 x 6.0 x 7.0 x 8.0 x
- --------- ---------------------------------------------------------------------
10.7% $10.43 $14.18 $17.92 $21.67 $25.42
11.7% 9.95 13.52 17.09 20.66 24.22
12.7% 9.50 12.90 16.30 19.70 23.09
- --------------------------------------------------------------------------------
Terminal Value as a Multiple of EBITDA(2)
4.0 x 5.0 x 6.0 x 7.0 x 8.0 x
- ------------- -------------- -------------- -------------- --------------
$ 198,383 $ 247,979 $ 297,575 $ 347,171 $ 396,767
Outstanding Obligations(3) $ 61,520
- --------------------------------------------------------------------------------
Example of DCF Calculation
- --------------------------------------------------------------------------------
Free Cash Flow
--------------
1998 $ 8,096
1999 5,629
2000 (10,685)
2001 (4,847)
2002 (311)
Terminal Value (6.0 x) 236,055
Discount Rate(4) 11.7%
Discounted Value $ 129,134
Net Value $ 129,134
==========
Fully-diluted Shares O/S 7,557
Net Value Per Share $ 17.09
- --------------------------------------------------------------------------------
- ----------
(1) Numbers adjusted to include the effects of DavCo Oil EBITDA.
(2) Based on multiples of EBITDA observed in restaurant transactions with
financial buyers. Range of multiples was 3.1 x to 7.8 x, with an average
of 5.3 x.
All EBITDA terminal values are net of maintenance capital expenditures in
the terminal year (2002) of $1,905 and estimated transaction costs of 2%.
(3) Includes estimated long-term debt and capitalized leases from year 2002
net of excess cash.
(4) See detailed Weighted Average Cost of Capital Analysis.
================================================================================
Page 52 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
LEVERAGED BUYOUT ANALYSIS
================================================================================
LBO MODEL ASSUMPTIONS AND OUTCOMES - (ASSUMING FRIENDCO DEVELOPMENT)
o The Leveraged Buyout Model is based on DavCo Management projections
combined with the capital assumptions of the Company's lenders.
o Equity returns are consistent with what a financial buyer would pay in a
competitive environment. The projections contemplate an exit in years
three through six with equity returns in the following ranges
Sponsor Equity - Pre-tax IRR 9% to 48%, with an expected return of 20-39%
Management Equity - Pre-tax IRR 7% to 60%, with an expected return of 23-47%
o The anticipated exit in year five meets the following conditions:
MDF Sale No MDF Sale
-------- -----------
Exit Year: 2002 2002
Exit EBITDA Multiple: 6.0x 6.0x
Exit P/E (adj. for cash) 11.0x 12.0x
Exit Book Multiple 0.7x 0.9x
o It is our conclusion that the pricing of the transaction and financing
structure appear reasonable as they result in adequate coverage ratios and
sufficient cash generation for anticipated capital expenditures and debt
amortization.
================================================================================
Page 53 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
LEVERAGED BUYOUT ANALYSIS
================================================================================
ESTIMATED INTERNAL RATES OF RETURN
With FriendCo Expansion Program
No Sale of MDF
- --------------------------------------------------------------------------------
Sponsor EBITDA Multiple 2000 2001 2002 2003
================================================================================
6.0 x 16.9% 24.5% 27.2% 27.9%
6.5 x 29.2% 32.3% 32.5% 31.7%
7.0 x 39.5% 38.9% 37.1% 35.0%
7.5 x 48.5% 44.6% 41.1% 38.0%
- --------------------------------------------------------------------------------
Management EBITDA Multiple 2000 2001 2002 2003
================================================================================
6.0 x 19.1% 29.2% 32.2% 32.7%
6.5 x 35.7% 39.1% 38.7% 37.3%
7.0 x 49.0% 47.2% 44.2% 41.2%
7.5 x 60.3% 54.2% 49.0% 44.6%
- --------------------------------------------------------------------------------
MDF Sale
- --------------------------------------------------------------------------------
Sponsor EBITDA Multiple 2000 2001 2002 2003
================================================================================
6.0 x 8.9% 20.0% 24.4% 26.0%
6.5 x 22.2% 28.3% 30.0% 29.9%
7.0 x 33.1% 35.2% 34.7% 33.4%
7.5 x 42.5% 41.2% 38.9% 36.5%
- --------------------------------------------------------------------------------
Management EBITDA Multiple 2000 2001 2002 2003
================================================================================
6.0 x 7.4% 23.2% 28.7% 30.4%
6.5 x 26.4% 34.0% 35.7% 35.2%
7.0 x 40.9% 42.7% 41.5% 39.3%
7.5 x 52.9% 50.1% 46.4% 42.8%
- --------------------------------------------------------------------------------
================================================================================
Page 54 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
LEVERAGED BUYOUT ANALYSIS
================================================================================
ESTIMATED INTERNAL RATES OF RETURN
Without FriendCo Expansion Program
No Sale of MDF
- --------------------------------------------------------------------------------
Sponsor EBITDA Multiple 2000 2001 2002 2003
================================================================================
6.0 x 15.9% 21.1% 22.9% 23.4%
6.5 x 27.0% 28.0% 27.6% 26.8%
7.0 x 36.5% 33.9% 31.7% 29.7%
7.5 x 44.8% 39.2% 35.3% 32.4%
- --------------------------------------------------------------------------------
Management EBITDA Multiple 2000 2001 2002 2003
================================================================================
6.0 x 17.5% 24.6% 26.9% 27.2%
6.5 x 32.8% 33.6% 32.7% 31.4%
7.0 x 45.2% 41.1% 37.7% 34.9%
7.5 x 55.8% 47.6% 42.1% 38.1%
- --------------------------------------------------------------------------------
MDF Sale
- --------------------------------------------------------------------------------
Sponsor EBITDA Multiple 2000 2001 2002 2003
================================================================================
6.0 x 7.6% 16.2% 19.7% 21.2%
6.5 x 19.8% 23.6% 24.7% 24.7%
7.0 x 29.9% 29.8% 28.9% 27.7%
7.5 x 38.6% 35.3% 32.7% 30.5%
- --------------------------------------------------------------------------------
Management EBITDA Multiple 2000 2001 2002 2003
================================================================================
6.0 x 5.5% 17.9% 22.7% 24.4%
6.5 x 23.0% 27.9% 29.0% 28.8%
7.0 x 36.6% 36.0% 34.4% 32.6%
7.5 x 47.9% 42.8% 38.9% 35.9%
- --------------------------------------------------------------------------------
================================================================================
Page 55 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
LEVERAGED RECAPITALIZATION ANALYSIS
================================================================================
o ESC has modeled a variety of potential leveraged recapitalization analyses
using a variety of assumptions.
o In general, these analyses show that DavCo is capable of sustaining
leverage sufficient to pay out a dividend to all shareholders of up to
$15.00 to $16.00 per share.
o However, a portion of this payment would likely be taxed at marginal,
ordinary income rates of approximately 40%.
o In addition, the stub equity shares would be expected to trade in the $5
per share range or lower, reflecting the Company's heavy debt burden and
limited earnings capability.
o Given the negative tax implications of the leveraged recapitalization, ESC
does not believe that this alternative transaction delivers superior value
for shareholders relative to the Proposed Transaction.
o Additionally, the estimated trading range of the shares would likely
further reduce the stock's liquidity and visibility.
o For these reasons, ESC has chosen not to focus on a leveraged
recapitalization as a viable means for delivering value to shareholders.
================================================================================
Page 56 EQUITABLE SECURITIES CORPORATION
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
VALUATION SUMMARY AND CONCLUSION
================================================================================
DAVCO RESTAURANTS, INC.
The following valuation ranges were derived from the data that was studied in
connection with the Proposed Transaction.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Methodology Employed Valuation Ranges
- ------------------------------------------------------------------------------------------------
<S> <C>
Analysis of Comparable Publicly-Traded Companies
QSR Operators $13.75 to $18.00
High Growth Consolidators/ Franchisees $14.50 to $19.00
Restricted Operators/Franchisees $14.00 to $17.25
Precedent Transactions for Control Acquisitions in the Restaurant Industry $14.00 to $16.50
Precedent Transactions for Acquisitions of Remaining Minority Interest $16.00 to $18.75
Premium Analysis for Control Acquisitions in the Restaurant Industry $18.00 to $19.00
Premium Analysis for Acquisitions of Remaining Minority Interest $16.00 to $17.00
Discounted Cash Flow Analysis $16.00 to $23.00
Leveraged Buyout Analysis $18.00 to $22.50
Leveraged Recapitalization Analysis Not Applicable
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Reference Value Range $16.00 - $20.00
- ------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Page 57 EQUITABLE SECURITIES CORPORATION
<PAGE>
================================================================================
-----------------------------------------
EXHIBITS
-----------------------------------------
================================================================================
<PAGE>
================================================================================
-----------------------------------------
EXHIBIT A:
COMPANY STOCK PERFORMANCE CHARTS
-----------------------------------------
================================================================================
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
COMPANY STOCK PERFORMANCE CHARTS
================================================================================
DAVCO RESTAURANTS, INC. -- PRICE/VOLUME GRAPH
WEEKLY SINCE AUGUST 13, 1993
[GRAPHIC OMITTED]
================================================================================
EQUITABLE SECURITIES CORPORATION
Exhibit A -- Page 1
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
COMPANY STOCK PERFORMANCE CHARTS
================================================================================
DAVCO RESTAURANTS, INC. -- PRICE/VOLUME GRAPH
DAILY SINCE MARCH 3, 1997
[GRAPHIC OMITTED]
================================================================================
EQUITABLE SECURITIES CORPORATION
Exhibit A -- Page 2
<PAGE>
================================================================================
------------------------------------------
EXHIBIT B
COMPANY'S RELATIVE STOCK PRICE PERFORMANCE
------------------------------------------
================================================================================
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
COMPANY'S RELATIVE STOCK PRICE PERFORMANCE
================================================================================
DAVCO RESTAURANTS, INC. -- INDEX GRAPH
WEEKLY SINCE AUGUST 13, 1993
[GRAPHIC OMITTED]
================================================================================
EQUITABLE SECURITIES CORPORATION
Exhibit B -- Page 1
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
COMPANY'S RELATIVE STOCK PRICE PERFORMANCE
================================================================================
DAVCO RESTAURANTS, INC. -- INDEX GRAPH
WEEKLY SINCE AUGUST 13, 1993
[GRAPHIC OMITTED]
================================================================================
EQUITABLE SECURITIES CORPORATION
Exhibit B -- Page 2
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
COMPANY'S RELATIVE STOCK PRICE PERFORMANCE
================================================================================
DAVCO RESTAURANTS, INC. -- INDEX GRAPH
WEEKLY SINCE SEPTEMBER 27, 1996
[GRAPHIC OMITTED]
================================================================================
EQUITABLE SECURITIES CORPORATION
Exhibit B -- Page 3
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
COMPANY'S RELATIVE STOCK PRICE PERFORMANCE
================================================================================
DAVCO RESTAURANTS, INC. -- INDEX GRAPH
WEEKLY SINCE SEPTEMBER 27, 1996
[GRAPHIC OMITTED]
================================================================================
EQUITABLE SECURITIES CORPORATION
Exhibit B -- Page 4
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
COMPANY'S RELATIVE STOCK PRICE PERFORMANCE
================================================================================
DAVCO RESTAURANTS, INC. -- INDEX GRAPH
WEEKLY SINCE SEPTEMBER 27, 1996
[GRAPHIC OMITTED]
================================================================================
EQUITABLE SECURITIES CORPORATION
Exhibit B -- Page 5
<PAGE>
================================================================================
-----------------------------------------
EXHIBIT C:
WEIGHTED AVERAGE COST OF CAPITAL ANALYSIS
-----------------------------------------
================================================================================
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
DISCOUNTED CASH FLOW ANALYSIS
================================================================================
WEIGHTED AVERAGE COST OF CAPITAL (Dollar amounts in thousands)
Levered Debt-to- Unlevered
Betas for Comparable Companies Beta(BI) Market Equity Beta(Bu)(1)
- ------------------------------ -------- ------------- -----------
Apple South Inc. 0.22 39.8% 0.18
Au Bon Pain Co. 0.72 80.0% 0.49
Consolidated Products Inc. 0.40 17.8% 0.36
Krystal Company 1.10 37.5% 0.90
Main Street & Main Inc. 0.59 78.7% 0.40
McDonald's Corp 0.72 17.7% 0.65
Morgan's 0.15 N/M N/M
NPC International 0.24 69.7% 0.17
PJ America 0.50 0.0% 0.50
Ryan's Family Steakhouse 0.89 N/M N/M
Wendy's International 0.81 8.6% 0.77
-------- ------------- -----------
Average 0.58 0.39 0.49
Market Assumptions
Implied Risk-Free Rate (5-Year Treasury) 6.08%
Risk Premium for Common Stocks(2) 8.4%
Illiquidity Risk Premium(3) 2.0%
Levered Cost of Equity for Comparables(4) 10.9%
Unlevered Cost of Equity for Comparables 10.2%
Marginal Tax Rate 40.0%
Debt-to-Equity Ratio 97.1%
<TABLE>
<CAPTION>
Preferred Common
Assumptions for Debt Equity(PE) Equity(CE)
- ------------------------ --------- ------------- ------------
<S> <C> <C> <C>
Cost 8.75% 0.0% 14.6%
Value(5) 50,945 $ -- $ 52,476
---------
Total Value of Company $103,421 Total Value = Debt + Preferred Equity + Common Equity
Relevered Beta(6) 0.78 Based on the Unlevered Beta from the Comparables
and the Company's Debt-to-Equity Ratio
Cost of Common Equity 14.6% Cost of Equity for the Company = Risk-Free Rate +
(Relevered Beta x Risk Premium) + Private Company Risk Premium
- ------------------------------------
Weighted Average Cost WACC = [(cost D) x (value D/V)] + [(cost PE) x (value PE/V)]
of Capital 11.7% + [(cost CE) x (value CE/V)]
- ------------------------------------
</TABLE>
- ----------
(1) Bu = BI/[1 + (1 - tax rate) x (debt/equity ratio)]. Assumes an average tax
rate of 40%.
(2) Represents the difference between the 68 year mean return for common
stocks and the implied risk-free rate.
(3) ESC estimate.
(4) Cost of equity = risk free rate + (BI x risk premium for common stocks).
(5) Based on the Company's projected Fiscal Year End 1997 Debt and Equity (net
of $1.134 in capital leases)
(6) Relevered Beta = average Bu x [1 + (1 - tax rate) x (debt/equity ratio)].
================================================================================
EQUITABLE SECURITIES CORPORATION
Exhibit C -- Page 1
<PAGE>
================================================================================
----------------------------------
EXHIBIT D:
DETAILED LEVERAGED BUYOUT ANALYSIS
----------------------------------
================================================================================
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - No Sale of MDF - With FriendCo Expansion
1:43 PM
11/10/91
- --------------------------------------------------------------------------------
USES OF FUNDS
- --------- ---------- --------
Net Purchase Price
Outstanding Stock $96,576
Equity Roll-over 32,119
Options 4,517
Warrants 8,816
Bonus Pymts. 1,905
--------
Net Purchase Price $143,934
Debt Retired 23,673
Debt Assumed 0
Cash Infusion 0
Transaction Costs 4,213
TOTAL USES $171,820
========
SOURCES OF FUNDS % IRR
- -------- -------- -------- -------- -------- ----- ----
WC Revolver $0 0.0%
Debt Assumed 0 0.0%
New Debt 1 25,000 14.6% 9.9%
New Debt 2 100,551 58.5% 9.9%
New Debt 3 Current 11,771 6.9% 9.6%
New Debt 4 2,379 1.4% 10.1%
Preferred Stock PIK 31,000 18.0% 12.0% dividend
Common Equity:
Sponsors 750 0.4% 27.2%
Management 369 0.2% 32.2%
Excess Cash on Balance Sheet 0 0.0%
-------- -----
TOTAL SOURCES $171,820 100.0%
EXIT YEAR 2002
EXIT EBITDA MULTIP 6.0 x
EXIT P/E* 12.0 x
EXIT BOOK MULTIPLE 0.9 x
* Adjusted For Cash Reduction
Un- Fully-
EQUITY ALLOCATION Diluted Diluted GOODWILL CALCULATION
- -------- -------- -------- -------- -------- -------- -------- --------
New Debt 2 * 0.0% Purchase Price $143,934
New Debt 3 * 0.0% Less:
New Debt 4 * 0.0% Net Worth 52,476
Preferred Stock * 0.0% Asset Write-Ups 0
Sponsors 67.0% 67.0% Deferred Taxes 3,241
Management 33.0% 33.0% --------
----- ----- GOODWILL $ 88,217
========
TOTAL ALLOCATION 100.0% 100.0%
===== =====
Use WC Receiver YES = 1, NO = 0 0 Years of PIK
Retire Existing Debt YES = 1, NO = 0 1 ------------
Junior Sub PIK YES = 1, NO = 0 0 0
Preferred Stock PlK YES = 1, NO = 0 1 10
- --------------------------------------------------------------------------------
Equitable Securities Corporation Page 1
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - No Sale of MDF - With FriendCo Expansion
(Historical FYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
---- -------- ------ ------ ------- ------- ------- ------- ------- ------- ------- -------
HISTORICAL PROJECTED
---- -------- ------ ------ ------- ------- ------- ------- ------- ------- ------- -------
INCOME STATEMENT ASSUMPTIONS 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
- ---------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Growth -- -- -- -- -0.8% 10.7% 13.2% 7.4% 13.5% 11.9% 11.1% 8.6%
Cost of Goods Sold -- -- -- 79.7% 82.0% 81.1% 80.9% 80.5% 80.0% 79.4% 79.0% 78.7%
---- ---- ---- --- --- --- --- --- --- ---- ---- ----
GROSS MARGIN -- -- -- 20.3% 19.0% 18.9% 19.1% 19.5% 20.0% 20.6% 21.0% 21.3%
Operating Expenses/Sales:
Franchise Royalties -- -- -- 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Other Income -- -- -- -0.6% -0.6% -0.4% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2%
General & Administrative -- -- -- 3.6% 2.9% 3.9% 3.9% 3.9% 3.8% 3.7% 3.6% 3.5%
Depreciation -- -- -- 4.4% 4.5% 3.9% 3.2% 2.9% 2.9% 2.9% 2.9% 2.8%
---- ---- ---- --- --- --- --- --- --- ---- ---- ----
OPERATING MARGIN -- -- -- 8.9% 7.1% 7.6% 8.1% 8.8% 9.5% 10.2% 10.7% 11.2%
Interest (Coupon) Rates:
Existing Debt ........................................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Overflow Debt ........................................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
New Debt 1 .............................................................. 9.85% 9.85% 9.85% 9.85% 9.85% 9.85%
New Debt 2 .............................................................. 9.90% 9.90% 9.90% 9.90% 9.90% 9.90%
New Debt 3 .............................................................. 9.19% 9.19% 9.90% 9.90% 9.90% 9.90%
New Debt 4 .............................................................. 10.05% 10.05% 10.05% 10.05% 10.05% 10.05%
Preferred Stock ......................................................... 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
Miscellaneous Income as a %
of Sales ........................................................ 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Taxes Rates:
Federal Tax Rate ........................................................ 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
State Tax Rate .......................................................... 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
Effective Tax Rate .............................. 52.89% 66.89% 74.02% 23.37% 60.13% 51.16% 48.13% 46.16% 44.84%
</TABLE>
Equitable Securities Corporation Page 2
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - No Sale of MDF - With FriendCo Expansion
(Historical FYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
---- ----- ----- ----- ------ ------ ------- --------- --------- --------- ---------
HISTORICAL PROJECTED
---- ----- ----- ----- ------ ------ ------- --------- --------- --------- ---------
BALANCE SHEET ASSUMPTIONS 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
- -------------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets:
Accounts Receivable/Sales -- -- -- -- 0.32% 0.25% 0.23% 0.23% 0.23% 0.23% 0.23%
Inventory/COGS -- -- -- -- 0.84% 1.01% 0.90% 0.91% 0.95% 0.99% 1.02%
Prepaid Expenses/RIT/Sales -- -- -- -- 0.51% 0.93% 0.85% 0.85% 0.83% 0.81% 0.00%
Deferred Tax Asset/Sales -- -- -- -- 0.38% 2.37% 2.19% 2.19% 2.07% 1.97% 1.89%
Current Liabilities:
Accounts Payable/COGS -- -- -- -- 3.31% 3.66% 3.26% 3.26% 3.28% 3.31% 3.32%
Accrued Advertising & Royalty Fees/CO -- -- -- -- 1.53% 1.31% 1.17% 1.17% 1.13% 1.13% 1.11%
Accrued Salaries & Wages/COGS -- -- -- -- 1.61% 1.84% 1.65% 1.66% 1.65% 1.65% 1.65%
Accrued Expenses/COGS -- -- -- -- 4.63% 4.53% 4.01% 3.97% 3.03% 3.73% 3.64%
Income Taxes Payable/COGS -- -- -- -- -0.87% 0.96% 0.89% 0.89% 0.84% 0.80% 0.77%
Capital Expenditures ...................................................... $13,260 $18,025 $39,296 $38,072 $38,353
Depreciation - Manual Input = 1,
Model Calculation = 0 1 $8,419 $8,170 $9,037 $10,092 $11,347
Deferred Taxes - Manual Input = 1,
Model Calculation = 0 1 $0 $0 $0 $0 $0
</TABLE>
---------
---------
BALANCE SHEET ASSUMPTIONS 2003
- -------------------------------------- ----
Current Assets:
Accounts Receivable/Sales 0.23%
Inventory/COGS 1.03%
Prepaid Expenses/RIT/Sales 0.79%
Deferred Tax Asset/Sales 1.85%
Current Liabilities:
Accounts Payable/COGS 3.33%
Accrued Advertising & Royalty Fees/CO 1.11%
Accrued Salaries & Wages/COGS 1.65%
Accrued Expenses/COGS 3.59%
Income Taxes Payable/COGS 0.76%
Capital Expenditures ............... $31,140
Depreciation - Manual Input = 1,
Model Calculation = 0 $10,828
Deferred Taxes - Manual Input = 1,
Model Calculation = 0 $0
Working Capital Advance Rates: Receivables 0.0%
Inventory 0.9%
$ Ceiling $0 (O= No Limit)
Transaction Cost Amort @ 20 Years
Goodwill Amortization @ 30 Years
Asset Write-Ups @ 5 Years
Equitable Securities Corporation Page 3
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - No Sale of MDF With FriendCo Expansion
(Historical FYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
------- ------- ------- --------- --------- --------- --------- --------- ---------
HISTORICAL PROJECTED
------- ------- ------- --------- --------- --------- --------- --------- ---------
INCOME STATEMENT 1992 1993 1994 1995 1996 1997 1998 1999 2000
- ---------------------------- ------- ------- ------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales -- -- -- $ 208,671 $ 206,902 $ 229,096 $ 259,368 $ 278,530 $ 316,196
Cost of Goods Sold -- -- -- 166,401 169,698 185,774 209,790 224,242 252,886
------- ------- ------- --------- --------- --------- --------- --------- ---------
GROSS MARGIN -- -- -- $ 42,270 $ 37,204 $ 43,322 $ 49,578 $ 54,288 $ 63,310
Operating Expenses (Income):
Franchise Royalties -- -- -- $ 8,346 $ 8,275 $ 9,179 $ 10,375 $ 11,141 $ 12,648
Other Income -- -- -- (1,351) (1,139) (940) (465) (506) (541)
General & Administrative -- -- -- 7,551 6,068 8,830 10,222 10,915 12,043
Depreciation -- -- -- 9,083 9,275 8,870 8,419 8,170 9,037
------- ------- ------- --------- --------- --------- --------- --------- ---------
OPERATING PROFIT -- -- -- $ 18,641 $ 14,725 $ 17,383 $ 20,028 $ 24,568 $ 30,123
EBITDA -- -- -- $ 27,724 $ 24,000 $ 26,253 $ 29,912 $ 33,244 $ 39,701
% Margin -- -- -- 13.3% 11.6% 11.5% 11.5% 11.9% 12.6%
DavCo Oil EBITDA $ 212 $ 223 $ 234
Adjusted EBITDA $ 30,124 $ 33,467 $ 39,935
Transaction Cost Amort -- -- -- 0 0 0 (211) (211) (211)
Goodwill Amortization. -- -- -- 0 0 0 0 (3,657) (3,657)
------- ------- ------- --------- --------- --------- --------- --------- ---------
EBIT -- -- -- $ 18,641 $ 14,725 $ 17,383 $ 20,817 $ 20,700 $ 26,255
Interest Expense:
Existing Debt -- -- -- $ 5,775 $ 5,044 $ 4,885 $ 0 $ 0 $ 0
Overflow Debt -- -- -- -- -- -- 0 0 0
New Debt 1 -- -- -- -- -- -- 2,463 2,419 2,371
New Debt 2 -- -- -- -- -- -- 9,955 9,638 9,291
New Debt 3 -- -- -- -- -- -- 1,082 1,082 1,165
New Debt 4 -- -- -- -- -- -- 239 763 1,660
------- ------- ------- --------- --------- --------- --------- --------- ---------
TOTAL INTEREST EXPENSE -- -- -- $ 5,775 $ 5,044 $ 4,885 $ 13,738 $ 13,902 $ 14,487
E.B.T -- -- -- $ 12,866 $ 9,681 $ 12,498 $ 7,079 $ 6,797 $ 11,768
Provision for Income Taxes -- -- -- 4,451 3,880 5,316 1,654 4,087 6,021
------- ------- ------- --------- --------- --------- --------- --------- ---------
NET INCOME -- -- -- $ 8,415 $ 5,801 $ 7,182 $ 5,425 $ 2,710 $ 5,747
======= ======= ======= ========= ========= ========= ========= ========= =========
Preferred Dividends -- -- -- 0 0 0 3,720 4,166 4,666
------- ------- ------- --------- --------- --------- --------- --------- ---------
NET TO RETAINED EARNINGS -- -- -- $ 8,415 $ 5,801 $ 7,182 $ 1,705 ($ 1,456) $ 1,081
======= ======= ======= ========= ========= ========= ========= ========= =========
</TABLE>
--------- --------- ---------
--------- --------- ---------
INCOME STATEMENT 2001 2002 2003
- ----------------------------- --------- --------- ---------
Net Sales $ 353,971 $ 393,145 $ 427,001
Cost of Goods Sold 281,183 310,631 336,071
--------- --------- ---------
GROSS MARGIN $ 72,788 $ 82,514 $ 90,930
Operating Expenses (Income):
Franchise Royalties $ 14,159 $ 15,726 $ 17,080
Other Income (575) (6l4) (653)
General & Administrative 12,974 14,031 14,962
Depreciation 14,092 11,347 11,828
--------- --------- ---------
OPERATING PROFIT $ 36,139 $ 42,025 $ 47,713
EBITDA $ 46,806 $ 53,986 $ 60,194
% Margin 13.2% 13.7% 14.1%
DavCo Oil EBITDA $ 245 $ 258 $ 271
Adjusted EBITDA $ 47,051 $ 54,244 $ 60,465
Transaction Cost Amort. (211) (211) (211)
Goodwill Amortization (3,657) (3,657) (3,637)
--------- --------- ---------
EBIT $ 32,270 $ 38,137 $ 43,845
Interest Expense:
Existing Debt $ 0 $ 0 $ 0
Overflow Debt 0 0 0
New Debt 1 2,318 2,260 2,196
New Debt 2 8,909 8,490 8,028
New Debt 3 1,133 1,097 1,058
New Debt 4 4,271 6,440 8,277
--------- --------- ---------
TOTAL INTEREST EXPENSE $ 16,630 $ 18,287 $ 19,560
E.B.T $ 15,640 $ 19,870 $ 24,285
Provision for Income Taxes 7,527 9,173 10,890
--------- --------- ---------
NET INCOME $ 8,113 $ 10,697 $ 13,395
========= ========= =========
Preferred Dividends 5,226 5,853 6,556
--------- --------- ---------
NET TO RETAINED EARNINGS $ 2,887 $ 4,844 $ 6,839
========= ========= =========
Equitable Securities Corporation Page 4
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - No Sale of MOP - With FriendCo Expansion
(Historical FYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
---- ----- ----- -------- -------- -------- -------- ---------- ---------- ----------
HISTORICAL PROJECTED
---- ----- ----- -------- -------- -------- -------- ---------- ---------- ----------
CASH FLOW STATEMENT 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
- ---------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET TO RETAINED EARNINGS -- -- -- $ 8,415 $ 5,801 $ 7,182 $ 1,705 $ (1,456) $ 1,091 $ 2,887
Non-Cash Adjustments:
Depreciation .................................................................... $ 8,419 $ 8,170 $ 9,037 $ 10,092
Asset Write-Up Depreciation ..................................................... 0 0 0 0
Transaction Cost Amort. ......................................................... 211 211 211 211
Goodwill Amortization ........................................................... 0 3,657 3,657 3,657
Deferred Taxes .................................................................. 0 0 0 0
Accrued Jr Sub Debt Interest .................................................... 0 0 0 0
Accrued Preferred Dividends ..................................................... 3,720 4,166 4,666 5,226
-------- -------- -------- --------
FUNDS FROM OPERATIONS ........................................................... $ 14,054 $ 14,748 $ 18,652 $ 22,073
Net Working Capital Requirements:
Accounts Receivable ............................................................. $ (21) $ (44) $ (92) $ (91)
Inventory ....................................................................... (43) (148) (376) (366)
Prepaid Expenses/RIT ............................................................ (86) (167) (243) (248)
Accrued Advertising & Royalty Fees .............................................. 84 174 272 272
Accrued Salaries & Wages ........................................................ 107 253 464 460
Accrued Expenses ................................................................ 255 506 788 789
Income Taxes Payable ............................................................ 81 141 127 133
Other Current Liabilities ....................................................... 0 0 0 0
-------- -------- -------- --------
(INCREASE) IN NET WORKING CAPITAL ............................................... $ 305 $ 744 $ 1,520 $ 1,498
CASH FROM OPERATIONS ......................................................... $ 14,360 $ 15,492 $ 20,173 $ 23,571
Capital Expenditures ............................................................ $(13,260) $(18,025) $(39,296) $(38,072)
Increase/(Decrease) in WC Revolver .............................................. 0 0 0 0
Decrease/(Increase) in Net Leased
Properties & Franc ............................................................. 0 0 0 0
Decrease/(Increase) in Oilier Assets ............................................ 0 0 0 0
Book Value of Assets Sold ....................................................... 0 0 0 0
-------- -------- -------- --------
CASH AVAILABLE FOR AMORTIZATION .............................................. $ 1,100 ($ 2,533) ($19,123) ($14,501)
======== ======== ======== ========
</TABLE>
---------- ----------
---------- ----------
CASH FLOW STATEMENT 2002 2003
- ---------------------------------- ---- ----
NET TO RETAINED EARNINGS $ 4,844 $ 6,839
Non-Cash Adjustments:
Depreciation ....................... $ 11,347 $ 11,828
Asset Write-Up Depreciation ........ 0 0
Transaction Cost Amort. ............ 211 211
Goodwill Amortization .............. 3,657 3,657
Deferred Taxes ..................... 0 0
Accrued Jr Sub Debt Interest ....... 0 0
Accrued Preferred Dividends ........ 5,853 6,556
-------- --------
FUNDS FROM OPERATIONS .............. $ 25,912 $ 29,091
Net Working Capital Requirements:
Accounts Receivable ................ $ (95) $ (81)
Inventory .......................... (383) (314)
Prepaid Expenses/RIT ............... (256) (238)
Accrued Advertising & Royalty Fees . 282 255
Accrued Salaries & Wages ........... 478 417
Accrued Expenses ................... 819 749
Income Taxes Payable ............... 137 149
Other Current Liabilities .......... 0 0
-------- --------
(INCREASE) IN NET WORKING CAPITAL .. $ 1,557 $ 1,342
CASH FROM OPERATIONS ............ $ 27,469 $ 30,433
Capital Expenditures ............... $(38,353) $(31,140)
Increase/(Decrease) in WC Revolver . 0 0
Decrease/(Increase) in Net Leased
Properties & Franc ................ 0 0
Decrease/(Increase) in Oilier Assets 0 0
Book Value of Assets Sold .......... 0 0
-------- --------
CASH AVAILABLE FOR AMORTIZATION . ($10,884) ($ 707)
======== ========
Equitable Securities Corporation Page 5
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - No Sale of MDF - With FriendCo Expansion
(Historical FYE September 30)
<TABLE>
<CAPTION>
------- ------- -------- -------- -------- -------
Thousands of Dollars PROJECTED
------- ------- -------- -------- -------- -------
1998 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C>
DEBT AMORTIZATION SCHEDULE Year # . 1 2 3 4 5 6
- --------------------------- ------- ------- -------- -------- -------- -------
CASH AVAILABLE FOR AMORTIZATION ................... $1,100 ($2,533) ($19,123) ($14,501) ($10,884) ($707)
Overflow Debt Addition ............................ 0 0 0 0 0 0
------- ------- -------- -------- -------- -------
Cash For Retirement of Existing Debt $1,100 ($2,533) ($19,123) ($14,501) ($10,884) ($707)
Existing Debt Retired ............................. 0 0 0 0 0 0
Cash For Retirement of Capitalized Leases $1,100 ($2,533) ($19,123) ($14,501) ($10,884) ($707)
Capitalized Leases Retired ........................ (2,680) (2,390) (2,132) (1,901) (1,694) (1,511)
------- ------- -------- -------- -------- -------
Cash For Retirement of Overflow Debt ($1,580) ($4,923) ($21,255) ($16,402) ($12,578) ($2,218)
Overflow Debt Retired ............................. 0 0 0 0 0 0
------- ------- -------- -------- -------- -------
Cash For Retirement of New Debt 1 ($1,580) ($4,923) ($21,255) ($16,402) ($12,578) ($2,218)
New Debt 1 Retired ................................ (444) (488) (536) (589) (646) (710)
------- ------- -------- -------- -------- -------
Cash For Retirement of New Debt 2 ($2,024) ($5,411) ($21,791) ($16,991) ($13,224) ($2,928)
New Debt 2 Retired ................................ (3,193) (3,509) (3,857) (4,239) (4,658) (5,119)
------- ------- -------- -------- -------- -------
Cash For Retirement of New Debt 3 ($5,217) ($8,920) ($25,648) ($21,230) ($17,882) ($8,047)
New Debt 3 Retired ................................ 0 0 (329) (361) (397) (436)
------- ------- -------- -------- -------- -------
Cash For Retirement of New Debt 4 ($5,217) ($8,920) ($25,977) ($21,591) ($18,279) ($8,483)
New Debt 4 Retired ................................ 5,217 8,920 25,977 21,591 18,279 8,483
------- ------- -------- -------- -------- -------
Cash For Retirement of Preferred Stock $0 $0 $0 $0 $0 $0
Preferred Stock Retired ........................... 0 0 0 0 0 0
------- ------- -------- -------- -------- -------
------- ------- -------- -------- -------- -------
CHANGE IN CASH ACCOUNT .......................... $0 $0 $0 $0 $0 $0
======= ======= ======== ======== ======== =======
</TABLE>
Equitable Securities Corporation Page 6
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - No Sale of MOP - With FriendCo Expansion
(Historical EYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
---- ---- ---- ---- -------- -------- -------- -------- -------- --------
HISTORICAL PROJECTED
---- ---- ---- ---- -------- -------- ------ ------- -------- -------- -------- --------
ASSETS 1992 1993 1994 1995 1996 1997 Adjust Closing 1998 1999 2000 2001
- ----------------------- ---- ---- ---- ---- ---- ---- ------ ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash & Cash Equivalents -- -- -- -- $1,947 $930 ($4) $926 $926 $926 $926 $926
Accounts Receivable -- -- -- -- 652 580 (7) 573 594 637 729 820
Inventory -- -- -- -- 1,421 1,877 (32) 1,845 1,888 2,036 2,412 2,778
Prepaid Expenses/RIT -- -- -- -- 1,046 2,132 (4) 2,128 2,214 2,381 2,624 2,872
Deferred Tax Asset -- -- -- -- 786 5,422 5,422 5,670 6,107 6,533 6,975
---- ---- ---- ---- -------- -------- -------- -------- -------- -------- --------
TOTAL CURRENT ASSETS -- -- -- -- $5,852 $10,941 $10,894 $11,292 $12,087 $13,224 $14,371
Fixed Assets:
Net PPE -- -- -- -- $49,520 $58,075 ($133) $57,942 $62,783 $72,638 $102,897 $130,877
Net Leased Properties
& Franchise Right -- -- -- -- 41,603 39,862 (16) 39,846 39,846 39,846 39,846 39,846
Other Assets -- -- -- -- 490 253 (1) 252 252 252 252 252
Asset Write-Ups -- -- -- -- 0 0 0 0 0 0 0 0
Transaction Costs -- -- -- -- 0 0 4,213 4,213 4,002 3,792 3,581 3,570
Goodwill -- -- -- -- 18,730 21,515 88,208 109,723 109,723 106,066 702,408 98,751
---- ---- ---- ---- -------- -------- -------- -------- -------- -------- --------
TOTAL FIXED ASSETS -- -- -- -- $110,343 $119,705 $211,976 $216,607 $222,593 $248,984 $273,096
TOTAL ASSETS -- -- -- -- $116,195 $130,646 $222,870 $227,898 $234,681 $262,208 $287,467
==== ==== ==== ==== ======== ======== ======== ======== ======== ======== ========
</TABLE>
-------- --------
-------- --------
ASSETS 2002 2003
- ----------------------- ---- ----
Current Assets:
Cash & Cash Equivalents $926 $926
Accounts Receivable 915 996
Inventory 3,161 3,475
Prepaid Expenses/RIT 3,128 3,366
Deferred Tax Asset 7,431 7,903
-------- --------
TOTAL CURRENT ASSETS $15,361 $16,666
Fixed Assets:
Net PPE $157,883 $177,195
Net Leased Properties
& Franchise Right 39,846 39,846
Other Assets 252 252
Asset Write-Ups 0 0
Transaction Costs 3,160 2,949
Goodwill 95,093 91,436
-------- --------
TOTAL FIXED ASSETS $296,234 $311,678
TOTAL ASSETS $311,795 $328,344
======== ========
Equitable Securities Corporation Page 7
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - No Sale of MDF - With FriendCo Expansion
(Historical FYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
---- ---- ---- ---- -------- -------- -------- -------- --------
HISTORICAL PROJECTED
---- ---- ---- ---- -------- -------- ------ ------- -------- -------- --------
LIABILITIES & EQUITY 1992 1993 1994 1995 1996 1997 Adjust Closing 1998 1999 2000
- ------------------------- ---- ---- ---- ---- ---- ---- ------ ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts Payable -- -- -- -- $5,615 $6,806 ($148) $6,658 $6,834 $7,300 $8,306
Accrued Advertising &
Royalty Fees -- -- -- -- 2,588 2,426 (51) 2,375 2,459 2,633 2,905
Accrued Salaries & Wages -- -- -- -- 2,732 3,421 (69) 3,352 3,459 3,712 4,176
Accrued Expenses -- -- -- -- 7,864 8,417 (268) 8,149 8,404 8,910 9,698
Income Taxes Payable -- -- -- -- (1,477) 1,780 1,780 1,861 2,002 2,129
---- ---- ---- ---- -------- -------- -------- -------- -------- --------
TOTAL CURRENT LIABILITIES -- -- -- -- $24,089 $22,850 $22,314 $23,017 $24,557 $27,214
Deferred Taxes -- -- -- -- $115 $3,241 ($3,241) $0 $0 $0 $0
Capital Lease Obligations -- -- -- -- 31,579 28,406 (1,134) 27,272 24,592 22,202 20,070
Long Term Debt:
Existing Debt -- -- -- -- $14,887 $23,673 ($23,673) $0 $0 $0 $0
Overflow Debt -- -- -- -- 0 0 0 0 0 0
New Debt 1 -- -- -- -- 0 0 25,000 25,000 24,556 24,068 23,532
New Debt 2 -- -- -- -- 0 0 100,551 100,551 97,358 93,849 89,992
New Debt 3 -- -- -- -- 0 0 11,771 11,771 11,771 11,771 11,442
New Debt 4 -- -- -- -- 0 0 2,379 7,596 16,516 42,493
---- ---- ---- ---- -------- -------- -------- -------- -------- --------
TOTAL LONG TERM DEBT -- -- -- -- $14,887 $23,673 $139,701 $141,281 $146,204 $167,459
TOTAL LIABILITIES -- -- -- -- $70,670 $78,170 $199,287 $188,890 $192,963 $214,743
Net Worth:
Equity - Common -- -- -- -- $33,024 $32,788 ($31,669) $1,119 $1,119 $1,119 $1,119
- Preferred -- -- -- -- 0 0 31,000 31,000 34,720 38,886 43,553
Retained Earnings -- -- -- -- 12,501 19,688 (18,224) 1,464 3,169 1,712 2,793
---- ---- ---- ---- -------- -------- -------- -------- -------- --------
NET WORTH -- -- -- -- $45,525 $52,476 $33,583 $39,008 $41,718 $47,465
---- ---- ---- ---- -------- -------- -------- -------- -------- --------
LIABILITIES & NET WORTH -- -- -- -- $116,195 $130,646 $222,870 $227,898 $234,681 $262,209
==== ==== ==== ==== ======== ======== ======== ======== ======== ========
BALANCE SHEET CHECK => -- -- -- -- 0 0 (0) (0) (0) (0)
(0) 0 (0)
</TABLE>
-------- -------- --------
-------- -------- --------
LIABILITIES & EQUITY 2001 2002 2003
- ------------------------- ---- ---- ----
Current Liabilities:
Accounts Payable $9,297 $10,328 $11,205
Accrued Advertising &
Royalty Fees 3,177 3,459 3,714
Accrued Salaries & Wages 4,636 5,114 5,531
Accrued Expenses 10,487 11,306 12,055
Income Taxes Payable 2,262 2,399 2,548
-------- -------- --------
TOTAL CURRENT LIABILITIES $29,839 $32,606 $35,053
Deferred Taxes $0 $0 $0
Capital Lease Obligations 18,169 16,475 14,964
Long Term Debt
Existing Debt $0 $0 $0
Overflow Debt 0 0 0
New Debt 1 22,943 22,297 21,587
New Debt 2 85,753 81,095 75,976
New Debt 3 11,081 10,684 10,248
New Debt 4 64,084 82,363 90,846
-------- -------- --------
TOTAL LONG TERM DEBT $183,861 $196,439 $198,657
TOTAL LIABILITIES $231,889 $245,520 $248,674
Net Worth:
Equity - Common $1,119 $1,119 $1,119
- Preferred 48,779 54,633 61,189
Retained Earnings 5,680 10,523 17,362
-------- -------- --------
NET WORTH $55,578 $66,275 $79,670
-------- -------- --------
LIABILITIES & NET WORTH $287,467 $311,795 $328,344
======== ======== ========
BALANCE SHEET CHECK => (0) (0) (0)
0 (0) 0
Note - These numbers do not reflect any accounting for the "push-down" of debt
and goodwill that may be reused by the Proposed Transaction. Adjustments include
leveraged buyout transaction and Company Division disposition
Equitable Securities Corporation Page 8
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - No Sale of MDF - With FriendCo Expansion
(Historical FYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
HISTORICAL PROJECTED
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
1992 1993 1994 1995 1996 1997 Closing 1998 1999 2000
CAPITALIZATION SUMMARY Year #... 0 1 2 3
- --------------------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Debt -- -- -- -- -- $23,673 $0 $0 $0 $0
Overflow Debt -- -- -- -- -- 0 0 0 0 0
Capitalized Leases -- -- -- -- -- 28,406 27,272 24,592 22,202 20,870
New Debt 1 -- -- -- -- -- 0 25,000 24,536 24,068 23,532
New Debt 2 -- -- -- -- -- 0 100,551 97,358 93,849 89,992
New Debt 3 -- -- -- -- -- 0 11,771 11,771 11,771 11,442
New Debt 4 -- -- -- -- -- 0 2,379 7,596 16,516 42,493
Preferred Equity -- -- -- -- -- 0 31,000 34,720 38,886 43,553
Common Equity -- -- -- -- -- 52,476 2,583 4,288 2,632 3,913
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
BOOK CAPITALIZATION -- -- -- -- -- $104,555 $200,556 $204,881 $210,124 $234,995
TOTAL DEBT -- -- -- -- -- $52,079 $166,973 $165,873 $168,406 $187,528
BOOK EQUITY -- -- -- -- -- $52,476 $33,583 $39,008 $41,718 $47,465
RATIO ANALYSIS
Total Debt/ Total Capitalization -- -- -- -- -- 49.8% 83.3% 81.0% 80.1% 79.8%
Senior Debt/ Total Capitalization -- -- -- -- -- 22.6% 12.5% 12.0% 11.5% 10.0%
Adjusted EBITDA/Interest -- -- -- -- -- -- -- 2.2 2.4 2.8
Adjusted EBITDA/Senior Interest -- -- -- -- -- -- -- 12.2 13.8 16.8
Senior Debt/Adjusted EBITDA -- -- -- -- -- -- -- 0.8 0.7 0.6
Senior Debt /EBIT -- -- -- -- -- -- -- 1.2 1.2 0.9
Senior Debt/Operating Cash Flow -- -- -- -- -- -- -- 1.7 1.6 1.2
Total Debt/Adjusted EBITDA -- -- -- -- -- -- -- 5.5 5.0 4.7
Total Debt/EBIT -- -- -- -- -- -- -- 8.0 8.1 7.1
Total Debt/Operating Cash Flow -- -- -- -- -- -- -- 11.6 10.9 9.3
</TABLE>
-------- -------- --------
-------- -------- --------
2001 2002 2003
CAPITALIZATION SUMMARY 4 5 6
- --------------------------------- -------- -------- --------
Existing Debt $0 $0 $0
Overflow Debt 0 0 0
Capitalized Leases 18,169 16,475 14,964
New Debt 1 22,943 22,297 21,587
New Debt 2 83,753 81,095 75,976
New Debt 3 11,081 10,684 10,248
New Debt 4 64,084 82,363 10,846
Preferred Equity 48,779 34,633 61,189
Common Equity 6,799 11,645 18,482
-------- -------- --------
BOOK CAPITALIZATION $257,608 $279,189 $293,291
TOTAL DEBT $202,030 $212,914 $213,621
BOOK EQUITY $55,578 $66,275 $79,670
RATIO ANALYSIS
Total Debt/ Total Capitalization 78.4% 76.3% 72.8%
Senior Debt/ Total Capitalization 8.9% 8.0% 7.4%
Adjusted EBITDA/Interest 2.8 3.0 3.1
Adjusted EBITDA/Senior Interest 20.3 24.0 27.5
Senior Debt/Adjusted EBITDA 0.5 0.4 0.4
Senior Debt /EBIT 0.7 0.6 0.5
Senior Debt/Operating Cash Flow 1.0 0.8 0.7
Total Debt/Adjusted EBITDA 4.3 3.9 3.5
Total Debt/EBIT 6.3 5.6 4.9
Total Debt/Operating Cash Flow 8.6 7.8 7.0
Equitable Securities Corporation Page 9
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
RETURNS SECTION
- --------------------------
BASE CASE - No Sale of MDF - With FriendCo Ex Exit Year 2002
Thousands of Dollars
Semi- Fully-
EQUITY ALLOCATION Investment % Diluted Diluted
Sponsors $750 67.0% 67.0% 67.0%
Management 369 33.0% 33.0% 33.0%
Preferred Stock 31,000 * 0.0% 0.0%
New Debt 4 2,379 * 0.0% 0.0%
New Debt 2 Option 100,551 * 0.0% 0.0%
New Debt 3 Option 11,771 * 0.0% 0.0%
Management Performance Option * * * 0.0%
-------- ----- ----- -----
TOTAL EQUITY ALLOCATION $146,820 100.0% 100.0% 100.0%
- ----------------------------- -------- ----- ----- -----
Exit Year Adjusted EBITDA $54,244
x EBITDA Multiple 6.0
--------
EXIT VALUATION $325,464
PLUS: Excess Cash $0
Conversion Costs 0
LESS Total Remaining Debt (212,914)
Total Preferred (54,633)
--------
NET PROCEEDS TO ALLOCATE $57,917
- ----------------------------- --------
Sr. Subordinated Share $0
LESS: Conversion Costs 0
--------
Net Subordinated Share $0
- ----------------------------- --------
Jr. Subordinated Share $0
LESS: Conversion Costs 0
--------
Net Jr. Subordinated Share $0
- ----------------------------- --------
Seller Note Share $0
- ----------------------------- --------
Preferred Share $0
- ----------------------------- --------
Sponsor's Equity Share $38,805
- ----------------------------- --------
Management's Equity Share $19,113
- ----------------------------- --------
<TABLE>
<CAPTION>
CLOSE 1998 1999 2000 2001 2002 2003
- ---------- ------------------ ---------- ------- ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New Debt 2
Investment ($100,551) $3,193 $3,509 $3,857 $4,239 $85,753 $0
Interest 9,955 9,658 9,291 8,909 8,490 0
Participation 0 0 0 0 0 0
---------- ------- ------- ------- ------- ------- ----
IRR = 9.90% ($100,551) $13,148 $13,147 $13,148 $13,148 $94,243 $0
- ---------- ------------------ ---------- ------- ------- ------- ------- ------- ----
New Debt 3
Investment ($11,771) $0 $0 $329 $361 $11,081 $0
Interest 1,082 1,082 1,165 1,133 1,097 0
Participation 0 0 0 0 0 0
---------- ------- ------- ------- ------- ------- ----
IRR = 9.57% ($11,771) $1,082 $1,082 $1,494 $1,494 $12,178 $0
- ---------- ------------------ ---------- ------- ------- ------- ------- ------- ----
Preferred Returns
Investment $0 $0 $0 $0 $0 $0 $0
Dividends 0 0 0 0 0 0
Participation 0 0 0 0 0 0
---------- ------- ------- ------- ------- ------- ----
IRR = #N/A $0 $0 $0 $0 $0 $0 $0
- ---------- ------------------ ---------- ------- ------- ------- ------- ------- ----
Sponsor Equity Returns
Pref (23,250)
Investment Comm ($750) $0 $0 $0 $0 $40,974 $0
Participation 0 0 0 0 38,805 0
---------- ------- ------- ------- ------- ------- ----
IRR = 27.16% ($24,000) $0 $0 $0 $0 $79,779 $0
- ---------- ------------------ ---------- ------- ------- ------- ------- ------- ----
Management Returns
Pref (7,750)
Investment Comm ($369) $0 $0 $0 $0 $13,658 $0
Participation 0 0 0 0 19,113 0
---------- ------- ------- ------- ------- ------- ----
IRR 32.19% ($8,119) $0 $0 $0 $0 $32,771 $0
- ---------- ------------------ ---------- ------- ------- ------- ------- ------- ----
</TABLE>
Equitable Securities Corporation Page 10
<PAGE>
Project Crab Cake Confidential
================================================================================
BASE CASE - Sale of MDF - with FriendCo expansion sales
10-Nov-97
01:16 PM
<TABLE>
<CAPTION>
==============================================================================================================================
USES OF FUNDS SOURCES OF FUNDS % IRR
- --------------------------------------- ----------------------------------------- ---- ----
<S> <C> <C> <C> <C>
Net Purchase Price WC Revolver $0 0.0%
Outstanding Stock $96,576 Debt Assumed 0 0.0%
Equity Roll-over 32,119 New Debt I 25,000 14.6% 9.9%
Options 4,517 New Debt 2 100,551 58.5% 9.9%
Warrants 8,816 New Debt 3 Current 11,771 6.9% 9.6%
Bonus Pymts. 1,905 New Debt 4 2,379 1.4% 10.1%
--------
Net Purchase Price $143,934 Preferred Stock PIK 31,000 18.0% 12.0% Dividend
Debt Retired 23,673 Common Equity
Debt Assumed 0 Sponsors 750 0.4% 24.4%
Cash Infusion 0 Management 369 0.2% 28.7%
Transaction Costs 4,213 Excess Cash on Balance Sheet 0 0.0%
-------- ----- ----
TOTAL USES $171,820 TOTAL SOURCES $171,820 100.0%
========
Un- Fully-
EQUITY ALLOCATION Diluted Diluted GOODWILL CALCULATION
---------------------------------------- --------------------
New Debt 2 * 0.0% Purchase Price $143,934
New Debt 3 * 0.0% Less:
New Debt 4 * 0.0% Net Worth 52.476
Preferred Stock * 0.0% Asset Write-Ups 0
Sponsors 67.0% 67.0% Deferred Taxes 3,241
Management 33.0% 33.0% -----
---- ---- GOODWILL $88,217
EXIT YEAR 2002 TOTAL ALLOCATION 100.0% 100.0% =======
===== =====
EXIT EBITDA MULTIP 6.0 x
EXIT P/E * 11.0 x
EXIT BOOK MULTIPLE 0.7 x Use WC Revolver YES = 1, NO = 0 0 Years of PIK
Retire Existing Debt YES = 1, NO = 0: 1
* Adjusted For Cash Reduction Junior Sub PIK YES = 1, NO = 0 0 0
Preferred Stock PIK YES = 1, NO = 0 1 10
==============================================================================================================================
</TABLE>
Equitable Securities Corporation Page 1
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - Sale of MDF - with FriendCo expansion sales
(Historical FYE September 30)
<TABLE>
<CAPTION>
Thousands of Dollars ------------------------------------- ------------------------------------------------------------
HISTORICAL PROJECTED
------------------------------------- ------------------------------------------------------------
INCOME STATEMENT ASSUMPTIONS 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Growth -- -- -- -- -0.8% 10.7% -0.4% 8.1% 15.0% 13.1% 12.0% 9.2%
Cost of Goods Sold -- -- -- 79.7% 82.0% 81.1% 79.8% 79.4% 78.9% 78.4% 78.1% 77.8%
GROSS MARGIN -- -- -- 20.3% 18.0% 18.9% 20.2% 20.6% 21.1% 21.6% 21.9% 22.2%
Operating Expenses/Sales:
Franchise Royalties -- -- -- 4.0% 4.0% 4.0% 4.0% 4.0% 40% 4.0% 4.0% 4.0%
Other Income -- -- -- -0.6% -0.6% -0.4% -0.2% -0.2% -0.2% -0.2% -0.1% -0.1%
General & Administrative -- -- -- 3.6% 2.9% 3.9% 4.2% 4.1% 4.0% 3.8% 3.7% 3.6%
Depreciation -- -- -- 4.4% 4.3% 3.9% 3.2% 2.9% 2.9% 2.9% 2.9% 2.8%
OPERATING MARGIN -- -- -- 8.9% 7.1% 7.6% 9.0% 9.7% 10.4% 11.0% 11.5% 11.9%
Interest (Coupon) Rates:
Existing Debt ................................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Overflow Debt ................................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
New Debt 1 ...................................................... 9.85% 9.85% 9.85% 9.85% 9.85% 9.85%
WC Revolver ..................................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
New Debt 2 ...................................................... 9.90% 9.90% 9.90% 9.90% 9.90% 9.90%
New Debt 3 ...................................................... 9.19% 9.19% 9.90% 9.90% 9.90% 9.90%
New Debt 4 ...................................................... 10.05% 10.05% 10.05% 10.05% 10.05% 10.05%
Preferred Stock ................................................. 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
Miscellaneous Income ..................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
as a % of Sales
Taxes Rates:
Federal Tax Rate ................................................ 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
State Tax Rate .................................................. 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
Effective Tax Rate ...................... 52.89% 66.89% 73.72% 22.24% 63.20% 52.41% 48.93% 46.72% 45.28%
</TABLE>
Equitable Securities Corporation Page 2
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - Sale of MDF - with FriendCo expansion sales
(Historical FYE September 30)
<TABLE>
<CAPTION>
Thousands of Dollars --------------------------------- --------------------------------------------------------
HISTORICAL PROJECTED
--------------------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET ASSUMPTIONS 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Current Assets:
Accounts Receivable/Sales -- -- -- -- -0.32 0.25% 2.14% 1.79% 1.42% 1.16% 0.96% 0.82%
Inventory/COGS -- -- -- -- -0.84 1.01% 0.92% 0.93% 0.98% 1.01% 1.04% 1.06%
Prepaid Expenses/RIT/Sales -- -- -- -- 0.51% 0.93% 0.96% 0.95% 0.92% 0.89% 0.86% 0.85%
Deferred Tax Asset/Sales -- -- -- -- -0.38 2.37% 2.48% 2.47% 2.30% 2.17% 2.07% 2.01%
Other Cur. Assets # 2/Sales -- -- -- -- 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Current Liabilities:
Accounts Payable/COGS -- -- -- -- 3.31% 3.66% 3.21% 3.21% 3.25% 3.27% 3.30% 3.31%
Accrued Advertising &Royalty Fees/CO -- -- -- -- 1.53% 1.31% 1.16% 1.17% 1.14% 1.12% 1.10% 1.09%
Accrued Salaries & Wages/COGS -- -- -- -- 1.61% 1.84% 1.65% 1.65% 1.65% 1.65% 1.64% 1.64%
Accrued Expenses/COGS -- -- -- -- 4.63% 4.53% 3.63% 3.61% 3.50% 3.41% 3.34% 3.30%
Income Taxes Payable/COGS -- -- -- -- -0.87% 0.96% 1.32% 1.31% 1.20% 1.13% 1.07% 1.03%
OTHER ASSUMPTIONS
Proceeds From Sale of Assets .......................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Book Value of Fixed Assets .......................................... 0 0 0 0 0 0
Net Accounts Receivable ............................................. 0 0 0 0 0 0
Inventory ........................................................... 0 0 0 0 0 0
Prepaid Expenses .................................................... 0 0 0 0 0 0
Other Current Assets #1 ............................................. 0 0 0 0 0 0
Other Current Assets #2 ............................................. 0 0 0 0 0 0
Accounts Payable .................................................... 0 0 0 0 0 0
Accrued Salaries .................................................... 0 0 0 0 0 0
Other Accrued Expenses .............................................. 0 0 0 0 0 0
Other Cur. Liab. #1 ................................................. 0 0 0 0 0 0
Other Cur. Liab. #2 ................................................. 0 0 0 0 0 0
Other Cur. Liab. #3 ................................................. 0 0 0 0 0 0
------- ------- ------- ------- ------- -------
Gain (Loss) on Sale of Assets $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Capital Expenditures $12,800 $17,356 $38,817 $37,383 $37,855 $30,632
Depreciation - Manual Input = 1, Model Calculation = 0 1 $ 7,296 $ 7,159 $ 8,095 $ 9,185 $10,445 $11,001
Deferred Taxes - Manual Input = 1, Model Calculation = 0 1 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Working Capital Advance Rates: Receivables 0.0% Transaction Cost Amort @ 10 Years Existing NOL's $3,200
Inventory 0.0% Goodwill Amortization @ 30 Years
$ Ceiling $0 (0 = No Limit) Asset Write Ups @ 5 Years
</TABLE>
Equitable Securities Corporation Page 3
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - Sale of MDF - with FriendCo expansion sales
(Historical FYE September 30)
<TABLE>
<CAPTION>
Thousands of Dollars ------------------------------------------------------------- ------------------------------
HISTORICAL
------------------------------------------------------------- ------------------------------
INCOME STATEMENT 1992 1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales -- -- -- $ 208,671 $ 206,902 $ 229,096 $ 228,235 $ 246,774
Cost of Goods Sold -- -- -- 166,401 169,698 185,774 182,033 195,930
---- ---- ---- --------- --------- --------- --------- ---------
GROSS MARGIN -- -- -- $ 42,271 $ 37,204 $ 43,322 $ 46,202 $ 50,844
Operating Expenses (Income):
Franchise Royalties -- -- -- $ 8,346 $ 8,275 $ 9,179 $ 9,129 $ 9,871
Other Income -- -- -- (1,351) (1,139) (940) (380) (418)
General & Administrative- -- -- 7,551 6,068 8,830 9,520 10,198
Depreciation -- -- -- 9,083 9,275 8,841 7,296 7,159
---- ---- ---- --------- --------- --------- --------- ---------
OPERATING PROFIT -- -- -- $ 18,641 $ 14,725 $ 17,412 $ 20,637 $ 24,035
EBITDA -- -- -- $ 27,724 $ 24,000 $ 26,253 $ 28,313 $ 31,612
% Margin -- -- -- 13.3% 11.6% 11.5% 12.4% 12.8%
DavCo Oil EBITDA $ 212 $ 223
Adjusted EBITDA $ 28,525 $ 31,835
Miscellaneous Income (Expense) -- -- -- $ 0 $ 0 $ 0 $ 0 $ 0
Gain (Loss) on Assets Sales -- -- -- 0 0 0 0 0
Asset Write-Up Depreciation -- -- -- 0 0 0 0 0
Transaction Cost Amort -- -- -- 0 0 0 (421) (421)
Goodwill Amortization -- -- -- 0 0 0 0 (3,665)
---- ---- ---- --------- --------- --------- --------- ---------
EBIT -- -- -- $ 18,641 $ 14,725 $ 17,412 $ 20,216 $ 19,948
Interest Expense:
Existing Debt -- -- -- $ 5,775 $ 5,044 $ 4,885 $ 0 $ 0
Overflow Debt -- -- -- -- -- -- 0 0
New Debt I -- -- -- -- -- -- 2,463 2,419
WC Revolver -- -- -- -- -- -- 0 0
New Debt 2 -- -- -- -- -- -- 9,955 9,638
New Debt 3 -- -- -- -- -- -- 1,082 1,082
New Debt 4 -- -- -- -- -- -- 239 792
---- ---- ---- --------- --------- --------- --------- ---------
TOTAL INTEREST EXPENSE- -- -- -- $ 5,775 $ 5,044 $ 4,885 $ 13,738 $ 13,931
E.B.T -- -- -- $ 12,866 $ 8,681 $ 12,527 $ 6,478 $ 6,017
Provision for Income Taxes -- -- -- 4,451 3,880 5,316 1,441 3,807
---- ---- ---- --------- --------- --------- --------- ---------
NET INCOME -- -- -- $ 8,415 $ 5,801 $ 7,211 $ 5,037 $ 2,210
==== ==== ==== ========= ========= ========= ========= =========
Preferred Dividends -- -- -- 0 0 0 3,721 4,166
---- ---- ---- --------- --------- --------- --------- ---------
NET TO RETAINED EARNINGS -- -- -- $ 8,415 $ 5,801 $ 7,211 $ 1,317 ($ 1,957)
==== ==== ==== ========= ========= ========= ========= =========
<CAPTION>
Thousands of Dollars --------------------------------------------------------
PROJECTED
--------------------------------------------------------
INCOME STATEMENT 2000 2001 2002 2003
<S> <C> <C> <C> <C>
Net Sales $ 283,805 $ 320,932 $ 359,445 $ 392,627
Cost of Goods Sold 224,007 251,729 280,585 305,424
--------- --------- --------- ---------
GROSS MARGIN $ 59,798 $ 69,203 $ 78,860 $ 87,203
Operating Expenses (Income):
Franchise Royalties $ 11,352 $ 12,837 $ 14,378 $ 15,705
Other Income (452) (487) (521) (559)
General & Administrative- 11,312 12,228 13,270 14,187
Depreciation 8,095 9,185 10,445 11,001
--------- --------- --------- ---------
OPERATING PROFIT $ 29,490 $ 35,439 $ 41,289 $ 46,868
EBITDA $ 38,037 $ 45,111 $ 52,255 $ 58,428
% Margin 13.4% 14.1% 14.5% 14.9%
DavCo Oil EBITDA $ 234 $ 245 $ 238 $ 271
Adjusted EBITDA $ 38,271 $ 45,356 $ 52,513 $ 58,699
Miscellaneous Income (Expense) $ 0 $ 0 $ 0 $ 0
Gain (Loss) on Assets Sales 0 0 0 0
Asset Write-Up Depreciation 0 0 0 0
Transaction Cost Amort (421) (421) (421) (421)
Goodwill Amortization (3,665) (3,665) (3,665) (3,665)
--------- --------- --------- ---------
EBIT $ 25,404 $ 31,353 $ 37,202 $ 42,782
Interest Expense:
Existing Debt $ 0 $ 0 $ 0 $ 0
Overflow Debt 0 0 0 0
New Debt I 2,371 2,318 2,260 2,196
WC Revolver 0 0 0 0
New Debt 2 9,291 8,909 8,490 8,028
New Debt 3 1,165 1,133 1,097 1,058
New Debt 4 1,723 4,376 6,596 8,491
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE $ 14,550 $ 16,736 $ 18,442 $ 19,774
E.B.T $ 10,853 $ 14,617 $ 18,760 $ 23,008
Provision for Income Taxes 5,689 7,153 8,764 10,417
--------- --------- --------- ---------
NET INCOME $ 5,165 $ 7,464 $ 9,996 $ 12,591
========= ========= ========= =========
Preferred Dividends 4,666 5,226 5,853 6,556
--------- --------- --------- ---------
NET TO RETAINED EARNINGS $ 498 $2,238 $4,142 $ 6,035
========= ========= ========= =========
</TABLE>
Equitable Securities Corporations Page 4
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - Sale of MDF - with FriendCo expansion sales
(Historical FYE September 30)
<TABLE>
<CAPTION>
Thousands of Dollars ----------------------------------------------- ----------------------------------
HISTORICAL PROJECTED
----------------------------------------------- ----------------------------------
CASH FLOW STATEMENT 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET TO RETAINED EARNINGS -- -- -- $8,413 $5,801 $7,211 $ 1,317 ($ 1,957) $ 498
Non-Cash Adjustments:
Depreciation ........................................................................ $ 7,296 $ 7,159 $ 8,095
Asset Write - Up Depreciation ....................................................... 0 0 0
Transaction Cost Amort .............................................................. 421 421 421
Goodwill Amortization ............................................................... 0 3,665 3,665
Deferred Taxes ...................................................................... 0 0 0
Accrued Jr Sub Debt Interest ........................................................ 0 0 0
Accrued Preferred Dividends ......................................................... 3,720 4,166 4,666
-------- -------- --------
FUNDS FROM OPERATIONS ............................................................. $ 12,754 $ 13,455 $ 17,346
Net Working Capital Requirements:
Accounts Receivable ................................................................. $ 590 $ 488 $ 378
Inventory ........................................................................... (39) (143) (371)
Prepaid Expenses/RIT ................................................................ (85) (167) (242)
Deferred Tax Asset .................................................................. (248) (437) (426)
Other Cur. Assets #2 ................................................................ 0 0 0
Accounts Payable .................................................................... 157 446 986
Accrued Advertising & Royalty Fees .................................................. 77 167 265
Accrued Salaries & Wages ............................................................ 99 243 454
Accrued Expenses .................................................................... 220 470 751
Income Taxes Payable ................................................................ 92 152 138
Other Current Liabilities ........................................................... 0 0 0
-------- -------- --------
(INCREASE) IN NET WORKING CAPITAL ................................................... $ 863 $ 1,219 $ 1,933
CASH FROM OPERATIONS ................................................................ $ 13,617 $ 14,674 $ 19,279
Capital Expenditures .................................................................. ($12,800) ($17,556) ($38,817)
Increase/(Decrease) in WC Revolver .................................................... 0 0 0
Decrease/(Increase) in Net Leased
Properties & Franc ................................................................... 0 0 0
Decrease/(Increase) in Other Assets ................................................... 0 0 0
Book Value of Assets Sold ............................................................. 0 0 0
-------- -------- --------
CASH AVAILABLE FOR AMORTIZATION .................................................... $ 817 ($ 2,882) ($19,338)
======== ======== ========
</TABLE>
Thousands of Dollars ------------------------------------
PROJECTED
------------------------------------
CASH FLOW STATEMENT 2001 2002 2003
---- ---- ----
NET TO RETAINED EARNINGS $ 2,238 $ 4,142 $ 6,035
Non-Cash Adjustments:
Depreciation $ 9,185 $ 10,445 $ 11,001
Asset Write - Up Depreciation 0 0 0
Transaction Cost Amort 421 421 421
Goodwill Amortization 3,665 3,665 3,665
Deferred Taxes 0 0 0
Accrued Jr Sub Debt Interest 0 0 0
Accrued Preferred Dividends 5,226 5,853 6,556
-------- -------- --------
FUNDS FROM OPERATIONS $ 20,736 $ 24,527 $ 27,679
Net Working Capital Requirements:
Accounts Receivable $ 319 $ 265 $ 234
Inventory (363) (378) (309)
Prepaid Expenses/RIT (247) (256) (238)
Deferred Tax Asset (442) (456) (472)
Other Cur. Assets #2 0 0 0
Accounts Payable 970 1,010 856
Accrued Advertising & Royalty Fees 265 275 248
Accrued Salaries & Wages 451 468 407
Accrued Expenses 752 781 710
Income Taxes Payable 144 149 161
Other Current Liabilities 0 0 0
-------- -------- --------
(INCREASE) IN NET WORKING CAPITAL $ 1,849 $ 1,858 $ 1,597
CASH FROM OPERATIONS $ 22,585 $ 26,385 $ 29,276
Capital Expenditures ($37,583) ($37,855) ($30,632)
Increase/(Decrease) in WC Revolver 0 0 0
Decrease/(Increase) in Net Leased
Properties & Franc 0 0 0
Decrease/(Increase) in Other Assets 0 0 0
Book Value of Assets Sold 0 0 0
-------- -------- --------
CASH AVAILABLE FOR AMORTIZATION ($14,998) ($11,470) ($ 1,356)
======== ======== ========
Equitable Securities Corporation Page 5
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE- Sale of MDF - with FriendCo expansion sales
(Historical FYE September 30)
<TABLE>
<CAPTION>
-------- -------- -------- -------- -------- --------
Thousands of Dollars PROJECTED
-------- -------- -------- -------- -------- --------
1998 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C>
DEBT AMORTIZATION SCHEDULE Year # .. 1 2 3 4 5 6
- -------------------------------- -------- -------- -------- -------- -------- --------
CASH AVAILABLE FOR AMORTIZATION ........ $ 817 ($ 2,882) ($19,538) ($14,998) ($11,470) ($ 1,356)
Overflow Debt Addition .................. 0 0 0 0 0 0
-------- -------- -------- -------- -------- --------
Cash For Retirement of Existing Debt .... $ 817 ($ 2,882) ($19,538) ($14,998) ($11,470) ($ 1,356)
Existing Debt Retired .................. 0 0 0 0 0 0
-------- -------- -------- -------- -------- --------
Cash For Retirement of Capitalized Leases 817 (2,882) (19,538) (14,998) (11,470) (1,356)
Capitalized Leases Retired ............. (2,680) (2,390) (2,132) (1,901) (1,694) (1,511)
-------- -------- -------- -------- -------- --------
Cash For Retirement of Overflow Debt .... ($ 1,863) ($ 5,272) ($21,670) ($16,899) ($13,164) ($ 2,867)
Overflow Debt Retired .................. 0 0 0 0 0 0
-------- -------- -------- -------- -------- --------
Cash For Retirement of New Debt 1 ....... ($ 1,863) ($ 5,272) ($21,670) ($16,899) ($13,164) ($ 2,867)
New Debt 1 Retired ..................... (444) (488) (536) (589) (646) (710)
-------- -------- -------- -------- -------- --------
Cash For Retirement of New Debt 2 ....... ($ 2,307) ($ 5,760) ($22,206) ($17,488) ($13,810) ($ 3,577)
New Debt 2 Retired ..................... (3,193) (3,509) (3,857) (4,239) (4,658) (5,119)
-------- -------- -------- -------- -------- --------
Cash For Retirement of New Debt 3 ....... ($ 5,500) ($ 9,269) ($26,063) ($21,727) ($18,468) ($ 8,696)
New Debt 3 Retired ..................... 0 0 (329) (361) (397) (436)
-------- -------- -------- -------- -------- --------
Cash Foe Retirement of New Debt 4 ....... ($ 5,500) ($ 9,269) ($26,392) ($22,088) ($18,865) ($ 9,132)
New Debt 4 Retired ..................... 5,500 9,269 26,392 22,088 18,865 9,132
-------- -------- -------- -------- -------- --------
Cash For Retirement of Preferred Stock .. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Preferred Stock Retired ................ 0 0 0 0 0 0
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
CHANGE IN CASH ACCOUNT .................. 0 0 0 0 0 0
======== ======== ======== ======== ======== ========
</TABLE>
Equitable Securities Corporation Page 6
<PAGE>
BASE CASE - Sale of MDF - with FriendCo expansion sales
(Historical FYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
----- ----- ----- ----- -------- -------- -------- --------
HISTORICAL PROJECTED
----- ----- ----- ----- -------- -------- -------- -------- -------- --------
ASSETS 1992 1993 1994 1995 1996 1997 Adjust Closing 1998 1999
- ---------------------------------------- ----- ----- ----- ----- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash & Cash Equivalents -- -- -- -- $ 1,947 $ 930 $ (124) $ 806 $ 806 $ 806
Accounts Receivable -- -- -- -- 652 580 4,904 5,484 4,894 4,406
Inventory -- -- -- -- 1,421 1,877 (242) 1,635 1,674 1,817
Prepaid Expenses/RIT -- -- -- -- 1,046 2,132 (28) 2,104 2,189 2,356
Deferred Tax Asset -- -- -- -- 786 5,422 5,422 5,670 6,107
Other Cur. Assets #2 -- -- -- -- 0 0 0 0 0
----- ----- ----- ----- -------- -------- -------- -------- --------
TOTAL CURRENT ASSETS -- -- -- -- $ 5,852 $ 10,941 $ 15,451 $ 15,233 $ 15,492
Fixed Assets:
Net PPE -- -- -- -- 49,520 $ 58,075 $ (2,547) $ 55,528 $ 61,032 $ 71,429
Net Leased Properties & Franchise Right -- -- -- -- 41,603 39,862 (4,370) 35,492 35,492 35,492
Other Assets -- -- -- -- 490 253 (4) 249 249 249
Asset Write-Ups -- -- -- -- 0 0 0 0 0 0
Transaction Costs -- -- -- -- 0 0 4,213 4,213 3,792 3,370
Goodwill -- -- -- -- 18,730 21,515 88,446 109,961 109,961 106,296
----- ----- ----- ----- -------- -------- -------- -------- --------
TOTAL FIXED ASSETS -- -- -- -- $110,343 $119,705 $205,443 $210,526 $216,836
TOTAL ASSETS -- -- -- -- $116,195 $130,646 $220,894 $225,759 $232,328
===== ===== ===== ===== ======== ======== ======== ======== ========
</TABLE>
-------- -------- -------- --------
PROJECTED
-------- -------- -------- --------
ASSETS 2000 2001 2002 2003
- ---------------------------------------- -------- -------- -------- --------
Current Assets:
Cash & Cash Equivalents $ 806 $ 806 $ 806 $ 806
Accounts Receivable 4,028 3,709 3,444 3,210
Inventory 2,188 2,551 2,929 3,238
Prepaid Expenses/RIT 2,598 2,845 3,101 3,339
Deferred Tax Asset 6,533 6,975 7,431 7,903
Other Cur. Assets #2 0 0 0 0
-------- -------- -------- --------
TOTAL CURRENT ASSETS $ 16,153 $ 16,886 $ 17,711 $ 18,496
Fixed Assets:
Net PPE $102,151 $130,549 $157,959 $177,590
Net Leased Properties & Franchise Right 35,492 35,492 35,492 35,492
Other Assets 249 249 249 249
Asset Write-Ups 0 0 0 0
Transaction Costs 2,949 2,528 2,107 1,685
Goodwill 102,630 98,965 95,300 91,634
-------- -------- -------- --------
TOTAL FIXED ASSETS $243,472 $267,783 $291,106 $306,651
TOTAL ASSETS $259,625 $284,669 $308,817 $325,147
======== ======== ======== ========
Equitable Securities Corporation Page 7
<PAGE>
BASE CASE - Sale of MDF - with FriendCo expansion sales
(Historical FYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
---- ---- ---- ---- -------- -------- -------- -------- -------- --------
HISTORICAL PROJECTED
---- ---- ---- ---- -------- -------- -------- -------- -------- --------
LIABILITIES & EQUITY 1992 1993 1994 1995 1996 1997 Adjust Closing 1998 1999
- --------------------------------------- ---- ---- ---- ---- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts Payable -- -- -- -- $ 5,615 $ 6,806 $ (1,122) $ 5,684 $ 5,841 $ 6,287
Accrued Advertising & Royalty Fees -- -- -- -- 2,588 2,426 (383) 2,043 2,120 2,287
Accrued Salaries & Wages -- -- -- -- 2,732 3,421 (525) 2,896 2,995 3,238
Accrued Expenses -- -- -- -- 7,864 8,417 (2,027) 6,390 6,610 7,080
Income Taxes Payable -- -- -- -- (1,477) 1,780 535 2,315 2,407 2,559
---- ---- ---- ---- -------- -------- -------- -------- --------
TOTAL CURRENT LIABILITIES -- -- -- -- $ 24,089 $ 22,850 $ 19,328 $ 19,973 $ 21,451
Deferred Taxes -- -- -- -- $ 115 $ 3,241 $ (3,241) $ 0 $ 0 $ 0
Capital Lease Obligations -- -- -- -- 31,579 28,406 (1,134) 27,272 24,592 22,202
Long Term Debt:
Existing Debt -- -- -- -- $ 14,887 $ 25,673 $(23,673) $ 0 $ 0 $ 0
Overflow Debt -- -- -- -- 0 0 0 0 0
New Debt 1 -- -- -- -- 0 0 25,000 25,000 24,556 24,068
WC Revolver -- -- -- -- 0 0 0 0 0 0
New Debt 2 -- -- -- -- 0 0 100,551 100,551 97,358 93,849
New Debt 3 -- -- -- -- 0 0 11,771 11,771 11,771 11,771
New Debt 4 -- -- -- -- 0 0 2,379 7,879 17,148
---- ---- ---- ---- -------- -------- -------- -------- --------
TOTAL LONG TERM DEBT -- -- -- -- $ 14,887 $ 23,673 $139,701 $141,564 $146,836
TOTAL LIABILITIES -- -- -- -- $ 70,670 $ 78,170 $186,301 $186,129 $190,489
Net Worth:
Equity - Common -- -- -- -- $ 33,024 $ 32,788 $(31,669) $ 1,119 $ 1,119 $ 1,119
- Preferred -- -- -- -- 0 0 31,000 31,000 34,720 38,886
Retained Earnings -- -- -- -- 12,501 19,688 (17,214) 2,474 3,791 1,834
---- ---- ---- ---- -------- -------- -------- -------- --------
NET WORTH -- -- -- -- $ 45,525 $ 52,476 $ 34,593 $ 39,630 $ 41,840
---- ---- ---- ---- -------- -------- -------- -------- --------
LIABILITIES & NET WORTH -- -- -- -- $116,195 $130,646 $220,894 $225,759 $232,328
==== ==== ==== ==== ======== ======== ======== ======== ========
BALANCE SHEET CHECK => -- -- -- -- 0 0 (0) (0) (0)
0 0
</TABLE>
-------- -------- -------- --------
PROJECTED
-------- -------- -------- --------
LIABILITIES & EQUITY 2000 2001 2002 2003
- ------------------------------------ -------- -------- -------- --------
Current Liabilities:
Accounts Payable $ 7,273 $ 8,243 $ 9,253 $ 10,199
Accrued Advertising & Royalty Fees 2,552 2,817 3,092 3,340
Accrued Salaries & Wages 3,692 4,143 4,611 5,018
Accrued Expenses 7,831 8,583 9,364 10,074
Income Taxes Payable 2,697 2,641 2,990 3,151
-------- -------- -------- --------
TOTAL CURRENT LIABILITIES $ 24,045 $ 26,627 $ 29,310 $ 31,692
Deferred Taxes $ 0 $ 0 $ 0 $ 0
Capital Lease Obligations 20,070 18,169 16,475 14,964
Long Term Debt:
Existing Debt $ 0 $ 0 $ 0 $ 0
Overflow Debt 0 0 0 0
New Debt 1 23,532 22,943 22,297 21,587
WC Revolver 0 0 0 0
New Debt 2 89,992 85,753 81,095 75,976
New Debt 3 11,442 11,081 10,684 10,248
New Debt 4 43,539 65,627 84,492 93,624
-------- -------- -------- --------
TOTAL LONG TERM DEBT $168,505 $185,404 $198,568 $201,435
TOTAL LIABILITIES $212,620 $230,200 $244,353 $248,091
Net Worth:
Equity - Common $ 1,119 $ 1,119 $ 1,119 $ 1,119
- Preferred 43,553 48,779 54,633 61,189
Retained Earnings 2,332 4,570 8,712 14,747
-------- -------- -------- --------
NET WORTH $ 47,004 $ 54,469 $ 64,464 $ 77,055
-------- -------- -------- --------
LIABILITIES & NET WORTH $259,625 $284,669 $308,817 $325,147
======== ======== ======== ========
BALANCE SHEET CHECK => (0) (0) (0) (0)
(0) (0) 0 0
Note - These numbers do not reflect any accounting for the "push-down" of debt
and goodwill that may be caused by the Proposed Transaction.
Adjustments include leveraged buyout transaction and Company Division
disposition.
Equitable Securities Corporation Page 8
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
BASE CASE - Sale of MDF - with FriendCo expansion sales
(Historical FYE September 30)
Thousands of Dollars
<TABLE>
<CAPTION>
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
HISTORICAL PROJECTED
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
1992 1993 1994 1995 1996 1997 Closing 1998 1999 2000
CAPITALIZATION SUMMARY Year # ... 0 1 2 3
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Debt -- -- -- -- -- $ 23,673 $ 0 $ 0 $ 0 $ 0
Overflow Debt -- -- -- -- -- 0 0 0 0 0
Capitalized Leases -- -- -- -- -- 28,406 27,272 24,592 22,202 20,070
New Debt 1 -- -- -- -- -- 0 25,000 24,556 24,068 23,532
WC Revolver -- -- -- -- -- 0 0 0 0 0
New Debt 2 -- -- -- -- -- 0 100,551 97,358 93,849 89,992
New Debt 3 -- -- -- -- -- 0 11,771 11,771 11,771 11,442
New Debt 4 -- -- -- -- -- 0 2,379 7,879 17,148 43,539
Preferred Equity -- -- -- -- -- 0 31,000 34,720 38,886 43,553
Common Equity -- -- -- -- -- 52,476 3,593 4,910 2,953 3,452
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
BOOK CAPITALIZATION -- -- -- -- -- $104,555 $201,566 $205,786 $210,877 $235,580
TOTAL DEBT -- -- -- -- -- $ 52,079 $166,973 $166,156 $169,038 $188,575
BOOK EQUITY -- -- -- -- -- $ 52,476 $ 34,593 $ 39,630 $ 41,840 $ 47,004
RATIO ANALYSIS
Total Debt/Total Capitalization -- -- -- -- -- 49.8% 82.8% 80.7% 80.2% 80.0%
Senior Debt/Total Capitalization -- -- -- -- -- 22.6% 12.4% 11.9% 11.4% 10.0%
Adjusted EBITDA/Interest -- -- -- -- -- -- -- 2.1 2.3 2.6
Adjusted EBITDA/Senior Interest -- 11.6 13.2 16.1
Senior Debt/Adjusted EBITDA -- -- -- -- -- -- -- 0.9 0.8 0.6
Senior Debt/EBIT -- -- -- -- -- -- -- 1.2 1.2 0.9
Senior Debt/Operating Cash Flow -- 1.8 1.6 1.2
Total Debt/Adjusted EBITDA -- -- -- -- -- -- -- 5.8 5.3 4.9
Total Debt/EBIT -- 8.2 8.5 7.4
Total Debt/Operating Cash Flow -- -- -- -- -- -- -- 12.2 11.5 9.8
</TABLE>
-------- -------- --------
PROJECTED
-------- -------- --------
2001 2002 2003
CAPITALIZATION SUMMARY 4 5 6
-------- -------- --------
Existing Debt $ 0 $ 0 $ 0
Overflow Debt 0 0 0
Capitalized Leases 18,169 16,475 14,964
New Debt 1 22,943 22,297 21,587
WC Revolver 0 0 0
New Debt 2 85,753 81,095 75,976
New Debt 3 11,081 10,684 10,248
New Debt 4 65,627 84,492 93,624
Preferred Equity 48,779 54,633 61,189
Common Equity 5,690 9,832 15,867
-------- -------- --------
BOOK CAPITALIZATION $258,042 $279,507 $293,455
TOTAL DEBT $203,573 $215,043 $216,399
` BOOK EQUITY $ 54,469 $ 64,464 $77,055
RATIO ANALYSIS
Total Debt/Total Capitalization 78.9% 76.9% 73.7%
Senior Debt/Total Capitalization 8.9% 8.0% 7.4%
Adjusted EBITDA/Interest 2.7 2.8 3.0
Adjusted EBITDA/Senior Interest 19.6 23.2 26.7
Senior Debt/Adjusted EBITDA 0.5 0.4 0.4
Senior Debt/EBIT 0.7 0.6 0.5
Senior Debt/Operating Cash Flow 1.0 0.8 0.7
Total Debt/Adjusted EBITDA 4.5 4.1 3.7
Total Debt/EBIT 6.5 5.8 5.1
Total Debt/Operating Cash Flow 9.0 8.2 7.4
Equitable Securities Corporation Page 9
<PAGE>
PROJECT CRAB CAKE CONFIDENTIAL
================================================================================
RETURN SECTION
- -----------------------------
BASE CASE - Sale of MDF - with FriendCo expansi Exit Year 2002
Thousands of Dollars
Semi- Fully-
EQUITY ALLOCATION Investment % Diluted Diluted
- ----------------------------- ---------- ----- ------- -------
Sponsors $750 67.0% 67.0% 67.0%
Management 369 33.0% 33.0% 33.0%
Preferred Stock 31,000 * 0.0% 0.0%
New Debt 4 2,379 * 0.0% 0.0%
New Debt 2 Option 100,551 * 0.0% 0.0%
New Debt 3 Option 11,771 * 0.0% 0.0%
Management Performance Option * * * 0.0%
-------- ----- ----- -----
TOTAL EQUITY ALLOCATION $146,820 100.0% 100.0% 100.0%
- ----------------------------- -------- ----- ----- -----
Exit Year Adjusted EBITDA $ 52,513
x EBITDA Multiple 6.0
--------
EXIT VALUATION $315,078
PLUS: Excess Cash $0
Conversion Costs 0
LESS: Total Remaining Debt (215,043)
Total Preferred (54,633)
--------
NET PROCEEDS TO ALLOCATE $45,402
- ----------------------------- --------
Sr. Subordinated Share $0
LESS: Conversion Costs 0
--------
Net Subordinated Share $0
- ----------------------------- --------
Jr. Subordinated Share $0
LESS: Conversion Costs 0
--------
Net Jr. Subordinated Share $0
- ----------------------------- --------
Seller Note Share $0
- ----------------------------- --------
Preferred Share $0
- ----------------------------- --------
Sponsor's Equity Share $30,419
- ----------------------------- --------
Management's Equity Share $14,983
- ----------------------------- --------
<TABLE>
<CAPTION>
CLOSE 1998 1999 2000 2001 2002 2003
- ---------- ------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
New Debt 2
Investment $(100,551) $ 3,193 $ 3,509 $ 3,857 $ 4,239 $ 85,753 $ 0
Interest 9,955 9,638 9,291 8,909 8,490 $ 0
Participation 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- ---------
IRR = 9.90% $(100,551) $ 13,148 $ 13,147 $ 13,148 $ 13,148 $ 94,243 $ 0
- ---------- ------- --------- --------- --------- --------- --------- --------- ---------
New Debt 3
Investment $ (11,771) $ 0 $ 0 $ 329 $ 361 $ 11,081 $ 0
Interest 1,082 1,082 1,165 1,133 1,097 $ 0
Participation 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- ---------
IRR = 9.57% $ (11,771) $ 1,082 $ 1,082 $ 1,494 $ 1,494 $ 12,178 $ 0
- ---------- ------- --------- --------- --------- --------- --------- --------- ---------
Preferred Returns
Investment $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest 0 0 0 0 0 0
Participation 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- ---------
IRR = #N/A $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
- ---------- ------- --------- --------- --------- --------- --------- --------- ---------
Sponsor Equity Returns
Pref (23,250)
Investment Comm $ (750) $ 0 $ 0 $ 0 $ 0 $ 40,974 $ 0
Participation 0 0 0 0 30,419 0
--------- --------- --------- --------- --------- --------- ---------
IRR = 24.36% $ (24,000) $ 0 $ 0 $ 0 $ 0 $ 71,394 $ 0
- ---------- ------- --------- --------- --------- --------- --------- --------- ---------
Management Returns
Pref (7,750)
Investment Comm $ (369) $ 0 $ 0 $ 0 $ 0 $ 13,658 $ 0
Participation 0 0 0 0 14,983 0
--------- --------- --------- --------- --------- --------- ---------
IRR = 28.67% $ (8,119) $ 0 $ 0 $ 0 $ 0 $ 28,641 $ 0
- ---------- ------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
Equitable Securities Corporation Page 10
<PAGE>
EXHIBIT (d)(1)
DAVCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
of DavCo Restaurants, Inc. ("DavCo" or the "Company") to consider the
important matter of the acquisition of the Company by DavCo Acquisition
Holding Inc., a Delaware corporation ("DAC"). DAC is a corporation recently
organized and owned by Ronald D. Kirstien, Harvey Rothstein, Citicorp Venture
Capital, Ltd. ("CVC") and certain affiliates of Messrs. Kirstien and Rothstein
and CVC (collectively, the "Affiliated Stockholders"). The meeting will be
held on January 12, 1998, at 10:00 a.m., local time, at the offices of the
Company, located at 1657 Crofton Boulevard, Crofton, Maryland 21114.
As explained in the enclosed Notice of Special Meeting of Stockholders
and Proxy Statement, the purpose of the Special Meeting is to consider and vote
upon a proposal to adopt the Restated Agreement and Plan of Merger dated as of
October 21, 1997 (the "Merger Agreement") among the Company, DAC and DavCo
Merger Sub Inc. ("DAC Sub"). Pursuant to the Merger Agreement, DAC Sub will
merge with and into the Company (the "Merger"), and the Company will continue as
the surviving corporation and a wholly-owned subsidiary of DAC. As a
stockholder, if the Merger is consummated, your ownership interest in the
Company will be converted automatically into the right to receive $20.00 in
cash, without interest, per share of common stock of the Company you own, unless
you exercise and perfect appraisal rights in accordance with Delaware law. The
treatment in the Merger of outstanding stock options and warrants to purchase
shares of common stock of the Company is described in the accompanying Proxy
Statement.
Details of the Merger Agreement and other important information appear
in the attached Proxy Statement. A copy of the Merger Agreement is attached as
Annex A to the Proxy Statement.
The Board of Directors has approved unanimously the Merger Agreement
and has determined that the Merger is fair to, and in the best interests of, the
stockholders of the Company and has recommended that the stockholders vote in
favor of adoption of the Merger Agreement and approval of the Merger. The
Company has retained Equitable Securities Corporation ("Equitable") to act as
financial advisor to the Board and to assist it in its review and consideration
of the Merger. Equitable has rendered an opinion, confirmed as of the date
hereof, that based upon the various considerations described in the opinion, the
consideration to be received by the Company's stockholders (other than DAC)
pursuant to the terms of the Merger Agreement is fair to them from a financial
point of view. A copy of the opinion of Equitable is set forth in full as Annex
B to the attached Proxy Statement.
According to the laws of the State of Delaware, the affirmative vote of
the holders of a majority of the outstanding shares of the Company's common
stock is required to adopt the Merger Agreement and to consummate the Merger. In
addition, the Company's Restated Certificate of Incorporation and the Merger
Agreement provide that the affirmative vote of the holders of a majority of the
outstanding shares of common stock that are not owned beneficially by the
Affiliated Stockholders or their affiliates or associates
<PAGE>
also is required to adopt the Merger Agreement and to consummate the Merger.
This voting requirement affords the Company's "public" stockholders the
opportunity to approve or reject the Merger.
Important information regarding the proposed Merger is included in the
enclosed Proxy Statement. You are urged to read the Proxy Statement carefully.
WE URGE YOU TO READ THE ENCLOSED MATERIALS CAREFULLY. We would like
your shares to be represented, and we hope you can attend the Special Meeting.
Whether or not you plan to attend the Special Meeting, please complete, sign and
date your proxy card and return it in the enclosed envelope as soon as possible.
If after voting your shares by proxy, you decide to change your vote or that you
would rather vote your shares in person, you may do so at any time prior to or
at the Special Meeting. Please do not send in your stock certificates at this
time.
Sincerely,
Ronald D. Kirstien
Chairman, President and Chief
Executive Officer
ii
<PAGE>
EXHIBIT (d)(2)
DAVCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held January 12, 1998
To the Stockholders of DavCo Restaurants, Inc.:
NOTICE HEREBY IS GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of DavCo Restaurants, Inc., a Delaware corporation
("DavCo" or the "Company"), will be held on January 12, 1998, at 10:00 a.m.,
eastern time, at the offices of the Company, 1657 Crofton Boulevard, Crofton,
Maryland 21114, for the following purposes:
1. To consider and vote upon a proposal to adopt the Restated Agreement
and Plan of Merger, dated as of October 21, 1997 (the "Merger
Agreement"), among the Company, DavCo Acquisition Holding Inc., a
Delaware corporation ("DAC"), and DavCo Merger Sub Inc., a Delaware
corporation and a wholly-owned subsidiary of DAC ("DAC Sub"),
pursuant to which: (a) DAC Sub will be merged with and into the
Company (the "Merger"), and the Company, as the surviving
corporation in the Merger, will become a wholly-owned subsidiary of
DAC; and (b) each share of the Company's common stock, par value
$.001 per share (the "Shares"), that is issued and outstanding at
the effective time of the Merger (the "Effective Time") (other than
Shares held in the Company's treasury, by any subsidiary of the
Company, by DAC or by DAC Sub, which will be canceled without
payment, and other than Shares in respect of which appraisal rights
have been perfected properly in accordance with Delaware law) will
be converted into the right to receive $20.00 in cash, without
interest; and
2. To transact such other business as may come properly before the
Special Meeting or any adjournments or postponements thereof.
These transactions and other related matters are more fully described in
the accompanying Proxy Statement and the Annexes and Schedules thereto. A copy
of the Merger Agreement is attached as Annex A to, and described in, the
accompanying Proxy Statement.
The Board of Directors has fixed the close of business on November 28,
1997 as the record date for determination of the holders of Shares entitled to
notice of and to vote at the Special Meeting. Only stockholders of record at the
close of business on November 28, 1997 are entitled to receive notice of, and to
vote at, the Special Meeting and any adjournments or postponements thereof.
According to the laws of the State of Delaware, the affirmative vote of the
holders of a majority of the outstanding Shares is required to adopt the Merger
Agreement and to consummate the Merger. In addition, the Company's Restated
Certificate of Incorporation and the Merger Agreement provide that the
affirmative vote of the holders of a majority of the outstanding Shares that are
not owned beneficially by Ronald D. Kirstien and certain of his affiliates,
Harvey Rothstein and certain of his affiliates, Citicorp Venture Capital, Ltd.
and certain of its affiliates, or any of their respective affiliates or
associates, also is required to adopt the Merger Agreement and to consummate the
Merger. See "INTRODUCTION-Voting at the Special Meeting" in the accompanying
Proxy Statement.
<PAGE>
Stockholders of the Company who do not vote in favor of adoption of the
Merger Agreement and who comply with the requirements of Section 262 of the
Delaware General Corporation Law, as amended (the "DGCL"), will have the right
to demand appraisal of their shares in connection with the Merger. Generally, to
preserve appraisal rights, a Stockholder must (1) before the vote with respect
to the Merger Agreement is taken at the Special Meeting, deliver to the Company
a written demand for appraisal of his, her or its Shares and (2) not vote in
favor of adoption of the Merger Agreement. For a description of appraisal
rights, see the information provided in the accompanying Proxy Statement under
the caption "APPRAISAL RIGHTS." See also Annex C to the accompanying Proxy
Statement for a copy of Section 262 of the DGCL.
Whether or not you intend to be personally present at the Special Meeting,
please complete, sign and date the enclosed proxy and return it promptly in the
enclosed postage prepaid envelope. Stockholders who attend the Special Meeting
may vote in person even if they have returned a proxy card.
By Order Of The Board of Directors
David J. Norman
Secretary
Crofton, Maryland
___________, 1997
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD
AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED,
WHETHER OR NOT YOU INTEND TO BE
PRESENT AT THE SPECIAL MEETING.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
- --------------------------------------------------------------------------------
ii
<PAGE>
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR
UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
DAVCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
--------------------
PROXY STATEMENT
--------------------
SPECIAL MEETING OF STOCKHOLDERS
To Be Held January 12, 1998
This Proxy Statement is being furnished to the stockholders (the
"Stockholders") of DavCo Restaurants, Inc., a Delaware corporation ("DavCo" or
the "Company"), in connection with the solicitation by the Company's Board of
Directors (the "Board of Directors" or the "Board") of proxies from holders of
outstanding shares of common stock, par value $.001 per share, of the Company
(the "Shares"), for use at the Special Meeting of Stockholders to be held at the
Company's principal office at 1657 Crofton Boulevard, Crofton, Maryland 21114,
on January 12, 1998, at 10:00 a.m., eastern time, and at any adjournments or
postponements thereof (the "Special Meeting"). This Proxy Statement and the form
of proxy attached hereto are first being mailed to the Stockholders on or about
________, 1997.
At the Special Meeting, the Stockholders will consider and vote upon a
proposal to adopt the Restated Agreement and Plan of Merger, dated as of October
21, 1997 (the "Merger Agreement"), among DavCo, DavCo Acquisition Holding Inc.,
a Delaware corporation ("DAC"), and DAC Merger Sub Inc., a Delaware corporation
and a wholly-owned subsidiary of DAC ("DAC Sub"). A copy of the Merger Agreement
is attached as Annex A to this Proxy Statement. The Merger Agreement provides
for the merger of DAC Sub with and into DavCo (the "Merger"), following which
DavCo will continue as the surviving corporation (the "Surviving Corporation")
and a wholly-owned subsidiary of DAC. Ronald D. Kirstien, President, Chief
Executive Officer and Chairman of the Board of Directors of DavCo ("Mr.
Kirstien"), certain affiliates of Mr. Kirstien (together with Mr. Kirstien, the
"Kirstien Investors), Harvey Rothstein, Senior Executive Vice President and a
director of DavCo ("Mr. Rothstein"), certain affiliates of Mr. Rothstein
(together with Mr. Rothstein, the "Rothstein Investors'), and Citicorp Venture
Capital, Ltd., a principal stockholder of DavCo ("CVC"), and certain affiliates
of CVC and its employees (together with CVC, the "CVC Investors" and, together
with the Kirstien Investors and the Rothstein Investors and CVC, the "Affiliated
Stockholders"), have organized DAC and DAC Sub for the purpose of acquiring
DavCo. It is expected that prior to consummation of the Merger all of the equity
interests in
<PAGE>
DAC will be owned by Messrs. Kirstien and Rothstein and the CVC Investors. If
the Merger is consummated, the ownership interests of the Stockholders in DavCo
(other than the ongoing interest of the Affiliated Stockholders through their
ownership of DAC) will cease, and each Share outstanding at the time the Merger
becomes effective under Delaware law (the "Effective Time") (other than Shares
held at the Effective Time in DavCo's treasury, by any subsidiary of DavCo, by
DAC or by DAC Sub, which will be canceled without payment, and other than Shares
in respect of which appraisal rights have been perfected properly under Delaware
law) will be converted into the right to receive $20.00 in cash, without
interest. For additional information concerning the terms and conditions of the
Merger, see "THE MERGER." For further information concerning the ownership of
DAC and a description of the conflicts of interest of certain members of the
Board of Directors, see "SPECIAL FACTORS--Interests of Certain Persons in the
Merger" and "CERTAIN INFORMATION CONCERNING DAC, DAC SUB AND AFFILIATES."
The affirmative vote of the holders of a majority of the outstanding
Shares and the affirmative vote of the holders of a majority of the outstanding
Shares that are not owned beneficially by the Affiliated Stockholders or by
persons that are "affiliates" or "associates" (as such terms are defined in rule
12b-2 under the Securities Exchange Act of 1934, as amended) of the Affiliated
Stockholders (such holders other than the Affiliated Stockholders and such
affiliates and associates being referred to collectively as the "Unaffiliated
Stockholders") are required to adopt the Merger Agreement and to consummate the
Merger. See "THE MERGER--Stockholder Adoption of the Merger Agreement."
The Board of Directors approved unanimously the Merger Agreement and
has determined that the Merger is fair to, and in the best interests of, all of
its Stockholders, including the Unaffiliated Stockholders, and has recommended
that the Stockholders vote in favor of adoption of the Merger Agreement and
approval of the Merger. See "SPECIAL FACTORS--Fairness of the Merger;
Recommendation of the Board of Directors; Position of DAC" and "--Interests of
Certain Persons in the Merger."
THE MERGER INVOLVES A MATTER OF GREAT IMPORTANCE TO THE COMPANY'S
STOCKHOLDERS. IF THE MERGER IS APPROVED AND CONSUMMATED, EACH SHARE OF THE
COMPANY'S COMMON STOCK (OTHER THAN THOSE HELD IN THE COMPANY'S TREASURY, BY ANY
SUBSIDIARY OF THE COMPANY, BY DAC OR BY DAC SUB AND THOSE AS TO WHICH APPRAISAL
RIGHTS ARE PROPERLY PERFECTED) WILL BE CONVERTED INTO THE RIGHT TO RECEIVE
$20.00 IN CASH, AND THE STOCKHOLDERS' EQUITY INTEREST IN THE COMPANY (OTHER THAN
THE ONGOING INTEREST OF THE AFFILIATED STOCKHOLDERS THROUGH THEIR OWNERSHIP OF
DAC) WILL CEASE. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND CONSIDER
CAREFULLY THE INFORMATION SUMMARIZED BELOW AND PRESENTED ELSEWHERE IN THIS PROXY
STATEMENT.
The date of this Proxy Statement is ___________, 1997.
-2-
<PAGE>
TABLE OF CONTENTS
Page
----
Summary........................................ 4
Introduction................................... 10
Special Factors................................ 13
Background of the Merger.................... 13
Past Contacts with Wendy's.................. 15
Fairness of the Merger; Recommendation of
the Board of Directors; Position of DAC.. 20
Opinion of Financial Advisor................ 24
Purpose of the Merger....................... 31
Interests of Certain Persons in the Merger.. 33
Certain Effects of the Merger............... 34
Plans for the Company After the Merger...... 35
Risk that the Merger Will Not Be
Consummated.............................. 35
Certain Risks in the Event of Bankruptcy.... 36
Certain Litigation.......................... 36
The Merger..................................... 37
General..................................... 37
Effective Time of the Merger................ 37
Stockholder Adoption of the Merger
Agreement................................ 37
Payment for Shares.......................... 38
The Payment Fund............................ 38
Regulatory Matters.......................... 38
Conditions to Consummation of the Merger.... 38
Certain Covenants........................... 39
Termination................................. 40
Expenses.................................... 41
Indemnification of Directors and Officers... 41
Accounting Treatment of the Merger.......... 42
Financing of the Merger........................ 42
Debt Financing............................. 42
Fees and Expenses.......................... 44
Certain Federal Income Tax Consequences........ 44
Appraisal Rights............................... 45
Certain Information Concerning DAC,
DAC Sub and Affiliates...................... 48
Business of the Company........................ 49
Selected Historical Financial Data of
the Company................................. 56
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 57
Certain Information Regarding the Directors
and Executive Officers of the Company....... 64
Market Prices and Dividends on the Shares...... 68
Certain Transactions in the Common Stock....... 68
Security Ownership of the Company.............. 69
Incorporation of Certain Documents by
Reference................................... 70
Additional Available Information............... 70
Independent Accountants........................ 71
Stockholder Proposals.......................... 71
Other Matters.................................. 71
Index to Consolidated Financial Statements..... F-1
Annexes
Annex A - Amended and Restated Agreement
and Plan of Merger
Annex B - Opinion of Equitable Securities
Corporation dated November 6, 1997
Annex C - Section 262 of the Delaware General
Corporation Law
Schedules
Schedule I - Purchases of Shares by DavCo
since August 31, 1995
-3-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
Certain significant matters discussed in this Proxy Statement are summarized
below. This summary is not intended to be a complete discussion of the matters
contained herein, and is qualified in all respects by the detailed information
appearing elsewhere in this Proxy Statement and the Annexes and Schedules
hereto. Stockholders are urged to review carefully this Proxy Statement and each
of the Annexes and Schedules hereto in their entirety. Unless defined previously
or herein, the capitalized terms used in this summary have the meanings ascribed
to them elsewhere in this Proxy Statement. Cross references in this summary are
to captions in this Proxy Statement.
Date, Time and Place of the Special Meeting
The Special Meeting will be held at the Company's principal office at
1657 Crofton Boulevard, Crofton, Maryland 21114, on January 12, 1998, at 10:00
a.m., eastern time.
Purpose of the Special Meeting
At the Special Meeting, Stockholders will be asked to consider and vote
upon a proposal to adopt the Merger Agreement pursuant to which DAC Sub will
merge with and into the Company, and the Company will become a wholly-owned
subsidiary of DAC. If the Merger is consummated, the ownership interests of the
Stockholders (other than the Affiliated Stockholders through their ownership of
DAC) in the Company will cease, and each Share (other than Shares held in the
Company's treasury, by any subsidiary of the Company, by DAC or by DAC Sub,
which will be canceled without payment, and other than Shares in respect of
which appraisal rights have been perfected properly under Delaware law) will be
converted into the right to receive $20.00 in cash, without interest, all as
more fully described in this Proxy Statement. DAC Sub is a newly formed,
wholly-owned subsidiary of DAC, which in turn is a newly formed corporation
owned entirely by the Affiliated Stockholders. See "INTRODUCTION--Matters to be
Considered at the Special Meeting," "THE MERGER" and "SPECIAL FACTORS--Certain
Effects of the Merger."
Record Date; Shares Entitled to Vote; Quorum
Only holders of record of the Shares at the close of business on
November 28, 1997, are entitled to notice of and to vote at the Special Meeting.
At such date there were an aggregate of _____________ Shares outstanding and
entitled to vote held by ____ holders of record. The presence in person or by
properly executed proxy of the holders of a majority of the outstanding Shares
entitled to vote is necessary to constitute a quorum at the Special Meeting.
Vote Required to Approve the Merger Agreement
Under Delaware law, the affirmative vote of Stockholders entitled to
cast at least a majority of the votes that all Stockholders are entitled to cast
with respect to the Merger Agreement is required to adopt the Merger Agreement.
Pursuant to the Company's Restated Certificate of Incorporation and the terms of
the Merger Agreement, consummation of the Merger also requires the affirmative
vote of a majority of the outstanding Shares held by Unaffiliated Stockholders.
See "INTRODUCTION--Voting at the Special Meeting" and "THE MERGER--Stockholder
Adoption of Merger Agreement."
All Shares represented at the Special Meeting by properly executed
proxies received prior to or at the Special Meeting, and not revoked before
their use, will be voted in accordance with the instructions on
- --------------------------------------------------------------------------------
-4-
<PAGE>
- --------------------------------------------------------------------------------
such proxies. If no instructions are given, proxies will be voted FOR adoption
of the Merger Agreement. A Stockholder who has given a proxy may revoke it at
any time before it is voted at the Special Meeting (or any postponement or
adjournment thereof) by filing with the Secretary of the Company a written
revocation bearing a later date than the proxy being revoked, or by submission
of a validly executed proxy bearing a later date than the proxy being revoked,
or by attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not in and of itself constitute revocation of a proxy).
The Merger
The Merger Agreement provides that, subject to the adoption of the
Merger Agreement by the Stockholders and the satisfaction or waiver of certain
other conditions, DAC Sub will merge with and into the Company and the separate
existence of DAC Sub will cease. The Company will be the Surviving Corporation
in the Merger and will continue as a wholly-owned subsidiary of DAC. Each Share
that is outstanding immediately prior to the Effective Time (other than Shares
held in the Company's treasury, by any subsidiary of the Company, by DAC or by
DAC Sub, which will be canceled without payment, and other than Shares in
respect of which appraisal rights have been perfected properly under Delaware
law) will be converted into the right to receive $20.00 in cash, without
interest. Upon consummation of the Merger, Stockholders, other than DAC, will
possess no further interest in, or rights as Stockholders of, the Company, other
than their right to receive $20.00 per Share or to pursue dissenters' rights.
For a more detailed description of the terms of the Merger Agreement, see "THE
MERGER."
Effective Time of the Merger
The Merger will become effective when the Certificate of Merger is duly
filed with the Secretary of State of the State of Delaware in accordance with
the relevant provisions of the Delaware General Corporation Law, as amended (the
"DGCL"), or at such later time as is specified in the Certificate of Merger. The
required filing is expected to be made promptly after the adoption of the Merger
Agreement by the Stockholders at the Special Meeting and the satisfaction or
waiver of the other conditions to consummation of the Merger set forth in the
Merger Agreement. See "THE MERGER--Effective Time of the Merger," "--Conditions
to Consummation of the Merger" and "--Certain Covenants." See also "SPECIAL
FACTORS--Risk that the Merger Will Not Be Consummated."
Recommendation of the Board of Directors
The Board of Directors unanimously approved the Merger Agreement and
has determined that the Merger is fair to, and in the best interests of, all of
the Stockholders, including the Unaffiliated Stockholders, and has recommended
that the Stockholders vote in favor of adoption of the Merger Agreement and
approval of the Merger.
In considering the conclusions of the Board of Directors with respect
to the Merger, Stockholders should be aware that certain of the directors and
officers of the Company have certain interests that present them with potential
or actual conflicts of interest in connection with the Merger. For a description
of these actual or potential conflicts of interests, see "SPECIAL
FACTORS--Interests of Certain Persons in the Merger." The Board of Directors, in
reaching its conclusions, considered a number of factors, which are described in
"SPECIAL FACTORS--Fairness of the Merger; Recommendation of the Board of
Directors; Position of DAC."
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Background of the Merger; Fairness of the Merger
The Board of Directors' decision to approve, and to cause DavCo to
enter into, the Merger Agreement was based upon the Board of Directors' belief
that the Merger is fair to, and in the best interests of, all of the
Stockholders, including the Unaffiliated Stockholders. The principal reason for
the decision of the Board of Directors to approve the Merger is that the Merger
will enable Stockholders to realize in cash a premium over the prices at which
the Shares have traded historically. The Board of Directors considered it to be
a favorable factor that the affirmative vote of a majority of the outstanding
Shares held by Unaffiliated Stockholders is required to adopt the Merger
Agreement and in order to consummate the Merger. In addition, Equitable
Securities Corporation delivered its opinion to the Board of Directors that, as
of the date of its opinion, the consideration proposed to be paid to the
Unaffiliated Stockholders pursuant to the Merger Agreement is fair to the
Unaffiliated Stockholders from a financial point of view. See "SPECIAL
FACTORS--Opinion of Financial Advisor." Factors not considered favorable by the
Board of Directors included the conflicts of interest of certain of its members
and management, certain conditions to consummation of the Merger that make it
possible that the Merger may not be consummated, the absence of a recommendation
from a special committee of independent directors and the failure to retain an
unaffiliated representative to negotiate the terms of the Merger on behalf of
the Unaffiliated Stockholders. For a more detailed discussion of these and other
factors considered by the Board, see "SPECIAL FACTORS--Fairness of the Merger;
Recommendation of the Board of Directors; Position of DAC." See "SPECIAL
FACTORS--Background of the Merger" for a description of the events leading up to
the execution of the Merger Agreement.
Stockholders also should note that in reaching its conclusions, the
Board of Directors determined that it was unlikely that DavCo could be sold in a
transaction, or any transaction could be consummated, other than the Merger or a
similar transaction with the Affiliated Stockholders, in which the Stockholders
would have an opportunity to obtain a premium to market price for the Shares,
and that the only meaningful comparison was between the $20.00 per Share payable
in the Merger and the potential for market appreciation in the Shares if DavCo
remained public and continued with its present business plan. See "SPECIAL
FACTORS--Fairness of the Merger; Recommendation of the Board of Directors" and
"-- Background of the Merger."
Opinion of Financial Advisor
Equitable Securities Corporation ("Equitable") was retained by DavCo with
respect to DAC's proposal to acquire the Shares not beneficially owned by the
Affiliated Stockholders. On October 21, 1997, Equitable delivered its oral
opinion to the Board of Directors that, as of the date of its opinion, the
consideration proposed to be paid to the Stockholders (other than DAC, the
Kirstien Investors, the Rothstein Investors and the CVC Investors) pursuant to
the Merger Agreement is fair to such Stockholders from a financial point of
view. Equitable also delivered on November 6, 1997, its written opinion to the
same effect, which includes a description of the procedures followed, the
matters considered, the scope of review undertaken and the assumptions made in
arriving at its conclusions. The full text of such opinion is attached to this
Proxy Statement as Annex B, which Stockholders are urged to read in its
entirety. For purposes of its opinion, Equitable relied, without independent
verification, on the accuracy and completeness of all financial and other
information reviewed by it. For further information regarding Equitable's
services as financial advisor, its opinion and its fee and expense arrangements,
see "SPECIAL FACTORS--Opinion of Financial Advisor."
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Interests of Certain Persons in the Merger
In considering the Merger and the conclusions of the Board of Directors
with respect thereto, Stockholders should be aware that certain of the directors
and officers of DavCo have certain interests that present them with actual or
potential conflicts of interest in connection with the Merger. These conflicts
of interests include the continuing 100% indirect equity interest of the
Kirstien Investors, the Rothstein Investors and the CVC Investors in DavCo
(through their ownership of DAC) after the Effective Time, the right of Messrs.
Kirstien and Rothstein and CVC to receive substantial amounts of cash
(aggregating approximately $47 million) with respect to the conversion of some
of their Shares in the Merger, and, in the case of Messrs. Kirstien and
Rothstein, the right to receive certain other significant cash payments
(aggregating approximately $3 million) upon completion of the Merger.
Stockholders should note in considering the approval of the Merger by
the Board of Directors that three of its nine members, Messrs. Kirstien and
Rothstein and Byron L. Knief (an officer of CVC, a director of the Company and a
CVC Investor), have a direct financial interest in DAC. Mr. Kirstien, President,
Chief Executive Officer and Chairman of the Board of DavCo, is President and a
director of DAC and is expected to own (together with the Kirstien Investors)
16.5% of DAC's outstanding common stock prior to the Merger. Mr. Rothstein,
Senior Executive Vice President and a director of DavCo, is a Vice President and
a director of DAC and is expected to own (together with the Rothstein Investors)
16.5% of DAC's outstanding common stock prior to the Merger. Mr. Knief is
expected to own less than one percent of DAC's outstanding common stock prior to
the Merger. In addition to Mr. Knief, one other of the nine directors, Charles
E. Corpening is an employee of CVC, which has a direct financial interest in DAC
and is expected to own (together with the CVC Investors) 67% of DAC's
outstanding common stock prior to the Merger. Additionally, two directors, James
D. Farley and Harold O. Rosser II, are former employees of Citicorp, N.A., an
affiliate of CVC, or CVC, and another director, Barton J. Winokur, is a partner
in the law firm Dechert Price & Rhoads, which provides and has provided legal
services both to CVC and to DavCo and is acting as special outside counsel to
DavCo in connection with the Merger. See "SPECIAL FACTORS--Fairness of the
Merger; Recommendation of the Board of Directors; Position of DAC" and
"--Background of the Merger."
Pursuant to the terms of the Merger Agreement, for six years after the
Effective time, the Surviving Corporation will provide officers' and directors'
liability insurance covering each present and former director, officer, employee
and agent of DavCo who is currently covered by DavCo's officers' and directors'
liability insurance with respect to actions and omissions occurring prior to the
Effective time, on terms no less favorable than such insurance maintained by
DavCo on the date of the signing of the Merger Agreement in terms of coverage
and amounts. The Merger Agreement also provides that DAC and the Surviving
Corporation indemnify and hold harmless the above parties against any losses,
claims, damages, liabilities, costs, expenses, judgments and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to any action or omission occurring
prior to the Effective Time to the full extent permitted under Delaware law, the
Surviving Corporation's Certificate of Incorporation or By-Laws as in effect as
of the Effective Time or any indemnification agreement as currently in effect.
See "THE MERGER--Indemnification of Directors and Officers."
For a more detailed description of the conflicts of interest of certain
of the officers and directors of DavCo, see "SPECIAL FACTORS--Interests of
Certain Persons in the Merger."
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Conditions to Consummation of the Merger
The obligations of DavCo, DAC and DAC Sub to consummate the Merger are
subject to a number of conditions, including: (i) adoption of the Merger
Agreement by the Stockholders at the Special Meeting, (ii) receipt by DAC of
financing proceeds sufficient to fund the cost of consummating the Merger, (iii)
the holders of not more than 5% of the total number of shares outstanding having
demanded appraisal of their Shares and (iv) compliance by DavCo, DAC and DAC Sub
with certain other covenants and conditions contained in the Merger Agreement.
See "THE MERGER--Conditions to Consummation of the Merger." See also "SPECIAL
FACTORS--Risk that the Merger Will Not Be Consummated."
Expenses
The Merger Agreement provides that DAC and DAC Sub are entitled to
reimbursement from DavCo for their out-of-pocket expenses incurred in connection
with the Merger Agreement and consummation of the transactions contemplated
thereby, including the financing thereof, in the event that the Merger Agreement
is terminated by DavCo because the Board of Directors shall have approved
another acquisition proposal consistent with its fiduciary obligations to
Stockholders under Delaware law, or if the Merger Agreement is terminated by DAC
because the Board of Directors of DavCo (i) shall have withdrawn or modified, in
a manner adverse to DAC, its approval or recommendation of the Merger or (ii)
shall have approved another acquisition proposal; provided that such
reimbursement for expenses shall not exceed an aggregate of $1,000,000. In
addition, DavCo has agreed to pay certain commitment and other fees in
connection with the financing of the Merger, totaling approximately $2.2
million, of which approximately $1.6 million has been paid and $0.6 million
would be payable upon funding by GAF (as hereinafter defined) under the
commitment. However, if DavCo terminates the commitment, a termination fee of
$750,000 would be payable by DavCo to GAF, and if GAF terminates the commitment
or fails to fund in contravention of the commitment, then GAF would refund to
DavCo $585,000 of the approximately $1.6 million in commitment and other fees
paid to date. See "FINANCING OF THE MERGER."
Financing of the Merger
The total amount of funds required by DAC and DAC Sub to consummate the
Merger and pay related fees and expenses is expected to be approximately $138
million. The expected source of these funds is from financing to be provided
pursuant to a commitment letter, dated as of October 17, 1997, from Global
Alliance Finance Company, L.L.C., a wholly-owned subsidiary of Deutsche Bank
North America ("GAF"), to provide, subject to certain conditions, debt financing
to DAC, DavCo and DavCo's subsidiaries aggregating $180,000,000. The GAF
financing commitments include $150 million in term loans and $30 million in
forward commitments, all to be secured by first-fee mortgages on owned
restaurant locations and first priority security interests in certain assets
relating to DavCo's restaurants. See "FINANCING OF THE MERGER" for a description
of this commitment letter.
The receipt by DAC of financing proceeds sufficient to consummate the
Merger and to pay related fees and expenses is a condition to the consummation
of the Merger. See `THE MERGER--Conditions to Consummation of the Merger."
Appraisal Rights
Holders of Shares who do not vote in favor of adoption of the Merger
Agreement may elect to have the fair value of their Shares appraised and paid to
them in cash if such Stockholders follow the procedures
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set forth under Delaware law. Holders of record of Shares who desire to exercise
such appraisal rights must satisfy all of the conditions contained in Section
262 of the DGCL, the full text of which section is attached to this Proxy
Statement as Annex C. A written demand for appraisal of the Shares owned by a
Stockholder seeking payment must be delivered to DavCo by such Stockholder
before the taking of the vote on approval of the Merger Agreement. Any such
demand should be directed to DavCo Restaurants, Inc., 1657 Crofton Boulevard,
Crofton, MD 21114, Attention: Secretary. This written demand must be separate
from any proxy or vote abstaining from or voting against adoption of the Merger
Agreement. Voting against adoption of the Merger Agreement, abstaining from
voting or failing to vote with respect to adoption of the Merger Agreement will
not constitute a demand for appraisal within the meaning of Section 262. Failure
to take any of the steps required under Section 262 may result in the loss of
appraisal rights.
Certain Federal Income Tax Consequences
The receipt of cash for Shares pursuant to the Merger or pursuant to
the exercise of appraisal's rights will be taxable transactions for United
States federal income tax purposes and also may be taxable transactions for
state, local, foreign and other tax purposes. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES." Stockholders are urged to consult their own tax advisers.
Market Information
The Shares are traded on the American Stock Exchange ("ASE") under the
symbol "DVC." On September 4, 1997, the last day of trading prior to the public
announcement of the September 5 Proposal (as hereafter defined), the closing
price for the Shares was $13.38 per Share. On October 21, 1997, the last day of
trading prior to the public announcement of the execution of the Merger
Agreement, such closing price was $18.06 per Share. On _________________, the
last full day of trading at the time of printing of this Proxy Statement, such
closing price was $____ per share.
For historical information on prices for the Shares, see "MARKET PRICES
AND DIVIDENDS ON THE SHARES."
Certain Litigation
Two purported class actions have been filed against DavCo and its Board
of Directors and CVC in connection with the Merger. These actions seek a
preliminary and permanent injunction against the Merger, unspecified monetary
damages and other relief. See "SPECIAL FACTORS--Certain Litigation."
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INTRODUCTION
This Proxy Statement is being furnished to the Stockholders in
connection with the solicitation by the Board of Directors of proxies from the
Stockholders for use at the Special Meeting to be held at DavCo's principal
office at 1657 Crofton Boulevard, Crofton, Maryland 21114, on January 12, 1998,
at 10:00 a.m., eastern time, and at any adjournments or postponements thereof.
This Proxy Statement, the attached Notice of Special Meeting and the enclosed
form of proxy are first being mailed to the Stockholders on or about _________,
1997.
DavCo's principal executive offices are located at 1657 Crofton
Boulevard, Crofton, Maryland 21114. Its telephone number is (410) 721-3770.
Matters to be Considered at the Special Meeting
At the Special Meeting, the Stockholders will be asked to consider and
vote upon a proposal to adopt the Merger Agreement. If the requisite votes in
favor of the proposal are obtained and certain other conditions are satisfied
or, where permissible, waived, the terms of the Merger Agreement provide, among
other things, that: (i) DAC Sub will be merged with and into DavCo and (ii) each
Share issued and outstanding immediately prior to the Effective Time (other than
Shares held at the Effective Time in DavCo's treasury, by any subsidiary of
DavCo, by DAC or by DAC Sub, which will be canceled without payment, and other
than Shares in respect of which appraisal rights have been perfected properly
under Delaware law) will be converted into the right to receive $20.00 in cash,
without interest. It is currently anticipated that the Merger will occur as
promptly as practicable after approval and adoption of the Merger Agreement by
the Stockholders at the Special Meeting and the satisfaction or, where
permissible, waiver of the other conditions to the consummation of the Merger.
There can be no assurance that, even if the requisite Stockholder approval is
obtained, the other conditions to the Merger will be satisfied or waived, or
that the Merger will be consummated. See "SPECIAL FACTORS--Risk that the Merger
Will Not Be Consummated." A copy of the Merger Agreement is attached to this
Proxy Statement as Annex A. For additional information concerning the terms and
conditions of the Merger, see "THE MERGER."
DAC and DAC Sub are newly formed corporations organized by the
Affiliated Stockholders for the purpose of effecting the transactions described
in this Proxy Statement. Upon consummation of the Merger, DavCo will become a
wholly-owned subsidiary of DAC. Prior to the Effective Time of the Merger, DAC
is expected to be owned entirely by the Affiliated Stockholders. See "CERTAIN
INFORMATION CONCERNING DAC, DAC SUB AND AFFILIATES."
The Board of Directors unanimously approved the Merger Agreement and
has determined that the Merger is fair to, and in the best interests of, all of
the Stockholders, including the Unaffiliated Stockholders, and has recommended
that the Stockholders vote in favor of adoption of the Merger Agreement and
approval of the Merger. For a discussion of the factors considered by the Board
of Directors in reaching it conclusions, see "SPECIAL FACTORS--Fairness of the
Merger; Recommendation of the Board of Directors." For a description of certain
interests of certain of DavCo's directors and officers that may have presented
them with actual or potential conflicts of interest in connection with the
Merger, see "SPECIAL FACTORS--Background of the Merger," "--Purpose of the
Merger" and "--Interests of Certain Persons in the Merger."
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Voting at the Special Meeting
The Board of Directors has fixed the close of business on November 28,
1997, as the "Record Date" for determining the Stockholders entitled to notice
of and to vote at the Special Meeting. Accordingly, only holders of record of
Shares as of the Record Date will be entitled to notice of and to vote at the
Special Meeting. On the Record Date, there were _______ Shares, held by
approximately ______ holders of record, outstanding and entitled to vote.
Stockholders may cast one vote per Share, either in person or by properly
executed proxy, on each matter to be voted on at the Special Meeting.
Under the provisions of the DGCL, the affirmative vote of the
Stockholders entitled to cast at least a majority of the votes that all
Stockholders are entitled to cast with respect to the Merger Agreement is
required to adopt and approve the Merger Agreement. Pursuant to DavCo's Restated
Certificate of Incorporation and the terms of the Merger Agreement, consummation
of the Merger also requires the affirmative vote of a majority of the
outstanding Shares that are held by the Unaffiliated Stockholders. The presence
of a majority of the Shares entitled to vote, represented in person or by proxy,
is necessary to constitute a quorum at the Special Meeting. As of the Record
Date, the Affiliated Stockholders may be deemed to have beneficially owned an
aggregate of ______ Shares, constituting approximately ___% of the Shares
outstanding on such date. See "SPECIAL FACTORS--Interests of Certain Persons in
the Merger" and "SECURITY OWNERSHIP OF THE COMPANY."
In the event that less than a majority of the outstanding Shares owned
by Unaffiliated Stockholders are voted for the Merger and there are Unaffiliated
Stockholders who did not deliver a proxy or otherwise vote at the Special
Meeting and whose shares, if voted in favor of the Merger, would cause such
requisite majority vote to be obtained, it is expected that the Special Meeting
will be adjourned and additional proxies from those Unaffiliated Stockholders
who have not previously delivered a proxy or otherwise voted at the Special
Meeting will be solicited until such time as a definitive vote is obtained.
As of the Record Date, Unaffiliated Stockholders hold ______ Shares,
the affirmative vote of _______ of which Shares is required to adopt the Merger
Agreement. This special voting requirement has the effect of neutralizing the
ability of the Affiliated Stockholders to control the outcome of the vote
through their majority ownership of Shares that otherwise would exist (but for
the provisions of the Restated Certificate of Incorporation and the Merger
Agreement). The Unaffiliated Stockholders who hold a majority of the outstanding
Shares held by Unaffiliated Stockholders will have the power to decide whether
or not to adopt the Merger Agreement. See "SPECIAL FACTORS--Fairness of the
Merger; Recommendation of the Board of Directors; Position of DAC" and "THE
MERGER--Stockholder Adoption of the Merger Agreement."
Votes cast in person or by proxy at the Special Meeting will be
tabulated by The Bank of New York (the "Transfer Agent"), which will determine
whether a quorum is present. The Transfer Agent will treat abstentions as Shares
that are present and entitled to vote for purposes of determining the approval
of such matter. In addition, if a broker submits a proxy indicating that it does
not have discretionary authority as to certain Shares to vote on a particular
matter, those Shares will not be treated as present and entitled to vote for
purposes of determining the approval of such matter, but will be treated as
present for purposes of determining whether a quorum is present at the Special
Meeting.
THE MERGER CONSTITUTES A MATTER OF GREAT IMPORTANCE TO STOCKHOLDERS. IF
THE MERGER AGREEMENT IS ADOPTED AND THE MERGER IS CONSUMMATED, THE OWNERSHIP
INTERESTS IN THE COMPANY OF THE STOCKHOLDERS (OTHER THAN THE ONGOING INTERESTS
OF THE AFFILIATED
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STOCKHOLDERS THROUGH THEIR OWNERSHIP OF DAC) WILL CEASE IN EXCHANGE FOR THE
RIGHT TO RECEIVE A CASH PAYMENT OF $20.00 PER SHARE OR TO PURSUE APPRAISAL
RIGHTS. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND CONSIDER CAREFULLY THE
INFORMATION PRESENTED IN THIS PROXY STATEMENT.
Proxies
All Shares represented at the Special Meeting by properly executed
proxies received prior to or at the Special Meeting, and not revoked before
their use, will be voted in accordance with the instructions thereon. If no
instructions are given, properly executed proxies will be voted FOR adoption of
the Merger Agreement. If any other matters are properly presented to the Special
Meeting or any adjournments or postponements thereof, the persons named in the
enclosed form of proxy as acting thereunder will have discretion to vote on such
matters in accordance with their best judgment. The Company does not know of any
matters other than the adoption and approval of the Merger Agreement that will
be presented at the Special Meeting.
A Stockholder who has given a proxy may revoke it at any time before it
is voted at the Special Meeting, or any postponements or adjournments thereof,
by filing with the Secretary of the Company, at the address of the Company set
forth on the first page of this Proxy Statement, a written revocation bearing a
later date than the proxy being revoked, or by submission of a validly executed
proxy bearing a later date than the proxy being revoked, or by attending the
Special Meeting, or any postponements or adjournments thereof, and voting in
person (although attendance at the Special Meeting, or any postponements or
adjournments thereof, will not in and of itself constitute revocation of a
proxy).
In the event that less than a majority of the outstanding Shares owned
by Unaffiliated Stockholders are voted for the Merger and there are Unaffiliated
Stockholders who did not deliver a proxy or otherwise vote at the Special
Meeting and whose shares, if voted in favor of the Merger, would cause such
requisite majority vote to be obtained, it is expected that the Special Meeting
will be adjourned and additional proxies from those Unaffiliated Stockholders
who have not previously delivered a proxy or otherwise voted at the Special
Meeting will be solicited until such time as a definitive vote is obtained.
Adjournment of the Special Meeting is expected under such circumstances because
the Affiliated Stockholders have indicated to the Company that, in the event
that less than a majority of the Shares owned by Unaffiliated Stockholders are
voted for the Merger and there are Unaffiliated Stockholders who did not deliver
a proxy or otherwise vote at the Special Meeting and whose shares, if voted in
favor of the Merger, would cause such requisite majority vote to be obtained,
they would vote for adjournment of the Special Meeting. If the Special Meeting
is postponed or adjourned, a Stockholder who has given a proxy may revoke it any
time before it is voted at any postponement or adjournment of the Special
Meeting in the manner set forth above.
Proxies are being solicited by and on behalf of the Board of Directors.
The Company will bear the cost of the Special Meeting and the cost of soliciting
proxies therefor, including the cost of printing and mailing the proxy material.
In addition to the solicitation of proxies by mail, the Company may utilize the
services of some of its directors, officers and regular employees (who will
receive no compensation therefor in addition to their regular remuneration) to
solicit proxies personally or by telephone, telegram or other form of wire or
facsimile communication. The Company intends to request brokers and other
custodians, nominees and fiduciaries to forward solicitation materials to the
beneficial owners of Shares held of record by such persons. The Company will
reimburse such brokers and other custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses incurred in connection therewith.
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In connection with the Merger, the Stockholders have the right to
exercise appraisal rights if they (i) do not vote for the adoption of the Merger
Agreement, (ii) deliver a written demand for appraisal to the Company prior to
the taking of a vote on the Merger Agreement at the Special Meeting, or any
postponements or adjournments thereof, and (iii) otherwise comply with the
requirements of Section 262 of the DGCL, a copy of which is included in this
Proxy Statement as Annex C. See "APPRAISAL RIGHTS" for a summary of the rights
of Stockholders to demand appraisal and a description of the procedure required
to be followed to exercise such rights.
SPECIAL FACTORS
Background of the Merger
On August 9, 1993, DavCo completed its initial public offering of
2,600,000 Shares at an initial price to the public of $12.00 per Share. The
Shares had traded between a high price of $18.50 per Share and a low price of
$6.69 per Share until the announcement of the September 5 Proposal (as hereafter
defined).
At various times after DavCo's initial public offering, the Board of
Directors discussed its concern over the prices at which the Shares were trading
in view of the Shares' initial public offering price, the performance of the
public markets generally and the Company's results of operations over this time.
The Board of Directors also took measures to improve the price at which levels
the Shares were trading, including a stock repurchase program that was
implemented in May 1996. This program failed to produce any significant
improvement in the Shares' trading price because of the relative illiquidity of
the Shares.
Following the conclusion of the July 30, 1997 Board meeting, Messrs.
Kirstien, Rothstein and Knief, told the other members of the Board of Directors
that they were considering the possibility of a "going private" transaction in
which Messrs. Kirstien and Rothstein and CVC would form an entity to acquire
ownership of the entire equity interest in DavCo. Following the July 30, 1997
meeting, Messrs. Kirstien and Rothstein and representatives of CVC had numerous
telephone discussions about the feasibility of such a transaction.
Over the period of August 13, 14 and 15, 1997, Messrs. Kirstien,
Rothstein and Knief met with several investment and commercial banks (including
GAF) to discuss the feasibility of arranging financing for a transaction and
continued to discuss among themselves the structure and terms of such a
transaction.
On September 5, 1997, Mr. Kirstien made a written proposal on behalf of
himself, Mr. Rothstein and CVC to the Board of Directors to acquire the Shares
of DavCo (other than certain Shares owned by them) for a cash price of $18.00 to
20.00 per Share (the "September 5 Proposal"). The September 5 Proposal was
subject to certain conditions, including successful negotiation of a definitive
merger agreement, procurement of necessary financing, regulatory approvals and
approval of DavCo's Board of Directors. The Company made a public announcement
of the September 5 Proposal on the same day.
Following the public announcement of the September 5 Proposal, DavCo
interviewed several investment banking firms to advise the Board of Directors on
the fairness, from a financial point of view, of the September 5 Proposal. On
September 10, 1997, the Company retained Equitable Securities Corporation
("Equitable") as financial advisor to the Board of Directors concerning the
September 5 Proposal. See "-- Opinion of Financial Advisor."
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On September 17, 1997, at its regularly scheduled meeting, the Board of
Directors reviewed and gave preliminary consideration to the September 5
Proposal. In the course of the September 17, 1997 meeting, the Board of
Directors met both with and without Messrs. Kirstien and Rothstein and Mr. Knief
and Charles E. Corpening, both of whom are officers of CVC, (Messrs. Kirstien,
Rothstein, Knief and Corpening being referred to herein as the "Participating
Directors" and the remaining directors being referred to as the
"Non-Participating Directors"), excusing the Participating Directors for
portions of the meeting while the Non-Participating Directors who were present
considered various aspects of the September 5 Proposal with Dechert Price &
Rhoads, special counsel to the Board ("Special Counsel"). During the meeting,
Messrs. Kirstien, Rothstein and Knief advised the Board of certain contacts that
DavCo and CVC had had with Wendy's International, Inc. ("Wendy's") with respect
to, among other things, certain concerns Wendy's had about the September 5
Proposal and the possible acquisition of DavCo by Wendy's. See "--Past
Contacts with Wendy's."
At the conclusion of the September 17, 1997 meeting, the
Non-Participating Directors who were present advised Messrs. Kirstien,
Rothstein, Knief and Corpening that it would be appropriate for the Board to
consider formally the September 5 Proposal if it was modified to confirm the
offer price at $20 per Share. The Board ratified and approved at the September
17, 1997 meeting the retention of Equitable as financial advisor to the Board
and directed Equitable to consider the Merger at a $20 per share offer price.
The Board also ratified and approved the retention of Dechert Price & Rhoads as
Special Counsel, and directed Special Counsel to begin negotiation of the terms
of a definitive merger agreement for the transactions contemplated by the
September 5 Proposal with counsel to Messrs. Kirstien, Rothstein and CVC.
During the period from September 17, 1997 to October 1, 1997, Messrs.
Kirstien and Rothstein and representatives of CVC continued to pursue
arrangements for financing the Merger. During this time, Special Counsel also
continued negotiations of the terms of the transaction and a definitive merger
agreement and Equitable continued its due diligence investigations of DavCo.
On October 1, 1997, the Board held a special meeting at which
Equitable made a presentation on the procedures and financial analyses it
proposed to use in valuing the Shares and developing its opinion on the
fairness of the Merger. See "--Opinion of Financial Advisor." Equitable
answered questions and received input from the Board on its proposed
procedures and methodologies. Special Counsel reviewed with the Board the
status of negotiations on the terms of a definitive merger agreement. In the
course of the meeting, Messrs. Kirstien, Rothstein and Knief also updated the
Board on contacts with Wendy's. See "--Past Contacts with Wendy's." The Board
also reviewed the terms of a proposed financing commitment from GAF obtained
by Messrs. Kirstien and Rothstein and CVC. During the October 1, 1997
meeting, the Non-Participating Directors met both with and without the
Participating Directors and with and without Equitable, excusing the
Non-Participating Directors or Equitable at various times as it considered
the September 5 Proposal, the financing commitment and the Equitable
presentation.
At the conclusion of the October 1, 1997 meeting, the Non-Participating
Directors advised Messrs. Kirstien, Rothstein and Knief that the financing
commitment from GAF, although generally satisfactory, included certain "due
diligence" conditions to financing that were unacceptable to the
Non-Participating Directors. The Board did approve the payment by DavCo of
certain commitment and other fees in connection with the GAF financing
commitment. In addition, the Non-Participating Directors instructed Special
Counsel to obtain specific assurances in the definitive merger agreement that
Messrs. Kirstien and Rothstein and CVC had no present plan or intention to sell
all or part of DavCo after completing the Merger and that they were not aware of
any information relating to DavCo and not publicly disclosed that would have a
material positive effect on the value of DavCo.
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During the period from October 1, 1997 to October 21, 1997, Messrs.
Kirstien and Rothstein and representatives of CVC continued to negotiate the
financing commitment of GAF, and succeeded in eliminating the conditions that
the Non-Participating Directors had found unacceptable. On October 17, 1997, a
definitive Commitment was received from GAF. During this period, Special Counsel
and counsel to Messrs. Kirstien, Rothstein and CVC continued negotiation of a
definitive merger agreement, which included the assurances requested by the
Non-Participating Directors.
On October 21, 1997, the Board held a special meeting at which the
terms of a final merger agreement were reviewed with Special Counsel. Messrs.
Kirstien, Rothstein and Knief confirmed that the price would be $20 per share,
as previously requested by the Board (the September 5 Proposal, as so modified,
being referred to as the "Proposal"). At the meeting, Equitable gave an oral
presentation to the Board and its oral opinion, subsequently confirmed in
writing, that the cash consideration offered in the Proposal is fair to the
Unaffiliated Stockholders from a financial point of view. See "--Opinion of
Financial Advisor." Based upon the Equitable opinion and upon consideration of
the terms of the merger agreement, the Board voted unanimously (with the
Participating Directors abstaining) to approve the Merger Agreement and to
recommend that the Stockholders vote in favor of adoption of the Merger
Agreement and approval of the Merger. On the evening of October 21, 1997, the
Merger Agreement was executed on behalf of DavCo, DAC and DAC Sub.
On October 22, 1997, DavCo made a public announcement of the execution
of the definitive Merger Agreement.
Past Contacts with Wendy's
During the Company's two previous fiscal years, Messrs. Kirstien and
Rothstein and representatives of CVC have had communications with
representatives of Wendy's both in connection with the Company's operations as a
Wendy's franchisee (see "BUSINESS") and at certain times to discuss the
possibility of an acquisition of DavCo by Wendy's.
On August 23, 1996, representatives of DavCo, including Messrs.
Kirstien and Rothstein, met with representatives of Wendy's, including Gordon
Teter, President of Wendy's, to discuss certain issues and resolve potential
disputes with respect to the Company's franchise agreements with Wendy's. The
parties discussed, among other alternatives, the concentration of the Company's
Wendy's franchises in its Mid-Atlantic market and neighboring markets. Wendy's
indicated that another alternative would be the acquisition of DavCo by Wendy's,
suggesting per Share consideration for DavCo in the range of $15 to $16, to
be reduced by the amount of outstanding Company debt (yielding net
consideration per share of approximately $10). However, Mr. Teter indicated
that Wendy's had not analyzed the Company sufficiently to enable Wendy's to
make a firm offer at that time. At the time, the market price for the
Company's common stock was $8.81 per share. Upon being informed of Wendy's
interest, Mr. Knief indicated to representatives of DavCo that CVC generally
had no interest in disposing of its investment in DavCo, but that in order
for CVC to consider selling its DavCo investment, a buyer would have to offer
CVC a price that reflected a very substantial premium, and that such a premium
price would have to be $30 or more per Share.
Approximately one year later, in June 1997, Mr. Knief received an
unsolicited telephone call (which Wendy's later indicated to the Company was not
a call authorized by Wendy's) from an investment banking firm inquiring as to
CVC's interest in a transaction for the sale of DavCo to Wendy's. Mr. Knief
again indicated that CVC wanted to continue holding its DavCo investment and
would consider a sale only at a very substantial premium price, suggesting again
that such a price would be $30 or more per Share.
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On or about August 12, 1997, Mr. Rothstein spoke by telephone with Mr.
Teter to inform Mr. Teter of the possibility of a buy out transaction led by
Messrs. Kirstien and Rothstein and CVC. Among other concerns, Mr. Teter
expressed concern regarding the amount of debt that would have to be incurred by
DavCo to complete such a transaction.
On or about August 19, 1997, Mr. Teter contacted Mr. Rothstein to
indicate that Wendy's might have an interest in acquiring DavCo and to arrange a
meeting for August 27, 1997 at the offices of J.P. Morgan ("J.P. Morgan"), a
financial advisor to Wendy's, with Messrs. Kirstien and Rothstein and
representatives of CVC to discuss a possible transaction. During this
conversation, Mr. Rothstein understood Wendy's to be indicating interest in a
transaction in the $25 per Share range. Mr. Rothstein did not understand,
however, whether the $25 per Share range represented the actual consideration to
be received by Stockholders or whether, as with Wendy's indication of interest
in August 1996, such amount would be reduced by the amount of outstanding
Company debt (yielding net consideration per Share of approximately $19).
Following the August 19 conversation with Mr. Teter, Mr. Rothstein
contacted Mr. Knief to inform CVC of his understanding of Wendy's interest and
to find out whether CVC was willing to meet under those circumstances. Mr. Knief
indicated to Mr. Rothstein that CVC generally was not interested in selling its
investment in DavCo and that, at a price of $25 per Share, CVC would rather be a
buyer than a seller of DavCo Shares. Mr. Knief indicated that CVC would be
interested in being a seller of its DavCo Shares only at $30 or more per Share
and would be willing to meet with Wendy's to discuss a transaction at that
price. Mr. Rothstein related this message to Mr. Teter.
On August 25, 1997, Mr. Teter telephoned Mr. Rothstein to indicate that
there would be no point in meeting if CVC would only be willing to sell its
Shares at a price of $30 or more per Share. The proposed August 27, 1997 meeting
was canceled. During this conversation or in a subsequent one, Mr. Rothstein
asked Mr. Teter for clarification of Wendy's interest in DavCo, and Mr. Teter
indicated that there must have been a misunderstanding of the August 19
conversation, as Mr. Teter did not believe any discussion of a price range for a
possible transaction had taken place.
On or about September 7, 1997, a representative of J.P. Morgan
contacted William T. Comfort, Jr., the Chairman of CVC, to indicate Wendy's
interest in a meeting with Mr. Comfort. Over the next four days, Mr. Teter, Mr.
Comfort, Mr. Rothstein and representatives of J.P. Morgan had brief discussions
in order to schedule a meeting between Mr. Teter and Mr. Comfort on September
18, 1997. No terms of any potential transaction were discussed during these
telephone calls.
On September 12, 1997, Wendy's wrote the following letter to DavCo in
which it raised concerns about the September 5 Proposal:
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September 12, 1997
DavCo Restaurants, Inc.
Harvey Rothstein
Ron Kirstien
1657 Crofton Boulevard
Crofton, MD 21114
Re: DavCo
Gentlemen:
It is our understanding that a restructuring of DavCo is being
considered that would result in a substantial increase in the financial
obligations of DavCo. While we do not know the details of this proposed
transaction, Wendy's is preliminarily concerned with several aspects of such a
proposal. We would like to discuss with you the specifics of the transaction in
order to better understand the impact on our franchisee and its Wendy's
business.
As you know, Wendy's has various contractual rights which may be
affected by the proposal, including without limitation, various rights of
consent and first refusal. It is imperative that we have a clear understanding
of the proposed transaction or series of transactions so that we can assess
those rights. Wendy's expressly reserves all of its rights and remedies under
the Development Agreement and the Unit Franchise Agreements and the various
consents and modifications to those documents, including without limitation, the
Letter of Intent dated April 28, 1997.
Any transaction that substantially increases the obligations of the
company, especially so as to provide a dividend stream to a shareholder, is of
major concern to Wendy's. Wendy's is concerned that the proposed transaction
could render DavCo incapable of timely meeting its obligations to Wendy's and
other creditors as they become due and in the ordinary course of business. These
obligations include, without limitation, payment obligations, development
obligations, and operational and other performance obligations. Any such plan to
increase debt or divert the cash flow from the business is in our view a
short-term focus on the business which we believe may be detrimental to the
long-term success of the franchise. It should be noted also that the unique
involvement of a financial institution continues to run contrary to Wendy's
policies regarding personal liability and direct ownership by individuals; to
the extent security interests are taken by other institutions or their
affiliates, they should understand this policy and Wendy's intent to enforce it.
Based on the publicly available information, it appears to us that the
proposed transaction is designed to enrich your largest shareholder at the
expense of your financial stability. In view of the fact that you are an
important franchisee, we are seriously concerned about the proposed transaction.
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We look forward to receiving a detailed understanding of the
transaction so that we might work together in the best interest of DavCo.
Sincerely,
WENDY'S INTERNATIONAL, INC.
Larry N. Nelson
Vice President and
Assistant General Counsel
On September 18, 1997, Messrs. Comfort, Knief and Corpening met with
Mr. Teter and another representative of Wendy's to discuss the September 5
Proposal and the concerns expressed in Wendy's September 12, 1997 letter.
On October 24, 1997, Mr. Kirstien wrote the following letter with
respect to the Wendy's letter of September 12, 1997:
October 24, 1997
Larry N. Nelson
Vice President and Assistant General Counsel
Wendy's International, Inc.
P.O. Box 256
Dublin, OH 43017
Dear Larry:
This will acknowledge receipt of your letter of September 12, 1997.
As you know, DavCo has announced that it has agreed to a transaction
which would result in the purchase of all of DavCo's public shares at a price of
$20 per share. The proposed transaction would be accomplished through a merger
and would be financed with a bank loan from a single financing source which
would fully comply with all of our contractual obligations with Wendy's.
While we understood your expressed concern for DavCo and its
shareholders, I am sure that you understand that Harvey and I believe that the
transaction will be good for our shareholders and for DavCo. We are fully aware
of our obligations to Wendy's and other creditors and intend to fulfill them as
we have prior to this transaction.
In your letter you have alleged that Wendy's has various rights of
consent and first refusal as well as "rights and remedies" under various
agreements which may be applicable to this transaction. We are unable to find
any basis for any claim to a right of consent or first refusal. If you believe
that you may have such rights, we would appreciate it if you could tell us the
basis for such claim. We also do not understand your reference
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to other "rights and remedies." If you believe that our proposal would violate
any of these agreements or give rise to any rights or remedies, we would again
ask if you would point to the relevant provisions and explain the applicability.
Very truly yours,
Ronald D. Kirstien
On November 5, 1997, Wendy's wrote the following letter to DavCo with
respect to the September 12, 1997 and the October 24, 1997 correspondence
between Wendy's and DavCo:
November 5, 1997
DavCo Restaurants, Inc.
Harvey Rothstein
Ron Kirstien
1657 Crofton Boulevard
Crofton, MD 21114
Gentlemen:
I am in receipt (as of October 27, 1997) of Ron Kirstien's letter dated
October 24, 1997, requesting that Wendy's provide specifics as to the rights
which it asserts in the pending transaction whereby DavCo Restaurants, Inc.
("DavCo") would go private.
It is our understanding that the interest of Citicorp Venture Capital,
Ltd. ("CVC") will be transferred and at least 20% of DavCo will be owned by a
party other than CVC, which raises issues with respect to Wendy's rights.
However, until DavCo has provided Wendy's with copies of all relevant documents
(including the executed Merger Agreement with exhibits, the specific terms of
financing and completed proxy statement), a clear understanding of the specific
ownership of DavCo Acquisition Holding, Inc. (pre and post-merger), and a
clarification of how that entity purports to acquire shares which are not held
by the public, it is impossible for Wendy's to properly assess all of its
rights. Wendy's has made a request for detailed information concerning the
transaction in my letter of September 12, 1997 and to date has received only a
draft proxy statement (with much of the information material to Wendy's left
blank) and none of the other documents related to the transaction.
Be advised that Wendy's expressly reserves all of its rights under the
existing agreements (including, without limitation, any right it has to review
and comment on information, consent to any change in the franchisee of the
franchise structure, or to exercise any right of first refusal), until it has a
reasonable opportunity to examine all documents and understand the transaction
in its entirety. Upon receipt of the relevant documents and a detailed
understanding of the ownership of DavCo Acquisition Holding,
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Inc., and its acquisition of DavCo shares, we would be happy to respond to your
request and promptly address any rights Wendy's may have.
Sincerely,
WENDY'S INTERNATIONAL, INC.
Larry N. Nelson
Vice President and
Assistant General Counsel
Fairness of the Merger; Recommendation of the Board of Directors; Position of
DAC
The Board of Directors. At its special meeting on October 21, 1997, the
Board, with the Participating Directors abstaining due to their actual or
potential conflicts of interest with respect to the Merger, unanimously
determined that the Merger is in the best interest of and fair to all of the
Stockholders, including the Unaffiliated Stockholders, authorized and approved
the entering into of the Merger Agreement and recommended that the Stockholders
vote in favor of adoption of the Merger Agreement and approval of the Merger.
In approving the Merger Agreement, and in determining the fairness of
the Merger to the Unaffiliated Stockholders, the full Board of Directors, and
the Non-Participating Directors, considered various factors, including, among
others, the following (such factors were considered over a period of time at
various meetings):
(i) information with respect to the financial condition and
results of operations of DavCo, and current industry, economic and
market conditions and the prices and volumes at which the Shares have
traded historically;
(ii) the presentations by Equitable and the opinion of
Equitable;
(iii) possible alternatives to the Proposal, the possible
values to Shareholders of such alternatives and the timing and
likelihood of achieving those values, particularly in light of the
position of DavCo's largest Stockholder that it generally was not
interested in a third party sale transaction and would consider
discussing such a transaction only at a substantial premium, indicated
to be net consideration in the $30 per Share range, and the
unlikelihood of such a transaction, and in light of the fact that DavCo
did not receive any proposal for an alternative acquisition transaction
over the six-week period from the public announcement of the September
5 Proposal to the date of execution of the Merger Agreement;
(iv) the various terms of the Merger Agreement, including the
ability of the Board, in the exercise of its fiduciary duties to
Stockholders, to consider competing proposals, and the limitation of
DAC and DAC Sub's claims thereunder (see "THE MERGER");
(v) the fact that, by reason of certain conditions to the
obligations of DAC and DAC Sub to consummate the Merger, including
conditions concerning financing, it is possible that the
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Merger may not be consummated and the consequences under the Merger
Agreement of the failure to satisfy such conditions;
(vi) the possible conflicts of interest of certain directors
and members of management of DavCo;
(vii) the absence of any recommendation of a special committee
of independent directors and the failure to retain any unaffiliated
representative to act solely on behalf of the Unaffiliated
Stockholders;
(viii) the fact that the adoption of the Merger Agreement is
subject to receiving approval by the affirmative vote of a majority of
the outstanding Shares held by Unaffiliated Stockholders; and
(ix) the ability of Stockholders to exercise appraisal rights
if the Merger is consummated.
In view of the wide variety of factors considered in connection with
its evaluation of the transaction, the Board found it impracticable to, and did
not, quantify or attempt to assign relative weights to the specific factors
considered in reaching its determinations, although on balance, it viewed the
matters set forth in items (i), (ii), (iii), (iv), (viii) and (ix) as favorable
to its decision, the matters set forth in items (v) and (vii) as unfavorable to
its decision, and the matters set forth in item (vi) as neutral to its decision.
The factors set forth above were considered by the Board of Directors
in the manner set forth below.
(i) On balance the Board considered as favorable to its
decision the matters set forth in item (i). The Board reviewed the historical,
including the most recent quarterly, operating results of DavCo. See "SELECTED
HISTORICAL FINANCIAL DATA OF THE COMPANY." The Board noted general improvements
in DavCo's results of operations for fiscal year 1997 over the prior fiscal
year, the substantial increase in revenues and net operating income for the
third quarter of fiscal year 1997 over the results for the same quarter of
fiscal year 1996 and the generally cyclical nature of the Company's operations.
See "SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY." The Board compared
these operating results to movements in the market price of the Shares over
the same period of time. See "MARKET PRICES AND DIVIDENDS ON THE SHARES." The
Board considered that DavCo became public as of August 13, 1993, at an initial
price to the public of $12.00 per Share and that the market price for the
Shares immediately prior to the public announcement of the September 5
Proposal was $13.38 per Share.
The Board considered that the $20.00 price per Share represented a
premium of approximately 49.5% over the $13.38 market price for the Shares
immediately prior to the public announcement of the September 5 Proposal. The
Board further noted that such price continued to represent a premium to the
market prices for the Shares following the announcement of the September 5
Proposal up to the last trading day prior to its meeting on October 21, 1997.
See "MARKET PRICES AND DIVIDENDS ON THE SHARES." Stockholders are urged to
obtain current market quotations for their Shares.
The Board also noted statistics showing the trading volumes and closing
prices for the Shares during the period from August 13, 1993 through September
4, 1997, which demonstrated a relative illiquidity in the Shares. The Board
concluded that the Proposal would give the Unaffiliated Stockholders,
particularly those holding a large number of Shares, an opportunity to realize
immediate value for their Shares at a substantial premium.
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The Board recognized that while consummation of the Merger would result
in the Stockholders being entitled to receive $20.00 in cash for each of their
Shares, it also would eliminate the opportunity for the current Stockholders
(other than the Kirstien Investors, the Rothstein Investors and the CVC
Investors through their ownership of DAC) to participate in the future growth,
if any, of the business of DavCo. On balance, and considering DavCo's future
prospects, as well as its historical results of operations, the Board concluded
that the uncertain prospect for future appreciation did not justify depriving
DavCo's Stockholders of the opportunity to obtain an immediate cash premium for
their Shares.
In light of these conclusions and the other matters discussed below,
the Board determined that the $20.00 price per Share payable in the Merger was
fair and presented the Stockholders with an attractive opportunity and
potentially greater benefit than maintaining their ownership interests in DavCo.
(ii) The Board considered as favorable to their decision the
matters set forth in item (ii). At the Board's October 21, 1997 special meeting,
Equitable delivered orally its opinion, subsequently confirmed in writing, that
the $20.00 per Share cash consideration to be received by Unaffiliated
Stockholders in the Merger is fair from a financial point of view. See
"--Opinion of Financial Advisor."
(iii) On balance the Board considered as favorable to their
decision the matters set forth in item (iii). The Board considered that CVC had
indicated its historical position, that it generally was not interested in a
third party sale transaction and would consider discussing such a transaction
only at a very substantial premium, indicated to be net consideration in the $30
per share range. See "--Background of the Merger" and "--Past Contacts." The
Board concluded that certain indications of interest from Wendy's at values
lower than $30 per share were precluded by the position of CVC with respect to
such a transaction. See "--Past Contacts." In addition, the Board considered
that the availability of potential third party buyers may be limited by DavCo's
relationship with Wendy's and the limitations that DavCo's franchise and
development agreements with Wendy's place on the transfer of DavCo's capital
stock, and on DavCo's business operations, business line expansion, geographic
expansion and management appointments. See "BUSINESS--Franchise and Development
Agreements." The Board noted that any potential third party buyer would have to
undertake a potentially lengthy consent and approval process with Wendy's. See
"BUSINESS -- Franchise and Development Agreements." The Board also noted that,
other than certain communications with Wendy's (see "--Past Contacts"), DavCo
had received no proposals for, or indications of interest in, an alternative
acquisition transaction over the approximately six-week period from the public
announcement of the September 5 Proposal to the date of execution of the Merger
Agreement.
The Board accordingly concluded that it was unlikely that DavCo could
be sold in a transaction, or any transaction could be consummated, other than
the Merger or a similar transaction with the Affiliated Stockholders, in which
the Stockholders would have an opportunity to obtain a premium to market price
for the Shares. The Board, therefore, determined that it would not be fruitful
to explore alternative transactions and that the only meaningful comparison was
between the proposed $20.00 per Share price and the potential for market
appreciation in the Shares if DavCo continued as a public company pursuing its
present business plan. See "SPECIAL FACTORS--Background of the Merger."
(iv) On balance the Board considered as favorable to their
decision the matters set forth in item (iv). The Board noted that the Merger
Agreement does not preclude DavCo's Board of Directors in the exercise of its
fiduciary obligations under applicable law from furnishing information to or
participating in negotiations with persons making unsolicited proposals to
acquire DavCo and permits the Board of Directors to terminate the Merger
Agreement if DavCo receives a bona fide third party offer to effect an
acquisition transaction that the Board of Directors determines after
consultation with legal advisors is more
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favorable than the Merger. The Merger Agreement also does not contain any
provision requiring a payment by DavCo if the Merger Agreement is terminated,
including by reason of a breach by DavCo, although if the Merger Agreement is
terminated under certain circumstances, DAC and DAC Sub will be entitled to have
their expenses reimbursed by DavCo. The Board also noted that the amount of
reimbursable expenses was limited to $1,000,000. See "THE MERGER--Expenses." The
Board noted further, however, that DavCo has agreed to pay certain commitment
fees to GAF in connection with the financing of the Merger, totaling
approximately $2.2 million, of which approximately $1.6 million has been paid
and $0.6 million would be payable upon funding under the GAF financing
commitment. However, if DavCo terminates the commitment, a termination fee of
$750,000 would be payable by DavCo to GAF, and if GAF terminates the commitment
or fails to fund in contravention of the commitment, then GAF would refund to
DavCo $585,000 of the approximately $1.6 million in commitment fees paid to
date. See "FINANCING OF THE MERGER."
In all other respects, with the exception of certain conditions to
consummation of the Merger, including a financing condition, discussed in (v)
below, the Board considered the terms of the Merger Agreement to be generally
favorable.
(v) The Board viewed as unfavorable to its decision the
matters set forth in item (v). The conditional nature of various aspects of the
Merger Agreement was reviewed by the Board. In order to address its concerns in
this regard, the Board reviewed the commitment letter DAC obtained from GAF to
finance the Merger and requested the removal of certain conditions to financing
under the GAF commitment that the Board found unacceptable. The Board was able
to accept the conditions of the Merger Agreement based on their conclusion that
they had a reasonable basis to believe that such conditions, including a
condition relating to financing, would be satisfied, and their understanding and
belief that the other conditions were customary for transactions of this kind,
were required as a matter of law or were otherwise essential to one or both
parties to the transaction. See "--Background of Merger" and "FINANCING OF THE
MERGER." The Board also noted that termination of the Merger Agreement due to a
failure to satisfy the financing condition would not entitle DAC or DAC Sub to
reimbursement of their expenses, nor entitle DavCo to repayment of the GAF
commitment fees (unless GAF shall have terminated the commitment or failed to
fund in contravention of the commitment, in which case, GAF is obligated to
refund $585,000 to DavCo).
(vi) On balance the Board viewed as neutral to its decision
the matters set forth in item (vi). The possible conflicts of interest of the
directors were considered at various meetings of the Board. The Board considered
significant the fact that approval of the Merger requires an affirmative vote of
a majority of the outstanding Shares held by Unaffiliated Stockholders.
(vii) The Board viewed as unfavorable to its decision the
matters set forth in item (vii). The Board felt, however, that because
completion of the Merger is conditioned upon receiving the affirmative vote of a
majority of the outstanding Shares held by Unaffiliated Stockholders and because
the Board had retained an independent financial advisor to evaluate the fairness
of the Merger to the Unaffiliated Stockholders from a financial point of view,
the absence of a special committee and an unaffiliated representative was
acceptable.
(viii) The Board viewed the matters set forth in item (viii)
to be favorable to its decision. The Board considered one of the paramount
factors in approving the Merger Agreement to be that the Merger Agreement and
DavCo's Restated Certificate of Incorporation require that the Unaffiliated
Stockholders determine for themselves whether they prefer to receive the
consideration contemplated by the Merger, and the premium to market prices
reflected therein, or to continue as Stockholders in DavCo.
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(ix) The Board viewed as favorable to its decision the matters
set forth in item (ix). The Board considered that even if the required majority
of the Unaffiliated Stockholders approves the Merger, certain Stockholders may
not support the Merger and wish to exercise appraisal rights. The Board felt it
to be important that Delaware law provides Stockholders with the opportunity to
exercise appraisal rights and to seek a judicial determination of the fair value
of their Shares, despite the approval of a majority of similarly situated,
Unaffiliated Stockholders.
DAC. DAC and the Affiliated Stockholders have not undertaken any formal
evaluation of the fairness of the Proposal to the Unaffiliated Stockholders.
Based, however, upon their consideration of, among other things, (i) historical
market prices for the Shares, including the Shares' initial public offering
price (and the fact that $20.00 per Share is substantially higher than the
market price per Share prior to the announcement of the September 5 Proposal),
(ii) the conclusions of the Non-Participating Directors and (iii) that the Board
had received the written opinion of Equitable to the effect that, as of the date
thereof, the consideration of $20.00 per Share to be received by the
Unaffiliated Stockholders in the Merger is fair to the Unaffiliated Stockholders
from a financial point of view, DAC and the Affiliated Stockholders believe that
the Merger is fair to the Unaffiliated Stockholders.
Opinion of Financial Advisor
Upon being advised of the Merger, the Board of Directors retained
Equitable pursuant to an engagement letter dated September 10, 1997 (the
"Engagement Letter") to (i) review and analyze the financial aspects of the
Merger; (ii) analyze the Company from a financial standpoint; (iii) assist the
Board of Directors in evaluating the Merger; and (iv) if requested, render an
opinion to the Board of Directors as to the fairness, from a financial point of
view as of the date of such opinion, of the Merger to holders of the Shares
(other than the Affiliated Stockholders). The Company retained Equitable because
of Equitable's reputation as a widely recognized investment banking firm that
regularly engages in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, secondary distributions
of listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
THE FOLLOWING IS A SUMMARY OF THE WRITTEN OPINION OF EQUITABLE TO THE
BOARD OF DIRECTORS. THE FULL TEXT OF EQUITABLE'S OPINION, WHICH SETS FORTH,
AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED,
AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX B AND IS
INCORPORATED HEREIN BY REFERENCE. HOLDERS OF SHARES ARE URGED TO READ THE
EQUITABLE OPINION CAREFULLY AND IN ITS ENTIRETY. A COPY OF EQUITABLE'S OCTOBER
1997 WRITTEN PRESENTATION TO THE BOARD OF DIRECTORS (THE "PRESENTATION") HAS
BEEN FILED AS AN EXHIBIT TO THE SCHEDULE 13E-3 (AS HEREINAFTER DEFINED) AND IS
INCORPORATED HEREIN BY REFERENCE TO THE FULL TEXTS OF THE WRITTEN OPINION AND
THE PRESENTATION. SEE "ADDITIONAL AVAILABLE INFORMATION."
EQUITABLE'S OPINION IS ADDRESSED TO THE BOARD OF DIRECTORS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF SHARES AS TO HOW SUCH STOCKHOLDERS
SHOULD VOTE IN CONNECTION WITH THE MERGER.
On October 21, 1997, Equitable delivered its written presentation to
the Board of Directors of DavCo. Equitable also reviewed the information
referred to below which underlies Equitable's financial analysis and its
opinion, and, based on the analysis referred to below, delivered its oral
opinion
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(subsequently confirmed in its written opinion, dated November 6, 1997) that as
of the date of such opinion, the cash consideration to be received by the
holders of Shares (other than the Affiliated Stockholders) is fair from a
financial point of view to such shareholders.
Equitable did not make an independent evaluation or appraisal of the
Company's assets or liabilities (contingent or otherwise), nor was Equitable
furnished with such evaluations or appraisals. No limitations were imposed by
the Board of Directors or the Company on Equitable with respect to the
information reviewed or the procedures followed by Equitable in rendering its
opinion. The Company and its management cooperated fully with Equitable in
connection with its investigations. As set forth in its written opinion,
Equitable assumed and relied upon, without assuming responsibility for
independent verification, the accuracy and completeness of the information
reviewed by Equitable or that was furnished to Equitable by or on behalf of the
Company. With respect to the financial projections provided to Equitable,
Equitable assumed that such projections were reasonably prepared and reflected
the best currently available estimates and good faith judgments of the
management of the Company as to the future financial performance of the Company.
Equitable also assumed, based on the information provided to Equitable and
without assuming responsibility for the independent verification thereof, that
no material undisclosed or contingent liability (disclosed or undisclosed)
exists with respect to the Company. Equitable's opinion is necessarily based on
the economic, market and other conditions as in effect on, and the information
available to Equitable as of, the date of its opinion. Equitable was not
requested to, and did not, solicit third party indications of interest in
acquiring all or part of the Company and assumed, with the permission of the
Company, that DAC has no present intention to sell the Company after the Merger.
Equitable conducted valuation analyses of the Company, but was not asked to and
did not recommend a specific per share price to be paid by the Affiliated
Stockholders for the Shares. Equitable's opinion does not address the likely tax
consequences of the Merger.
In conducting its analysis and arriving at its opinion, Equitable: (a)
reviewed the audited and unaudited financial statements for the four most recent
fiscal years and interim periods of the Company; (b) discussed the past and
current operations, financial conditions and prospects of the Company and its
subsidiaries with its management; (c) reviewed with management certain business
plans of the Company and certain financial projections prepared by the
management of the Company and pertaining to the Company and its subsidiaries (d)
reviewed the terms of the Merger with the Company and its legal advisors; (e)
reviewed the historical market prices and reported trading volumes of the
Shares; (f) compared the price per share offered in the Merger to historical
market prices of the Shares; (g) compared the financial performance of the
Company with, and reviewed the prices and reported trading activity of, the
securities of certain publicly traded companies whose operating characteristics
and/or industry focus Equitable believes resemble those of the Company; (h)
reviewed the financial terms of selected acquisitions of the remaining minority
interest of other publicly traded companies; (i) reviewed the financial terms of
selected control acquisitions of companies with operating characteristics and/or
industry focus Equitable believes resemble those of the Company; (j) performed a
discounted cash flow analysis of the Company based upon the financial
information and financial projections provided to Equitable by management of the
Company; (k) performed a stand-alone leveraged buyout analysis utilizing
operating assumptions provided to Equitable by the management of the Company and
the capital structure as outlined by the Company's lenders; (l) performed a
leveraged recapitalization analysis of the Company based upon financial
information provided to Equitable by the management of the Company; and (m)
reviewed such other information and performed such other analyses as Equitable
deemed appropriate.
In preparing its opinion for the Board of Directors, Equitable
performed a variety of financial and comparative analyses and considered a
variety of factors, as described below. The summary of such analyses does not
purport to be a complete description of the analyses underlying Equitable's
opinion. The
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preparation of a fairness opinion is a complex analytic process involving
various subjective determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances, and, therefore, such an opinion is not readily
summarized.
In arriving at its opinion, Equitable did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Equitable believes that its analyses must be considered as a whole
and that selecting portions of its analyses or portions of the factors
considered by it, without considering all analyses and factors, could create a
misleading or incomplete view of the processes underlying such analyses and its
opinion. In its analyses, Equitable made numerous assumptions with respect to
the Company, industry performance, general business, regulatory, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Company. No company, transaction or business used in such
analyses as a comparison is identical to the Company or the Merger, nor is an
evaluation of the results of such analyses entirely mathematical, rather it
involves necessarily complex considerations of and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions being analyzed. The estimates contained in such analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, because such estimates are
inherently subject to substantial uncertainty, none of the Company, Equitable or
any other person assumes responsibility for their accuracy.
The following is a summary of the report presented by Equitable to the
Board of Directors on October 21, 1997.
Analysis of Selected Publicly Traded Companies. Equitable reviewed and
compared certain financial, operating and stock market information of the
Company to selected publicly traded companies whose operating characteristics
and/or industry focus Equitable believes resemble those of the Company to
varying degrees. Those comparable companies classified for analysis as Quick
Service Restaurants (QSR) consisted of Au Bon Pain Co.; Consolidated Products,
Inc.; Krystal Company; McDonald's Corp.; Sbarro, Inc. and Wendy's International,
Inc. Those comparable companies that were franchisees and classified as
Franchisee - Restricted Operators for analysis consisted of DavCo Restaurants,
Inc.; Family Steak Houses of Florida, Inc.; Main Street and Main, Inc. and NPC
International, Inc. Those comparable companies that were franchisees and
classified as Franchisees - High Growth Consolidators for analysis consisted of
Apple South Inc.; DenAmerica Corp. and PJ America, Inc. (in the aggregate, the
QSRs, the Franchisees - Restricted Operators and the Franchisees - High Growth
Consolidators are the "Selected Companies"). Equitable created a range of market
multiples for the Selected Companies by dividing the aggregate value calculated
as total common shares outstanding multiplied by the closing market prices per
share on October 16, 1997 (Krystal Company share price was frozen as of
September 27, 1997 due to its acquisition by Port Royal Holdings, Inc.) plus the
latest reported total debt (including capitalized leases), preferred stock and
minority interest (combined, the sum is "Total Firm Value") of each of the
Selected Companies by such company's net revenues, EBITDA and EBIT for the
latest four fiscal quarters as reported in publicly available information and by
dividing the closing market price per share on October 16, 1997 by EPS for the
latest four fiscal quarters as reported in publicly available information ("LTM
P/E") and as projected for the 1997 and 1998 calendar years, as represented by
the mean estimate reported by publicly available sources. In addition, Equitable
looked at the multiple of reported book equity, as determined by multiplying the
shares outstanding by the market closing price, and dividing by the most
recently reported book equity. Equitable determined the relevant ranges of
multiples derived from the Selected Companies, as
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well as the average multiples (excluding the maximum and minimum values) across
each of the three industry segments. These figures are detailed in the chart
that follows:
<TABLE>
<CAPTION>
Category Range of Values Average Value
-------- -------- ------ -------------
<S> <C> <C> <C>
QSR Revenues 0.6x to 3.3x 1.4x
EBITDA 6.6x to 10.7x 8.7x
EBIT 9.1x to 15.9x 13.0x
P/E TR12 14.5x to 31.5x 19.0x
P/E 1997 13.8x to 33.0x 18.2x
P/E 1998 12.6x to 26.5x 18.5x
Book Equity 1.1x to 4.7x 2.8x
Franchisees -
Restricted Operators Revenues 0.6x to 1.8x 0.6x
EBITDA 6.2x to 13.2x 8.6x
EBIT 9.3x to 15.8x 12.6x
P/E TR12 17.4x to 20.3x 18.8x
P/E 1997 14.9x to 29.2x 15.7x
P/E 1998 12.3x to 23.3x 13.9x
Book Equity 0.6x to 3.5x 2.2x
Franchisees -
High Growth Consolidators Revenues 0.4x to 3.2x 1.7x
EBITDA 6.0x to 21.7x 12.7x
EBIT 10.2x to 26.7x 18.0x
P/E TR12 25.7x to 30.7x 28.2x
P/E 1997 8.0x to 23.9x 19.0x
P/E 1998 15.1x to 20.1x 17.6x
Book Equity 1.3x to 4.2x 3.6x
</TABLE>
Equitable compared the above-mentioned ranges and average multiples of
the Selected Companies to the Company's market multiples (based on the $18.06
per share closing market price as of October 16, 1997) on an actual basis.
Equitable calculated imputed valuation ranges of the Company by applying the
results of the Company to the average multiples derived from its analysis of the
Selected Companies.
The imputed values were then compared to the Company's average discount
over the trailing twelve month period. The averages were calculated based on the
multiples generated by dividing the Total Firm Value of each of the Selected
Companies by such company's net revenues, EBITDA and EBIT for the latest four
fiscal quarters as reported in publicly available information and by dividing
the closing market price per share on October 16, 1997 by EPS for the latest
four fiscal quarters as reported in publicly available information ("LTM P/E")
and as projected for the 1997 and 1998 calendar years, as represented by the
mean estimate reported by publicly available sources. In addition, Equitable
analyzed the multiple of reported book equity, as determined by multiplying the
shares outstanding by the market closing price, and dividing by the most
recently reported book equity.
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<PAGE>
The Company's multiples were generated based on both the (i) the
closing stock price one day prior to the announcement of the Merger and (ii) the
closing stock price of the Company's shares as of October 16, 1997. The
multiples were then compared to the applicable industry sector over the prior
twelve month period in order to generate an average trading discount. The
following were the average trading discount imputed values:
QSR 24.5% to 41.5%
Franchisees
- High Growth Consolidators 41.7% to 54.8%
- Restricted Operators 6.7% to 22.7%
This analysis resulted in a range of imputed values for the Company of
$13.75 to $19.00 per share. In reviewing the operations of the Selected
Companies, Equitable determined that no company was directly comparable to the
Company. After examining the ranges of multiples produced by an analysis of the
Selected Companies, discussing the operations of the Company with management and
reviewing other relevant data concerning the Company versus the Selected
Companies (including sales, relative size, profitability and growth prospects)
and the historic trading pattern of the Shares, Equitable concluded that on a
fully-distributed basis, the Shares of the Company would most likely trade at a
discount to the values implied by the average multiples of the Selected
Companies.
Analysis of Precedent Transactions for Selected Control Acquisitions in
the Restaurant Industry. Equitable analyzed the purchase prices and multiples
paid or proposed to be paid in selected merger and acquisition transactions that
have occurred since April 1994 in the restaurant industry (the "Selected
Restaurant Control Transactions"). This analysis was based on the following
publicly available information for Selected Restaurant Control Transactions and
included: Canteen Corp./Compass Group PLC; Ground Round Restaurants
Inc./Citicorp Venture Capital, Ltd.; Southern Hospitality/DavCo Restaurants,
Inc.; Westsphere Capital/Chase Manhattan Corp.; Denwest Restaurant
Corp./American Family Restaurants Inc.; TPI Enterprises Inc./Shoney's Inc.; NPC
International Inc./Investor Group; Volunteer Capital Corp./Wendy's
International, Inc.; Casa Bonita/CKE Restaurants, Inc.; Arby's Inc./RTM
Restaurant Group; Rally's Hamburgers Inc./Checker's Drive-In Restaurants;
Hardees Food Systems/CKE Restaurants; Krystal Company/Port Royal Holdings Inc.;
Perkins Family Restaurant LP/Restaurant Company; 30 Burger King
Restaurants/AmeriKing Inc.; El Chico Restaurants, Inc./Investor Group;
Sagebrush, Inc./WSMP, Inc.; Skyline Chili, Inc./Fleet Equity Partners; and the
Merger. Equitable selected transactions in which it believed that the target
company had operating characteristics and/or industry focus that resembled those
of the Company. Equitable calculated the Total Firm Value, based on the purchase
price, as a multiple of net sales, EBITDA and EBIT and the shares outstanding
multiplied by the applicable closing price ("Equity Value") as a multiple of
book equity and net income for each target company for the four fiscal quarters
immediately preceding the announcement. This analysis indicated that the ranges
of multiples derived from the Selected Restaurant Control Transactions were (i)
net sales: 0.3x to 1.8x; (ii) EBITDA: 3.1x to 11.5x; (iii) EBIT: 4.3x to 15.4x;
(iv) reported book equity: 1.0x to 6.0x; and (v) net income: 9.7x to 27.3x. The
average multiples of net sales, EBITDA, EBIT, reported book equity and net
income (excluding the maximum and minimum values) were 0.7x, 6.7x, 9.7x, 2.4x
and 17.4x, respectively. Considering the Offer Price, the Company's multiples of
net sales, EBITDA, EBIT, reported book equity and net income were 0.9x, 7.4x,
11.2x, 2.9x and 19.2x, respectively. Equitable then calculated the imputed
valuation ranges of the Company by applying the results for the preceding four
fiscal quarters and projected 1997 of the Company to the average multiples
derived from its analysis of the Selected Restaurant Control Transactions. This
analysis indicated a range of imputed values for the Company of $14.00 to $16.50
per Share.
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<PAGE>
Premium Analysis for Selected Control Acquisitions in the Restaurant
Industry. Equitable also presented an analysis of the premiums paid in
connection with Selected Restaurant Control Transactions. Equitable calculated
the percentage premium per share paid by the acquiror in each of the Selected
Restaurant Control Transactions involving a publicly traded target as a
percentage of the stock price of the target company one day, one week and four
weeks prior to the initial announcement of the September 5 Proposal. This
analysis indicated that the relevant ranges of premiums paid were (i) one day:
(32.9%) to 132.0% (ii) one week: (35.5%) to 169.8%; and (iii) four weeks:
(20.4%) to 176.2%. These premiums resulted in average values of 37.8%, 40.5% and
39.9% for one-day, one week and four weeks, respectively. Equitable compared the
above-mentioned analysis for premiums paid in the Selected Restaurant Control
Transactions to the Company's closing market price of the Shares one day, one
week and four weeks prior to the initial announcement of the September 5
Proposal. Equitable then calculated the imputed valuation range of the Company
by applying the average premiums derived from its analysis of the Selected
Restaurant Control Transactions to the closing market price of the Shares on the
appropriate date. This analysis resulted in a range of values for the Company of
$18.19 to $18.79 per share.
Analysis of Precedent Transactions for Selected Acquisitions of
Remaining Minority Interest. Equitable also analyzed transactions involving the
purchase of remaining minority interest transactions that have occurred since
February 1994 (the "Selected Remaining Minority Interest Transactions"). The
analysis of Selected Remaining Minority Interest Transactions was generated from
publicly available information from the following transactions: Scripps Howard
Broadcasting Company/EW Scripps Company; FoxMeyer Corp./National Intergroup
Inc.; Castle & Cooke Homes Inc./Dole Food Company, Inc.; Pacific Telecom
Inc./PacifiCorp; Fleet Mortgage Group, Inc./Fleet Financial Group Inc.; Rust
International Inc./WMX Technologies Inc.; Club Med Inc./Club Mediterranee SA;
Riverwood International Corp./RIC Holdings Inc.; Bic Corp./Bic SA; NPC
International Inc./Investor Group; Arcus Inc./United Acquisition Company; Great
American Management and Investment Inc./Equity Holdings; Goulden Poultry Company
Inc./Gold Kist Inc.; Bankers Life Holding (Conseco)/Conseco Inc.; Crocker Realty
Trust Inc./Highwoods Properties Inc.; General Physics Corp./National Patent
Development Corporation; WCI Steel Inc./Renco Group Inc.; Leslie's
Poolmart/Investor Group; Central Tractor Farm & Country Inc./JW Childs Equity
Partners LP; Mafco Consolidated Group/Mafco Holdings Inc.; and the Merger (the
"Selected Remaining Minority Interest Acquisitions"). Equitable calculated the
Total Firm Value, based on the purchase price, as a multiple of net sales,
EBITDA and EBIT and the Equity Value as a multiple of reported book equity and
net income for each target company for the four fiscal quarters immediately
preceding the Initial Announcement. This analysis indicated that the ranges of
multiples derived from the Selected Remaining Minority Interest Acquisitions
were (i) net sales: 0.1x to 4.8x; (ii) EBITDA: 2.2x to 9.7x; (iii) EBIT: 3.1x to
15.4x; (iv) reported book equity: 0.9x to 5.0x; and (v) net income: 2.7x to
28.9x. The average multiples of net sales, EBITDA, EBIT, reported book equity
and net income (excluding the maximum and minimum values) were 1.2x, 6.4x, 9.5x,
2.3x, 15.5x, respectively. Considering the Offer Price, the Merger's multiples
of net sales, EBITDA, EBIT, reported book equity and net income were 0.9x, 7.4x,
11.2x, 2.9x and 19.2x, respectively. Equitable then calculated the imputed
valuation ranges of the Company's shares by applying the results for the
preceding four fiscal quarters and projected 1997 fiscal year end of the Company
to the average multiples derived from its analysis of the Selected Remaining
Minority Interest Acquisitions. This analysis indicated a range of values of the
Company of $16.00 to $18.75 per share.
Analysis of Premiums for Acquisitions of Remaining Minority Interest.
Equitable also presented an analysis of the premiums paid in connection with
Selected Remaining Minority Interest Transactions. Equitable calculated the
premium per share paid by the acquiror in each of the Selected Remaining
Minority Interest Transactions as a percentage of the stock price of the target
company one day, one week and four weeks prior to the original announcement of
the transaction. This analysis indicated that the
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relevant ranges of premiums paid were (i) one day: (1.8%) to 52.0%, (ii) one
week: 0.6% to 50.0% and (iii) four weeks: 1.3% to 77.8%. These premiums resulted
in average values of 21.7%, 24.2%, and 28.6% for one-day, one week and four
weeks, respectively. Equitable compared these ranges of premiums paid in the
Selected Remaining Minority Interest Transactions to the Company's closing
market price of the Shares one day, one week and four weeks prior to the Initial
Announcement. Equitable then calculated the imputed valuation range of the
Company's shares by applying the average premiums derived from its analysis of
the Selected Remaining Minority Interest Transactions to the closing market
price of the Shares on the appropriate date. This analysis resulted in a range
of imputed values for the shares of the Company of $16.28 to $16.71 per share.
Discounted Cash Flow Analysis. Equitable performed discounted cash flow
analyses of the projected free cash flows of the Company for the fiscal years
1998 through 2002 based in part upon certain operating and financial
assumptions, forecasts and other information provided by the management of the
Company including the potential disposition of the Company's Midwest Division.
Using this financial information, Equitable calculated the projected free cash
flow based on projected unleveraged net income (earnings before interest and
after taxes) for the 1998 through 2002 fiscal years as adjusted for: (i) certain
projected non-cash items (such as depreciation and amortization); (ii)
forecasted capital expenditures (including discretionary capital expenditures);
and (iii) forecasted working capital requirements (the sum of which is "Free
Cash Flow"). Equitable discounted the stream of projected Free Cash Flows back
to September 28, 1997 (start of fiscal year 1998) using discount rates ranging
from 10.7% to 12.7%. The range of discount rates was designed to reflect the
Company's estimated cost of capital which was based on (i) prevailing interest
rates, including the Company's after-tax cost of debt and the current risk free
rate, (ii) the long-term observed risk premium for securities over the risk free
rate, (iii) an estimated illiquidity risk premium and (iv) the calculated Beta
for the Company's Shares as well as those of the Selected Companies, taking into
account the capital structures of each company. The range of EBITDA multiples
was selected based on the multiples observed in Selected Restaurant Control
Transactions involving a financial buyer. To estimate the residual value of the
Company at the end of the forecast, Equitable applied a range of multiples to
the Company's projected 2002 EBITDA between 4.0x to 8.0x. In order to arrive at
a residual value, Equitable utilized the Company's 2002 EBITDA, based on Company
projections, then subtracted the Company's projected maintenance capital
expenditures in that same year, then applied the aforementioned range of EBITDA
multiples to arrive at a future estimated firm value. Estimated transaction
costs of 2.00% to sell the Company were then netted to arrive at an estimated
future firm value. Equitable then subtracted all outstanding debt, including
capital leases, and added back cash, in excess of amounts needed for ordinary
operations, to arrive at a final residual equity value. Equitable added the
present value of the cash flows and the present value of the final residual
equity value to derive a reference range of values for the Company of $16.00 to
$23.00 per Share.
Leveraged Buyout Analysis. Equitable also prepared a financial analysis
of a leveraged buyout of the Company based on management's projections combined
with the capital assumptions of the Company's lenders. A range of internal rates
of returns ("IRRs") was calculated in order to determine the returns that could
be generated for both sponsor and management equity investments in the Company.
These IRRs were derived based on the Company's projected performance from 1998
to 2003.
The leveraged buyout analysis assumed a "going private" transaction at
the end of fiscal year 1997. The IRR values were then calculated based on a
range of EBITDA exit multiples and a range of exit years. The range of EBITDA
multiples was selected based on the multiples observed in Selected Restaurant
Control Transactions involving a financial buyer. The exit years contemplated in
the model range from year three to year six from the end of fiscal year 1997.
IRRs were calculated based on an initial sponsor investment of $24,000,000 that
consisted of 75% of the preferred shares to be issued and
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67% of the Common Stock to be issued in the Merger. IRRs were calculated based
on an initial management investment of $8,119,000 that consisted of 25% of the
preferred shares to be issued and 33% of the Common Stock to be issued in the
Merger. The proceeds for disbursement to investors were generated by multiplying
the appropriate exit EBITDA multiple times the applicable projected EBITDA and
then netting all outstanding obligations, including capital leases, and adding
back excess cash beyond needs for operations. The value of the pay-in-kind
preferred shares accreted at a rate of 12% annually.
The leveraged buyout contemplates for (i) sponsor equity - pre-tax IRRs
ranging from 9% to 48%, with an expected return of 20% to 39% and, (ii)
management equity - pre-tax IRRs ranging from 7% to 60%, with an expected return
of 23% to 47%.
Leveraged Recapitalization Analysis. Equitable also prepared a
financial analysis of a recapitalization of the Company in which all
shareholders would receive an extraordinary cash distribution per Share of
$15.00 to $16.00 that would be financed with new senior debt financing and any
existing excess cash of the Company based in part on certain financial
assumptions and other information provided by the Company. In addition,
Equitable estimated that the stub security would trade in the range of $5.00 to
$6.00. Equitable determined the level of the special dividend paid by estimating
the sustainable amount of leverage that the Company could incur while servicing
the debt on a timely basis. The stub security estimated value was based on the
negative book equity generated by the leveraged recapitalization transaction and
the resulting reduced cash flow, profitability and income generating capability
of the Company.
Pursuant to the Engagement Letter and later discussions, Equitable was
paid $225,000, plus expenses, in connection with this engagement. The fees
payable to Equitable were not contingent upon the consummation of the Merger.
The Company also has agreed to reimburse Equitable for all travel and other
out-of-pocket expenses incurred in connection with Equitable's engagement under
the Engagement Letter, including all reasonable fees and disbursements of
Equitable's legal counsel and other professional advisors. The Company has also
agreed to indemnify Equitable and its affiliates, the respective limited and
general partners, directors, officers, agents and employees of Equitable and its
affiliates and each other person, if any, controlling Equitable or any of its
affiliates to the full extent lawful from and against any losses, damages,
liabilities, expenses or claims (or actions in respect thereof, including
without limitation, shareholder and derivative actions and arbitration
proceedings) related to or otherwise arising out of the engagement contemplated
by the Engagement Letter or Equitable's role in connections therewith (other
than those determined to have resulted from Equitable's bad faith or gross
negligence). In the ordinary course of its business, Equitable may have traded
and may in the future trade securities of the Company for its own account and
for the accounts of its customers, and, accordingly, may at all times hold a
long or short position in such securities.
EXCEPT AS DESCRIBED HEREIN, NEITHER EQUITABLE NOR ANY AFFILIATE OF
EQUITABLE HAS PERFORMED ANY INVESTMENT BANKING OR OTHER FINANCIAL SERVICES FOR,
OR HAD ANY MATERIAL FINANCIAL RELATIONSHIP WITH THE COMPANY DURING THE TWO YEARS
PRECEDING THE DATE HEREOF.
Purpose of the Merger
DavCo has entered into the Merger Agreement because the Board of
Directors concluded that the Merger was fair to, and in the best interests of,
the Unaffiliated Stockholders. In particular, the Board concluded that it was
unlikely that DavCo could be sold in a transaction, or any transaction could be
consummated, other than the Merger or a similar transaction with the Affiliated
Stockholders, in which the
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Stockholders would have an opportunity to obtain a premium to historical and
current market prices, and that the $20.00 per Share price payable in the Merger
represented an attractive alternative to the potential for future market
appreciation of the Shares. For a discussion of the various factors considered
by the Board in reaching these conclusions, see "SPECIAL FACTORS--Background of
the Merger" and "--Fairness of the Merger; Recommendation of the Board of
Directors; Position of DAC."
The purpose of DAC and its affiliates (including Messrs. Kirstien and
Rothstein and the CVC Investors) in proceeding with the Merger is to acquire the
entire equity interest in DavCo in a leveraged transaction providing fair value
to the Unaffiliated Stockholders. See "CERTAIN INFORMATION CONCERNING DAC, DAC
SUB AND AFFILIATES" and "--Interest of Certain Persons in the Merger." DAC,
Messrs. Kirstien and Rothstein and the CVC Investors regard the acquisition of
the Shares in the Merger as an attractive investment opportunity because they
believe DavCo's future business prospects are favorable and that the substantial
increase in the debt to equity ratio of DavCo after the Merger, although
importing greater investment risks, will create the potential for the
shareholders' equity value of DavCo to increase more rapidly on a percentage
basis than the shareholders' equity value of an identical corporation with a
larger equity base and less debt. Messrs. Kirstien and Rothstein and the CVC
Investors could earn a substantial return on their equity investment in DAC (of
which DavCo will be a wholly-owned subsidiary following consummation of the
Merger). In addition, the flexibility inherent in a closely-held corporation to
implement a long-term business strategy, without concentrating on short-term,
reported quarterly earnings reports, should render more feasible these results.
While the Kirstien Investors, the Rothstein Investors and the CVC
Investors are looking to achieve substantial returns on their investment in
DavCo through their ownership of DAC, they believe that such returns are
available only to those investors who are willing to bear the substantial risks
associated with a highly leveraged investment. Each believes that the discount
on the potential future value of DavCo which may be applied to reflect such risk
from the point of view of Unaffiliated Stockholders is necessarily different
from the discount applied by DAC and the Affiliated Stockholders who will own a
significant interest in a privately held company and who accordingly will be
able to closely and directly monitor and influence the performance of their
investment.
As a result of the Merger, the Kirstien Investors will increase their
percentage beneficial ownership of the equity interests in DavCo, on a fully
diluted basis, from approximately 7.7% to 16.5%; the Rothstein Investors will
increase their percentage ownership, on a fully diluted basis, from
approximately 5.8% to 16.5%; and CVC from approximately 40.6% to, together with
all CVC Investors, 67.0%, on a fully diluted basis. The Affiliated Stockholders'
percentage interests in DavCo's net book value and net earnings will increase
correspondingly. See "SELECTED FINANCIAL DATA OF DAVCO." Payments in connection
with the Merger and related financing will reduce substantially DavCo's net book
value and net earnings. See "FINANCING OF THE MERGER."
In order to provide a prompt and orderly transfer of ownership of DavCo
from the Stockholders to DAC, in light of relevant financial, legal, tax and
other considerations, and to facilitate the required financing for the
transaction, the acquisition has been structured as a merger pursuant to which,
if the Merger Agreement is adopted by the requisite vote of the Stockholders,
DAC Sub will be merged with and into DavCo and all of the outstanding Shares
(other than Shares held in DavCo's treasury, by any subsidiary of DavCo, or by
DAC or DAC Sub) will be converted into the right to receive $20.00 in cash per
Share, without interest unless holders thereof elect to pursue appraisal rights
under the DGCL. See "THE MERGER" and "APPRAISAL RIGHTS."
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Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors with
respect to the Merger, Stockholders should be aware that certain members of
DavCo's Board of Directors have certain interests that present them with actual
or potential conflicts of interest in connection with the Merger. The Board of
Directors was aware of these conflicts and considered them among the other
matters described under "SPECIAL FACTORS -- Fairness of the Merger;
Recommendation of the Board of Directors."
Interest in Common Stock. As of the Record Date, DavCo's directors, Mr.
Kirstien, Mr. Rothstein, Mr. Knief, Mr. Corpening, Edward H. Chambers, Mr.
Farley, Gino Marchetti, Mr. Rosser and Mr. Winokur, beneficially owned an
aggregate of 1,260,630 Shares, as follows:
Number of
Shares(1)
---------
R. D. Kirstien (2).......................... 595,769
H. Rothstein (3)............................ 449,274
B. L. Knief (4)............................. 45,742
C.E. Corpening (5).......................... --
E. H. Chambers.............................. 9,500
J. D. Farley................................ 51,416
G. Marchetti................................ 13,600
H. O. Rosser................................ 71,329
B. J. Winokur............................... 24,000
--------------
(1) Includes all stock options which are exercisable within 60 days of
__________, 1997.
(2) Includes shares held by the Kirstien Investors.
(3) Includes shares held by the Rothstein Investors.
(4) Excludes shares held by CVC. Mr. Knief serves as Senior
Vice-President of CVC.
(5) Excludes shares held by CVC. Mr. Corpening serves as an officer of
CVC.
The Kirstien Investors, the Rothstein Investors and the CVC Investors
have agreed to contribute prior to consummation of the Merger 200,000 Shares,
200,000 Shares and 1,200,000 Shares, respectively, to DAC in exchange for 16.5%,
16.5% and 67.0%, respectively, of the outstanding shares of common stock of DAC.
These shares will not be converted in the Merger and will be canceled without
payment (other than the issuance of shares of DAC's common stock to Messrs.
Kirstien and Rothstein and the CVC Investors). Accordingly, if the Merger is
consummated, the directors of DavCo, as Stockholders, are expected to receive
aggregate net proceeds (net of the exercise price of Shares held under options)
of $11,289,192 in respect of the conversion of their Shares in the Merger as
follows:
R. D. Kirstien..............................$ 5,528,339
H. Rothstein................................ 2,636,380
B. L. Knief................................. 714,840
C. E. Corpening............................. --
E. H. Chambers.............................. 84,688
J. D. Farley................................ 629,240
G. Marchetti................................ 114,375
H. O. Rosser................................ 1,387,080
B. J. Winokur............................... 194,250
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Equity Ownership of DAC. As noted above, the Kirstien Investors, the
Rothstein Investors and the CVC Investors are expected to own 16.5%, 16.5% and
67.0%, respectively, of the equity interests in DAC. See "CERTAIN INFORMATION
CONCERNING DAC, DAC SUB AND AFFILIATES."
Bonuses. If the Merger is consummated, DAC has agreed that Mr. Kirstien
and Mr. Rothstein will receive one-time cash payments aggregating approximately
$3,040,000.
Indemnification. Under the Merger Agreement, DAC or the Surviving
Corporation is required to provide, for a period of six years after the
Effective Time, directors' and officers' liability insurance policies in favor
of the present and former directors, officers, employees and agents of DavCo who
are presently covered under such policies by the Company with respect to actions
or omissions occurring prior to the Effective Time on terms no less favorable
than such insurance maintained by DavCo as of the date of the Merger Agreement
in terms of coverage and amounts, provided that DAC and the Surviving
Corporation shall not be required to pay in the aggregate an annual premium for
such insurance in excess of 200% of the last annual premium paid prior to the
date of the Merger Agreement. The Merger Agreement also provides that DAC and
the Surviving Corporation will indemnify and hold harmless the above parties
against any losses, claims, damages, liabilities, costs, expenses, judgments and
amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation arising out of or pertaining to any action or
omission occurring prior to the Effective Time to the full extent permitted
under Delaware law, the Surviving Corporation's Certificate of Incorporation or
By-Laws in effect as of the Effective Date or any indemnification agreement as
presently in effect. In addition, under the Merger Agreement, DAC has agreed
that all rights to indemnification existing in favor of the employees, agents,
directors and officers of DavCo in effect on the date of the Merger Agreement
will survive the Merger, and that the Certificate of Incorporation and Bylaws of
the Surviving Corporation will include indemnification provisions no less
comprehensive than those contained in the Surviving Corporation's Certificate of
Incorporation and Bylaws in effect as of the Effective Time. The Merger
Agreement also provides that all existing indemnification agreements between the
Company and its directors, officers, employees and agents will be continued
after the Effective Time. See " THE MERGER--Indemnification of Directors and
Officers."
Other. Messrs. Kirstien, Rothstein, Knief and Corpening and David F.
Thomas are currently the directors of DAC and DAC Sub. See "CERTAIN INFORMATION
CONCERNING DAC, DAC SUB AND AFFILIATES." The Merger Agreement provides that the
directors of DAC Sub will be the directors of the Surviving Corporation, and
that the officers of DavCo will be the officers of the Surviving Corporation
upon the consummation of the Merger. See "CERTAIN INFORMATION CONCERNING THE
DIRECTORS AND OFFICERS OF DAVCO." The compensation levels and employee benefit
plans and programs for directors, officers and employees of DavCo after the
Merger are expected to be substantially the same as those currently provided by
DavCo.
Certain Effects of the Merger
Upon consummation of the Merger, the Stockholders will be entitled to
receive a payment in cash of $20.00 per Share, without interest, or to exercise
appraisal rights under Section 262 of the DGCL if properly demanded prior to the
vote on the Merger at the Special Meeting. The Stockholders (other than the
Affiliated Stockholders through their ownership of DAC), as of the Effective
Time, will have no continuing ownership interest in the Company and will no
longer participate in the future earnings and potential growth of the Company.
The Affiliated Stockholders, as the holders of all of the outstanding
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common stock of DAC, will be entitled to all of the benefits, and subject to all
of the risks, that will result from such ownership.
As a result of the Merger, the Company will become a privately held,
wholly-owned subsidiary of DAC. From the Effective Time, the Shares will no
longer be traded on the ASE, and price quotations with respect to sales of
Shares in the public market will no longer be available. The registration of the
Shares under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), will terminate and this termination will substantially reduce the
information required to be filed by the Company with the Securities and Exchange
Commission (the "Commission") and will make certain of the provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) and the requirement, under the proxy rules of Regulation 14A, of
furnishing a proxy or information statement in connection with stockholders
meetings no longer applicable to the Company.
Pursuant to the terms of the Merger Agreement, the board of directors
of DAC Sub shall become, upon consummation of the Merger, the board of directors
of the Company (as the Surviving Corporation). Messrs. Kirstien, Rothstein,
Knief, Corpening and Thomas are the current directors of DAC Sub and are
expected to be the only directors of the Surviving Corporation.
Plans for the Company After the Merger
It is expected that following the Merger the business and operations of
the Company will, except as set forth in this Proxy Statement, be conducted by
the Surviving Corporation substantially as they are currently conducted.
Except as described in this Proxy Statement, DAC has no present plans
or proposals that relate to or would result in an extraordinary corporate
transaction involving the Company's corporate structure, business or management,
such as a merger, reorganization, liquidation, relocation of any operations of
the Company or sale or transfer of a material amount of assets. However, DAC
will continue to evaluate the business and operations of the Surviving
Corporation following the Merger and may propose or develop new plans and
proposals which it considers to be in the best interests of the Surviving
Corporation and its stockholders.
Risk that the Merger Will Not Be Consummated
Consummation of the Merger is subject to several conditions, including
receipt of the required Stockholder approval, the absence of an injunction or
other order restraining consummation of the transactions contemplated by the
Merger Agreement, receipt by DAC and/or DAC Sub of the required financing to
complete the Merger and to pay related fees and expenses and holders of not more
than 5% of the outstanding Shares electing to demand appraisal rights. See "THE
MERGER--Conditions to Consummation of the Merger." Although, as described in
"FINANCING OF THE MERGER," DAC has obtained a commitment for the required
financing, this commitment contains several conditions. Therefore, even if the
requisite Stockholder approval is obtained, there can be no assurance that the
Merger will be consummated.
The Merger Agreement provides that DAC and DAC Sub are entitled to
reimbursement from DavCo for their expenses incurred in connection with the
Merger Agreement and consummation of the transactions contemplated thereby in
the event that the Merger Agreement is terminated by DavCo because of the
exercise by the Board of Directors of its right under the Merger Agreement to
accept another acquisition proposal consistent with its fiduciary obligations to
stockholders under Delaware law, or if the
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Merger Agreement is terminated by DAC because the Board of Directors of DavCo
(i) shall have withdrawn or modified, in a manner adverse to DAC, its approval
or recommendation of the Merger or (ii) shall have approved another acquisition
proposal; provided that such reimbursement for expenses shall not exceed an
aggregate of $1,000,000 See "THE MERGER--Expenses." In addition, DavCo has paid
approximately $1.6 million in commitment fees in connection with the Financing
(as hereafter defined), only $585,000 of which is refundable under limited
circumstances. See "THE MERGER--Expenses."
It is expected that if the Merger Agreement is not adopted by the
Stockholders, or if the Merger is not consummated for any other reason, the
Company's current management, under the direction of the Board of Directors,
will continue to mange the Company as an on-going business. No other transaction
is currently being considered by the Company as an alternative to the Merger.
Certain Risks in the Event of Bankruptcy
If the Company is insolvent at the Effective Time or becomes insolvent
as a result of the Merger, the transfer of funds representing the $20.00 per
Share price payable to Stockholders upon consummation of the Merger may be
deemed to be a "fraudulent conveyance" under applicable law, and therefore may
be subject to claims of certain creditors of the Company. If such a claim is
asserted by the creditors of the Company after the Merger, there is a risk that
persons who were Stockholders of the Company at the Effective Time will be
ordered by a court to turn over to the Company's trustee in bankruptcy all or a
portion of the $20.00 per Share in cash they received upon the consummation of
the Merger.
Based upon the projected capitalization of the Company at the time of
the Merger and projected results of operations and cash flow after the Merger,
management of the Company has no reason to believe that the Company and its
subsidiaries, on a consolidated basis, will be insolvent immediately after
giving effect to the Merger.
Certain Litigation
On September 8 and September 9, 1997, two purported stockholder class
action complaints (the "Complaints") were filed in the Court of Chancery of the
State of Delaware naming DavCo, the individual members of its board of directors
and Citicorp (an affiliate of CVC) as defendants. These actions are captioned:
Harbor Finance Partners v. Ronald D. Kirstien, Harvey Rothstein, Edward H.
Chambers, Gino Marchetti, James D. Farley, Harold O. Rosser, Byron L. Knief,
Barton J. Winokur, Charles Corpening, Citicorp, and DavCo Restaurants, Inc.,
Del. Ch., C.A. No. 15912NC (filed September 8, 1997) and Gorin Brothers, L.P. v.
Ronald D. Kirstien, Harvey Rothstein, James D. Farley, Byron L. Knief, Charles
E. Corpening, Barton J. Winokur, Gino Marchetti, Harold O. Rosser, Edward H.
Chambers, Citicorp and DavCo Restaurants, Inc., Del. Ch., C.A. No. 15915NC
(filed September 9, 1997). The complaints charge that the September 5 Proposal
is, or consummation thereof would be, wrongful, unfair and in breach of the
individual defendants' fiduciary duties. Among other things, according to the
Complaints, (i) the $18-$20 price range referenced in the September 5 Proposal
is grossly inadequate and unfair, (ii) the September 5 Proposal was made at a
time when DavCo is poised for significant future growth and earnings, (iii) the
Affiliated Stockholders will consummate the September 5 Proposal without an
auction or other type of market check, and (iv) the defendants are in possession
of non-public information concerning the financial condition and prospects of
DavCo. The Complaints seek, among other things, injunctive relief against
consummation of the September 5 Proposal, rescissory relief or damages in lieu
thereof if the September 5 Proposal is consummated, and other equitable relief.
On October 29, 1997, all defendants moved to dismiss the Harbor Finance
complaint for failure to state a claim upon which relief may be granted and to
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stay discovery with respect thereto pending determination of the motion to
dismiss. The Gorin complaint has not been served and, accordingly, the
defendants are not obligated to respond thereto.
THE MERGER
The following information with respect to the terms and conditions of the Merger
is qualified in its entirety by reference to the complete text of the Merger
Agreement, a copy of which is attached to this Proxy Statement as Annex A.
General
The Merger Agreement sets forth the terms and conditions upon which the
Merger is to be effected. The Merger will be consummated only if the conditions
thereto set forth in the Merger Agreement are satisfied or waived (see
"Conditions to Consummation of the Merger" below) including receipt of the
required stockholder approval (see "Stockholder Adoption of the Merger
Agreement" below).
The Merger Agreement provides that at the Effective Time, DAC Sub will
merge with and into the Company and the separate existence of DAC Sub will
cease. The Company shall be the Surviving Corporation in the Merger. Each Share
which is outstanding immediately prior to the Effective Time (other than Shares
held at the Effective Time in the Company's treasury, by any Subsidiary of the
Company, by DAC or by DAC Sub, which will be canceled without payment, and other
than Shares in respect of which appraisal rights have been properly perfected)
will be converted into the right to receive $20.00 in cash, without interest.
Each share of common stock of DAC Sub issued and outstanding at the Effective
Time will become, without any action on the part of the holder thereof, one
fully paid and non-assessable share of common stock of the Surviving
Corporation. Upon consummation of the Merger, Stockholders, other than DAC (and
the Affiliated Stockholders as the owners of DAC), will possess no further
interest in, or rights as Stockholders of, the Company, other than their right
to receive $20.00 per Share or to exercise appraisal rights.
Effective Time of the Merger
The Merger Agreement provides that the Merger will become effective at
such time as the Certificate of Merger is duly filed with the Secretary of State
of the State of Delaware in accordance with the DGCL or at such later time as is
specified in the Certificate of Merger. The required filing is expected to be
made promptly following the approval and adoption of the Merger Agreement by the
Stockholders at the Special Meeting and the satisfaction, or where permissible,
waiver of the other conditions set forth in the Merger Agreement. Upon the
effectiveness of the Merger, the Restated Certificate of Incorporation of DavCo
will be amended to read as set forth in Exhibit A to the Merger Agreement and as
so amended will be the Restated Certificate of Incorporation of the Surviving
Corporation, and the By-Laws of DAC Sub in effect at the Effective Time will
become the By-Laws of the Surviving Corporation. The Merger Agreement provides
that, at the Effective Time, the directors of DAC Sub will be the directors of
the Surviving Corporation and the officers of DavCo will be the officers of the
Surviving Corporation.
Stockholder Adoption of the Merger Agreement
Under the DGCL, the affirmative vote of Stockholders entitled to cast
at least a majority of the votes which all Stockholders are entitled to cast at
the Special Meeting is required for adoption of the Merger Agreement. Pursuant
to the terms of DavCo's Restated Certificate of Incorporation and the Merger
Agreement, consummation of the Merger also requires the affirmative vote of a
majority of the
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outstanding Shares that are held by the Unaffiliated Stockholders. See
"INTRODUCTION--Voting at the Special Meeting," "SPECIAL FACTORS--Interests of
Certain Persons in the Merger."
Payment for Shares
After consummation of the Merger, Stockholders must surrender their
stock certificates or certificates representing unexercised options or warrants
to purchase Shares (collectively "Warrants") to a bank or trust company to be
designated by DAC Sub (the "Paying Agent") in order to receive $20.00 per Share
or, in the case of Warrants, an aggregate amount equal to $20.00 multiplied by
the aggregate number of Shares issuable upon the exercise in full of all
Warrants held by the holder thereof as of the Effective Time, less the aggregate
cash exercise price payable upon exercise of all such Warrants. No interest will
be paid or accrued on the cash payable upon the surrender of such certificates.
Detailed instructions with regard to the surrender of certificates,
together with a letter of transmittal, will be forwarded to holders of Shares by
the paying Agent promptly following the Effective Time. Stockholders should not
submit their certificates to the Company or the Paying Agent until they have
received such materials.
Payment for Shares will be made to former Stockholders as promptly as
practicable following receipt by the Paying Agent of such certificates and other
required documents. Until stock certificates and other required documents are
received by the paying Agent, each certificate formerly representing Shares or
Warrants shall represent solely (i) the right to receive $20.00 per Share in
cash, without interest (less, in the case of Warrants, the aggregate cash
exercise price payable upon exercise of such Warrants), or (ii) in the case of
Shareholders who have properly perfected appraisal rights with respect to their
Shares, the right to seek payment pursuant to Section 262 of the DGCL. See
"APPRAISAL RIGHTS."
The Payment Fund
At or before the Effective Time, DAC Sub (or the Company, as the
Surviving Corporation) will deposit with the Paying Agent, in trust for the
benefit of all Stockholders receiving cash for their Shares, an amount of cash
sufficient to satisfy the payment of $20.00 for each outstanding Share and
Warrant owned by such Stockholders. At any time at least 120 days after the
Effective Time, the Surviving Corporation may request the Paying Agent to return
to it an amount equal to $20.00 multiplied by the number of shares in respect of
which appraisal rights have been properly perfected.
Regulatory Matters
Other than the requirements of the Exchange Act, premerger notification
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the filing of the Certificate of Merger pursuant to the DGCL, neither the
Company, DAC nor DAC Sub is aware of any federal or state regulatory approvals
or consents that must be obtained in connection with the Merger.
Conditions to Consummation of the Merger
The respective obligations of DAC, DAC Sub and DavCo to effect the
Merger are subject to the satisfaction or waiver, at or prior to the Effective
Time, of each of the following conditions: (i) the representations and
warranties contained in the Merger Agreement that are qualified by materiality
shall be true and correct and those that are not so qualified shall be true and
correct in all material respects as of the Closing Date; (ii) the performance in
all material respects of all obligations contained in the Merger Agreement that
are required to be performed at or prior to the Closing Date; (iii) the
Stockholders shall
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have adopted and approved the Merger Agreement and the Merger as required under
the laws of the State of Delaware, and the holders of a majority of the
outstanding Shares that are held by the Unaffiliated Stockholders shall have
voted for the adoption and approval of the Merger Agreement and the Merger; (iv)
all filings with and all approvals, consents, authorizations and waivers from
governmental and other regulatory agencies and other third parties required to
consummate the transactions contemplated by the Merger Agreement, which, if not
obtained, would have a material adverse effect on the financial condition,
results of operation or business of DavCo and its subsidiaries taken as a whole,
or would prevent the consummation of the Merger and other transactions
contemplated by the Merger Agreement, shall have been made or obtained; (v)
there shall be no effective restraining order, injunction or any other order of
any nature issued by a court of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Merger and the transactions
contemplated by the Merger Agreement; and (vi) no action, proceeding,
application or counterclaim by any governmental entity before any court or
governmental regulatory or administrative agency, authority or tribunal, and
which (A) if adversely determined would have a material adverse effect on the
Surviving Corporation or the ability of any party to the Merger Agreement to
perform its obligations thereunder or (B) challenges or seeks to challenge,
restrain or prohibit the consummation of the Merger, shall have been threatened,
instituted or be pending.
The obligation of DAC and DAC Sub to effect the Merger is also subject
to the satisfaction or waiver, at or prior to the Effective Time, of the
following conditions: (i) DAC and/or DAC Sub shall have completed their
arrangements for the Financing (as hereafter defined) and received the cash
proceeds thereof; and (ii) the holders of not more than 5% of the total number
of Shares outstanding immediately prior to the Effective Time, on a fully
diluted basis, shall have demanded an appraisal of such Shares in accordance
with Section 262 of the DGCL.
Certain Covenants
Conduct of DavCo's Business Prior to the Merger. The Merger Agreement
provides that, prior to the Effective Time, except as contemplated by the Merger
Agreement or otherwise consented to or approved in writing by DAC: (i) DavCo
will operate and will cause its subsidiaries to operate its business in the
ordinary course of business; (ii) DavCo shall not declare, set aside or pay any
dividends on, or make any distributions in respect of, its outstanding capital
stock, except for its regular dividend to stockholders, shall not split, combine
or reclassify any of its outstanding capital stock and shall not purchase,
redeem or otherwise acquire any of its outstanding capital stock or any right,
warrant or option to acquire stock; (iii) DavCo shall not issue, sell or
otherwise encumber any shares of its capital stock or other voting securities or
rights, warrants or options therefor, except for the issuance of Shares upon the
exercise of warrants or options outstanding prior to the date of the Merger
Agreement; (iv) DavCo shall not amend its Certificate of Incorporation or
By-laws; (v) DavCo shall not acquire any business or any corporation,
partnership, joint venture, association or other business organization or
division thereof (or any interest therein), or form any subsidiaries; (vi) DavCo
shall not sell or otherwise dispose of any of its substantial assets, except in
the ordinary course of business, or as disclosed in the Merger Agreement; (vii)
DavCo shall not make any capital expenditures or commitments with respect
thereto, except capital expenditures or commitments not exceeding $20,000,000 in
the aggregate as DavCo may, in its discretion, deem appropriate; (viii) DavCo
shall not (x) incur any indebtedness for borrowed money or guaranty any such
indebtedness of another person, other than (A) borrowings in the ordinary course
under existing lines of credit (or under any refinancing of such existing
lines), (B) indebtedness owing to, or guaranties of indebtedness owing to, DavCo
or (C) in connection with the financing of the Merger, or (y) make any loans or
advances to any other person, other than to DavCo and other than routine
advances to employees, except in the case of either (x) or (y) as disclosed in
the Merger Agreement; (ix) DavCo shall not grant or agree to grant to any
employee any increase in wages or bonus, severance, profit sharing, retirement,
deferred compensation,
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insurance or other compensation or benefits, or establish any new compensation
or benefit plans or arrangements, or amend or agree to amend any existing DavCo
plans, except as may be required under existing agreements or in the ordinary
course of business consistent with past practices; (x) DavCo shall not merge,
amalgamate or consolidate with any other entity in any transaction, sell all or
substantially all of its business or assets, or acquire all or substantially all
of the business or assets of any other person or entity; (xi) DavCo shall not
enter into or amend any employment, consulting, severance or similar agreement
with any individual; (xii) DavCo shall not change its accounting policies in any
material respect, except as required by generally accepted accounting
principles; and (xiii) DavCo shall not commit or agree to take any of the
foregoing actions.
Other Agreements. DavCo has agreed to take all action necessary in
accordance with applicable law and its Restated Certificate of Incorporation and
By-laws to call, give notice of and convene the Special Meeting of Stockholders
to consider and vote upon the approval of the Merger and all other actions
contemplated by the Merger Agreement that require approval and adoption by the
Stockholders. DavCo, DAC and DAC Sub have agreed to use their commercially
reasonable efforts and to otherwise cooperate in taking the steps necessary to
consummate the Merger. In particular, DAC and DAC Sub have agreed to use their
commercially reasonable efforts to obtain the Financing on terms satisfactory to
them. DavCo has agreed that it will not, and will not permit any of its
subsidiaries or any of their respective officers, employees, representatives or
agents, directly or indirectly, to solicit, initiate or encourage, or to
participate in any discussions or negotiations regarding, or to furnish to any
person any information with respect to, or to take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or
reasonably may be expected to lead to, any proposal regarding a merger or other
business combination involving DavCo or for the acquisition of a material equity
interest in, or a material portion of the assets of, DavCo (an "Acquisition
Proposal"), other than the transactions contemplated by the Merger Agreement;
provided that DavCo may furnish such information to, or enter into discussions
or negotiations with, another party in connection with an unsolicited
Acquisition Proposal by such party if determined in good faith by the Board of
Directors (after consultation with counsel) to be required for the Board to
comply with its fiduciary obligations to stockholders under applicable law.
Termination
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, whether before or after approval and
adoption of the Merger Agreement by the Stockholders: (i) by mutual written
consent of the DAC and DavCo; (ii) by either DavCo or DAC if the Merger has not
been consummated on or prior to April 1, 1998, provided that the failure to
consummate the Merger is not attributable to the failure of the terminating
party to fulfill its obligations pursuant to the Merger Agreement; (iii) by
either DavCo or DAC if at the Special Meeting or any adjournment thereof, the
Stockholders fail to adopt and approve the Merger Agreement and the Merger as
required by Delaware law, DavCo's Restated Certificate of Incorporation and the
terms of the Merger Agreement; (iv) by either DavCo or DAC if a court of
competent jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken other actions,
in each case permanently enjoining, restraining, or otherwise prohibiting the
Merger, and such order, decree, ruling or other action shall become final and
nonappealable; (v) by DavCo, if the Board of Directors of DavCo shall have
approved an Acquisition Proposal after determining that such approval is
necessary in the exercise of its fiduciary obligations under applicable law;
(vi) by DAC, if the Board of Directors of DavCo shall have (i) withdrawn or
modified, in a manner adverse to DAC or DAC Sub, the approval or recommendation
by the Board of Directors of the Merger Agreement or the Merger or (ii) approved
another Acquisition Proposal; (vii) by DAC, if any of the conditions to DAC or
DAC Sub's obligations set forth in Section 6.2 of the Merger Agreement shall
have become incapable of fulfillment, and shall not have been waived by DAC, or
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if DavCo shall breach in any material respect any of its representations,
warranties or obligations under the Merger Agreement and such breach shall not
have been cured in all material respects or waived and DavCo shall not have
provided reasonable assurance that such breach will be cured in all material
respects on or before the closing date, but only if such breach, singly or
together with all other such breaches, constitutes a failure of the condition
contained in such Section 6.2 as of the date of such termination, and provided
that DAC or DAC Sub shall not be in breach of any of its material
representations, warranties, covenants or agreements contained in the Merger
Agreement; or (viii) by DavCo, if any of the conditions to DavCo's obligations
set forth in Section 6.3 of the Merger Agreement shall have become incapable of
fulfillment, and shall not have been waived by DavCo, or if DAC or DAC Sub shall
breach in any material respect any of their respective representations,
warranties or obligations hereunder and such breach shall not have been cured in
all material respects or waived and DAC or DAC Sub, as the case may be, shall
not have provided reasonable assurance that such breach will be cured in all
material respects on or before the closing date, but only if such breach, singly
or together with all other such breaches, constitutes a failure of the condition
contained in such Section 6.3 as of the date of such termination, and provided
that DavCo shall not be in breach of any of its material representations,
warranties, covenants or agreements contained in the Merger Agreement.
Expenses
The Merger Agreement provides that DAC and DAC SUB are entitled to
reimbursement from DavCo for their expenses incurred in connection with the
Merger Agreement and consummation of the transactions contemplated thereby in
the event that the Merger Agreement is terminated by DavCo because of the
exercise by the Board of Directors of its right under the Merger Agreement to
accept another acquisition proposal consistent with its fiduciary obligations to
stockholders under Delaware law, or if the Merger Agreement is terminated by DAC
because the Board of Directors of DavCo (i) shall have withdrawn or modified, in
a manner adverse to DAC, its approval or recommendation of the Merger or (ii)
shall have approved another acquisition proposal; provided that such
reimbursement for expenses shall not exceed an aggregate of $1,000,000. Beyond
the terms of the Merger Agreement, DavCo has agreed to bear as its expense the
commitment fees in connection with the Financing, totaling approximately $2.2
million, of which approximately $1.6 million has been paid by DavCo and
approximately $0.6 million would be payable upon funding by GAF under the
commitment. However, if DavCo terminates the commitment, a termination fee of
$750,000 would be payable by DavCo to GAF, and if GAF terminates the commitment
or fails to fund in contravention of the commitment, GAF is required to refund
to DavCo $585,000 of the $1.6 million in commitment fees paid by DavCo. See
"FINANCING OF THE MERGER--Fees and Expenses."
Indemnification of Directors and Officers
Under the Merger Agreement, DAC or the Surviving Corporation is
required to provide, for a period of six years after the Effective Time,
directors' and officers' liability insurance policies in favor of the present
and former directors, officers, employees and agents of DavCo who are presently
covered under such policies by the Company with respect to actions or omissions
occurring prior to the Effective Time on terms no less favorable than such
insurance maintained by DavCo as of the date of the Merger Agreement in terms of
coverage and amounts, provided that DAC and the Surviving Corporation shall not
be required to pay in the aggregate an annual premium for such insurance in
excess of 200% of the last annual premium paid prior to the date of the Merger
Agreement. The Merger Agreement also provides that DAC and the Surviving
Corporation will indemnify and hold harmless the above parties against any
losses, claims, damages, liabilities, costs, expenses, judgments and amounts
paid in settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to any action or omission
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occurring prior to the Effective Time to the full extent permitted under
Delaware law, the Surviving Corporation's Certificate of Incorporation or
By-Laws in effect as of the Effective Date or any indemnification agreement as
presently in effect. In addition, under the Merger Agreement, DAC has agreed
that all rights to indemnification existing in favor of the employees, agents,
directors and officers of DavCo in effect on the date of the Merger Agreement
will survive the Merger, and that the Certificate of Incorporation and Bylaws of
the Surviving Corporation will include indemnification provisions no less
comprehensive than those contained in the Surviving Corporation's Certificate of
Incorporation and Bylaws in effect as of the Effective Time. The Merger
Agreement also provides that all existing indemnification agreements between the
Company and its directors, officers, employees and agents will be continued
after the Effective Time. See " THE MERGER--Indemnification of Directors and
Officers."
Accounting Treatment of the Merger
Pursuant to the guidelines established by the Financial Accounting
Standards Board's Emerging Issues Task Force (EITF) Issue 88-16, the Merger will
be accounted for as a step acquisition.
FINANCING OF THE MERGER
The consummation of the Merger is subject to, among other things,
receipt by DAC and DAC Sub of proceeds of the financing (the "Financing")
necessary to pay the consideration payable to the Stockholders in the Merger and
to pay fees and expenses incurred in connection with the Merger. The total
amount of financing expected to be required is approximately $138 million and is
expected to be obtained from GAF, as described below.
The expected sources and uses of funds in connection with the Merger are as
follows:
Sources
Debt Financing...................................... $ 137,502,000
---------------
Total Sources of Funds......................... $ 137,502,000
===============
Uses
Payment for Shares in the Merger.................... $ 105,392,000
Management, Director and Employee Options and Bonus
(net of tax benefit to Company)................... $ 6,422,000
Repayment of Existing Indebtedness.................. $ 21,295,000
Fees and Expenses................................... $ 4,393,000
---------------
Total Uses of Funds............................ $ 137,502,000
===============
Debt Financing
GAF has committed, pursuant to a commitment letter dated October 17,
1997 and subject to the various conditions mentioned below, to provide a total
of $180,000,000 in financing in the form of three term loans, described below,
aggregating $150,000,000, and a two-year forward commitment facility in the
amount of $30,000,000. Borrowers under the GAF commitment are DavCo, Southern
Hospitality Corp., a
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subsidiary of DavCo, and DAC, and borrowings under the GAF financing would be
guarantied by FriendCo Restaurants, Inc., a subsidiary of DavCo.
The first term loan ("Loan 1"), in the amount of $20,000,000 for 15
designated restaurant locations, amortizes in equal monthly payments over a 20
year term. The interest rate on Loan 1 will be fixed at the closing of the
financing at a per annum rate equal to the 30-year U.S. Treasury Rate plus 325
basis points. Loan 1 will be secured by a first-fee mortgage on the 15 Loan
1-designated restaurants and a first priority security interest in all other
assets relating to the same 15 restaurants. The second term loan ("Loan 2"), in
the amount of $104,000,000 for 124 designated restaurant locations, amortizes in
equal monthly payments over a 15-year term. The interest rate on Loan 2 will be
fixed at the closing of the financing at a per annum rate equal to the 10-year
U.S. Treasury Rate plus 350 basis points. Loan 2 will be secured by a first
priority security interest in all other assets relating to the same 124 Loan
2-designated restaurants. The third term loan ("Loan 3") is in the amount of
$26,000,000 for 38 designated restaurant locations. Loan 3 provides for up to a
two-year term with interest-only payments during such term, with principal
reductions during such two-year term occurring only upon the sale or disposition
of a Loan 3-designated restaurant during the term. At the end of the two-year
term, the remaining principal balance of Loan 3, unless paid, will be converted
into a 15-year term loan, provided that there shall have been no material
adverse change in the borrowers. The per annum interest rate on Loan 3 will be
based upon the one month LIBOR plus 350 basis points, to be set monthly. If Loan
3 is converted with two years, the interest rate will be fixed at a rate per
annum equal to the 10-year U.S. Treasury Rate plus 350 basis points.
The commitment letter provides for a two-year, $30,000,000 forward
commitment for development or acquisition of new restaurants. Availability under
the forward commitment will be limited to 75% of the business and realty value
of the newly constructed or acquired restaurants. In addition, to be eligible
for borrowing under the forward commitment, the restaurants pledged as
collateral for such borrowing must demonstrate certain minimum cash flow and
fixed charge coverage criteria. Borrowings under the forward commitment will
amortize in equal monthly installment over two different terms, determined by
the collateral base: a 15-year term for borrowings for newly acquired or
constructed restaurants secured by equipment or business value, and a 20-year
term for borrowings for newly acquired or constructed restaurants secured by
real estate and furniture, fixtures and equipment. Borrowings under the forward
commitment will be cross-collateralized and cross-defaulted with Loan 1, Loan 2
and Loan 3. The interest rate on borrowings under the forward commitment will be
determined based upon the term of each borrowing, with the spread for each
borrowing subject to change based upon prevailing market conditions.
The definitive agreements for the financing to be provided under the
GAF commitment letter have not been reached. Accordingly, the provisions
described herein may change as a result of the negotiation of definitive
agreements. It is a condition to the GAF financing that definitive agreements be
entered into. In addition, it is anticipated that the obligation of GAF to
provide financing will be subject to the satisfaction of certain other
conditions, including among others: (i) the satisfaction of all conditions
precedent to the Merger and GAF's satisfaction with the terms and documentation
for the Merger; (ii) GAF shall have received a solvency letter from a third
party valuation firm satisfactory to GAF as to the solvency of the borrowers
after giving effect the Merger; and (iii) GAF shall have received evidence
acceptable to it as to borrowers' compliance with and good standing under its
existing restaurant franchise documents.
The definitive agreements for the financing are also expected to
contain numerous restrictive covenants, including covenants related to mergers
and asset sales or purchases, incurrence of debt obligations, liens and
contingent obligations, termination, waivers or amendments of franchise
documents, name changes, transactions with affiliates, distributions and
dividends and use of proceeds. The definitive
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agreements also are expected to contain standard event of default provisions,
including, among other things, payment defaults, misrepresentations, covenant
defaults, material defaults under franchise agreements and other material
contracts, cross-defaults into other material indebtedness, failure to have
perfected liens of purported priority, termination of GAF loan documents or
franchise agreements, bankruptcy events, adverse judgments, abandonment of the
Wendy's franchise and changes of control.
Fees and Expenses
The fees and expenses paid and estimated to be paid by DAC and DavCo in
connection with the Merger, the Financing and related transactions are as
follows:
Financing Fees.................................... $ 2,213,000
Investment Banking................................ $ 200,000
Legal and Accounting.............................. $ 1,700,000
Printing and Distribution......................... $ 10,000
SEC Filings....................................... $ 22,600
Miscellaneous..................................... $ 247,400
-------------
TOTAL........................................ $ 4,393,000
=============
To the extent not paid prior to the Effective time by DAC or DavCo, all
such fees and expenses will be paid by the Surviving Corporation if the Merger
is consummated. DavCo has paid approximately $1.6 million in commitment and
other fees in connection with the Financing. If the Merger is not consummated,
each party will bear its respective fees and expenses (including, with respect
to DavCo, the commitment and other fees relating to the Financing) except as
provided in the Merger Agreement. See "THE MERGER -- Expenses."
In addition to the foregoing fees, DAC has agreed to make certain
one-time payments aggregating approximately $3 million to Messrs. Kirstien and
Rothstein upon consummation of the Merger. See "SPECIAL FACTORS -- Interests of
Certain Persons in the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of federal income tax consequences is based on
current law and is for general information only. The tax treatment of a
Stockholder may vary depending upon his, her or its particular situation.
Certain holders (including, but not limited to, insurance companies, tax-exempt
organizations, financial institutions, S Corporations, employees of DavCo,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The receipt of cash for Shares pursuant to the Merger or the exercise
of appraisal rights by Stockholders will be treated as a redemption of DavCo
stock for federal income tax purposes. Assuming that a Stockholder's interest in
DavCo will terminate as a result of the Merger taking into account the
constructive ownership rules of Section 318 of the Internal Revenue Code (the
"Code"), the Stockholder will realize gain or loss equal to the difference
between the amount of cash received and the Stockholder's
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tax basis for his, her or its Shares. The gain or loss will be capital gain or
loss if the Stockholder holds his, her or its Shares as a capital asset.
Under the provisions of the Taxpayer Relief Act of 1997, in the case of
individuals and other persons not taxed as corporations, if the holding period
for the Shares is more than 18 months as of the Effective Time, the maximum
federal income tax rate on any capital gain recognized by the Stockholder is
20%. A non-corporate Stockholder whose holding period is more than 12 months but
no more than 18 months as of the Effective Time will be subject to a maximum tax
rate on capital gains of 28%. Net gains on the sale of capital assets held 12
months or less are taxed at rates applicable to ordinary income. A capital loss
of a noncorporate Stockholder may be offset against capital gains (and against
ordinary income up to $3,000 per year). Unused capital losses may be carried
forward to future years. In the case of corporate Stockholders, net capital
gains are generally taxed at rates applicable to ordinary income.
Stockholders whose interests in DavCo (taking into account the
constructive ownership rules of Section 318 of the Code) are not terminated as a
result of the Merger will realize gain or loss as described above if the
redemption is either "not essentially equivalent to a dividend" or
"substantially disproportionate" within the meaning of Section 302 of the Code.
Whether or not a Stockholder qualifies for sale or exchange treatment under
these provisions depends on the Stockholder's individual facts and
circumstances. Stockholders should consult their tax advisors with respect to
the applicability of these provisions.
If the transaction does not qualify for sale or exchange treatment as
described above, the payment for Shares will be treated as a distribution by
DavCo with respect to its stock, taxable as a dividend (without any reduction
for the Stockholder's basis in the Shares) to the extent that DavCo has current
or accumulated earnings and profits for federal income tax purposes. Any
unrecovered basis in the Shares should be reallocated to other stock that the
holder owns or is treated as owning under the constructive ownership rules. If
the amount of the payment exceeds DavCo's earnings and profits, it will be
treated first as a return of capital (thereby reducing the Shareholder's basis
in his, her or its Shares) and then, to the extent it exceeds his, her or its
basis, as gain or loss from the sale or exchange of the Shares.
APPRAISAL RIGHTS
Each Stockholder has the right to demand appraisal of his shares in
connection with the Merger, to have his Shares appraised by the Delaware Court
of Chancery and to receive the fair value of his Shares as determined by such
Court, in cash, if such stockholder follows the procedures set forth under
Delaware law and summarized below.
Holders of record of Shares who desire to exercise appraisal rights
must satisfy all of the conditions contained in Section 262 of the DGCL. A
written demand for appraisal of the Shares owned by a Stockholder seeking
appraisal must be delivered to DavCo by the record holder of such Shares before
the taking of the vote on the Merger. Any such demands should be directed to:
DavCo Restaurants, Inc., 1657 Crofton Boulevard, Crofton, MD 21114, Attention:
Secretary. This written demand for appraisal must be separate from any proxy or
vote abstaining from or voting against approval of the Merger. Voting against
approval of the Merger, abstaining from voting or failing to vote with respect
to approval of the Merger will not constitute a demand for payment within the
meaning of Section 262.
STOCKHOLDERS ELECTING TO EXERCISE APPRAISAL RIGHTS UNDER SECTION 262
MUST NOT VOTE FOR APPROVAL OF THE MERGER. A VOTE BY A
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STOCKHOLDER AGAINST APPROVAL OF THE MERGER IS NOT REQUIRED IN ORDER FOR THAT
STOCKHOLDER TO EXERCISE APPRAISAL RIGHTS. HOWEVER, IF A STOCKHOLDER RETURNS A
SIGNED PROXY BUT DOES NOT SPECIFY A VOTE AGAINST APPROVAL OF THE MERGER OR A
DIRECTION TO ABSTAIN, THE PROXY, IF NOT REVOKED, WILL BE VOTED FOR APPROVAL OF
THE MERGER, WHICH WILL HAVE THE EFFECT OF WAIVING THAT STOCKHOLDER'S APPRAISAL
RIGHTS.
A demand for appraisal will be sufficient if it reasonably informs
DavCo of the identity of the Stockholder and that such Stockholder intends
thereby to demand appraisal of such Stockholder's Shares.
Only a holder of record of Shares is entitled to assert appraisal
rights for the Shares registered in that holder's name. A demand for appraisal
should be executed by or on behalf of the holder of record fully and correctly,
as the holder's name appears on the stock certificates. If Shares are owned of
record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the demand for appraisal should be made in that capacity, and if
the Shares are owned of record by more than one person, as in a joint tenancy or
tenancy in common, the demand for appraisal should be executed by or on behalf
of all joint owners. An authorized agent, including one or more joint owners,
may execute a demand for appraisal on behalf of a holder of record; however, the
agent must identify the record owner or owners and expressly disclose the fact
that in executing the demand, the agent is agent for such owner or owners. A
record holder such as a broker who holds Shares as nominee for several
beneficial owners may exercise appraisal rights with respect to the Shares held
for one or more beneficial owners while not exercising such rights with respect
to the Shares held for other beneficial owners; in such case, the written demand
should set forth the number of Shares as to which appraisal is sought and where
no number of Shares is expressly mentioned the demand will be presumed to cover
all Shares held in the name of the record owner. Holders of Shares who hold
their shares in brokerage accounts or other nominee forms and who wish to
exercise appraisal rights are urged to consult with their brokers to determine
the appropriate procedures for the making of a demand for appraisal by such
nominee.
Within 10 days after the Effective Time, the Surviving Corporation must
send a notice as to the effectiveness of the Merger to each person who has
satisfied the appropriate provisions of Section 262 of the DGCL. Within 120 days
after the Effective Time, but not thereafter, the Surviving Corporation, or any
record holder of shares entitled to appraisal rights under Section 262 of the
DGCL and who has complied with the foregoing procedures, may file a petition in
the Delaware Court of Chancery demanding a determination of the fair value of
the Shares. The Surviving Corporation is not under any obligation, and DavCo has
no present intention, to file a petition with respect to the appraisal of the
fair value of the Shares. Accordingly, it is the obligation of the Stockholders
to initiate all necessary action to perfect their appraisal rights within the
time prescribed in Section 262 of the DGCL.
Within 120 days after the Effective Time, any record holder of Shares
who has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of Shares not voted in favor of the
Merger with respect to which demands for appraisal were received and the
aggregate number of holders of such Shares. Such statements must be mailed
within 10 days after a written request therefor has been received by the
Surviving Corporation.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the Stockholders
entitled to appraisal rights and will appraise the "fair value" of the Shares,
exclusive of any element of value arising from the accomplishment or expectation
of the Merger, together with a fair rate of Interest, if any, to be paid upon
the amount determined to be the fair
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value. Stockholders considering seeking appraisal should be aware that the fair
value of their Shares as determined under Section 262 of the DGCL could be more
than, the same as or less than the value of the consideration that they would
otherwise receive in the Merger if they did not seek appraisal of their Shares.
The Delaware Supreme Court has stated that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered in the appraisal
proceedings. In addition, the Delaware courts have stated that the statutory
appraisal remedy under Section 262 of the DGCL may not be a dissenter's
exclusive remedy, depending on the factual circumstances. See "Certain
Litigation".
The Delaware Court of Chancery will also determine the amount of
interest, if any, to be paid upon the amounts to be received by persons whose
Shares have been appraised. The costs of the action may be determined by the
court and taxed upon the parties as the court deems equitable. Upon application
of a Stockholder, the court may also order that all or a portion of the expenses
incurred by any holder of Shares in connection with an appraisal, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all of the Shares entitled to appraisal.
Any Stockholder who has duly demanded an appraisal in compliance with
Section 262 of the DGCL will not, after the Effective Time, be entitled to vote
the Shares subject to such demand for any purpose or be entitled to the payment
of dividends or other distributions on those Shares (except dividends or other
distributions payable to holders of record of Shares as of a date prior to the
Effective Time).
If any Stockholder who demands appraisal of Shares under Section 262 of
the DGCL fails to perfect, or effectively withdraws or loses, the right to
appraisal, as provided in the DGCL, the Shares of such holder will be converted
into the right to receive the Merger consideration without interest in
accordance with the Merger Agreement. A holder of Shares will fail to perfect,
or will effectively lose, the right to appraisal if no petition for appraisal is
filed within 120 days after the Effective Time. A holder may withdraw a demand
for appraisal by delivering to the Surviving Corporation a written withdrawal of
the demand for appraisal and acceptance of the Merger, except that any such
attempt to withdraw made more than 60 days after the Effective Time will require
the written approval of the Surviving Corporation and, after a petition for
appraisal has been filed, such appraisal proceeding may not be dismissed as to
any Stockholder without the approval of the Court.
Failure to follow the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of such rights.
The foregoing is a summary of certain of the provisions of Section 262
of the DGCL and is qualified in its entirety by reference to the full text of
such Section, a copy of which is attached hereto as Annex C.
It is a condition to the obligations of DavCo and DAC to consummate the
Merger that the holders of not more than five percent of the outstanding Shares
properly demand appraisal rights under the DGCL.
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CERTAIN INFORMATION CONCERNING
DAC, DAC SUB AND AFFILIATES
DAC and its wholly-owned Subsidiary, DAC Sub, are newly formed Delaware
corporations organized at the direction of the Affiliated Stockholders for the
purpose of consummating the Merger. The address of DAC's and DAC Sub's principal
executive offices is 1657 Crofton Boulevard, Crofton, Maryland 21114 and their
telephone number is (410) 721-3770. It is not anticipated that, prior to the
Merger, DAC or DAC Sub will have any significant assets or liabilities (other
than those obtained or incurred in connection with the Merger, including the
Financing) or will engage in any activities other than those incident to their
formation and capitalization, the arrangement of the financing and the Merger.
All of the outstanding capital stock of DAC Sub is owned by DAC. All of
the outstanding capital stock of DAC is expected to be owned by the Affiliated
Stockholders. The Affiliated Stockholders are comprised of Ronald D. Kirstien,
Harvey Rothstein and the CVC Investors.
Immediately prior to the Merger, DAC's outstanding common stock is
expect to be owned substantially as follows:
Percent of
Outstanding
Holders Common Stock
- ------- ------------
CVC Investors....................................... 67.0%
Kirstien Investors.................................. 16.5
Rothstein Investors................................. 16.5
Each stockholder of DAC will enter into an agreement with DAC pursuant
to which the shares of DAC's common stock to be acquired by such investor will
be issued. It is contemplated that these agreements will contain certain
restrictions on the transfer or disposition of such shares customary in
transactions of this type, including provisions for the repurchase under certain
circumstances, of the shares held by the investor if such individual's
employment with the Company is terminated or if he dies or becomes disabled or
retired.
Ronald D. Kirstien presently serves as President and a director of both
DAC and DAC Sub. Harvey Rothstein presently serves as Vice President, Secretary
and a director of such companies. Messrs. Knief, Corpening and Thomas also serve
as directors of DAC and DAC Sub. The name, citizenship, business address,
present principal occupation and five-year employment history of each of the
foregoing directors and executive officers of DAC and DAC Sub are set forth in
"CERTAIN INFORMATION REGARDING THE DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY."
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BUSINESS OF THE COMPANY
General
As of September 27, 1997, the Company operated 229 "Wendy's Old
Fashioned Hamburgers" restaurants, making it the world's largest franchisee of
Wendy's. The Company maintains exclusive franchise territories in metropolitan
Baltimore and Washington, D.C., the eastern shore of Maryland and portions of
northern Virginia (collectively, the "Mid-Atlantic"), where it operates 138
restaurants as of September 27, 1997. In fiscal 1997, the Company opened five
new Mid-Atlantic restaurants and closed two existing Mid-Atlantic restaurants.
The Mid-Atlantic restaurants had an average sales of $1,121,000 for the fiscal
year ended September 27, 1997. The average restaurant operating profit margin
for the Mid-Atlantic restaurants was $236,000 for fiscal 1997.
As of September 27, 1997, the Company also operated 53 Wendy's
restaurants in metropolitan St. Louis and central Illinois (the "Midwest"). The
Company does not maintain exclusive franchise territories in the Midwest. In
fiscal 1997, the Company opened no new Midwest restaurants. Average sales for
the Midwest restaurants were $614,000 for the fiscal year ended September 27,
1997. The average restaurant operating profit margin for the Midwest restaurants
was $48,000 for fiscal 1997.
Effective September 24, 1994, the Company acquired 34 restaurants in
the metropolitan Nashville, Tennessee area (the "Southern Market") through the
acquisition of all of the outstanding common stock of Southern Hospitality
Corporation ("Southern Hospitality"). The consideration paid to the stockholders
of Southern Hospitality was approximately $14,225,000. The Company also retired
pre-existing debt and satisfied certain other obligations of Southern
Hospitality in the amount of approximately $7,000,000. The acquisition was
financed through an $18,250,000 loan from First National Bank of Maryland and
from working capital of the Company. The transaction was accounted for as a
purchase for financial reporting purposes. During fiscal years 1995 and 1996,
the Company opened four additional restaurants in Tennessee. Average sales for
the Southern restaurants for the fiscal year ended September 27, 1997, were
$959,000 and the average restaurant operating profit margin was $174,000.
Recent Developments
On July 14, 1997, the Company acquired 34 Franchised Friendly's
Restaurants from Friendly Ice Cream Company of Wilbraham, Massachusetts
("F.I.C.C.") along with an exclusive development territory consisting of
Delaware, Maryland, Washington, D.C. and Northern Virginia for consideration of
approximately $8.5 million and the agreement to develop an additional 74
Friendly's Restaurants in this exclusive territory by the end of calendar 2003.
In addition, the Company manages 14 Friendly's Restaurants for F.I.C.C. in this
exclusive territory, with an option to acquire these managed restaurants under
certain conditions.
On September 24, 1997, the Company entered into an agreement to sell
the operations of 46 Wendy's restaurants in its Midwestern region to Western &
Southern Food Service, L.L.C. ("W&S") and to sublease the real estate and
improvements held by the Company under lease for these restaurants for
consideration of approximately $4.75 million. The agreement with W&S is subject
to, among other conditions, the approval by Wendy's of W&S as a Wendy's
franchisee, the receipt of financing by W&S and the consent of certain
landlords. The Company would, under the terms of this agreement, remain
primarily liable as lessee of the leased real estate and is responsible for the
closing costs and disposing of seven underperforming restaurants.
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Strategy
Opening New Restaurants. The Company has implemented a program designed
to increase its number of restaurants, primarily in its Mid-Atlantic market. In
fiscal 1997, the Company opened five new restaurants in its Mid-Atlantic market,
none in its Southern market and none in its Midwest market. The Company closed
five restaurant, due to unprofitability. The Company has also selected the sites
for up to an additional seven new restaurants that it intends to open in fiscal
1998. The number of restaurants opened may vary depending open general economic
conditions, variability in time required to obtain local permits, the continued
availability of financing, and the Company's ability to locate additional
suitable restaurant sites. The Company has agreed with Wendy's to open or have
under construction a minimum of six Mid-Atlantic restaurants in each calendar
year through 2015 and to operate a total of 240 Mid-Atlantic restaurants by the
end of the calendar year 2015. The Company has met or exceeded this committed
growth rate through September 27, 1997, and anticipates meeting this growth rate
by opening at least an additional 102 restaurants in the Mid-Atlantic region by
the end of the calendar year 2015. Any new restaurants opened by the Company
must be approved by Wendy's.
Mid-Atlantic Renovation Program. The Company, pursuant to an agreement
with Wendy's, has instituted a program to retrofit selected Mid-Atlantic
restaurants, primarily through the installation of an additional cash register,
the upgrading of the point of sale system, and certain other structural
modifications designed to increase service capacity and operational efficiency.
The cost of retrofitting a restaurant is typically between $35,000 and $50,000.
Restaurant Operations
Menu. Each Wendy's restaurant offers a diverse menu containing a
variety of food items, featuring hamburgers and fillet of chicken breast
sandwiches which are prepared to order with the customer's choice of condiments.
The Wendy's menu also typically includes chili, baked and french fried potatoes,
freshly prepared salads, and Frosty dessert. The Mid-Atlantic market continues
to test fried chicken in some of its restaurants. In addition, the restaurants
sell a variety of promotional products, normally on a limited time basis.
Marketing and Promotions. As required by its franchise agreements, the
Company must contribute at least 4.0% of its restaurant sales to an advertising
and marketing fund. Two and one half percent of restaurant sales is currently
used to benefit all restaurants owned and franchised by Wendy's. The Wendy's
National Advertising Program, Inc. uses this fund to develop advertising and
sales promotion materials and concepts to be implemented nationally. In fiscal
1997, The Wendy's National Advertising Program, Inc. sponsored a number of
promotional campaigns which featured specialty menu items. The Company is
required to spend the remainder of the 4% of its restaurant sales on local
advertising. See "--Franchise and Development Agreements." The Company typically
spends its local advertising dollars on local television and radio promotions.
Site Selection. Site selection for new restaurants is made by the
Company's real estate and development department subject to acceptance by
Wendy's. A typical market area will have a population base of at least 50,000
people within a three mile radius. Within the potential market area, the Company
evaluates major retail and office concentrations and major traffic arteries to
determine focal points. Site specific factors which the Company considers
include visibility, convenience of access, proximity to direct competition
(including other Wendy's restaurants), access to utilities, local zoning
regulations and various other factors. The Company's current business strategy
is to locate new restaurants, whenever possible, in free-standing buildings
located on the grounds of shopping centers.
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<PAGE>
Restaurants Layout and Operations. The Company's restaurants typically
range from 2,700 to 3,200 square feet with a seating capacity of between 90 and
130 people, and are typically open from 10:30 a.m. to 10:00 p.m., with many
restaurants open for extended evening hours. Generally, the dining areas are
fully carpeted and informal in design, with tables for two to four people.
Approximately 98% of the Company's restaurants also feature drive-thru windows.
Average drive-thru guest checks generally exceed in-restaurant guest checks. In
fiscal 1997, drive-thru sales constituted approximately 52% of the Company's
sales.
Most Company restaurants opened since January 1992 are designed to
incorporate Wendy's new high-capacity central grill/multiple register design
("High-Capacity Restaurants"). High-Capacity Restaurants are typically larger in
size than traditional Wendy's restaurants and feature a central grilling area
and computerized ordering system designed to relay customer orders to the
grilling area more efficiently. In addition, High-Capacity Restaurants typically
incorporate multiple cash registers, instead of the earlier one register Wendy's
design, and a second drive-thru window.
The Company's reporting system provides restaurant and operating data,
including sales mix and labor cost information, with respect to each restaurant
to the Company's executive offices. Weekly management reports by Area Managers
and Regional Managers track food and labor costs and unit income. Physical
inventories of all food items are taken weekly, and inventories of critical food
items are taken twice a day.
Raw Materials
As a Wendy's franchisee, the Company complies with uniform recipe and
ingredient specifications provided by Wendy's, and purchase all food and
beverage inventories and restaurant supplies from independent vendors approved
by Wendy's. Except for The New Bakery Co. of Ohio, Inc. (the "Bakery"), a
wholly-owned subsidiary of Wendy's, Wendy's does not sell food or supplies to
its franchisees. The Company purchases its sandwich buns from the Bakery for the
majority of its restaurants. The Company purchases soft drink products from the
Coca-Cola Company and its affiliates. Most other food items and supplies
purchased by the Company are warehoused and distributed by independent
distributors. The Company, and, in some instances Wendy's, negotiate prices
directly with the vendors.
The Company has not experienced any significant shortages of food,
equipment, fixtures or other products which are necessary to restaurant
operations. The Company anticipates no such shortages and believes that
alternate suppliers are available in the event such shortages occur.
Franchise and Development Agreements
General. The Company's relationship with Wendy's is governed by (i) a
development agreement (the "Development Agreement"), which grants to the Company
an exclusive franchise territory, (ii) unit franchise and restaurant franchise
agreements (collectively, the "Franchise Agreements"), one of which is executed
in connection with the opening of each of the Company's restaurants, and (iii)
certain other agreements between the Company and Wendy's. These agreements
provide Wendy's with significant rights regarding the business and operations of
the Company and impose restrictions regarding the ownership of the Company's
capital stock.
The Company is restricted by its agreements with Wendy's from engaging
in competitive "quick service restaurant" ("QSR") businesses, including QSR
concepts that serve hamburgers, chili or chicken breast sandwiches. In addition,
Mr. Kirstien has been designated by Wendy's as the individual responsible
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<PAGE>
for the development and management of the Company's restaurants. In the event
Mr. Kirstien (or any other successor approved by Wendy's) (i) is no longer
employed by the Company, or (ii) either owns less than a certain interest in the
Company's capital stock or is not the beneficiary of an employment incentive
plan acceptable to Wendy's, the Company must employ a successor, who is required
to be approved by Wendy's, within 180 days of the occurrence of such event. The
failure to obtain Wendy's approval of a successor within such period would
constitute an event of default under the Development Agreement and each of the
Franchise Agreements.
The Company's agreements with Wendy's restrict the ownership and
transfer of the capital stock of the Company. These agreements provide, among
other things, that in the event any person or entity (other than CVC, WEP or
Messrs. Kirstien and Rothstein) acquires 20% or more of the outstanding Shares
(assuming full exercise of all presently outstanding warrants and options that
are exercisable within 60 days), Wendy's may terminate the Development Agreement
and/or any or all of the Franchise Agreements.
Any acquisition by the Company of an existing Wendy's restaurant would
require the consent of Wendy's and is also subject to Wendy's right of first
refusal. The Company has agreed that it will not seek to acquire additional
Wendy's franchises without first obtaining a waiver of this prohibition from
Wendy's, except if such additional franchises are located in the States of
Maryland or Virginia.
In order to secure the obligations of the Company to make certain
payments to Wendy's pursuant to the Development Agreement and the Franchise
Agreements, the Company is required to maintain letters of credit in the face
amount of $2.0 million. If the Company fails to make any required payment to
Wendy's, upon five days prior written notice by Wendy's, Wendy's is entitled to
draw down amounts under the letters of credit in satisfaction of such
obligations or to terminate the Development Agreement and the Franchise
Agreements, subject to applicable grace periods.
If the Company fails to comply with the Development Agreement or the
Franchise Agreements for restaurants within a covered territory, then Wendy's
may terminate the exclusivity of the Company's franchises in such covered
territory. Any event of default under any Franchise Agreement would give Wendy's
the right to terminate the franchise rights of the Company's restaurant governed
by such Franchise Agreement. The loss of the exclusivity in a territory or a
significant portion of franchise rights would have a material adverse effect on
the Company.
The Company is also required to operate each of its Wendy's restaurants
in accordance with certain standards described in the Wendy's International
Operations Manual. Wendy's periodically monitors the operations of the Company's
restaurants and notifies the Company of any failure to comply with any of the
Franchise Agreements, the Development Agreement or the Wendy's International
Operations Manual.
Development Agreement. The Company and Wendy's entered into a
Development Agreement covering the District of Columbia and certain counties in
Virginia and Maryland and a Development Agreement covering Baltimore and certain
counties in Maryland in 1978. These two Development Agreements were subsequently
combined into a single Development Agreement in 1980. The Company entered into
another Development Agreement covering certain counties on the eastern shore of
Maryland in 1982, which was substantially completed and provided the Company a
right of first refusal for all new restaurants in this territory. This
Development Agreement was merged with the combined Development Agreement in
1996. The Company does not have a development agreement with Wendy's for either
its Midwest operations or the Southern Market. Accordingly, Wendy's (or a person
or entity approved by
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Wendy's) could, subject to certain limitations, open Wendy's restaurants in the
Midwest or in the Southern Market that would compete with the Company's
restaurants.
Pursuant to the Development Agreement, the Company has been granted
exclusive rights to develop and operate a specific number of Wendy's restaurants
within the covered territories. The Company is required to develop and commence
construction of new Wendy's restaurants in accordance with development and
performance schedules. The Company is currently obligated to open or commence
construction of a minimum of six restaurants in each calendar year through 2015
and to operate a total of 240 Mid-Atlantic restaurants by the end of the
calendar year 2015. The Development Agreement extends through the term of the
development and performance schedules. Thereafter, the Company retains a right
of first refusal regarding the development of new restaurants in the relevant
franchise territory for an additional 10 year period unless the Company is in
default under the terms of the Development Agreement.
Pursuant to the Development Agreement, the Company is required to
submit to Wendy's for its acceptance each proposed restaurant site and the plans
for each new restaurant. Wendy's provides standard construction plans,
specifications and layouts for new restaurants and provides training in the
Wendy's system, including standards, methods, procedures and techniques for
operation of a Wendy's restaurant. The Company is obligated to pay Wendy's a
technical assistance fee upon the opening of each new restaurant.
Unit Franchise Agreement and Restaurant Agreements. The Company
operates each of its Wendy's restaurants under a Franchise Agreement with
Wendy's. Each Franchise Agreement provides the Company the right to operate a
Wendy's restaurant for a period of 20 years. The Franchise Agreements are
renewable by the Company, subject to certain conditions, for varying periods of
up to 20 years (the terms of any renewal period may differ from those in effect
during the initial term). Each unit franchise agreement gives the Company the
exclusive right to operate a Wendy's restaurant in a particular geographic area,
defined by either a radius of three miles or a population of 20,000 persons.
There are no exclusive territorial rights granted to the Company under
restaurant franchise agreements.
Pursuant to the Franchise Agreements, Wendy's prescribes the designs,
color schemes, signs and equipment to be utilized in each restaurant, and
determines the menu items as well as the formulas and ingredients for the
preparation of food and beverage products. Each Franchise Agreement requires the
Company to pay to Wendy's a technical assistance fee upon the opening of each
new restaurant and a monthly royalty equal to 4% of the gross sales of that
particular restaurant. Each new restaurant opened within an area covered by the
Development Agreement according to the applicable development schedule will be
governed by a unit franchise agreement, with a technical assistance fee of
$7,500. All other new restaurants will be governed by a restaurant franchise
agreement, with a technical assistance fee of $25,000. In addition, the Company
must contribute to national advertising and expend specified percentages of
gross monthly sales for local advertising. See "BUSINESS--Restaurant
Operations." All restaurants not located within an area covered by the
Development Agreement, including any restaurant opened in the Midwest or the
Southern Market, have been developed pursuant to a restaurant franchise
agreement. Any further development in these markets would be pursuant to the
form of franchise agreement applicable to such markets under the Company's
agreements with Wendy's.
Government Regulations
The restaurant business is subject to extensive federal, state and
local government regulations relating to the development and operation of
restaurants, including regulations relating to building, ingress and egress,
zoning and the preparation and sale of food. The Company is also subject to
federal and state
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environmental regulations, but these have not had a material effect on the
Company's operations. The Company is also subject to laws governing
relationships with employees, such as minimum wage requirements, health
insurance coverage requirements, and laws regulating overtime, working
conditions and employee citizenship. During fiscal year 1996 Congress passed the
Minimum Wage Bill which increased the minimum wage to $4.75 per hour as of
October 1, 1996 and $5.15 per hour as of September 1, 1997. Substantial
increases in the minimum wage or mandatory health care coverage could adversely
affect the Company.
Seasonality and Quarterly Results
The restaurant sales of the Company, similar to the rest of the
quick-service restaurant industry, are moderately seasonal. The lowest sales
months are typically January and February, while the highest sales months are
June, July and August. During the initial six months of each fiscal year
(October through March), the Company has typically recorded 47% to 49% of its
total annual sales, and operating margins have been slightly lower due to lower
sales providing a smaller spread over fixed costs.
Trademarks and Service Marks
The Franchise Agreements grant to the Company the right to use certain
registered trademarks and service marks, such as "Wendy's", "Wendy", "Wendy's
Old Fashioned Hamburgers", and "Quality Is Our Recipe", which Wendy's has
adopted to identify and promote Wendy's restaurants. The Company believes that
these marks are of material importance to the Company's business.
Competition
The quick-service restaurant industry is intensely competitive with
respect to price, service, location and food quality. The industry is mature and
competition is expected to increase. There are several well-established
competitors with substantially greater financial and other resources than the
Company, some of which have been in existence for substantially longer than the
Company and may have substantially more units in the markets where the Company's
restaurants are or may be located. McDonald's, Burger King and Hardee's/Roy
Rogers restaurants are the Company's principal competitors as other
quick-service hamburger chains in the Company's franchise territories. The
Company's principal competitors have been engaged in an attempt to draw customer
traffic by a deep discounting strategy; however, neither Wendy's nor the Company
believes that this is a profitable long-term strategy.
The Company and the quick-service restaurant industry generally are
significantly affected by factors such as changes in local, regional or national
economic conditions, changes in consumer tastes, severe weather and consumer
concerns about the nutritional quality of quick-service food. In addition,
factors such as increases in food, labor and energy costs, the availability and
cost of suitable restaurant sites, fluctuating insurance rates, state and local
regulations and the availability of an adequate number of hourly-paid employees
can also adversely affect the quick-service restaurant industry.
Employees
As of September 27, 1997, the Company employed approximately 9,700
persons in six states and District of Columbia. Of those employees, 1,350 hold
management or administrative positions and the remainder are engaged in the
operation of the Company's restaurants. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its employee
relations to be good.
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<PAGE>
Properties
As of September 27, 1997, the Company operated 229 Wendy's restaurants
in the locations listed below. Of the 229 restaurants, the Company owned the
land and building for 23 restaurants, owned the building and held long-term land
leases for 57 restaurants, and held leases covering land and building for 149
restaurants. The Company's land and building leases are most commonly written
for initial term of 20 years, with one or more five year renewal options.
Certain leases require the payment of additional rent equal to a percentage
(usually between 2% and 7%) of annual sales in excess of specified amounts.
The Company leases approximately 30,000 square feet of office space in
a building in Crofton, Maryland, which it uses as a headquarters and operations
center. The Company also leases office space in Nashville, Tennessee and St.
Louis, Missouri for the local operations of Southern Hospitality, and MDF, Inc.
respectively.
The following lists the locations of the restaurants operated by the
Company (by market) as of September 27, 1997:
Location No.
-------- ---
Mid-Atlantic Market:
Maryland 90
Virginia 37
District of Columbia 7
---
138
Midwest Market:
Illinois 27
Missouri 29
---
53
Southern Market:
Tennessee 38
---
TOTAL ALL MARKETS 229
===
Legal Proceedings
From time to time, the Company is a party to routine litigation
incidental to its business. The Company maintains commercial, general liability,
workers' compensation and directors and officers insurance policies which cover
most of the actions brought against the Company. In connection with the Merger,
two purported class actions have been filed against the Company and its
directors. See "SPECIAL FACTORS--Certain Litigation."
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SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The selected financial data as of September 26, 1992, September 25,
1993, September 24, 1994, September 30, 1995 and September 28, 1996 and for the
years ended September 26, 1992, September 25, 1993, September 24, 1994,
September 30, 1995 and September 28, 1996 have been derived from the audited
financial statements of the Company and its predecessor (the "Predecessor").
Effective February 10, 1993, the Predecessor underwent a recapitalization which
was accounted for using the "push down" method of accounting. The Predecessor
was then merged with the Company in August 1993. The results for and as of the
39 weeks ended June 29, 1996 and June 28, 1997 are derived from the unaudited
financial statements and notes thereto of the Company and, in the opinion of
management, reflect all adjustments, consisting of normal recurring adjustments,
necessary to present fairly information set forth therein. The results for the
39 weeks ended June 29, 1996 and June 28, 1997 are not necessarily indicative of
the results expected for any other interim period or for the full year. The
following information should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the financial statements and notes thereto included elsewhere in the Proxy
Statement.
<TABLE>
<CAPTION>
For the 39 weeks
Fiscal Year Ended Ended
---------------------------------------------------------------- --------------------
Predecessor
and Company
Company Company Company Combined Predecessor Company Company
---------------------------------------------------------------- --------------------
Sept. 28, Sept. 30, Sept. 24, Sept. 25, Sept. 26, June 28, June 29,
1996 1995 1994 1993 1992 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS (in 000's)(1):
Restaurant sales........ $206,903 $208,671 $163,355 $152,702 $ 138,483 $163,185 $148,701
Operating income........ 8,071(3) 17,290 14,558 6,525 5,653 11,325 8,539
Income (loss) before
extraordinary item.... 2,391(3) 8,415 7,034 (1,813) (4,454) 8,217 5,293
Net income (loss)....... 2,391(3) 8,415 7,034 (4,197) (4,454) 4,735 3,156
Ratio of earnings to
fixed charges(2)...... 2.7x -- -- -- 2.5x 2.0x
PER SHARE DATA:
Earnings per Share
assuming full dilution $ 0.34(3) $ 1.18 $ 0.98 -- -- $ 0.68 $ 0.45
</TABLE>
<TABLE>
<CAPTION>
As of As of
-------------------------------------------------------------- ------------------------
Predecessor
and Company
Company Company Company Predecessor Predecessor Company Company
-------------------------------------------------------------- ------------------------
Sept. 28, Sept. 30, Sept. 24, Sept. 25, Sept. 26, June 28, June 29,
1996 1995 1994 1993 1992 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION(1)
(in 000's except per
Share amounts)
Property and equipment,
net.................. $49,521 $41,661 $ 33,521 $ 12,321 $ 11,308 $ 54,931 $ 50,415
Leased properties, net.. 37,918 43,828 44,300 42,734 39,203 35,229 41,128
Franchise rights, net... 3,551 4,095 4,154 3,025 3,228 3,323 4,074
Total assets............ 117,558 115,700 113,428 82,400 65,587 118,478 123,607
Long-term debt, net of
current portion and
discount.............. 11,699 14,778 17,928 (4) 1,734 8,195 10,544 13,132
Capital lease
obligations, net 28,404 31,083 32,838 30,722 30,980 26,085 28,881
of current portion...
Stockholders' equity.... 45,526 44,219 35,804 28,770 (4,285) 50,025 46,485
Book value per Share
assuming full dilution 6.46 -- -- -- -- 7.17 ---
</TABLE>
- ----------------------------
(1) On September 24, 1994, the Company acquired Southern Hospitality for
approximately $17.5 million cash (net of cash acquired) and the assumption
of certain liabilities. The acquisition was accounted for as a purchase.
(2) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes and extraordinary
items, plus fixed charges. Fixed charges include interest expenses on all
indebtedness and capital lease obligations and the Company's interest
factor for operating leases.
(3) Income for the fiscal year ended September 28, 1996 includes a pre-tax
charge of $5.5 million related to SFAS No. 121 (Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of).
(4) Increase in long-term debt relates to financing obtained in conjunction
with the acquisition of Southern Hospitality.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Components of Revenues and Expenses
The Company's revenues consist entirely of restaurant sales. Any
additional amounts of income are minor and are included in other income, net.
Restaurant operating profit is computed by subtracting cost of
restaurant sales and restaurant operating expenses from restaurant sales. Cost
of restaurant sales consists of the Company's expenditures for food, supplies
(primarily paper goods) and direct labor. Restaurant operating expenses include
all other direct costs, including occupancy costs, advertising expenses,
expenditures for repairs and maintenance, area and regional management expenses,
and workers compensation, casualty and general liability insurance costs. In
addition to franchise royalty payments, the Company is also required to
contribute 4.0% of its restaurant sales to an advertising fund, which consists
of an amount (currently 2.5% of sales) for Wendy's National Advertising Program,
Inc. and the remainder for local advertising.
Franchise royalties, as required by the Company's Franchise Agreements
with Wendy's, have remained constant at 4.0% of restaurant sales throughout the
periods presented. General and administrative expenses consist of corporate
expenses, including executive and administrative compensation, office expenses
and professional fees.
Results of Operations
The following table expresses certain items in the Company's
consolidated statements of operations as a percentage of restaurant sales for
each of the three most recent fiscal years and for the 39 weeks ended June 29,
1996 and June 28, 1997.
<TABLE>
<CAPTION>
For the fiscal year ended For the 39 weeks Ended
------------------------------------- -----------------------
Sept. 28, Sept. 30, Sept. 24, June 28, June 29,
Statement of Operations Data: 1996 1995 1994 1997 1996
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Restaurant sales........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of restaurant sales................ 61.0 60.0 59.3 60.9 61.4
Restaurant operating expenses........... 20.5 19.8 20.1 20.3 20.8
--------- --------- --------- -------- --------
Restaurant operating profit............. 18.5 20.2 20.6 18.8 17.8
Franchise royalties..................... 4.0 4.0 4.0 4.0 4.0
General and administrative.............. 3.6 3.8 4.0 3.9 3.7
Depreciation and amortization........... 4.3 4.1 3.7 4.0 4.4
Loss on write-down of impaired
long-lived assets....................... 2.7 -- -- -- --
Operating income........................ 3.9% 8.3% 8.9% 6.9% 5.7%
========= ========= ========= ======== ========
</TABLE>
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The following discussion and analysis should be read in conjunction
with the consolidated financial statements and the related notes thereto
appearing elsewhere in this proxy statement.
39 Weeks and 13 Weeks Ended June 28, 1997 Compared to 39 Weeks and 13 Weeks
Ended June 29, 1996
Revenues. Company restaurant sales increased 11.4% for the 13 weeks
ended June 28, 1997 compared to the 13 weeks ended June 29, 1996. Company
restaurant sales increased 9.7% for the 39 weeks ended June 28, 1997 compared to
the 39 weeks ended June 29, 1996. The overall increase is sales is related to
sales growth in all of the company's divisions during the third quarter of
fiscal year 1997. Same store sales for the 13 weeks ended June 28, 1997 compared
to the 13 weeks ended June 29, 1996 for the Mid-Atlantic division increased
7.8%, for the Southern division increased 5.7%, and for the Mid-West division
increased 4.6%. Consolidated same store sales increased 6.9% for the third
quarter of fiscal 1997 compared to the third quarter of fiscal 1996. Same store
sales for the 39 weeks ended June 28, 1997 compared to the respective period in
fiscal year 1996 for the Mid-Atlantic division increased 4.9%, for the Southern
division increased 8.1% and for the Mid-West division decreased 1.6%.
Consolidated same store sales for the 39 weeks ended June 28, 1997 increased
4.4% over the 39 weeks ended June 29, 1996. The positive same store sales growth
during the fiscal year 1997 third quarter is related to improved operations,
renewed focus on the Super Value Menu, and the successful roll-out of the "Fresh
Stuffed PITA" sandwiches. The "Fresh Stuffed PITA" sandwich roll-out increased
and is expected to continue to help increase customer traffic. Same store sales
on a year to date basis were also positively impacted for comparison purposes by
the lower sales reported for the fiscal 1996 periods due to a harsh winter. The
slight decrease in same store sales for the Mid-West division for the respective
39 week periods can be attributed to increased competition and harsh winter
weather experienced this year. Company wide sales were also positively impacted
by the 8 new stores opened since June 29, 1996. The company is constantly
working on improving sales by improving operations, continuing to satisfy guests
and new product innovations.
The weighted average number of restaurants open for the 13 weeks ended
June 28, 1997 was 228.3 compared to 224.1 for the relative period in fiscal year
1996. The weighted average number of restaurants open for the 39 weeks ended
June 28, 1997 was 227.9 compared to 219.9 for the relative period in fiscal year
1996. The reason for the increase over fiscal year 1996 is primarily related to
the increase in the number of units in the Mid-Atlantic division. Average sales
per company restaurant for the Mid-Atlantic division increased 9.4% to $306,700
for the third quarter and increased 6.0% to $821,400 for the 39 weeks ended June
28, 1997. Average sales per company restaurant increased by 6.6% to $170,500 for
the third quarter and declined 0.1% to $452,400 for the 39 weeks ended June 28,
1997 in the Mid-West division. The Southern division realized increases in
average sales per restaurant of 5.7% to $252,400 for the third quarter and 7.3%
to $719,600 for the 39 weeks ended June 28, 1997. These changes in average sales
per company restaurant are directly related to the above mentioned reasons for
changes in sales and same store sales.
Average guest count per company restaurant was 79,900 and 217,800 for
the third quarter and 39 weeks ended June 28, 1997, respectively. Average guest
check was $3.33 for the third quarter and $3.29 for the 39 weeks ended June 28,
1997. These figures are not comparable to the respective periods in 1996 due to
changes in the product mix such as the addition of the $.99 Chicken Nuggets,
which is a value added menu item and an increase of strategically selected menu
items.
Costs and Expenses. Cost of restaurant sales declined as a percentage
of sales for the 13 weeks and 39 weeks ended June 28, 1997 when compared to the
respective fiscal 1996 periods. Cost of restaurant sales for the third quarter
of fiscal 1997 was 59.1% of sales compared to 60.0% of sales for the
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third quarter of fiscal 1996. Cost of restaurant sales for the 39 week period in
fiscal 1997 was 60.9% of sales compared to 61.4% of sales for the 1996 period.
Cost of restaurant sales is comprised of food, supplies, payroll and benefits
expense. Cost of food and supplies was consistent, 33.4%, as a percentage of
sales for the 39 weeks in fiscal 1997 when compared to the fiscal 1996 period.
Cost of food and supplies as a percentage of sales was positively impacted
during the third quarter of fiscal year 1997, 33.1% compared to 33.4% for the
prior year's quarter by management working to reduce spoilage, obtain more
favorable food cost, and strategically increasing certain menu prices. The
"Fresh Stuffed PITA" sandwich also had a positive impact on food cost during the
quarter. The reduction of cost of restaurants sales as a percentage of sales can
also be related to a slight reduction of payroll and benefit cost as a
percentage of sales. Payroll and benefits cost percentage improved due to the
leveraging effect of increased sales as discussed above. (Note: there is a
certain level of this expense which is not dependent on sales, such as a
manager's salary). This improvement more than offset the negative impact of the
increase in the Federal Minimum wage.
Restaurant operating expenses decreased as a percentage of sales for
both the 13 weeks and 39 weeks ended June 28, 1997 when compared to the
respective periods in fiscal year 1996.
Restaurant operating expenses dropped from 19.9% of sales for the third
quarter of fiscal 1996 to 19.3% of sales for the third quarter of fiscal 1997
and from 20.8% of sales to 20.3% of sales for the respective 39 weeks periods in
fiscal 1996 and 1997. The Mid-Atlantic and Southern division's restaurant
operating expenses decrease as a percent of revenue more than offset the
Mid-West division increase. The Mid-West division increase as a percent of sales
was caused by the leveraging effect of lower sales for the 39 week period. Both
the Mid-Atlantic and the Southern division's decrease in restaurant operating
expenses as a percentage of sales was due to the saving of certain expenses
related to the severe weather experienced in the 1996 periods, such as increased
utilities and snow removal. The leveraging effect of higher sales was also a
factor.
Franchise royalties remained constant at 4% of sales and is expected to
remain 4% of sales. General and Administrative cost increased $664,000 and
$921,000 during the 13 weeks and 39 weeks ended June 28, 1997 respectively when
compared to the respective period in fiscal 1996. This increase was attributable
to incentive type expenses, such as bonuses, incurred due to the improved
Company's performance when compared to fiscal 1996.
Depreciation and amortization expense remained relatively constant in
terms of dollars for both periods presented. Depreciation and Amortization
dropped as a percentage of sales due to the leveraging effects of higher sales.
The additional depreciation and amortization related to new assets acquired
since June 29, 1996 was offset by the reduction related to asset write offs in
the fourth quarter of fiscal year 1996 of approximately $5.5 million resulting
from the implementation of SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of ".
Non-Operating Charges. Interest expense, interest income and the income
remained relatively constant for all periods presented. The Company's effective
tax rate for fiscal 1997 has increased due to the Illinois unitary tax, and
other non-deductible expenses.
Fiscal 1996 Compared to Fiscal 1995
Revenues. Company restaurant sales decreased to $206.9 million in 1996
from $208.7 million in 1995, a decrease of 0.9%. This decrease in sales was
primarily attributed to an additional week included in the fiscal year 1995
period as a result of the Company's 52/53 week reporting basis. Approximately
$3.9
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million in sales was related to the additional week in fiscal year 1995. Also,
sales were negatively impacted by the severe weather experienced during 1996 and
the Federal Government shutdown. There was a 3.9% decrease in same store sales
for the fiscal year 1996 compared to fiscal year 1995. Same store sales for
fiscal year 1996 for the Mid-Atlantic market decreased by 3.7%, 4.0% for the
Midwest market, and 4.3% for the Southern market. To counteract this trend,
management identified and introduced new strategies for building sales. As these
initiatives were combined with the Company's other strategies, same store sales
began improving during the later part of fiscal 1996. Same store sales for the
fourth quarter fiscal 1996 increased 3.2% from the fourth quarter fiscal 1995.
The average sales per Company restaurant decreased to $933,300 for the
52 weeks ended September 28, 1996 from $984,800 for the 53 weeks ended September
30, 1995. The weighted average number of restaurants open during the year was
221.7 for 1996 and 211.9 for 1995. The weighted average number of Mid-Atlantic
restaurants open was 128.5 for 1996 and 122.5 for 1995, and average sales per
restaurant in the Mid-Atlantic region decreased to $1,073,000 from $1,131,000.
The weighted average number of Midwest restaurants open was 55.3 for 1996 and
54.3 for 1995, and average sales per restaurant decreased to $615,700 from
$643,800. The weighted average number of Southern restaurants open for 1996 was
37.9 compared to 35.1 for 1995, and average sales per restaurant for 1996 were
$922,700 compared to $1,001,900 for 1995. Average guest count per Company
restaurant decreased to 303,900 in 1996 from 330,300 in 1995. The overall
decrease in average sales and average guest count per Company restaurant for the
1996 period compared to the 1995 period can be attributed to the additional week
in the 1995 period and the above mentioned reasons for decreased revenue.
Average guest check increased to $3.07 for fiscal 1996 from $2.98 for fiscal
1995. This increase was primarily the result of the $0.99 Chicken Nuggets
addition, which is a value added menu item.
Cost and Expenses. Cost of restaurant sales increased to $126.3 million
in 1996 from $125.2 million in 1995. As a percent of sales, cost of restaurant
sales increased to 61.0% in 1996 from 60.0% in 1995. Cost of restaurant sales as
a percent of sales for the Mid-Atlantic restaurants increased to 59.1% in 1996
from 58.4% in 1995. Comparing the components of cost of restaurant sales for the
Mid-Atlantic restaurants, the cost of food and supplies increased to 33.2% of
sales in 1996 from 32.7% of sales in 1995. Payroll and benefits expense
increased to 25.9% in 1996 from 25.7% in 1995. Cost of restaurant sales as a
percent of sales in the Midwest restaurants increased to 67.6% for the 1996
period from 66.9% for the 1995 period. Comparing the components of cost of
restaurant sales for the Midwest restaurants, the cost of food and supplies
increased to 35.8% of sales in 1996 from 35.5% of sales in 1995. Payroll and
benefits expense increased to 31.8% of sales in 1996 from 31.4% of sales in
1995. The Southern restaurants' cost of sales for fiscal 1996 were 62.5%
compared to 59.5% in 1995. Comparing the components of cost of restaurant sales
for the Southern restaurants, the cost of food and supplies increased to 33.3%
for the 1996 period from 31.6% in the 1995 period. Payroll and benefits expenses
increased to 29.3% for the 1996 period from 27.9% in the 1995 period due to the
very low unemployment rate in the Southern market. The overall increase in the
cost of restaurant sales can be attributed to increased labor cost, increased
food cost, primarily related to product mix change, and the cost leveraging
effect of lower same store sales for fiscal year 1996.
Restaurant operating expenses increased to $42.4 million in 1996 from
$41.4 million in 1995. As a percent of sales, this represents a increase to
20.5% in 1996 from 19.8% in 1995. Restaurant operating expenses in the
Mid-Atlantic restaurants remained consistent at 19.5% of sales in 1996 and in
1995. Restaurant operating expenses in the Midwest restaurants increased to
25.0% of sales in 1996 from 22.9% of sales in 1995. Restaurant operating
expenses in the Southern restaurants increased to 19.9% of sales for 1996 from
18.3% of sales in 1995. The increase in restaurant operating expenses is related
to the cost leveraging effect of the additional week in the fiscal 1995 period
and the additional expenses in the 1996
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<PAGE>
period related to the severe weather, such as increased utilities, snow removal
and roof repairs. The impact as a percentage of sales was less in the
Mid-Atlantic restaurants due to the larger sales base.
General and administrative expenses decreased to $7.4 million in fiscal
year 1996 from $7.9 million in fiscal year 1995, representing as a percent of
sales, 3.6% for 1996 and 3.8% for 1995. This decrease was due to the
implementation of curbs on administrative costs and the impact of reduced
expenses directly related to sales and profit, such as bonuses.
Depreciation and amortization expense increased to $8.9 million in 1996
from $8.5 million in 1995, representing an increase, as a percent of sales, to
4.3% in 1996 from 4.1% in 1995. This increase was due to lower sales in the 1996
period and incurrence of additional depreciation expense on capital expenditures
for new store openings and existing store improvements.
The implementation of SFAS No. 121 (Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of) resulted in a pre-tax
charge of $5,513,000 during the 1996 period.
Non-Operating Charges. Interest expense decreased to $5.0 million in
1996 from $5.8 million in 1995. The decrease was due to a decline in interest
rates, additional capitalization of interest relating to construction in
progress and the reduction in the principal amount of the Company's long term
debt. Interest income decreased $169,000 between periods due to a reduction in
overnight investments. Other income decreased slightly between periods.
The provision for income taxes decreased to $1.8 million for fiscal
1996 from $4.5 million for fiscal 1995. The Company's effective tax rate for
fiscal 1996 was 42.6% and 34.6% for fiscal 1995. The increase in the effective
tax rate was due to the reevaluation of the Company's deferred tax liability
during the 1995 period and the impact of changes in certain states' tax rates.
Fiscal 1995 Compared to Fiscal 1994
Revenues. Company restaurant sales increased to $208.7 million in 1995
from $163.4 million in 1994, an increase of 27.7%. This increase was mainly due
to the acquisition of Southern Hospitality which contributed approximately $35.2
million of total restaurant sales, and the addition in 1995 of nine new
restaurants. Part of the increase in sales can also be attributed to an
additional week included in the fiscal 1995 period as a result of the Company's
52/53 week reporting basis. Same store sales decreased by 0.8% for the fiscal
year 1995 compared to fiscal year 1994. Same store sales for fiscal year 1995
increased for the Southern market by 2.6% and for the Midwest market by 1.2%,
and decreased for the Mid-Atlantic market by 2.2%.
The average sales per Company restaurant increased to $984,800 in 1995
from $971,600 in 1994, a 1.4% increase due to the acquisition of Southern
Hospitality in September 1994 and improvements in Midwest average sales offset
by a decrease in Mid-Atlantic sales. The weighted average number of restaurants
open during the year was 211.9 for 1995 and 168.1 for 1994. The weighted average
number of Mid-Atlantic restaurants open was 122.5 for 1995 and 114.1 for 1994,
and average sales per restaurant in the Mid-Atlantic region decreased to
$1,131,000 in 1995 from $1,138,000 in 1994, a 0.6% decrease. The weighted
average number of Midwest restaurants open was 54.3 for 1995 and 54.0 for 1994,
and average restaurant sales increased to $643,800 in 1995 from $620,600 in
1994, a 3.7% increase. The Southern restaurants which were acquired on September
24, 1994 had 35.1 weighted average number of restaurants open for 1995 and
average restaurant sales of $1,001,900. Average guest count per Company
restaurant
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<PAGE>
increased to 330,300 in 1995 from 324,900 in 1994. Average guest check decreased
to $2.98 for fiscal 1995 from $2.99 for fiscal 1994.
Cost and Expenses. Cost of restaurant sales increased to $125.2 million
in 1995 from $96.9 million in 1994. As a percent of sales, cost of restaurant
sales increased to 60.0% in 1995 from 59.3% in 1994. Cost of restaurant sales as
a percent of sales for the Mid-Atlantic restaurants increased to 58.4% in 1995
from 57.7% in 1994. Comparing the components of cost of restaurant sales for the
Mid-Atlantic restaurants, the cost of food and supplies decreased slightly to
32.7% of sales in 1995 from 32.8% of sales in 1994. Payroll and benefits expense
increased to 25.7% of sales in 1995 from 25.0% of sales in 1994. Cost of
restaurant sales as a percent of sales in the Midwest restaurants increased to
66.9% for the 1995 period from 65.4% for the 1994 period. Comparing the
components of cost of restaurant sales for the Midwest restaurants, the cost of
food and supplies increased to 35.5% of sales in 1995 from 35.2% of sales in
1994. Payroll and benefits expense increased to 31.4% of sales in 1995 from
30.2% of sales in 1994. The Southern restaurants' cost of sales for fiscal 1995
was 59.5% of revenue which consisted of food and supplies of 31.6% and payroll
and benefit expense of 27.9% of revenue. The overall increase in the cost of
restaurant sales can be attributed to increased labor cost offset by overall
favorable food costs, primarily beef and chicken, and the cost leveraging effect
of slightly lower same store sales for fiscal year 1995.
Restaurant operating expenses increased to $41.4 million in 1995 from
$32.8 million in 1994, primarily due to the inclusion of the Southern
restaurants in 1995. As a percent of sales, this represents a decrease to 19.8%
in 1995 from 20.1% in 1994. Restaurant operating expenses in the Mid-Atlantic
restaurants increased to 19.5% of sales in 1995 from 19.2% of sales in 1994.
Restaurant operating expenses in the Midwest restaurants decreased to 22.9% of
sales in 1995 from 23.5% of sales in 1994. Restaurant operating expenses in the
Southern restaurants were 18.3% of sales for the year ended September 30, 1995.
The lower restaurant operating expense as a percentage of sales in the Southern
region were primarily due to lower workers' compensation and general liability
expenses.
General and administrative expenses increased to $7.9 million in fiscal
year 1995 from $6.5 million in fiscal year 1994, primarily due to the inclusion
of the Southern restaurants in 1995. General and administrative expenses
decreased as a percent of sales to 3.8% for 1995 from 4.0% for 1994. This slight
decrease in percent of sales was due primarily to the leveraging effect of the
additional week included in the 1995 fiscal year.
Depreciation and amortization expenses increased to $8.5 million in
1995 from $6.1 million in 1994, representing an increase, as a percent of sales,
to 4.1% in 1995 from 3.7% in 1994. This increase was due to additional
amortization expenses related to the goodwill and other assets which arose from
the acquisition of Southern Hospitality, and additional depreciation expense
incurred on capital expenditures for new store openings and existing store
improvements.
Non-Operating Charges. Interest expense increased to $5.8 million in
1995 from $3.8 million in 1994. The increase was due to the additional interest
expense related to the borrowing of approximately $18.3 million secured on
September 24, 1994, to fund the acquisition of Southern Hospitality, and the
inclusion of interest expense on capital leases for the Southern restaurants.
Interest income decreased slightly between periods.
Other income increased $0.9 million mainly due to the disposition of assets.
The provision for income taxes increased to $4.5 million for fiscal
1995 from $4.2 million for fiscal 1994. The Company's effective tax rate for
fiscal 1995 was 34.6% and 37.6% for fiscal 1994. This decrease can be attributed
to a reevaluation of the Company's deferred tax liability requirements.
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<PAGE>
Liquidity and Capital Resources
The Company has historically financed its business activities primarily
from cash generated from operating activities, long-term debt, "build-to-suit"
leases, ground leases, and sale-leasebacks. The Company has reviewed its policy
of leasing all of its new restaurants and has determined that it may be in the
Company's best interest to own certain properties. Accordingly, during 1997 and
1996, the Company purchased the land and/or buildings for certain of its new
restaurants.
Cash flow provided by operating activities was $14.3 million for the 39
weeks ended June 28, 1997, $16.7 million in 1996 and $13.9 million in 1995. Net
cash used in investing activities was $8.5 million for the fiscal 1997 period,
$14.0 million in 1996, and $11.7 million in 1995. Cash used in investing
activities typically represents capital expenditures for the building of new
restaurants. These expenditures also include franchise fees, deferred
pre-opening costs and leasehold improvements on existing restaurants.
Financing activities during the 39 weeks ended June 28, 1997 used net
cash of $6.8 million, which reflected short-term borrowings offset by capital
lease and debt repayments. Financing activities in fiscal 1996 used net cash of
$1.1 million, which related to debt and capital lease repayments offset by
short-term borrowings. Financing activities in fiscal 1995 used net cash of 4.9
million, which related to debt and capital lease repayments.
The Company opened 5 new restaurants and closed 2 restaurants in the
Mid-Atlantic market and 3 in the Mid-West market during the 39 weeks ended June
28, 1997.
The Company anticipates that its future capital requirements will be
primarily for the development of new restaurants, upgrading of existing
restaurants and possible acquisitions. On July 15, 1997 the Company signed an
agreement to combine the revolving line of credit for $13 million and the $5
million credit facility to form an $18 million revolving credit facility. Also,
on July 15, 1997, the Company's wholly own subsidiary FriendCo Restaurants, Inc.
signed a $10 million term loan facility which was mainly used to fund the
purchase price and start up cost for the Friendly's transaction which was
disclosed on Form 8-K filed on July 25, 1997. Management anticipates that cash
provided by operating activities, cash on hand, the revolving line of credit
facility of $18 million, and the term loans will enable the Company to meet its
cash requirements through the remainder of fiscal 1997. The Company may take
advantage of opportunities to finance some of its new restaurant development
with more permanent debt or sale/leaseback financing, if such financing is
available at attractive rates and terms.
Inflation
Certain of the Company's operating costs are subject to inflationary
pressures, of which the most significant are food and labor costs. As of
September 27, 1997, approximately 43% of the Company's employees were paid wages
equal to or based on the federal minimum hourly wage rate. Recent changes in the
federal minimum hourly wage rate will serve to increase labor costs in fiscal
year 1998 and beyond. Economic growth that would reduce unemployment or make
more jobs available in higher paying industries, would directly affect the
Company's labor costs.
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<PAGE>
CERTAIN INFORMATION REGARDING THE DIRECTORS
AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information regarding the directors and
executive officers of the Company. Included are their business or residence
address, present principal occupation and information regarding other material
occupations, positions, offices or employments held during the past five years.
Each individual listed below is a citizen of the United States.
Directors and Executive Officers of the Company
Years in
Present Position with Present
Name Age the Company Position
---- --- ----------- --------
Ronald D. Kirstien 52 Chairman of the Board, 9
1657 Crofton Boulevard Chief Executive Officer,
Crofton, MD 21114 President and Director
Harvey Rothstein 54 Senior Executive Vice 9
1657 Crofton Boulevard President of Real Estate
Crofton, MD 21114 and Development and
Director
Gino Marchetti 71 Director 4
324 Devon Way
West Chester, PA 19380
James D. Farley 71 Director 4
425 Park Avenue
3rd Floor
New York, NY 10022
Harold O. Rosser 49 Director 4
126 East 56th Street
New York, NY 10022
Byron L. Knief 55 Director 4
399 Park Avenue,
14th Floor
New York, NY 10043
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<PAGE>
Years in
Present Position with Present
Name Age the Company Position
---- --- ----------- --------
Barton J. Winokur 57 Director 4
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
Edward H. Chambers 60 Director 2
260 Baltimore Pike
Wawa, PA 19063
Charles E. Corpening 32 Director 2
399 Park Avenue,
14th Floor
New York, NY 10043
Joseph F. Cunnane, III 49 Executive Vice President 3
1657 Crofton Boulevard of Operations
Crofton, MD 21114
Richard H. Borchers 43 Executive Vice President 3
1657 Crofton Boulevard of Human Resources
Crofton, MD 21114
David J. Norman 38 General Counsel and *
1657 Crofton Boulevard Secretary
Crofton, MD 21114
- ------------------------------------
* less than one year
-65-
<PAGE>
Name Principal Occupation and Other Information
Ronald D. Kirstien Mr. Kirstien has served as Chairman of the
Board and Chief Executive Officer of the
Company since 1987, and President of DavCo
Food, Inc., formerly the Company's
operating subsidiary ("DavCo Food") since
1983. Mr. Kirstien joined DavCo Food in
1980 as Vice President of Operations. He
began his career in 1961 with Gino's
Restaurants, Inc., and transferred to the
Rustler division of Gino's Restaurants,
Inc. in 1973. Age 52. Director since
December 1987.
Harvey Rothstein Mr. Rothstein has served as Senior
Executive Vice President since September
1997. From 1987 to September 1997, he was
Executive Vice President of Real Estate and
Development of the Company. Mr. Rothstein
joined DavCo Food in 1979, and became Vice
President of Real Estate and Development in
1980. From 1978 to 1979, Mr. Rothstein was
the manager of franchise development for
Arthur Treacher's, Inc. Age 54. Director
since December 1987.
Gino Marchetti Mr. Marchetti co-founded Gino's
Restaurants, Inc., a publicly-traded
company which operated a hamburger
restaurant chain, in 1958 and served on the
board of directors of Gino's Restaurants,
Inc. until 1982. Mr. Marchetti served on
the board of directors of DavCo Food from
December 1987 to August 1993. Mr. Marchetti
was also a professional football player
with the former Baltimore Colts and has
been inducted into the National Football
League's Hall of Fame. Age 71. Director
since September 1993.
James D. Farley Mr. Farley served as Vice Chairman and
Director of Citibank, N.A. and Citicorp
from 1984 until his retirement in 1991. Mr.
Farley also currently serves as director of
Moore Corporation, Ltd., a provider of
business forms, and is the Chairman of the
Hartford Foundation, a non-profit
organization. Age 71. Director since
February 1993.
Harold O. Rosser Mr. Rosser is currently a principal in the
private equity firm of Bruckmann, Rosser,
Sherrill & Co., Inc. Prior to 1995, Mr.
Rosser served as Managing Director of
Citicorp Venture Capital, Ltd. since 1994
and Vice President of Citicorp Venture
Capital, Ltd. since 1987, after spending 12
years with Citicorp and Citibank, N.A. in
various corporate finance positions. Mr.
Rosser also currently serves as a director
of Jitney-Jungle Stores of America, Inc.,
California Pizza Kitchen, Inc., Restaurant
Associates Corp. and B&G Foods, Inc. Mr.
Rosser previously served as a member of the
Company's board of directors from 1991 to
mid-1993. Age 49. Director since September
1993.
Byron L. Knief Mr. Knief currently serves as President of
Citicorp Capital Investors, Ltd. and Senior
Vice President of Citicorp Venture Capital,
Ltd. Mr. Knief joined Citicorp in 1966 and
has run a variety of Citicorp businesses in
the United States, Canada, Latin America
and Europe. Mr. Knief also currently serves
as a director of Fonorola, Inc., a Canadian
telephone company. Mr. Knief previously
served as a director of the Company from
1991 to mid-1993. Age 55. Director since
September 1993.
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<PAGE>
Name Principal Occupation and Other Information
Barton J. Winokur Mr. Winokur has been a partner of the law
firm of Dechert Price & Rhoads since 1972.
He is the chairman of the firm. Mr. Winokur
also currently serves as a director of
AmeriSource Corporation, a drug wholesaling
company, and CDI Corporation, a provider of
consulting and engineering, temporary help
and executive placement services. Age 57.
Director since September 1993.
Edward H. Chambers Mr. Chambers is Executive Vice President -
Finance and Administration for Wawa, Inc.,
an operator of Mid-Atlantic convenience
stores with sales in excess of $900
million. From 1984 to 1988, Mr. Chambers
served as President and Chief Executive
Officer of Northern Lites, Ltd., a start-up
venture operating quick service
restaurants. From 1976 to 1984, he served
as Senior Vice President - Finance and then
President of the Kentucky Fried Chicken
Retail Operations of Heublien/RJR Nabisco.
Mr. Chambers presently serves as a member
of the board of directors of Nobel
Education Dynamics, a publicly traded
company, and of Riddle Memorial Hospital.
Age 60. Director since 1995.
Charles E. Corpening Mr. Corpening is a Vice President at
Citicorp Venture Capital, Ltd. Prior to
joining CitiCorp Venture Capital, Ltd., in
1994, Mr. Corpening was a Vice President
with Roundtree Capital Corporation, a
private investment firm based in Stamford,
Connecticut. Additionally, he had worked
with the Rockefeller Group and the Mergers
and Acquisitions Group of PaineWebber, Inc.
He received his A.B. from Princeton
University and his M.B.A. from Columbia
Business School. Mr. Corpening is also a
director of Kemet Corporation, Chase Brass
and W.B. Bottling. Age 32. Director since
1995.
Joseph C. Cunnane, III Joseph C. Cunnane, III has served as
Executive Vice President of Operations
since September 1997. From 1994 to
September 1997, he was Senior Vice
President of Operations of the Company.
Prior to that time, he served as Vice
President of Operations of the Company from
1984 to 1994. From 1980 to 1984, he served
as Regional Manager for the Company's
Washington, D.C. region. Age 49.
Richard H. Borchers Richard H. Borchers has served as Executive
Vice President of Human Resources since
September 1997. From 1994 to September
1997, he was Senior Vice President of Human
Resources of the Company. Prior to that
time, he served as Vice President of Human
Resources of the Company from 1991 to 1994,
Director of Human Resources of the Company
from 1988 to 1991 and as Regional Manager
of the Company's Washington, D.C. northern
region from 1985 to 1988. Age 43.
David J. Norman David J. Norman has served as General
Counsel and Secretary since September 1997.
Prior to joining the Company, Mr. Norman
was a principal in the firm of Mason,
Ketterman and Morgan from 1992 to 1997, and
represented the Company in corporate and
litigation matters. Age 38.
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<PAGE>
MARKET PRICES AND DIVIDENDS ON THE SHARES
The Company's Common Stock commenced trading on the NASDAQ National
Market System (ticker symbol DVCO) on August 10, 1993. Prior to August 10, 1993,
there was no market for the Company's Common Stock. As of December 11, 1996, the
Company's common stock began trading on the ASE under the symbol "DVC". On
September 4, 1997, the last trading day before the public announcement of the
September 5 Proposal, the reported closing price per Share was $13.38. On
October 21, 1997, the last trading day before the public announcement of the
execution of the Merger Agreement, the reported closing sale price per Share was
$18.06. On ___________, 1997, the last full trading day prior to the date of
this Proxy Statement, the reported closing sale price per Share was $_______.
STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT PRICE QUOTATION FOR THE COMMON STOCK.
The Company has not paid any cash dividends on its Common Stock and
does not intend to pay cash dividends on its Common Stock for the foreseeable
future. The Company intends to retain future earnings to finance further
development.
The following table sets forth, for the fiscal quarters indicated, the
high and low closing sales prices per Share, as quoted on the NASDAQ National
Market System before December 11, 1996 and the ASE on or after December 11,
1996.
High Low
---- ---
1995
First Quarter...................... $ 16.25 $ 12.25
Second Quarter..................... 14.00 12.25
Third Quarter...................... 14.00 13.00
Fourth Quarter..................... 14.50 11.75
1996
First Quarter...................... 13.50 8.50
Second Quarter..................... 9.25 6.50
Third Quarter...................... 9.75 6.50
Fourth Quarter..................... 9.50 8.25
1997
First Quarter...................... 9.63 8.38
Second Quarter..................... 10.75 9.00
Third Quarter...................... 11.50 8.63
CERTAIN TRANSACTIONS IN THE COMMON STOCK
Except as set forth above, there were no transactions in the Shares
that were effected during the past 60 days by (i) the Company, (ii) any director
or executive officer of the Company, (iii) any persons controlling the Company
or (iv) any director or executive officer of the persons ultimately in control
of the Company, DAC or DAC Sub.
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<PAGE>
SECURITY OWNERSHIP OF THE COMPANY
The table below sets forth certain information regarding beneficial
ownership of the Shares as of September 27, 1997, by each person or entity known
to the Company who owns of record or beneficially five percent or more of the
Shares, by each named executive officer and director and all officers and
directors as a group. Unless otherwise indicated, the business address of each
person or entity listed below is 399 Park Avenue, New York, New York 10043.
<TABLE>
<CAPTION>
Percentage of
Outstanding
Number of Shares of Common Stock
Name Common Stock (1) (*denotes less than 1%)
- ---- ------------ -----------------------
<S> <C> <C>
Citicorp Venture Capital, Ltd. (2)................. 3,133,049 40.60%
Ronald D. Kirstien (3) ............................ 595,769 7.72
Harvey Rothstein (3)(4)............................ 449,274 5.82
James D. Farley ................................... 51,416 *
Byron L. Knief (5)................................. 45,742 *
Harold O. Rosser (6) .............................. 71,329 0.94
Gino Marchetti (7)................................. 13,600 *
Barton J. Winokur (8).............................. 24,000 *
Edward H. Chambers (9)............................. 9,500 *
Charles E. Corpening (10).......................... -- *
Joseph F. Cunnane, III (3)......................... 12,600 *
Richard H. Borchers (3)............................ 11,900 *
David J. Norman (3)................................ 2,200 *
All officers and directors as a group
(12 Persons) .................................. 1,296,830 16.00
World Equity Partners, L.P. (11)................... 441,026 5.72
</TABLE>
- ---------------------
(1) In determining the number of Shares beneficially owned, Shares issuable
pursuant to options and warrants exercisable within 60 days of
September 27, 1997 are deemed outstanding for purposes of determining
the total number of outstanding Shares for the holders of such options
or warrants and are not deemed outstanding for such purpose for all
other Stockholders.
(2) Citicorp Venture Capital, Ltd. ("CVC") is a subsidiary of Citibank,
N.A., a national bank. The Shares listed in this table do not include
119,724 Shares owned by certain affiliates of CVC.
(3) Business address is 1657 Crofton Boulevard, Crofton, Maryland 21114.
(4) Includes approximately 83,000 Shares held in trust.
(5) Mr. Knief serves as Senior Vice President of CVC.
(6) Business address is Bruckmann, Rosser, Sherrill & Co., Inc., 126 East
56th Street, New York, New York 10022.
(7) Business address is 324 Devon Way, West Chester, Pennsylvania 19380.
(8) Business address is 4000 Bell Atlantic Tower, 1717 Arch Street,
Philadelphia, Pennsylvania 19103.
(9) Business address is Wawa, Inc., 260 Baltimore Pike, Wawa, Pennsylvania
19063.
(10) Mr. Corpening serves as a Vice President of CVC.
(11) World Equity Partners, L.P., a limited partnership of which another
affiliate of CVC is the investment advisor, received a warrant which is
exercisable for 441,026 Shares in connection with the recapitalization
of the Company in February 1993. All warrants are currently
exercisable.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Securities and Exchange Commission (the "Commission") pursuant to the Exchange
Act (File No. 1-12481), are incorporated in this Proxy Statement by reference
and shall be deemed to be a part hereof for purposes of the Exchange Act:
(a) The Company's Annual Report on Form 10-K for the year
ended September 28, 1996 (the "Company's Form 10-K");
(b) The portions of the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders held on January 29, 1997 that
have been incorporated by reference into the Company's Form 10-K;
(c) The Company's Quarterly Report on Form 10-Q for the
quarter ended December 28, 1996;
(d) The Company's Quarterly Report on Form 10-Q for the
quarter ended March 29, 1997;
(e) The Company's Current Report on Form 8-K dated June 10,
1997;
(f) The Company's Current Report on Form 8-K dated July 25,
1997;
(g) The Company's Quarterly Report on Form 10-Q for the
quarter ended June 28, 1997;
(h) The Company's Current Report on Form 8-K dated September
12, 1997; and
(i) The Company's Current Report on Form 8-K dated November 5,
1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the Special Meeting and any adjournment or postponement thereof, shall
be deemed to be incorporated by reference in this Proxy Statement and to be a
part hereof for purposes of the Exchange Act from the date of the filing of such
documents. Any statement contained in this Proxy Statement, in a supplement to
this Proxy Statement or in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein or in any
subsequently filed supplement to this Proxy Statement or in any document that
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Proxy
Statement.
ADDITIONAL AVAILABLE INFORMATION
The Company, DAC, DAC Sub, Mr. Kirstien, Mr. Rothstein and CVC have
filed with the Commission a Rule 13e-3 Transaction Statement on Schedule 13E-3
(the "Schedule 13E-3") under the Exchange Act with respect to the transactions
described in this Proxy Statement. As permitted by the rules and regulations of
the Commission, this Proxy Statement omits certain information and exhibits
contained in the Schedule 13E-3. The Schedule 13E-3 (including exhibits) and any
amendments thereto may be
-70-
<PAGE>
inspected and copied at, or obtained from, the Commission's offices as set forth
below. For further information, reference is hereby made to the Schedule 13E-3
and the exhibits thereto. Statements contained in this Proxy Statement
concerning documents filed with the Commission as exhibits to the Schedule 13E-3
or attached as Annexes to this Proxy Statement are not necessarily complete and,
in each instances, reference is made to the copy of the document filed as an
exhibit to the Schedule 13E-3 or attached as an Annex to this Proxy Statement.
Each statement in this Proxy Statement concerning such a document is qualified
in its entirety by reference to such document.
The Company is currently subject to the informational and reporting
requirements of the Exchange Act, and in accordance therewith files periodic
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at
7 World Trade Center, New York, New York 10048 and Citicorp Center, 500 Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such reports and other
information may also be obtained upon payment of the Commission's prescribed
rates by writing to the Commission's Public Reference Section at 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web site
at http://www.sec.gov that contains reports and other information regarding
registrants that file electronically with the Commission. In addition, material
filed by the Company may be inspected at the offices of the American Stock
Exchange at 86 Trinity Place, New York, New York 10006.
Certain documents discussed in this Proxy Statement, including, without
limitation, the Schedule 13 E-3 and all exhibits thereto and the opinion of
Equitable, are also available for inspection and copying at the principal
executive offices of the Company at 1657 Crofton Boulevard, Crofton, Maryland
21114, (410) 721-3770, during its regular business hours, by any Stockholder or
his or her representative so designated in writing. Upon the written request of
a Stockholder directed to the Secretary of the Company at the above address, the
Company will mail to such Stockholder a copy of any such document at the expense
of such Stockholder.
If the Merger is consummated, the Company will deregister the Shares
and will no longer be subject to the requirements of the Exchange Act. See
"SPECIAL FACTORS--Certain Effects of the Merger."
INDEPENDENT ACCOUNTANTS
The consolidated balance sheets of the Company and its subsidiaries as
of September 28, 1996 and September 30, 1995 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended, September 28, 1996, September 30, 1995 and September 24, 1994,
copies of which are attached to this Proxy Statement, have been audited by
Arthur Andersen LLP, independent auditors. Representatives of Arthur Andersen
LLP are expected to be present at the Special Meeting, may make a statement if
they desire to do so and will be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
If the Merger is not consummated, the next Annual Meeting of
Stockholders of the Company is expected to be held on ____________. Any
Stockholder who wishes to present a proposal for action at such meeting must
comply with the applicable rules and regulations of the Commission then in
effect and
-71-
<PAGE>
the Company's By-Laws. In accordance with regulations issued by the Commission,
Stockholder proposals intended for presentation at the next Annual Meeting of
Stockholders must be received by the Secretary of the Company no later than
______ __, 1997 if such proposals are to be considered for inclusion in the
Company's proxy statement for the next Annual Meeting of the Stockholders.
OTHER MATTERS
The Company knows of no other business that will be presented for
action by the Stockholders at the Special Meeting. No other business may be
transacted at the Special Meeting unless written notice thereof is first given
to Stockholders in the manner prescribed by Delaware law and the Company's
By-Laws.
David J. Norman
Secretary
- --------------------------------------------------------------------------------
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
- --------------------------------------------------------------------------------
-72-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................................................ F-2
Consolidated Statements of Operations of the Company for the years ended
September 28, 1996, September 30, 1995, and September 24,1994......................................... F-3
Consolidated Balance Sheet of the Company as of September 28, 1996 and
September 30, 1995.................................................................................... F-4
Consolidated Statements of Stockholders' Equity of the Company for the years ended
September 28, 1996, September 30, 1995, and September 24, 1994........................................ F-6
Consolidated Statements of Cash Flows of the Company for the years ended
September 28, 1996, September 30, 1995 and September 24, 1994......................................... F-7
Notes to Consolidated Financial Statements.............................................................. F-8
Consolidated Statements of Operations of the Company for the 13 weeks and 39 weeks
ended June 28, 1997 (Unaudited) and June 29, 1996 (Unaudited)......................................... F-21
Consolidated Balance Sheet of the Company as of June 28, 1997 (Unaudited) and
September 28, 1996 (Audited).......................................................................... F-22
Consolidated Statements of Cash Flows of the Company for the 39 weeks ended
June 28, 1997 (Unaudited) and June 29, 1996 (Unaudited)............................................... F-24
Notes to Unaudited Consolidated Financial Statements.................................................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of DavCo Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of DavCo
Restaurants, Inc. (a Delaware corporation) and subsidiaries (the Company) as of
September 28, 1996 and September 30, 1995, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended September 28, 1996, September 30, 1995 and September 24, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DavCo Restaurants, Inc. and
subsidiaries as of September 28, 1996 and September 30, 1995, and the results of
their operations and their cash flows for the years ended September 28, 1996,
September 30, 1995 and September 24, 1994, in conformity with generally accepted
accounting principles.
Arthur Andersen /s/
Baltimore, Maryland
November 6 , 1996
F-2
<PAGE>
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in 000's except per share data)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Sept. 28, 1996 Sept. 30, 1995 Sept. 24, 1994
---------------------- --------------------- ---------------------
<S> <C> <C> <C>
Restaurant sales $ 206,903 $ 208,671 $ 163,355
Costs and Expenses:
Cost of restaurant sales (Note 7) 126,309 125,242 96,875
Restaurant operating expenses (Note 7) 42,408 41,373 32,771
Franchise royalties (Note 5) 8,277 8,346 6,535
General and administrative 7,407 7,881 6,524
Depreciation and amortization (Note 2,3) 8,918 8,539 6,092
Loss on write down of impaired
long-lived assets (Note 4) 5,513 - -
------------------------------------------------------------------
198,832 191,381 148,797
------------------------------------------------------------------
Operating income 8,071 17,290 14,558
Interest expense (Notes 9 and 10) (5,048) (5,775) (3,784)
Interest income 36 205 241
Other income , net 1,105 1,146 250
------------------------------------------------------------------
Income before income taxes 4,164 12,866 11,265
Provision for income taxes (Note 8) (1,773) (4,451) (4,231)
------------------------------------------------------------------
Net income 2,391 8,415 7,034
Earnings per common share (Note 2) :
Net income per common share $ 0.34 $ 1.18 $ 0.98
------------------------------------------------------------------
Weighted average number of shares
outstanding - assuming full dilution 7,052 7,157 7,204
------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
DAVCO RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(in 000's except per share data)
<TABLE>
<CAPTION>
September 28, September 30,
1996 1995
---------------------- -----------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 2) $ 1,948 $ 331
Receivables 652 572
Refundable income taxes (Note 8) - 1,175
Inventories (Note 2) 1,421 1,307
Prepaid expenses 1,034 1,593
Deferred tax asset (Note 8) 1,004 786
---------------- ----------------
Total Current Assets 6,059 5,764
---------------- ----------------
Property and equipment, net of accumulated
depreciation of $8,378 and $5,945, respectively
(Notes 2 and 3) 49,521 41,661
---------------- ----------------
Leased properties, net of accumulated amortization
of $8,044 and $9,362 respectively (Notes 2 and 10) 37,918 43,828
---------------- ----------------
Other Assets:
Franchise rights, net(Notes 2 and 5) 3,551 4,095
Goodwill, net(Notes 2 and 13) 18,730 19,639
Deferred tax asset(Note 8) 1,156 -
Other 623 713
---------------- ----------------
Total Other Assets 24,060 24,447
---------------- ----------------
Total Assets $ 117,558 $ 115,700
---------------- ----------------
Current Liabilities:
Accounts payable $ 5,615 $ 6,397
Accrued advertising and royalty fees(Note 5) 2,588 2,230
Accrued salaries and wages 2,732 2,583
Accrued expenses 7,997 7,248
Short-term borrowings (Note 9) 6,768 -
Current portion of long-term debt(Note 9) 3,055 3,685
Current portion of capital lease obligations(Note 10) 3,174 3,094
---------------- ----------------
Total Current Liabilities 31,929 25,237
Long-term debt, less current portion(Note 9) 11,699 14,778
Capital lease obligations, less current portion(Note 10) 28,404 31,083
Deferred taxes payable(Note 8) - 383
---------------- ----------------
Total Liabilities 72,032 71,481
---------------- ----------------
</TABLE>
Commitments and Contingencies(Note 11)
F-4
<PAGE>
<TABLE>
<S> <C> <C>
Stockholders' Equity:
Common stock, $.001 par value; 11,400,000
shares authorized and 6,587,628 issued
(Note 12) 7 7
Treasury stock, at cost,132,107 shares(Note12) (1,084) -
Additional paid-in capital 31,101 31,101
Warrants outstanding (Note 12) 3,000 3,000
Retained earnings 12,502 10,111
---------------- ----------------
Total Stockholders' Equity 45,526 44,219
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 117,558 $ 115,700
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in 000's)
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-In Warrants Treasury Earnings Stockholders'
Stock Capital Outstanding Stock (Deficit) Equity
----- ------- ----------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 25, 1993 $ 7 $ 31,101 $3,000 $ - $(5,338) $28,770
Net Income - - - - 7,034 7,034
----- ------- ------ ------- --------- -------
BALANCE, September 24, 1994 7 31,101 3,000 - 1,696 35,804
Net Income - - - - 8,415 8,415
----- ------- ------ ------- --------- -------
BALANCE, September 30, 1995 7 31,101 3,000 - 10,111 44,219
Purchase of Treasury - - - - -
Stock (132,107 shares) (1,084) - (1,084)
Net Income - - - 2,391 2,391
----- ------- ------ ------- --------- -------
-
BALANCE, September 28, 1996 $ 7 $31,101 $3,000 $(1,084) $ 12,502 $45,526
----- ------- ------ ------- --------- -------
</TABLE>
F-6
<PAGE>
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 28, September 30, September 24,
1996 1995 1994
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,391 $ 8,415 $ 7,034
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Loss on write down of impaired long-lived asset 5,513 - -
Depreciation and amortization 8,918 8,539 6,092
Net (gain) loss on disposition of assets (356) (420) 52
Deferred tax (benefit) provision (1,757) (1,204) 460
Amortization of debt discount - 36 18
Net change in operating assets and liabilities:
Increase in receivables (80) (240) (58)
Decrease (increase) in refundable income taxes 1,175 (806) 1,176
(Increase) decrease in inventories (114) (30) 1
Decrease (increase) in prepaid expenses 559 (520) 68
Increase (decrease) in accounts payable and accrued (33) 771 (451)
expenses
Increase in accrued advertising and royalty fees 358 33 229
Increase (decrease) in accrued salaries and wages 149 (9) 19
Increase (decrease) in income taxes payable - (626) 640
----------- ------------ -----------
Net Cash Flows Provided By Operating Activities 16,723 13,939 15,280
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets (272) (100) (103)
Property and equipment acquired and constructed (14,243) (13,384) (15,144)
Proceeds from disposition of assets 528 500 -
Payment for acquisition of company, net of cash acquired - - (17,497)
Purchases of restricted asset, net of sales - - (1,236)
Proceeds from redemption of restricted asset - 1,236 -
----------- ----------- -----------
Net Cash Flows Used In Investing Activities (13,987) (11,748) (33,980)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (3,094) (2,608) (2,143)
Purchase of treasury stock (1,084) - -
Repayments of long-term obligations (3,709) (2,317) (764)
Proceeds from long-term debt - - 18,250
Short-term borrowings 6,768 - -
----------- ----------- -----------
Net Cash Flows (Used In) Provided By Financing Activities (1,119) (4,925) 15,343
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND 1,617 (2,734) (3,357)
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, 331 3,065 6,422
----------- ----------- -----------
beginning of period
CASH AND CASH EQUIVALENTS, end of period $ 1,948 $ 331 $ 3,065
----------- ----------- -----------
Supplemental Cash Flow Information:
Cash paid for interest $ 5,419 $ 5,885 $ 4,085
----------- ----------- -----------
Cash paid for income taxes, net of refunds $ 2,358 $ 7,433 $ 1,911
----------- ----------- -----------
</TABLE>
F-7
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS:
As of September 28, 1996, DavCo Restaurants, Inc., a Delaware corporation (the
"Company"), operated 228 "Wendy's Old Fashioned Hamburgers" restaurants, making
it the world's largest franchisee of Wendy's International, Inc. ("Wendy's").
The Company maintains exclusive franchise territories in metropolitan Baltimore
and Washington, D.C., the eastern shore of Maryland and portions of northern
Virginia (the "Mid-Atlantic"), where it operates 134 Wendy's restaurants. The
Company also operates 56 Wendy's restaurants in metropolitan St. Louis and
central Illinois (the "Midwest") and 38 Wendy's restaurants in the metropolitan
Nashville, Tennessee area (the"Southern Market") (see Note 13 - Acquisition of
Southern Hospitality Corporation). The Company does not maintain exclusive
franchise territories in the Midwest or the Southern Market.
The Company was incorporated in December 1987, at which time certain members of
management ("Management"), Citicorp Venture Capital ("CVC") and one of its
affiliates sponsored a leveraged buyout pursuant to which Management acquired
100% of the Company's outstanding common equity of the Company, then consisting
only of the Mid-Atlantic restaurants and CVC acquired convertible preferred
stock representing 70% of the Company's common equity on a fully diluted basis.
In January 1991, the Company acquired most of the St. Louis restaurants and
certain other Wendy's restaurants in central Illinois. This acquisition, which
was accounted for as a purchase, was effected through MDF, Inc.
("MDF"), a wholly-owned subsidiary of the Company.
In February 1993, the Company consummated a recapitalization (the
"Recapitalization") to effectuate certain agreements executed in May 1992 (the
"1992 Settlement") to settle outstanding litigation between the Company, CVC and
certain affiliates of CVC. Pursuant to the Recapitalization, the Company (I)
repurchased all of its common equity from Management; (ii) made payments to
Management for covenants not to compete with the Company in the amount of
$6,186,000; (iii) repaid its indebtedness to a CVC affiliate, which was incurred
to finance the leveraged buyout; and (iv) issued 500,000 shares of Common Stock
to Management at the Initial Public Offering price of $12, which was recorded by
the Company as management stock expense of $6,000,000 at the date of issuance.
As a result of the Recapitalization, CVC and its affiliates acquired
substantially all of the outstanding common stock of the Company. Accordingly,
the Recapitalization was accounted for using the push-down method of accounting
whereby the purchase price was allocated to the assets and liabilities of the
Company based on their estimated fair values at the date of the
Recapitalization.
In August 1993, the Company consummated an initial public offering (the "Initial
Public Offering") of 2,600,000 shares of its Common Stock, par value $.001. The
net proceeds from the Initial Public Offering, which aggregated approximately
$27.6 million, along with certain
F-8
<PAGE>
Company cash, were used to repay the $15,000,000 in senior debt and $10,000,000
in subordinated debt, redeem the Class A preferred stock, and repay deferred
royalties.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, MDF, Inc. and Southern Hospitality
Corporation, which was acquired at the close of business on September 24, 1994
(see Note 13). All significant intercompany balances and transactions have been
eliminated in consolidation.
Fiscal Year
The Company maintains its accounts on a 52/53 week fiscal year ending the last
Saturday of September. The fiscal years ended September 28, 1996 (fiscal 1996)
and September 24, 1994 (fiscal 1994) each contained 52 weeks, while the fiscal
year ended September 30, 1995 (fiscal 1995) contained 53 weeks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Inventories
Inventories consist primarily of food and supplies and are stated at the lower
of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
Property and Equipment
Property and equipment is stated at cost. Normal repairs and maintenance costs
are expensed as incurred. Depreciation is being recorded using the straight-line
method over the estimated useful lives of the property and equipment, as
follows:
Useful Lives
Buildings 25 years
Building equipment 10-20 years
Furniture, fixtures and restaurant equipment 5-10 years
Leased Properties
Leased properties consist of capitalized building and leasehold improvements.
Amortization is recorded using the straight-line method over the lives of the
leases.
F-9
<PAGE>
Franchise Rights
The franchise agreements with Wendy s International, Inc. require the Company to
pay a fee for technical assistance to be provided over the term of the franchise
agreement for each unit opened. Amortization is recorded on the straight-line
method over the terms of the franchise agreements. The franchise agreements
generally provide for a term of 20 years and renewal options upon expiration.
Accumulated amortization as of September 28, 1996 and September 30, 1995, was
approximately $1,053,000 and $758,000, respectively (see Note 5).
Goodwill
The Company has classified the cost in excess of fair value of the net assets
(including tax attributes) of companies acquired in purchase transactions as
goodwill. Goodwill is being amortized on a straight line method over 30 years.
Accumulated amortization was approximately $2,054,000 and $1,368,000 as of
September 28, 1996 and September 30, 1995, respectively.
Income Taxes
Deferred income taxes are computed using the liability method, which provides
that deferred tax assets and liabilities are recorded based on the differences
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes. (see Note 8)
Earnings Per Common Share
Earnings per common share is computed based on the weighted average number of
common and common equivalent shares outstanding during the periods. Common stock
equivalents include options and warrants to purchase common stock which are
assumed to be exercised using the treasury stock method. The weighted average
number of shares reflected includes treasury stock acquired pursuant to the
Stock Repurchase Program through the date of acquisition (see Note 12).
Preopening Costs
Direct costs incurred in connection with opening new restaurants are deferred
and amortized on a straight-line basis over a 12-month period following the
opening of a new restaurant.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and in the disclosure of contingent assets and liabilities.
While actual results could differ from those estimates, management believes that
actual results will not be materially different from amounts provided in the
accompanying consolidated financial statements.
F-10
<PAGE>
New Authoritative Standards Not Yet Implemented
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 -
"Accounting for Stock Based Compensation." This statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages, but does not require, all entities to adopt that
method of accounting for all of their employee stock option plans. Entities
electing not to make the change in accounting method must make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied. The accounting and disclosure
requirements of this statement are effective for fiscal years that began after
December 15, 1995. The Company has not yet determined whether or not it will
adopt the fair value based method of accounting defined in this statement.
Prior Year Reclassifications
Certain reclassifications have been made to the prior years' balances in order
to conform to fiscal 1996 presentation.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (amounts in 000's):
September 28, September 30,
1996 1995
-------------- -------------
Buildings $ 14,708 $ 10,150
Land 10,339 8,445
Furniture, fixtures and equipment 26,992 24,432
Construction in progress 5,860 4,579
57,899 47,606
-------------- -------------
Less: Accumulated depreciation (8,378) (5,945)
-------------- -------------
Property and equipment, net $ 49,521 $ 41,661
-------------- -------------
4. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO
BE DISPOSED OF
During the fourth quarter of fiscal 1996, the Company elected early adoption of
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of "(SFAS
No. 121). SFAS No. 121 requires impairment
F-11
<PAGE>
losses to be recorded on long-lived assets used in operations when events or
circumstances indicate that the assets may be impaired based upon the
undiscounted cash flows estimated to be generated by those assets. The Company
determined that due to recent operating and cash flow changes and due to the
overall decline in the Quick Service Restaurant market, that indicators were
present. Accordingly, the Company evaluated the ongoing value of the property
and equipment (and intangibles) associated with its restaurants. Based on this
evaluation, the Company determined that assets with a net book value of $89.9
million were impaired and reduced their carrying value by $5.5 million to their
estimated fair value. Fair value was determined based on the most appropriate of
the following - the market value of restaurants in an arms length transaction,
the recoverability of rents (and other assets) through a sublease arrangement or
the estimated future cash flows to be generated by the restaurants.
5. FRANCHISE RIGHTS:
The franchise agreements for Washington, D.C., Baltimore, Maryland, and the
surrounding areas contain certain requirements regarding the number of units to
be opened in the future. Should the Company fail to comply with the required
development schedule or with the requirements of the agreements for restaurants
within areas covered by the development agreements, Wendy's International, Inc.
could terminate the exclusive nature of the Company's franchise. The franchise
agreements also provide Wendy's International, Inc. significant rights regarding
the business and operations of the Company and impose restrictions regarding the
ownership of the Company's capital stock.
The Company is also required to pay royalty and advertising fees amounting to 4%
each of annual restaurant sales, as defined in the franchise agreements. The 4%
advertising fee is a combination of 2.5% to Wendy's National Advertising
Program, Inc. for national advertising, with the remainder paid for local
advertising.
6. RETIREMENT PLANS:
Substantially all full-time employees of the Company are eligible to participate
in a defined contribution 401(k) plan. Employees may make contributions to the
plan through salary deferral. The Company makes annual contributions to the plan
based on a percentage of the employee's contribution, up to certain limitations.
The Company's contributions were approximately $107,000, $94,000 and $76,000 for
the years ended September 28, 1996, September 30, 1995 and September 24, 1994,
respectively.
F-12
<PAGE>
7. COST OF RESTAURANT SALES AND RESTAURANT OPERATING EXPENSES:
Cost of restaurant sales and restaurant operating expenses consisted of the
following (amounts in 000's):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 28, September 30, September 24,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cost of restaurant sales -
Food and supplies $ 69,603 $ 68,857 $ 54,344
Labor 56,706 56,386 42,531
------------- ------------ ------------
$ 126,309 $ 125,242 $ 96,875
------------- ------------ -----------
Restaurant operating expenses -
Advertising $ 8,869 $ 9,448 $ 7,310
Rent 7,675 7,261 6,397
Utilities 7,915 7,620 6,151
Maintenance and repairs 5,301 4,676 3,551
Other 102,648 12,368 9,362
------------- ------------ ------------
$ 42,408 $ 41,373 $ 32,771
------------- ------------ ------------
</TABLE>
8. INCOME TAXES:
The provision (benefit) for income taxes was comprised of the following (amount
in 000's):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 28, September 30, September 24,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Federal:
Current $ 2,927 $ 68,857 $ 54,344
Deferred (1,457) (1,023) (125)
State:
Current 603 1,034 411
Deferred (300) (181) 585
------------- ------------ -----------
Provision for income taxes $ 1,773 $ 4,451 $ 4,231
------------- ------------ -----------
</TABLE>
The difference between the recorded income tax provision and the "expected" tax
provision based on the statutory federal income tax rate is as follows (amounts
in 000's):
F-13
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 28, September 30, September 24,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Computed federal tax provision
(benefit) at statutory rate: $ 1,416 $ 4,374 $ 3,830
State income taxes (net of federal
income tax effect) 329 563 297
Nondeductible expenses 15 - 3
Targeted jobs tax credit (10) (382) (399)
Goodwill amortization 238 238 160
Reevaluation of deferred tax liability (200) (383) -
Other, net (15) 41 340
-------------- ------------ -----------
Provision for income taxes $ 1,773 $ 4,451 $ 4,231
-------------- ------------ -----------
</TABLE>
As of September 28, 1996 and September 30, 1995, the Company had federal net
operating loss carry forwards for income tax purposes of approximately
$3,023,000 and $4,244,000, respectively, to offset against future taxable
income. Approximately $1,200,000 of net operating loss carryforwards are
utilizable per year. If not utilized, these carryforwards will expire through
2003. In addition the Company had state net operating loss carryforwards of
approximately $3,500,000 as of September 28, 1996.
Total deferred tax liabilities and deferred tax assets as of September 28, 1996
and September 30, 1995, and the sources of the differences between financial
accounting and tax bases of the Company's assets and liabilities which give rise
to the deferred tax liabilities and deferred tax assets and the tax effects of
each, are as follows (amounts in 000's):
<TABLE>
<CAPTION>
September 28, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $ 1,958 $ 2,250
Leased properties 546 1,845
Franchise rights 628 770
Other 141 392
-------------- --------------
Total $ 3,273 $ 5,257
-------------- --------------
Deferred tax assets:
Accrued expenses and reserves $ 1,169 $ 1,197
Covenants not to compete 2,396 2,411
Operating loss carryforwards
and credits 1,343 1,787
Capitalized development costs 278 201
Other 247 64
-------------- --------------
Total $ 5,433 $ 5,660
-------------- --------------
</TABLE>
F-14
<PAGE>
9. LONG-TERM DEBT AND FINANCING ARRANGEMENTS:
Long-term debt consisted of the following (amounts in 000's):
<TABLE>
<CAPTION>
Sept. 28, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Installment promissory notes, interest ranging from 1% to 2% over the
bank's prime rate, due in monthly principal installments plus
interest through September 1999; secured by restaurant equipment,
furniture and fixtures, leasehold improvements and inventory. $ 714 $ 1,245
Installment promissory note, interest at 6%, due in quarterly
installments through January 1996 and a lump-sum payment for
equipment due January 1996, both secured by restaurant point of
sale equipment - 618
Term loan from a bank, (as described below) 14,040 16,600
-------- --------
14,754 18,463
Less: Current portion (3,055) (3,685)
-------- --------
Long-term debt $ 11,699 $ 14,778
-------- --------
</TABLE>
Aggregate maturities of the Company's long-term debt as of September 28, 1996
are as follows:
Maturing fiscal year:
1997 $ 3,055
1998 2,747
1999 8,952
-------
$14,754
-------
Financing Arrangements
In September 1994, the Company modified its existing bank credit facilities and
created a new financing agreement. Under the new financing agreement, the
Company borrowed $18,250,000 (the "Term Loan") from a bank. The proceeds from
the Term Loan were used to consummate the acquisition of Southern Hospitality
Corporation (See Note 13). The Term Loan is secured by the common stock of
Southern Hospitality Corporation. The Term Loan provides for fixed principal
payments of approximately $152,000 per month plus interest beginning in November
1994 and ending with a balloon payment in September 1999. In addition, each year
the agreement requires the Company to repay against the Term Loan, a certain
percentage of excess cash flow, as defined, within 120 days of its fiscal year
end through 1998. Beginning with the first such additional payment, the
Company's monthly principal payment drops to approximately $146,000 for 12
months. After that period of time, the monthly payment reverts back to $152,000
unless
F-15
<PAGE>
there has been an additional excess cash flow payment. During 1995, the bank
adjusted the Term Loan's interest rate to either (1) a floating rate per annum
equal to 0.25% in excess of the higher of the prime rate or the average rate for
90 day commercial paper or (2) a fixed rate equal to 1.25% per annum in excess
of an adjusted LIBOR rate in effect for periods up to 180 days. In August 1995,
the Company fixed the interest rate at 7.47% on approximately half of the Term
Loan principal amount, through an interest rate swap arrangement with the bank.
In January 1996, the Company fixed the interest rate at 6.75% on the remainder
of the Term Loan principal amount, for the duration of the loan, through an
additional interest rate swap arrangement with the bank. As of September 28,
1996, the estimated fair market value of interest rate swap arrangements was
$93,000 based on a dealer quote.
During fiscal 1996, the Company established a $13,000,000 Revolving Credit
Facility, which replaced the $7,500,000 revolving and $2,500,000 fixed asset
facilities. The Revolving Credit Facility increased the sub-limit for letters of
credit from $5,000,000 to $7,000,000 and increased the amount available for
advances under an automated principal funding mechanism.
The Company's funding needs, up to $5,000,000, may be automatically advanced
into its commercial checking account. Advances under the automated system bear
interest at the aforementioned floating interest rate or a daily adjusting rate
equal to 1.5% per annum in excess of the one month LIBOR rate.
The interest rate on the Revolving Line of Credit is either (1) a floating rate
per annum equal to the bank's prime rate or the floating rate per annum equal to
an adjusted LIBOR rate for a 30 day interest period, determined and adjusted
daily, plus up to 155 basis points per annum or (2) a fixed rate equal to an
adjusted LIBOR rate for the period corresponding to the term of the interest
period selected, plus up to 155 basis points per annum. The weighted average
balance outstanding under the Revolving Line of Credit for the year ended
September 28, 1996 was $4,353,000. The weighted average interest rate under the
Revolving Line of Credit for the year ended September 28, 1996 was 7.03%. The
balance outstanding at September 28, 1996 was $6,768,000. The weighted average
balances outstanding for the year ended September 30, 1995 were $208,000 and $0
for the working capital line and the acquisition line, respectively.
In July 1996, the Company obtained a separate short-term $5,000,000 credit
facility. This facility may only be used to fund tax indemnifications
obligations and to repurchase common stock and will expire on January 18, 1997.
Any borrowings would bear interest at the same rates as the Revolving Credit
Facility. There have not been any borrowings under this facility to date.
The terms of the financing arrangements contain, among other provisions, certain
covenants for maintaining defined levels of tangible net worth and various
financial ratios, including cash flow coverage and total liabilities to tangible
net worth. As of September 28, 1996, the Company was in compliance with all
applicable covenants.
F-16
<PAGE>
10. LEASES:
The Company leases a substantial portion of the land and buildings used in the
operation of its restaurants. These leases generally provide for a
noncancellable term of 20 years and provide for additional renewal terms at the
Company's option. Certain leases contain provisions for percentage rentals on
sales above specified minimums. Expenses incurred under these provisions
aggregated approximately $579,000, $764,000 and $609,000 for the years ended
September 28, 1996, September 30, 1995, and September 24, 1994, respectively.
As of September 28, 1996, future minimum lease payments related to leases were
as follows: (amounts in 000's)
Capital Leases Operating Leases
-------------- ----------------
1997 $6,786 $ 7,398
1998 6,227 6,936
1999 5,614 6,569
2000 5,348 6,506
2001 5,103 6,361
2002 and thereafter 24,869 47,662
-------- --------
53,947 $81,432
-------
Less: amount representing interest (22,369)
-------
Present value of future minimum lease payments $31,578
-------
Rent expense under operating leases, including percentage rentals based on
sales, was approximately $8,313,000, $7,895,000 and $6,319,000 for the years
ended September 28, 1996, September 30, 1995 and September 24, 1994,
respectively.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is party to several legal proceedings which are considered by
management to be customary and incidental to its business. In the opinion of
management, after consulting with legal counsel, the ultimate disposition of
these lawsuits will not have a material adverse effect on the Company's
financial position or results of operations.
Letters of Credit
At September 28, 1996, the Company was contingently liable for outstanding
letters of credit relating to liability insurance and Wendy s International,
Inc. current royalty requirements, aggregating approximately $4,070,000.
F-17
<PAGE>
Other
During fiscal year 1997 and 1998, the Company will be required to pledge
additional collateral in the amount of approximately $600,000 and $1,000,000,
respectively, in connection with the Company's worker compensation insurance
policy.
12. CAPITAL STOCK, WARRANTS AND OPTIONS:
Effective with the Initial Public Offering, the Company's authorized capital
stock consisted of 8,200,000 shares of voting Common Stock and 3,200,000 shares
of non-voting Common Stock. As of September 28, 1996 and September 30, 1995,
there were 6,587,628 shares of voting Common Stock outstanding and no shares of
non-voting Common Stock outstanding.
In connection with the Recapitalization, warrants to purchase 441,026 shares of
Common Stock at $.01 each, were issued and recorded at their estimated fair
value of $3,000,000 at date of issuance. These warrants expire February 10,
2003.
In fiscal 1993, the company granted stock options in conjunction with the
Recapitalization to management stockholders and certain affiliates of CVC.
Approximately 515,000 of these options vest over a five-year period. Of the
remaining 41,000 options, approximately 37,000 vest pro rata over a three-year
period and 4,000 vested upon grant.
In fiscal 1994, the Company adopted the 1994 Director Stock Option Plan and the
1994 Employee Stock Option Plan whereby certain named directors and officers
received options to purchase Common Stock. The option price equals the fair
market value of the Common Stock at the date of grant. The options expire ten
years from the date and vest 20% per year beginning with the first anniversary
of the date of grant.
During fiscal year 1996, the Company adopted the 1996 Director Stock Option Plan
and the 1996 Employee Stock Option Plan whereby certain named directors and
officers received options to purchase Common Stock. The option price equals the
fair market value of the Common Stock at the date of grant. The options expire
ten years from date of grant and vest 20% per year beginning with the first
anniversary of the date of grant.
Effective May 1,1996, the Company adopted a stock repurchase plan where up to
1,000,000 shares of the Company's common stock will be purchased over a two year
period, depending on price and market conditions. As of September 28, 1996, the
Company had repurchased 132,107 shares at an aggregate cost of $1,083,874.
F-18
<PAGE>
The following table summarizes stock option activity:
Number Exercise Price
of Shares Per Share
--------- --------------
Outstanding, September 25, 1993
(235,000 Exercisable) 555,618 $6.80-$12.00
Activity during fiscal 1994:
Granted 45,000 $16.13-$17.50
Exercised -- --
Cancelled (5,000) $ 16.13
-------- -------------
Outstanding, September 24, 1994 595,618 $6.80-$17.50
(247,000 Exercisable)
Activity during fiscal 1995:
Granted 5,000 $ 13.81
Exercised -- --
Canceled (5,000) $ 16.13
-------- -------------
Outstanding, September 30, 1995
(267,000 Exercisable) 595,618 $6.80-$17.50
Activity during fiscal 1996:
Granted 48,000 $ 8.50
Exercised -- --
Canceled (10,000) $8.50-$16.13
-------- -------------
Outstanding, September 28, 1996
(287,000 Exercisable) 633,618 $6.80-$17.50
-------- -------------
13. ACQUISITION OF SOUTHERN HOSPITALITY CORPORATION
As of the close of business on September 24, 1994, the Company acquired Southern
Hospitality Corporation for approximately $17.5 million cash (net of cash
acquired) and the assumption of certain liabilities. The acquisition was
accounted for as a purchase. The excess of the purchase price over the net
assets acquired was allocated in accordance with "push-down" accounting to the
assets and liabilities based on their estimated fair values. This allocation
resulted in a $8.6 million increase to goodwill, a $435,000 increase to leased
properties and a $165,000 increase to deferred tax payable. The goodwill is
being amortized using the straight-line basis over 30 years.
The following unaudited pro forma summary consolidated results of operations
assumes the acquisition had occurred at the beginning of each of the fiscal
years presented. The pro forma results are based on historical information and
do not necessarily reflect the actual results that would have occurred, nor is
it necessarily indicative of future results of operations of the combined
entities (in 000's except per share data).
F-19
<PAGE>
Fiscal Year Ended
Sept. 24, 1994
(Unaudited)
-------------
Restaurant sales $ 195,281
-------------
Net income before extraordinary item $ 7,481
-------------
Net income $ 7,481
-------------
Per share data:
Net income before extraordinary item $ 1.04
-------------
Net income $ 1.04
-------------
The significant pro forma adjustments reflected above relate to increases in
interest expense had the financing been obtained at the beginning of the year
and increases in amortization expense due to the creation of goodwill.
F-20
<PAGE>
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in 000's except per share data)
<TABLE>
<CAPTION>
For the 13 For the 39
weeks ended weeks ended
------------------------------- -------------------------------
June 28, 1997 June 29, 1997 June 28, 1997 June 29, 1996
<S> <C> <C> <C> <C>
Restaurant Sales $ 60,706 $ 54,491 $ 163,185 $ 148,701
Cost and Expenses:
Cost of restaurant sales 35,895 32,706 99,404 91,323
Restaurant operating expenses 11,724 10,872 33,038 30,890
Franchise royalties 2,432 2,179 6,536 5,950
General and administrative 2,339 1,675 6,355 5,434
Depreciation and amortization 2,179 2,236 6,527 6,565
54,569 49,668 151,860 140,162
Operating Income 6,137 4,823 11,325 8,539
Interest expense (1,196) (1,295) (3,710) (3,862)
Interest income 9 9 25 22
Other income, net 101 150 577 594
Income (Loss) before Provision for I 5,051 3,687 8,217 5,293
(Provision) Benefit for Income Taxes (2,102) (1,449) (3,482) (2,137)
Net Income (Loss) $ 2,949 $ 2,238 $ 4,735 $ 3,156
Earnings (Loss) per Common Share -
Assuming Full Dilution (Note 2) $ 0.42 $ 0.32 $ 0.68 $ 0.45
Weighted Average Shares Outstanding -
Assuming Full Dilution (Note 2) 6,976 7,054 6,974 7,085
</TABLE>
See notes to unaudited consolidated financial statements.
F-21
<PAGE>
DAVCO RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(in 000's except per share data)
<TABLE>
<CAPTION>
June 28, 1997
(Unaudited) September 28, 1996
----------- ------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,003 $ 1,948
Receivables 741 652
Refundable income taxes 12 12
Inventories 1,489 1,421
Prepaid expenses 1,211 1,377
Deferred tax asset 1,008 1,044
--------- ---------
Total Current Assets 5,464 6,414
--------- ---------
Property and equipment, net 54,931 49,521
--------- ---------
Leased properties, net 35,229 37,918
--------- ---------
Other Assets:
Franchise rights, net 3,323 3,551
Goodwill, net 18,210 18,730
Deferred tax asset 1,156 1,144
Other 165 280
Total Other Assets 22,854 23,705
Total Assets $ 118,478 $ 117,558
Current Liabilities:
Accounts payable $ 5,347 $ 5,615
Accrued advertising and royalty fees 2,337 2,588
Accrued salaries and wages 3,340 2,732
Accrued expenses 9,024 7,997
Short-term borrowings 4,755 6,768
Current portion of long-term debt 2,056 3,055
Current portion of capital lease obligations 3,085 3,174
Income taxes payable 1,880 --
--------- ---------
Total Current Liabilities 31,824 31,929
</TABLE>
F-22
<PAGE>
<TABLE>
<S> <C> <C>
Long term debt, less current portion 10,544 11,699
Capital lease obligations, less current portion 26,085 28,404
--------- ---------
Total Liabilities 68,453 72,032
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.001 par value; 11,400,000 shares authorized
and 6,587,628 issued 7 7
Treasury stock, at cost, 158,807 and 132,107 shares,
respectively (1,320) (1,084)
Additional paid-in capital 31,101 31,101
Warrants outstanding 3,000 3,000
Retained earnings 7,237 12,502
--------- ---------
Total Stockholders' Equity 50,025 45,526
Total Liabilities and Stockholders' Equity $ 118,478 $ 117,558
</TABLE>
See notes to unaudited consolidated financial statements.
F-23
<PAGE>
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in 000's)
<TABLE>
<CAPTION>
For the 39
weeks ended
-----------------------------------------
June 28, 1997 June 29, 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,735 $ 3,156
Adjustments to reconcile net income to net cash flows
provided by operating activities--
Depreciation and amortization 6,527 6,565
Loss on disposition of assets 145 68
Deferred tax (benefit) provision (16) 1,351
Net change in assets and liabilities 2,950 628
Net Cash Flows Provided By Operating Activities 14,341 11,768
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets (13) (481)
Property and equipment acquired and constructed (8,462) (11,651)
Net Cash Flows Used In Investing Activities (8,475) (12,132)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (2,408) (2,281)
Repayments of long-term debt, net (2,154) (3,003)
Purchase of treasury stock (236) (890)
Short-term borrowings, net (2,013) 8,644
Net Cash Flows (Used In) Provided by Financing Act (6,811) 2,470
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(945) 2,106
CASH AND CASH EQUIVALENTS, beginning of period 1,948 331
CASH AND CASH EQUIVALENTS, end of period $ 1,003 $ 2,437
Supplemental Cash Flow Information:
Cash paid for interest $ 3,710 $ 4,117
Cash paid for income taxes, net of refunds $ 1,619 $ 239
</TABLE>
F-24
<PAGE>
DAVCO RESTAURANTS, INC. NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS June 28, 1997
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DavCo Restaurants, Inc., a Delaware corporation (the "Company"),
operates 229 "Wendy's Old Fashioned Hamburgers" restaurants, making it the
world's largest franchisee of Wendy's International, Inc. ("Wendy's"). The
Company maintains exclusive franchise territories in metropolitan Baltimore,
Washington, D.C., the eastern shore of Maryland and portions of northern
Virginia (the "Mid-Atlantic"), where it operates 138 Wendy's restaurants. The
Company also operates 53 Wendy's restaurants in metropolitan St. Louis and
central Illinois (the "Midwest") through a wholly-owned subsidiary, MDF, Inc.
and 38 Wendy's restaurants in metropolitan Nashville, Tennessee (the "South").
The Company does not maintain exclusive franchise territories in the Midwest or
the South.
DavCo's wholly owned subsidiary FriendCo Restaurants, Inc ("FriendCo")
signed agreements, mainly a purchase and development agreement, with Friendly's
Ice Cream Corporation and Friendly's Restaurant Franchise, Inc. on July 10,1997,
effective July 14, 1997, hence there is no financial information related to
FriendCo included in this Form 10-Q. For further information relating to the
agreements reference Form 8-K filed on July 25, 1997.
In management's opinion, the accompanying interim consolidated
financial statements of the Company include all adjustments, consisting only of
normal, recurring adjustments necessary for a fair presentation of the Company's
financial position at June 28, 1997 and the results of its operations and its
cash flows for the periods ended June 28, 1997 and June 29, 1996. These
statements are presented in accordance with the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in the Company's annual consolidated financial statements have
been omitted from these statements, as permitted under the applicable rules and
regulations. Readers of these statements should refer to the consolidated
financial statements and notes thereto as of September 28, 1996 and for the year
then ended. The results of operations presented in the accompanying financial
statements are not necessarily representative of operations for an entire year.
Certain reclassifications have been made to the prior year's balances
in order to conform to current year presentation.
The Company maintains its accounts on a 52/53 week fiscal year. Both
the fiscal 1997 and 1996 periods contained 13 weeks and 39 weeks, respectively.
2. EARNINGS PER COMMON SHARE
Earnings per common share is computed based on the weighted average
number of common and common equivalent shares outstanding during the periods.
Common stock equivalents include options and warrants to purchase common stock
which are assumed to be
F-25
<PAGE>
exercised using the treasury stock method. The weighted average number of shares
reflected includes treasury stock acquired pursuant to the Stock Repurchase
Program.
In March 1997, the Financial Accounting Standard Board released SFAS
128 "Earnings per Share". The new statement is effective December 15, 1997 and
early adoption is not permitted. When adopted, SFAS 128 will require the
restatement of prior periods and disclosure of basic and diluted earnings per
share and related computations. At the present time, management believes that
the adoption of SFAS 128 will not materially affect the Company's consolidated
financial statements.
3. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is party to a number of legal proceedings which are
considered by management to be customary and incidental to its business. In the
opinion of management, after consulting with legal counsel, the ultimate
disposition of these lawsuits will not have a material adverse effect on the
Company's financial position or results of operations.
Letters of Credit
As of June 28, 1997, the Company was contingently liable for
outstanding letters of credit relating to liability insurance, workers'
compensation collateral and Wendy's current royalty requirements, aggregating
approximately $4,670,000.
4. GOODWILL
The company's excess of cost over the fair value of net assets acquired
(or goodwill) is amortized on a straight-line basis over 30 years. The carrying
amount of goodwill is reviewed if facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted cash flows of the entity acquired
over the remaining amortization period, the carrying amount of the goodwill is
reduced by the estimated shortfall of cash flows.
5. TREASURY STOCK
On May 2, 1996, the Company announced that its Board of Directors had
authorized management to repurchase up to 1,000,000 shares of its common stock
on the open market and in privately negotiated transactions during the following
twenty four months. As of June 28, 1997, the Company had purchased 158,807
shares of its common stock for $1,319,505. The Company is accounting for the
treasury stock at cost.
F-26
<PAGE>
Annex A
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 21, 1997
AMONG
DAVCO ACQUISITION HOLDING INC.,
DAVCO MERGER SUB INC.
AND
DAVCO RESTAURANTS, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER.....................................................................2
SECTION 1.1. The Merger.....................................................2
SECTION 1.2. Closing........................................................2
SECTION 1.3. Effective Time.................................................2
SECTION 1.4. Effects of the Merger..........................................2
SECTION 1.5. Certificate of Incorporation; By-laws..........................3
SECTION 1.6. Directors......................................................3
SECTION 1.7. Officers.......................................................3
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT
CORPORATIONS...................................................................3
SECTION 2.1. Effect on Capital Stock........................................3
SECTION 2.2. Stock Option Plans.............................................5
SECTION 2.3. Exchange of Certificates.......................................5
ARTICLE III
REPRESENTATIONS AND WARRANTIES.................................................8
SECTION 3.1. Representations and Warranties
of the Company.................................................8
SECTION 3.2. Representations and Warranties
of Parent and Sub......................................13
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
PRIOR TO MERGER...............................................................16
SECTION 4.1. Conduct of Business of the Company............................16
SECTION 4.2. Other Actions.................................................18
ARTICLE V
ADDITIONAL AGREEMENTS.........................................................18
SECTION 5.1. Meeting of Stockholders.......................................18
SECTION 5.2. Proxy Statement; Schedule 13E-3...............................18
SECTION 5.3. Access to Information; Confidentiality........................19
SECTION 5.4. Commercially Reasonable Efforts...............................20
SECTION 5.5. Financing.....................................................20
SECTION 5.6. Indemnification; Directors' and
Officers' Insurance...........................................20
SECTION 5.7. Public Announcements..........................................22
SECTION 5.8. Acquisition Proposals.........................................22
SECTION 5.9. Stockholder Litigation........................................23
- i -
<PAGE>
SECTION 5.10. Board Action Relating to Stock
Option Plans and Warrants..............................23
ARTICLE VI
CONDITIONS PRECEDENT..........................................................24
SECTION 6.1. Conditions to Each Party's Obligation
to Effect the Merger..........................................24
SECTION 6.2. Conditions to Obligations of Parent
and Sub.......................................................25
SECTION 6.3. Conditions to Obligations of
the Company............................................25
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER.............................................26
SECTION 7.1. Termination...................................................26
SECTION 7.2. Effect of Termination.........................................27
SECTION 7.3. Expenses......................................................28
SECTION 7.4. Amendment.....................................................28
SECTION 7.5. Extension; Waiver.............................................28
SECTION 7.6. Procedure for Termination,
Amendment, Extension or Waiver................................28
ARTICLE VIII
GENERAL PROVISIONS............................................................29
SECTION 8.1. Nonsurvival of Representations
and Warranties................................................29
SECTION 8.2. Fees and Expenses.............................................29
SECTION 8.3. Definitions...................................................29
SECTION 8.4. Notices.......................................................29
SECTION 8.5. Interpretation................................................30
SECTION 8.6. Counterparts..................................................30
SECTION 8.7. Entire Agreement;
Third-Party Beneficiaries.....................................30
SECTION 8.8. Governing Law.................................................31
SECTION 8.9. Assignment....................................................31
SECTION 8.10. Enforcement...................................................31
SECTION 8.11. Severability..................................................31
- ii -
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 21, 1997
AMONG
DAVCO ACQUISITION HOLDING INC.,
A DELAWARE CORPORATION ("PARENT"),
DAVCO MERGER SUB INC.,
A DELAWARE CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF
PARENT ("SUB"),
AND
DAVCO RESTAURANTS, INC.,
A DELAWARE CORPORATION (THE "COMPANY").
W I T N E S S E T H :
WHEREAS, the Board of Directors of each of Parent, Sub and the Company has
adopted resolutions approving this Agreement, pursuant to which Sub shall be
merged with and into the Company and the Company shall become a wholly owned
direct subsidiary of the Parent (the "Merger"); and
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
WHEREAS, as of the date hereof, Ronald D. Kirstien, Harvey Rothstein and
Citicorp Venture Capital, Ltd. (collectively, the "Affiliated Stockholders") own
or have the power to vote 3,996,578 shares of the common stock of the Company
(representing approximately 57% of the total number of outstanding shares of the
Company's common stock as of the date hereof);
WHEREAS, in accordance with applicable law, the Company's Restated
Certificate of Incorporation and the terms of this Agreement, the affirmative
vote of the holders of a majority of the outstanding common stock of the Company
and the affirmative vote of holders of a majority of the outstanding shares of
common stock that are not beneficially owned by the Affiliated Stockholders or
by persons that are Affiliates or Associates (as such terms are defined in
Section 8.3) of the Affiliated Stockholders are required to adopt and approve
this Agreement and the Merger and to consummate the Merger; and
WHEREAS, as of November 4, 1997, the parties hereto determined to amend and
restate this Agreement in accordance herewith.
<PAGE>
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.1. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement and Plan of Merger (the "Agreement"), and in accordance
with the Delaware General Corporation Law (the "DGCL") Sub shall be merged with
and into the Company at the Effective Time (as hereinafter defined). Upon the
Effective Time, the separate existence of Sub shall cease, and the Company shall
continue as the surviving corporation (the "Surviving Corporation").
SECTION 1.2. Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Section 7.1, and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "Closing") will take place
at 10:00 a.m. New York City time on the second business day following the date
on which the last to be fulfilled or waived of the conditions set forth in
Article VI shall be fulfilled or waived in accordance with this Agreement (the
"Closing Date"), at the offices of Dechert Price & Rhoads, Bell Atlantic Tower,
1717 Arch Street, Philadelphia, Pennsylvania, unless another date, time or place
is agreed to in writing by the parties hereto.
SECTION 1.3. Effective Time. The parties hereto will file with the
Secretary of State of the State of Delaware (the "Delaware Secretary of State")
on the date of the Closing (or on such other date as Parent and the Company may
agree) a certificate of merger or other appropriate documents, executed in
accordance with the relevant provisions of the DGCL, and make all other filings
or recordings required under the DGCL in connection with the Merger. The Merger
shall become effective upon the filing of the certificate of merger with the
Delaware Secretary of State, or at such later time as is specified in the
certificate of merger (the "Effective Time").
SECTION 1.4. Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the properties,
rights, privileges, powers and franchises of the Company and Sub shall vest in
the Surviving Corporation, and all debts, liabilities and duties of the Company
and Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
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SECTION 1.5. Certificate of Incorporation; By-laws. (a) At the Effective
Time, the Company's Restated Certificate of Incorporation shall be amended so as
to read in its entirety as set forth in Exhibit A to this Agreement and as so
amended shall become the certificate of incorporation of the Surviving
Corporation.
(b) The By-Laws of Sub as in effect at the Effective Time shall be, from
and after the Effective Time, the By-Laws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
SECTION 1.6. Directors. The directors of Sub at the Effective Time shall
become, from and after the Effective Time, the directors of the Surviving
Corporation, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
SECTION 1.7. Officers. At the Effective Time, the officers of the Company
shall become the officers of the Surviving Corporation, until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT
CORPORATIONS
SECTION 2.1. Effect on Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of any holder:
(a) Common Stock of Sub. Each share of common stock of Sub issued and
outstanding immediately prior to the Effective Time shall be converted into and
become one validly issued, fully paid and nonassessable share of Common Stock,
par value $0.001 per share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Parent - Owned Stock. Each share of
the capital stock of the Company issued or outstanding immediately prior to the
Effective Time that is owned by the Company or by Parent or Sub shall be
cancelled automatically and shall cease to exist, and no cash or other
consideration shall be delivered or deliverable in exchange therefor.
(c) Conversion of Company Shares. At the Effective Time, each share of the
common stock, par value $.001 per share, of the Company (the "Common Stock")
that is then issued and outstanding (such shares of Common Stock being
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hereinafter referred to collectively as the "Company Shares") (in each case,
other than shares to be cancelled pursuant to subsection 2.1(b) above and other
than shares held by Dissenting Shareholders (as hereinafter defined), which
shares will not constitute "Company Shares" hereunder), and, subject to Section
2.2 hereof, each Warrant (as defined in Section 2.2 hereof) that by its terms is
exercisable from and after the Effective Time only for the amount of Merger
Consideration that such Warrant would have been entitled to receive if it had
been exercised prior to the Effective Time, or that is amended in accordance
with Section 5.10, shall be converted into and become the right to receive, upon
surrender of the certificate representing such Company Share or Warrant in
accordance with Section 2.3, $20.00 in cash, without interest thereon (the
"Merger Consideration"), less, in the case of any Warrant, the amount of any
cash exercise price payable upon exercise of such Warrant.
(d) Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Common Stock issued and outstanding immediately prior to the
Effective Time held by a holder (a "Dissenting Shareholder") (if any) who has
the right to demand, and who properly demands, an appraisal of such shares in
accordance with Section 262 of the DGCL (or any successor provision)
("Dissenting Shares") shall not be converted into a right to receive the Merger
Consideration unless such Dissenting Shareholder fails to perfect or otherwise
loses such Dissenting Shareholder's right to such appraisal, if any. If, after
the Effective Time, such Dissenting Shareholder fails to perfect or loses any
such right to appraisal, each such share of such Dissenting Shareholder shall be
treated as a share that had been converted as of the Effective Time into the
right to receive the Merger Consideration in accordance with this Section 2.1.
The Company shall give prompt notice to Parent of any demands received by the
Company for appraisal of any Company Shares, and Parent shall have the right to
participate in and direct all negotiations and proceedings with respect to such
demands. The Company shall not, except with the prior written consent of Parent,
make any payment with respect to, or settle or offer to settle, any such
demands.
(e) Cancellation and Retirement of Common Stock. As of the Effective Time,
all certificates representing shares of Common Stock, other than certificates
representing shares to be cancelled in accordance with Section 2.1(b) or
Dissenting Shares, issued and outstanding immediately prior to the Effective
Time, shall no longer be outstanding and shall automatically be cancelled and
shall cease to exist, and each holder of a certificate representing any such
shares of Common Stock shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration upon surrender of such
certificate in accordance with Section 2.3.
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SECTION 2.2. Stock Option Plans. For purposes of this Agreement, the term
"Warrant" means each unexercised option (including without limitation any
Company Stock Option, as hereafter defined) or warrant to purchase Company
Shares from the Company (whether such option or warrant is vested or not) that
is outstanding at the Effective Time. The term "Company Stock Option" means each
outstanding option to purchase shares of Common Stock (a "Company Stock Option")
issued under the Company's 1994 Employee Stock Option Plan, 1996 Employee Stock
Option Plan, 1997 Employee Stock Option Plan, 1994 Director Stock Option Plan,
1996 Director Stock Option Plan and 1997 Director Stock Option Plan
(collectively, the "Company Stock Option Plans"). As of the date hereof, the
unexercisable portion of each Company Stock Option shall become immediately
exercisable for the amount of Merger Consideration that would have been payable
in respect of any Company Shares issuable for any such Company Stock Option, if
such Company Stock Option had been exercised immediately prior to the Effective
Time, subject to all expiration, lapse, exercise price and other terms and
conditions thereof. Each holder of Warrants that by their terms are exercisable
from and after the Effective Time only for the amount of Merger Consideration
that such Warrants would have been entitled to receive if they had been
exercised prior to the Effective Time, or that are amended in accordance with
Section 5.10, shall be entitled to receive an aggregate amount equal to the
Merger Consideration multiplied by the aggregate number of Company Shares
issuable upon the exercise in full of all Warrants held by such holder as of the
Effective Time, less the aggregate cash exercise price payable upon exercise of
all Warrants held by such holder.
SECTION 2.3. Exchange of Certificates. (a) Paying Agent. As of the
Effective Time, Sub (or the Company, as the Surviving Corporation) shall
deposit, or shall cause to be deposited, with or for the account of a bank or
trust company designated by Sub, which shall be reasonably satisfactory to the
Company (the "Paying Agent"), for the benefit of the holders of shares of Common
Stock and the holders of the Warrants, cash in an aggregate amount equal to (i)
the product of (x) the number of shares of Common Stock and Warrants issued and
outstanding at the Effective Time (other than shares to be cancelled pursuant to
subsection 2.1(b) above and Dissenting Shares) and (y) Merger Consideration less
(ii) the aggregate cash exercise price payable upon exercise of all Warrants
(such amount being hereinafter referred to as the "Payment Fund").
(b) Exchange Procedures. As soon as practicable after the Effective Time,
each holder of an outstanding certificate or certificates which prior thereto
represented Company Shares or Warrants (other than shares to be cancelled
pursuant to subsection 2.1(b) above and Dissenting Shares) shall, upon surrender
to the Paying Agent of such certificate or
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certificates and acceptance thereof by the Paying Agent, be entitled to the
amount of cash which the aggregate number of Company Shares or Warrants
previously represented by such certificate or certificates surrendered shall
have been converted into the right to receive pursuant to subsection 2.1(c). The
Paying Agent shall accept such certificates upon compliance with such reasonable
terms and conditions as the Paying Agent may impose to effect an orderly
exchange thereof in accordance with normal exchange practices. If the
consideration to be paid in the Merger (or any portion thereof) is to be
delivered to any person other than the person in whose name the certificate
representing Company Shares or Warrants surrendered in exchange therefor is
registered, it shall be a condition to such exchange that the certificate so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such exchange shall pay to the Paying
Agent any transfer or other taxes required by reason of the payment of such
consideration to a person other than the registered holder of the certificate
surrendered, or shall establish to the satisfaction of the Paying Agent that
such tax has been paid or is not applicable. After the Effective Time, there
shall be no further transfer on the records of the Company or its transfer agent
of certificates representing Company Shares or Warrants and if such certificates
are presented to the Company for transfer, they shall be cancelled against
delivery of the Merger Consideration as hereinabove provided. Until surrendered
as contemplated by this subsection 2.3(b), each certificate representing Company
Shares or Warrants (other than certificates representing shares to be cancelled
in accordance with Section 2.1(b) or Dissenting Shares), shall be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration, without any interest thereon, as
contemplated by Sections 2.1 and 2.2. No interest will be paid or will accrue on
any cash payable as Merger Consideration to any holder of Company Shares or
Warrants.
(c) Letter of Transmittal. Promptly after the Effective Time (but in no
event more than five days thereafter), the Surviving Corporation shall require
the Paying Agent to mail to each record holder of certificates that immediately
prior to the Effective Time represented Company Shares or Warrants which have
been converted pursuant to Section 2.1, a form of letter of transmittal and
instructions for use in surrendering such certificates and receiving the
consideration to which such holder shall be entitled therefor pursuant to
Section 2.1.
(d) No Further Ownership Rights in Common Stock or Preferred Stock. The
Merger Consideration paid upon the surrender for exchange of certificates
representing Company Shares or Warrants in accordance with the terms of this
Article II shall be deemed to have been issued and paid in full
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satisfaction of all rights pertaining to the Company Shares or Warrants
theretofore represented by such certificates.
(e) Termination of Payment Fund. Any portion of the Payment Fund which
remains undistributed to the holders of the certificates representing Company
Shares or Warrants for 120 days after the Effective Time shall be delivered to
the Surviving Corporation, upon demand, and any holders of Company Shares or
Warrants who have not theretofore complied with this Article II shall thereafter
look only to the Surviving Corporation and only as general creditors thereof for
payment of their claim for the Merger Consideration.
(f) No Liability. None of Parent, Sub, the Surviving Corporation or the
Paying Agent shall be liable to any person in respect of any cash, shares,
dividends or distributions payable from the Payment Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any certificates representing Company Shares or Warrants shall not have been
surrendered prior to five years after the Effective Time (or immediately prior
to such earlier date on which the Merger Consideration in respect of such
certificate would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.1(c))), any such cash, shares,
dividends or distributions payable in respect of such certificate shall, to the
extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person previously
entitled thereto.
(g) Investment of Payment Fund. The Paying Agent shall invest the Payment
Fund, as directed by the Surviving Corporation, in (i) direct obligations of the
United States of America, (ii) obligations for which the full faith and credit
of the United States of America is pledged to provide for the payment of
principal and interest, (iii) commercial paper rated the highest quality by
either Moody's Investors Services, Inc. or Standard & Poor's Corporation, or
(iv) certificates of deposit, bank repurchase agreements or bankers, acceptances
of commercial banks with capital exceeding $100 million, and any net earnings
with respect thereto shall be paid to the Surviving Corporation as and when
requested by the Surviving Corporation; provided that any such investment or any
such payment of earnings shall not delay the receipt by holders of Company
Shares or Warrants of the Merger Consideration or otherwise impair such holders'
respective rights hereunder.
(h) Withholding Rights. The Surviving Corporation, Parent or Sub shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of Company Shares or Warrants such
amounts as the Surviving Corporation, Parent or Sub is required
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to deduct and withhold with respect to the making of such payment under the Code
(as hereinafter defined), or any provision of state, local or foreign tax law,
including, without limitation, withholdings required in connection with payments
with respect to Company Stock Options held by employees of the Company. To the
extent that amounts are so withheld by the Surviving Corporation, Parent or Sub,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder in respect of which such deduction and
withholding was made.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of the Company. The Company
represents and warrants to Parent and Sub as follows:
(a) Organization, Standing and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority to
carry on its business as now being conducted. The Company is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) would not have a material adverse effect on the business, financial
condition or results of operations of the Company and the Subsidiaries (as
defined in subsection 3.1(b) hereof) taken as a whole ("Material Adverse
Effect"). The Company has delivered to Parent complete and correct copies of its
Restated Certificate of Incorporation (the "Certificate of Incorporation") and
By-laws, as amended to the date of this Agreement.
(b) Subsidiaries. Section 3.1(b) of the disclosure schedule attached hereto
(the "Disclosure Schedule") sets forth the name, jurisdiction of incorporation,
capitalization and number of shares of outstanding capital stock of each class
owned, directly or indirectly, by the Company of each corporation of which the
Company owns, directly or indirectly, a majority of the outstanding capital
stock (individually, a "Subsidiary" and, collectively, the "Subsidiaries"). All
the issued and outstanding shares of capital stock of each Subsidiary are
validly issued, fully paid and nonassessable. All such shares owned, directly or
indirectly, by the Company are owned by the Company beneficially and of record,
free and clear of all liens, pledges, encumbrances or restrictions of any kind.
No Subsidiary has outstanding any
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securities convertible into or exchangeable or exercisable for any shares of its
capital stock, there are no outstanding options, warrants or other rights to
purchase or acquire any capital stock of any Subsidiary, there are no
irrevocable proxies with respect to such shares, and there are no contracts,
commitments, understandings, arrangements or restrictions by which any
Subsidiary or the Company is bound to issue additional shares of the capital
stock of a Subsidiary. Except for the Subsidiaries, and as otherwise disclosed
in Section 3.1(b) of the Disclosure Schedule, the Company does not own, directly
or indirectly, any capital stock or other equity securities of any corporation
or have any direct or indirect equity interest in any business. Each Subsidiary
(a) is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation; (b) has all requisite corporate
power and authority and any necessary governmental authority to carry on its
business as it is now being conducted and to own, operate and lease its
properties; and (c) is qualified or licensed to do business as a foreign
corporation and is in good standing in each of the jurisdictions in which (i)
the ownership or leasing of real property or the conduct of its business
requires such qualification or licensing and (ii) the failure to be so qualified
or licensed, either singly or in the aggregate, would have a Material Adverse
Effect. The Company has previously delivered to Parent and Sub complete and
correct copies of the Certificates or Articles of Incorporation and By-Laws of
each Subsidiary, each as amended to date. All such Certificates or Articles of
Incorporation and By-Laws are in full force and effect.
(c) Capitalization. As of the date hereof, the authorized capital stock of
the Company consists of 11,400,000 shares of Common Stock. At the close of
business on September 27, 1997, 6,428,821 shares of Common Stock were issued and
outstanding, 131,500 shares of Common Stock were reserved for issuance pursuant
to outstanding Company Stock Options, 996,644 shares of Common Stock were
reserved for issuance upon conversion of Warrants (other than Company Stock
Options), and 158,807 shares of Common Stock were held by the Company in its
treasury. Except as set forth above, at the close of business on September 27,
1997, no shares of capital stock or other equity securities of the Company were
issued, reserved for issuance or outstanding. All outstanding shares of capital
stock of the Company are, and all shares which may be issued pursuant to the
Company Stock Option Plan or any other outstanding Warrants will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights. Except as set forth above or in Section 3.1(c) of
the Disclosure Schedule, the Company has no outstanding option, warrant,
subscription or other right, agreement or commitment which either (i) obligates
the Company to issue, sell or transfer, repurchase, redeem or otherwise acquire
or vote any shares of the capital stock of the
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Company or (ii) restricts the transfer of Common Stock. Except as set forth in
Section 3.1(c) of the Disclosure Schedule, the Company has no outstanding stock
appreciation rights, phantom stock or stock equivalents. Section 3.1(c) of the
Disclosure Schedule accurately sets forth the number of Company Shares issuable
upon exercise of each outstanding Warrant, and the applicable exercise price
with respect to each such Warrant.
(d) Authority; Enforceability; Noncontravention. The Company has the
requisite corporate power and authority to enter into this Agreement and,
subject to the approval of its stockholders as set forth in subsection 6.1(a)
with respect to the consummation of the Merger, to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement by
the Company and the consummation by the Company of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Company, subject to the approval of its stockholders as set forth in
subsection 6.1(a). This Agreement has been duly executed and delivered by the
Company and, assuming this Agreement constitutes the valid and binding agreement
of Parent and Sub, constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except that the
enforceability hereof may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally and that 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. Except as disclosed in Section 3.1(d) of the Disclosure
Schedule, the execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated by this Agreement and compliance
with the provisions hereof will not, (i) violate any of the provisions of the
Restated Certificate of Incorporation or By-laws of the Company, (ii) subject to
the governmental filings and other matters referred to in the following
sentence, conflict with, result in a breach of or default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of a material benefit
under, or require the consent of any person under, any indenture or other
agreement, permit, concession, franchise, license or similar instrument or
undertaking to which the Company is a party or by which the Company or any of
its assets is bound or affected, or (iii) subject to the governmental filings
and other matters referred to in the following sentence, contravene any law,
rule or regulation of any state or of the United States or any political
subdivision thereof or therein, or any order, writ, judgment, injunction,
decree, determination or award currently in effect, which, in the case of
clauses (ii) and (iii) above, singly or in the aggregate, would have a Material
Adverse Effect or prevent consummation of the transactions contemplated hereby.
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No consent, approval or authorization of, or declaration or filing with, or
notice to, any governmental agency or regulatory authority (a "Governmental
Entity"), which has not been received or made, is required by or with respect to
the Company in connection with the execution and delivery of this Agreement by
the Company or the consummation by the Company of the transactions contemplated
hereby, except for (i) the requirements or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), (ii) the filing of the certificate of merger
with the Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business,
(iii) such other consents, approvals, authorizations, filings or notices as are
set forth in Section 3.1(d)(iii) of the Disclosure Schedule and (iv) any
applicable filings under state antitakeover laws, or filings, authorizations,
consents or approvals the failure to make or obtain which, in the aggregate,
would not have a Material Adverse Effect or prevent consummation of the
transactions contemplated hereby.
(e) Financial Statements; SEC Reports. The Company has previously furnished
Parent and Sub with true and complete copies of (i) its Annual Report on Form
10-K for the year ended September 28, 1996 (the "Annual Report") filed by the
Company with the Securities and Exchange Commission (the "SEC"), (ii) its
Quarterly Reports on Form 10-Q for the quarters ended December 28, 1996, March
29, 1997 and June 28, 1997 (collectively, the "Quarterly Reports" and, together
with the Annual Report, the "Reports") filed by the Company with the SEC, (iii)
proxy statements relating to all of the Company's meetings of shareholders
(whether annual or special) held or scheduled to be held since September 28,
1996 and (iv) each other registration statement, proxy or information statement
or current report on Form 8-K filed since September 28, 1996 by the Company with
the SEC. Since September 1, 1993, the Company has complied in all material
respects with its SEC filing obligations under the Exchange Act. The financial
statements and related schedules and notes thereto of the Company contained in
the Reports (or incorporated therein by reference) were prepared in accordance
with generally accepted accounting principles applied on a consistent basis
except as noted therein, and fairly present in all material respects the
consolidated financial position of the Company and its consolidated Subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended, subject (in the case of interim unaudited
financial statements) to normal year-end audit adjustments, and such financial
statements complied as of their respective dates in all material respects with
applicable rules and regulations of the SEC. Each such registration statement,
proxy statement and Report was prepared in accordance with the requirements of
the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange
Act and did not, on the date
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of effectiveness in the case of such registration statements, on the date of
mailing in the case of such proxy statements and on the date of filing in the
case of such Reports, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(f) Absence of Certain Changes or Events. Except as may be disclosed in the
Reports or as otherwise disclosed in Section 3.1(f) of the Disclosure Schedule,
since June 28, 1997 there has not been (a) any material adverse change in the
business, assets, financial condition or operations of the Company and the
Subsidiaries taken as a whole; (b) any damage, destruction or loss, whether
covered by insurance or not, having a material adverse effect upon the
properties or business of the Company and the Subsidiaries taken as a whole; (c)
any declaration, setting aside or payment of any dividend, except for the
Company's regular dividend to stockholders, or other distribution in respect of
the capital stock of the Company or any redemption or other acquisition by the
Company of any of its capital stock; (d) any issuance by the Company, or
commitment of the Company to issue, any shares of its Common Stock or securities
convertible into or exchangeable for shares of its Common Stock; (e) any
increase in the rate or terms of compensation payable or to become payable by
the Company or any Subsidiary to its directors, officers of key employees,
except increases occurring in the ordinary course of business in accordance with
its customary past practices; (f) any increase in the rate or terms of any
bonus, insurance, pension or other employee benefit plan, payment or arrangement
made to, for or with any directors, officers or key employees, except increases
occurring in the ordinary course of business in accordance with its customary
past practices; (g) any change by the Company in accounting methods, principles
or practices except as required by generally accepted accounting principles; (h)
an entry into any agreement, commitment or transaction by the Company or any
Subsidiary which is material to the Company and its Subsidiaries taken as a
whole, except agreements, commitments or transactions in the ordinary course of
business; (i) any material breach by the Company of any of its material
obligations under its franchise agreements with Wendy's International, Inc.
("Wendy's") or, to the Company's knowledge, by Wendy's of its material
obligations thereunder; (j) any incurrence, other than in the ordinary course of
business, of material indebtedness for money borrowed; or (k) any agreement or
commitment, whether in writing or otherwise, to take any action described in
this subsection 3.1(f). Since June 28, 1997, the Company and the Subsidiaries
have conducted their respective businesses in all material respects only in the
ordinary course, consistent with past custom and practice, except as
contemplated by this Agreement.
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(g) Company Schedule 13E-3 and Proxy Materials. All of the information
supplied by the Company for inclusion in the Rule 13e-3 Transaction Statement on
Schedule 13E-3 (the "Schedule 13E-3") referred to in Section 5.2 hereof will
not, on the date the Schedule 13E-3 is first filed, and all of the information
supplied by the Company for inclusion in the definitive proxy statement (the
"Definitive Proxy Statement") referred to in Section 5.2 hereof will not, on the
date when the Definitive Proxy Statement is first mailed to the Company's
shareholders, and the Schedule 13E-3 and the Definitive Proxy Statement, as then
amended or supplemented, will not, on the date of the Company's stockholders'
meeting referred to in Section 5.1 hereof or on the Closing Date (as defined in
Section 1.2 hereof), contain any statement which is false or misleading with
respect to any 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 were made, not misleading. Notwithstanding
the foregoing, the Company makes no representation or warranty regarding
information furnished by Parent or Sub for inclusion in the Schedule 13E-3 or
the Definitive Proxy Statement (or any amendment or supplement thereto). The
Definitive Proxy Statement will comply as to form and, with respect to
information supplied or to be supplied in writing by or on behalf of the Company
for inclusion in the Definitive Proxy Statement, substance in all material
respects with the requirements of the Exchange Act and the applicable rules and
regulations of the SEC thereunder.
(h) Board Recommendation. The Board of Directors of the Company has
recommended that the stockholders of the Company vote for approval and adoption
of this Agreement.
(i) Brokers. No broker, investment banker, financial advisor or other
person, the fees and expenses of which will be paid by the Company, is entitled
to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement.
SECTION 3.2. Representations and Warranties of Parent and Sub. Parent and
Sub represent and warrant to the Company as follows:
(a) Organization, Standing and Corporate Power. Parent is a corporation
duly organized and validly existing under the laws of the jurisdiction in which
it is incorporated. Sub is a corporation duly organized, validly existing, and
in good standing under the laws of the jurisdiction in which it is incorporated.
Each of Parent and Sub has the requisite corporate power and authority to carry
on its business as now being conducted. Each of Parent and Sub is duly qualified
or licensed
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to do business and is in good standing in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed (individually or in the aggregate) would
not have a Material Adverse Effect.
(b) Capitalization. As of the date of this Agreement, the authorized
capital stock of Parent consists of 1,000 shares of Common Stock, par value
$0.01 per share, no shares of which are presently issued and outstanding. As of
the date of this Agreement, the authorized capital stock of Sub consists of
1,000 shares of Common Stock, par value $0.01 per share, 1,000 shares of which
are presently issued and outstanding, which constitutes all of the issued and
outstanding capital stock of Sub. All of the issued and outstanding shares of
capital stock of Parent and Sub are validly issued, fully paid and
nonassessable. As of the Effective Time of the Merger, the capitalization of
Parent and Sub and the ownership of the issued and outstanding shares of
Parent's and Sub's capital stock will be in all material respects as described
in the Definitive Proxy Statement.
(c) Authority; Enforceability; Noncontravention. Parent and Sub have all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement by Parent and Sub and the consummation by Parent and
Sub of the transactions contemplated by this Agreement have been duly authorized
by all necessary corporate action on the part of Parent and Sub. This Agreement
has been duly executed and delivered by and, assuming this Agreement constitutes
the valid and binding agreement of the Company, constitutes a valid and binding
obligation of each of Parent and Sub, enforceable against such party in
accordance with its terms, except that the enforceability hereof may be subject
to bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights generally and that 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. The execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
by this Agreement and compliance with the provisions of this Agreement will not
(i) violate any of the provisions of the charter documents of Parent, or the
Certificate of Incorporation or Bylaws of Sub, (ii) subject to the governmental
filings and other matters referred to in the following sentence, conflict with,
result in a breach of or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a material benefit under, or require
the consent of any person
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under, any indenture, or other agreement, permit, concession, franchise, license
or similar instrument or undertaking to which Parent or any of its subsidiaries
is a party or by which Parent or any of its subsidiaries or any of their assets
is bound or affected, or (iii) subject to the governmental filings and other
matters referred to in the following sentence, contravene any law, rule or
regulation of any state or of the United States or any political subdivision
thereof or therein, or any order, writ, judgment, injunction, decree,
determination or award currently in effect, which, in the case of clauses (ii)
and (iii) above, singly or in the aggregate, would have a material adverse
effect on the business, financial condition or results of operations of Parent
and Sub taken as a whole or prevent consummation of the transactions
contemplated hereby. No consent, approval or authorization of, or declaration or
filing with, or notice to, any Governmental Entity which has not been received
or made is required by or with respect to Parent or Sub in connection with the
execution and delivery of this Agreement by Parent or Sub or the consummation by
Parent or Sub, as the case may be, of any of the transactions contemplated by
this Agreement, except for (i) the requirements or the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), (ii) the filing of the certificate of
merger with the Delaware Secretary of State and appropriate documents with the
relevant authorities of other states in which the Company is qualified to do
business, (iii) such other consents, approvals, authorizations, filings or
notices as are set forth in Section 3.1(d)(iii) of the Disclosure Schedule and
(iv) any applicable filings under state antitakeover laws, or filings,
authorizations, consents or approvals the failure to make or obtain which, in
the aggregate, would not have a material adverse effect on the business,
financial condition or results of operations of Parent and Sub taken as a whole
or prevent consummation of the transactions contemplated hereby.
(d) Financing. Parent and Sub have received a written commitment (the
"Commitment") from Global Alliance Finance Company, L.L.C. dated as of October
17, 1997, to provide debt financing on or prior to the Closing Date of an amount
not less than $180 million (the "Financing"). Parent has accepted the
Commitment, which, to the knowledge of Parent and Sub, is valid and in full
force and effect. A true and correct copy of the Commitment is attached as
Exhibit 3.2(d) hereto.
(e) No Undisclosed Material Developments; Sale of the Company. Parent is
unaware of any information or plans relating to the Company, its business,
assets, financial condition or prospects, which would have a material positive
effect on the value of the Company or the Company Shares and which have not been
disclosed either in any filings of the Company, Parent or Sub under the Exchange
Act or to the Board of Directors of the Company. Parent does not have any
present plan or present intention to sell, dispose of or otherwise transfer,
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or cause to be sold, disposed of or otherwise transferred, directly or
indirectly, (i) more than 50% of the beneficial ownership of the outstanding
voting capital stock of the Surviving Corporation or (ii) assets constituting
more than 50% of the earning power of the Company and its subsidiaries or with a
book value in excess of 50% of the book value of all assets of the Company and
its subsidiaries.
(f) Schedule 13E-3 and Proxy Materials. All of the information to be
furnished by Parent or Sub for inclusion in the Schedule 13E-3 and the
Definitive Proxy Statement (or any amendment or supplement thereto) will not, in
the case of the Schedule 13E-3, on the date it is first filed, and in the case
of the Definitive Proxy Statement, on the date it is first mailed to the
Company's shareholders, and in the case of the Schedule 13E-3 and the Definitive
Proxy Statement, as then amended or supplemented, on the date of the Company's
stockholders' meeting referred to in Section 5.1 hereof or on the Closing Date,
contain any statement which is false or misleading with respect to any 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 were made, not misleading. Notwithstanding the foregoing,
Parent and Sub make no representation or warranty regarding information
furnished by the Company for inclusion in the Schedule 13E-3 (or any amendment
or supplement thereto). The Schedule 13E-3 will comply as to form and, with
respect to information supplied or to be supplied in writing by or on behalf of
Parent or Sub for inclusion in the Schedule 13E-3, substance in all material
respects with the requirements of the Exchange Act and the applicable rules and
regulations of the SEC thereunder.
(g) Brokers. No broker, investment banker, financial advisor or other
person, the fees and expenses of which will be paid by Parent of Sub, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
PRIOR TO MERGER
SECTION 4.1. Conduct of Business of the Company. (a) Except as contemplated
by this Agreement, during the period from the date of this Agreement to the
Effective Time, the Company shall operate, and shall cause each Subsidiary to
operate, its business in the ordinary course of business. Without limiting the
generality of the foregoing, during the
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period from the date of this Agreement to the Effective Time, except as
expressly contemplated by this Agreement, the Company shall not, without the
prior written consent of Parent:
(i) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any of
the Company's outstanding capital stock, except for the Company's regular
dividend to stockholders (y) split, combine or reclassify any of its
outstanding capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
outstanding capital stock, or (z) purchase, redeem or otherwise acquire any
shares of outstanding capital stock or any rights, warrants or options to
acquire any such shares;
(ii) issue, sell, grant, pledge or otherwise encumber any shares of
its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities, except for the
issuance of shares of Common Stock upon exercise of Warrants outstanding
prior to the date of this Agreement and disclosed in Section 3.1(c), or
take any action that would make the Company's representations and
warranties set forth in Section 3.1(c) not true and correct in all material
respects;
(iii) amend its Restated Certificate of Incorporation or By-laws or
other comparable charter or organizational documents;
(iv) acquire any business or any corporation, partnership, joint
venture, association or other business organization or division thereof (or
any interest therein), or form any subsidiaries;
(v) sell or otherwise dispose of any of its substantial assets, except
in the ordinary course of business, or as disclosed in Section 4.1(a)(v) of
the Disclosure Schedule;
(vi) make any capital expenditures or commitments with respect
thereto, except capital expenditures or commitments not exceeding
$20,000,000 in the aggregate as the Company may, in its discretion, deem
appropriate;
(vii) (x) incur any indebtedness for borrowed money or guaranty any
such indebtedness of another person, other than (A) borrowings in the
ordinary course under
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existing lines of credit (or under any refinancing of such existing lines),
(B) indebtedness owing to, or guaranties of indebtedness owing to, the
Company or (C) in connection with the Financing, or (y) make any loans or
advances to any other person, other than to the Company and other than
routine advances to employees, except in the case of either (x) or (y) as
disclosed in Section 4.1(a)(vii) of the Disclosure Schedule;
(viii) grant or agree to grant to any employee any increase in wages
or bonus, severance, profit sharing, retirement, deferred compensation,
insurance or other compensation or benefits, or establish any new
compensation or benefit plans or arrangements, or amend or agree to amend
any existing Company Plans, except as may be required under existing
agreements or in the ordinary course of business consistent with past
practices;
(ix) merge, amalgamate or consolidate with any other entity in any
transaction, sell all or substantially all of its business or assets, or
acquire all or substantially all of the business or assets of any other
Person;
(x) enter into or amend any employment, consulting, severance or
similar agreement with any individual;
(xi) change its accounting policies in any material respect, except as
required by generally accepted accounting principals; or
(xii) commit or agree to take any of the foregoing actions.
SECTION 4.2. Other Actions. The Company and Parent shall not take any
action that would, or that could reasonably be expected to, result in (i) any of
the representations and warranties of such party set forth in this Agreement
that are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect or (iii) any of the conditions of the Merger set forth in
Article VI not being satisfied.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1. Meeting of Stockholders. The Company will take all action
necessary in accordance with applicable law
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and its Restated Certificate of Incorporation and By-laws to duly call, give
notice of, and convene a meeting of its stockholders (the "Stockholders'
Meeting") to consider and vote upon the adoption and approval of this Agreement
and the Merger and all actions contemplated hereby which require approval and
adoption by the Company's stockholders.
SECTION 5.2. Proxy Statement; Schedule 13E-3. Parent will prepare and file,
and the Company will cooperate with Parent in the preparation and filing of, the
Schedule 13E-3 with the SEC with respect to the transactions contemplated by
this Agreement. The Company shall pay the filing fee for such Schedule 13E-3. In
connection with the Stockholders' Meeting contemplated hereby, the Company will
prepare and file, and Parent will cooperate with the Company in the preparation
and filing of, a preliminary Proxy Statement relating to the transactions
contemplated by this Agreement (the "Preliminary Proxy Statement") with the SEC
and will use its commercially reasonable best efforts to respond to the comments
of the SEC and to cause the Definitive Proxy Statement to be mailed to the
Company's stockholders, in each case as soon as reasonably practicable. Each
party to this Agreement will notify the other parties promptly of the receipt of
the comments of the SEC, if any, and of any request by the SEC for amendments or
supplements to the Schedule 13E-3, the Preliminary Proxy Statement or the
Definitive Proxy Statement or for additional information, and will supply the
others with copies of all correspondence between such party or its
representatives, on the one hand, and the SEC or members of its staff, on the
other hand, with respect to the Schedule 13E-3, the Preliminary Proxy Statement,
the Definitive Proxy Statement or the Merger. If at any time prior to the
Stockholders' Meeting, any event should occur relating to the Company or any of
the Subsidiaries which should be set forth in an amendment of, or a supplement
to, the Schedule 13E-3 or the Definitive Proxy Statement, the Company will
promptly inform Parent. If at any time prior to the Stockholders' Meeting, any
event should occur relating to Parent or Sub or any of their respective
Associates or Affiliates, or relating to the plans of any such persons for the
Surviving Corporation after the Effective Time of the Merger, or relating to the
Financing, that should be set forth in an amendment of, or a supplement to, the
Schedule 13E-3 or the Definitive Proxy Statement, the Company, with the
cooperation of Parent, will, upon learning of such event, promptly prepare, file
and, if required, mail such amendment or supplement to the Company's
stockholders; provided that, prior to such filing or mailing the Company shall
consult with Parent with respect to such amendment or supplement and shall
afford Parent reasonable opportunity to comment thereon. Parent will furnish to
the Company the information relating to Parent and Sub, their respective
Associates and Affiliates and the plans of such persons for the Surviving
Corporation after the Effective Time of the Merger, and relating to the
Financing, which is required to
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be set forth in the Schedule 13E-3, the Preliminary Proxy Statement or the
Definitive Proxy Statement under the Exchange Act and the rules and regulations
of the SEC thereunder.
SECTION 5.3. Access to Information; Confidentiality. From and after the
date hereof, the Company will provide to Parent complete access to the Company's
facilities, books and records and shall cause the directors, employees,
accountants, and other agents and representatives (collectively,
"Representatives") of the Company to cooperate fully with Parent and Parent's
Representatives in connection with Parent's due diligence investigation of the
Company and the Company's assets, contracts, liabilities, operations, records
and other aspects of its business (including any environmental investigation of
the companies facilities). Parent shall keep all information supplied or made
available to Parent hereunder in confidence and shall not disclose the same to
any party other than its employees or advisors on a "need to know" basis and
only for purposes of evaluating the Merger. Parent will not use such information
except for evaluating the Merger, in connection with procurement of the
Financing and in connection with Parent and Sub's filings under the Exchange Act
as contemplated by this Agreement. If the Merger is not consummated and this
Agreement is terminated in accordance with its terms, Parent shall return any
information provided hereunder.
SECTION 5.4. Commercially Reasonable Efforts. Upon the terms and subject to
the conditions and other agreements set forth in this Agreement, each of the
parties agrees to use commercially reasonable 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 to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by this Agreement, including the
satisfaction of the respective conditions set forth in Article VI.
SECTION 5.5. Financing. Each of Parent and Sub shall use their commercially
reasonable efforts to obtain the Financing on terms satisfactory to them and to
deliver to the Company true and correct copies of the fully executed and
delivered Definitive Financing Agreements with respect thereto on or before the
Closing Date. Parent and Sub shall use their best efforts to satisfy on or
before the Closing Date all requirements of the Definitive Financing Agreements
which are conditions to closing the transactions constituting the Financing and
to drawing the cash proceeds thereunder. The obligations contained herein are
not intended, nor shall they be construed, to benefit or confer any rights upon
any person, firm or entity other than the Company.
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SECTION 5.6. Indemnification; Directors' and Officers' Insurance. (a) From
and after the Effective Time, Parent shall, and shall cause the Surviving
Corporation to, indemnify and hold harmless each person who is now, at any time
has been or who becomes prior to the Effective Time a director, officer,
employee or agent of the Company or any of its subsidiaries (the "Indemnified
Parties") against any and all losses, claims, damages, liabilities, costs,
expenses (including reasonable fees and expenses of legal counsel), judgments,
fines or amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation (each a "Claim") arising out of the or pertaining to
any action or omission occurring prior to the Effective Time (including, without
limitation, any which arise out of or relate to the transactions contemplated by
this Agreement), regardless of whether such Claim is asserted or claimed prior
to, at or after the Effective Time, to the full extent permitted under Delaware
law or the Surviving Corporation's Certificate of Incorporation or By-laws in
effect as of the Effective Date or under any indemnification agreement in effect
as of the date of this Agreement. Without limiting the generality of the
preceding sentence, in the event any Indemnified Party becomes involved in any
Claim, after the Effective Time, Parent shall, and shall cause the Surviving
Corporation to, periodically 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 provisions of paragraph (b) of this
Section 5.6, and subject to the providing by such Indemnified Party of an
undertaking to reimburse all amounts so advanced in the event of a final and
non-appealable determination by a court of competent jurisdiction that such
Indemnified Party is not entitled thereto.
(b) The Indemnified Party shall control the defense of any Claim with
counsel selected by the Indemnified Party, which counsel shall be reasonably
acceptable to Parent, provided that Parent and the Surviving Corporation shall
be permitted to participate in the defense of such Claim at their own expense,
and provided further that if any D&O Insurance (as defined in paragraph (c) of
this Section 5.6) in effect at the time shall require the insurance company to
control such defense in order to obtain the full benefits of such insurance and
such provision is consistent with the provisions of the Company's D&O Insurance
existing as of the date of this Agreement, then the provisions of such policy
shall govern. Neither Parent nor the Surviving Corporation shall be liable for
any settlement effected without its written consent, which consent shall not be
withheld unreasonably.
(c) For a period of six years after the Effective Time, Parent or the
Surviving Corporation shall provide officers' and directors' liability insurance
("D&O Insurance") covering each Indemnified Party who is presently covered by
the Company's
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officers' and directors' liability insurance or will be so covered at the
Effective Time with respect to actions or omissions occurring prior to the
Effective Time, on terms no less favorable than such insurance maintained in
effect by the Company as of the date hereof in terms of coverage and amounts,
provided that Parent and the Surviving Corporation shall not be required to pay
in the aggregate an annual premium for D&O Insurance in excess of 200% of the
last annual premium paid prior to the date hereof, but in such case shall
purchase as much coverage as possible for such amount.
(d) The Certificate of Incorporation and By-laws of the Surviving
Corporation shall contain the provisions with respect to indemnification set
forth in the Certificate of Incorporation and By-laws of the Surviving
Corporation as of the Effective Date, which provisions shall not be amended,
repealed or otherwise modified after the Effective Time in any manner that would
adversely affect the rights thereunder of the Indemnified Parties in respect of
actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement), unless
such modification is required by law. Parent, Sub and the Company agree that all
rights existing in favor of any Indemnified Party under any indemnification
agreement in effect as of the date hereof shall survive the Merger and shall
continue in full force and effect, without any amendment thereto. In the event
any Claim is asserted or made, any determination required to be made with
respect to whether an Indemnified Party's conduct complies with standards set
forth under such provisions of the Certificate of Incorporation or By-laws or
under the DGCL or any indemnification agreement, as the case may be, shall be
made by independent legal counsel selected by such Indemnified Party and
reasonably acceptable to Parent; and provided that nothing in this Section 5.6
shall impair any rights or obligations of any current or former director or
officer of the Company or any of its subsidiaries, including pursuant to the
respective certificates of incorporation or bylaws of Parent, the Surviving
Corporation or the Company, or their respective subsidiaries, under the DGCL or
otherwise.
(e) The provisions of this Section 5.6 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, his or her
heirs and his or her personal representatives and shall be binding on all
successors and assigns of Parent, Sub, the Company and the Surviving
Corporation.
SECTION 5.7. Public Announcements. Parent and Sub, on the one hand, and the
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press release
or other public statements with respect to the transactions
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contemplated by this Agreement, including the Merger, and shall not issue any
such press release or make any such public statement prior to such consultation,
except as may be required by applicable law, court process or by obligations
pursuant to any listing agreement with any national securities exchange.
SECTION 5.8. Acquisition Proposals. The Company shall not, nor shall it
authorize or permit any of its Representatives to, directly or indirectly, (i)
solicit, initiate or encourage the submission of any Acquisition Proposal (as
hereinafter defined) or (ii) participate in any discussions or negotiations
regarding, or furnish to any person any non-public information with respect to,
or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal; provided, however, that the foregoing shall not prohibit
the Board of Directors of the Company from furnishing information to, or
entering into discussions or negotiations with, any person in connection with an
unsolicited bona fide Acquisition Proposal by such person if, and to the extent
that, the Board of Directors of the Company, after consultation with independent
legal counsel (which may include its regularly engaged independent legal
counsel), determines in good faith that such action is required for the Board of
Directors of the Company to comply with its fiduciary obligations to
stockholders under applicable law. The Company shall provide prompt written
notice to Parent to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or entity, such written
notice shall include the material terms and conditions of such Acquisition
Proposal or inquiry, and the identity of the person making any such Acquisition
Proposal or inquiry; provided that the Company shall not be required to provide
such notice of such terms or conditions or identity if the Company's Board of
Directors, after consultation with independent legal counsel (which may include
its regularly engaged independent legal counsel), determines in good faith that
giving such notice would be inconsistent with its fiduciary obligations to
stockholders under applicable law. For purposes of this Agreement, "Acquisition
Proposal" means any proposal with respect to a merger, consolidation, share
exchange or similar transaction involving the Company, or any purchase of all or
any significant portion of the assets of the Company, or any equity interest in
the Company, other than the transactions contemplated hereby.
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SECTION 5.9. Stockholder Litigation. The Company shall give Parent the
opportunity to participate in the defense or settlement of any stockholder
litigation against the Company and its directors relating to the transactions
contemplated by this Agreement; provided, however, that no such settlement shall
be agreed to without Parent's consent, which consent shall not be unreasonably
withheld if such settlement would entail solely the payment of monetary relief.
SECTION 5.10. Board Action Relating to Stock Option Plans and Warrants. As
soon as practicable following the date of this Agreement, the Board of Directors
of the Company (or, if appropriate, any committee administering a Company Stock
Option Plan) shall adopt such resolutions or take such actions as may be
required to adjust the terms of all outstanding Company Stock options in
accordance with Section 2.2 and shall make such other changes to the Company
Stock Option Plans as it deems appropriate to give effect to the Merger. In
addition, prior to the Effective Time, the Board of Directors of the Company
shall adopt such resolutions and take such actions as may be required to amend
the terms of all outstanding Warrants in accordance with Section 2.2 and shall
make such other changes to the Warrants as it deems appropriate to give effect
to the Merger.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1. Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
adopted and approved by (i) the affirmative vote of the stockholders of the
Company as required under the laws of the State of Delaware and (ii) the
affirmative vote of holders of a majority of the outstanding shares of Common
Stock that are not beneficially owned by the Affiliated Stockholders or by
persons that are Affiliates or Associates of the Affiliated Stockholders.
(b) Governmental and Regulatory Consents. All filings required to be made
prior to the Effective Time with, and all consents, approvals, permits and
authorizations required to be obtained prior to the Effective Time from,
Governmental Entities, including, without limitation, those set forth in Section
3.1(d)(iii) of the Disclosure Schedule, in connection with the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby by the Company, Parent and Sub, and which, either individually or in the
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aggregate, if not obtained would have a Material Adverse Effect or would prevent
consummation of the Merger, will have been made or obtained (as the case may
be).
(c) No Injunctions, Restraints or Litigation. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; provided, however, that the
parties invoking this condition shall use reasonable efforts to have any such
order or injunction vacated. There shall not be threatened, instituted or
pending any action, proceeding, application or counterclaim by any Governmental
Entity before any court or governmental regulatory or administrative agency,
authority or tribunal (i) which if adversely determined would have a material
adverse effect on the Surviving Corporation or the ability of any party to this
Agreement to perform its obligations hereunder or (ii) which challenges or seeks
to challenge, restrain or prohibit the consummation of the Merger.
SECTION 6.2. Conditions to Obligations of Parent and Sub. The obligations
of Parent and Sub to effect the Merger are further subject to the following
conditions:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in Section 3.1 that are qualified by materiality shall be
true and correct and such representations and warranties of the Company set
forth in Section 3.1 that are not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date, except to the extent
such representations and warranties speak as of an earlier date and except for
changes permitted or contemplated by this Agreement, and Parent shall have
received an officers' certificate signed on behalf of Parent to the effect set
forth in this paragraph.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Parent shall have
received an officers' certificate signed on behalf of the Company to such
effect.
(c) Financing. On or prior to the Effective Time, Parent and/or Sub shall
have completed their arrangements for the Financing and received the cash
proceeds thereof.
(d) Dissenting Shares. Parent shall have received evidence, in form and
substance reasonably satisfactory to it, that the number of Dissenting Shares
shall constitute no greater than 5% of the total number of shares of Common
Stock
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outstanding immediately prior to the Effective Time, on a fully diluted basis.
SECTION 6.3. Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger is further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent and Sub set forth in Section 3.2 that are qualified by materiality shall
be true and correct and such representations and warranties of Parent and Sub
set forth in Section 3.2 that are not so qualified shall be true and correct in
all material respects, in each case as of the date of this Agreement and as of
the Closing Date as though made on and as of the Closing Date, except to the
extent such representations and warranties speak as of an earlier date and
except for changes permitted or contemplated by this Agreement, and the Company
shall have received a certificate signed on behalf of Parent by the chief
executive officer and the chief financial officer of Parent to the effect set
forth in this paragraph.
(b) Performance of Obligations of Parent and Sub. Parent and Sub shall have
performed in all material respects all obligations required to be performed by
them under this Agreement at or prior to the Closing Date, and the Company shall
have received a certificate signed on behalf of Parent by the chief executive
officer and the chief financial officer of Parent to such effect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. Termination. This Agreement may be terminated and abandoned at
any time prior to the Effective Time, whether before or after approval of
matters presented in connection with the Merger by the stockholders of the
Company:
(a) by mutual written consent of Parent and the Company; or
(b) by either Parent or the Company:
(i) if, upon a vote at the Stockholders Meeting, or any adjournment
thereof, the adoption and approval of this Agreement and the Merger by the
stockholders of the Company required by Delaware law, the Company's
Restated Certificate of Incorporation or the terms of this Agreement shall
not have been obtained; or
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<PAGE>
(ii) if the Merger shall not have been consummated on or before April
1, 1998, provided that the failure to consummate the Merger is not
attributable to the failure of the terminating party to fulfill its
obligations pursuant to this Agreement; or
(iii) if any Governmental Entity shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable; or
(c) by the Company, if the Board of Directors of the Company shall have
approved an Acquisition Proposal after determining, upon the basis of written
advice of outside counsel (who may be the Company's regularly retained outside
counsel) that such approval is necessary in the exercise of its fiduciary
obligations under applicable law; or
(d) by Parent, if the Board of Directors of the Company shall have (i)
withdrawn or modified, in a manner adverse to Parent or Sub, the approval or
recommendation by the Board of Directors of the Company of this Agreement or the
Merger or (ii) approved another Acquisition Proposal; or
(e) by Parent, if any of the conditions set forth in Section 6.2 shall have
become incapable of fulfillment, and shall not have been waived by Parent, or if
the Company shall breach in any material respect any of its representations,
warranties or obligations hereunder and such breach shall not have been cured in
all material respects or waived and the Company shall not have provided
reasonable assurance that such breach will be cured in all material respects on
or before the Closing Date, but only if such breach, singly or together with all
other such breaches, constitutes a failure of the condition contained in Section
6.2 as of the date of such termination; or
(f) by the Company, if any of the conditions set forth in Section 6.3 shall
have become incapable of fulfillment, and shall not have been waived by the
Company, or if Parent or Sub shall breach in any material respect any of their
respective representations, warranties or obligations hereunder and such breach
shall not have been cured in all material respects or waived and Parent or Sub,
as the case may be, shall not have provided reasonable assurance that such
breach will be cured in all material respects on or before the Closing Date, but
only if such breach, singly or together with all other such breaches,
constitutes a failure of the condition contained in Section 6.3 as of the date
of such termination;
- 27 -
<PAGE>
provided, however, that the party seeking termination pursuant to clause (e) or
(f) hereof is not in breach of any of its material representations, warranties,
covenants or agreements contained in this Agreement.
SECTION 7.2. Effect of Termination. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Parent, Sub or the Company, other than the last
three sentences of Section 5.3 and Sections 7.2, 7.3 and 8.2. Nothing contained
in this Section shall relieve any party from any liability resulting from any
material breach of the representations, warranties, covenants or agreements set
forth in this Agreement.
SECTION 7.3. Expenses. In the event that this Agreement is terminated by
the Company pursuant to subsection 7.1(c) or by Parent pursuant to subsection
7.1(d), Parent and Sub shall be entitled to reimbursement by the Company for
their out-of-pocket expenses incurred in connection with the negotiation,
execution, delivery and performance of this Agreement and the Financing,
provided that such reimbursement for expenses shall not exceed $1,000,000.
SECTION 7.4. Amendment. Subject to the applicable provisions of the DGCL,
at any time prior to the Effective Time, the parties hereto may modify or amend
this Agreement, by written agreement executed and delivered by duly authorized
officers of the respective parties; provided, however, that after approval of
the Merger by the stockholders of the Company, no amendment shall be made which
reduces the consideration payable in the Merger or adversely affects the rights
of the Company's stockholders hereunder without the approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing' signed on behalf of each of the parties.
SECTION 7.5. Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or (c) subject
to Section 7.3, waive compliance with any of the agreements or conditions of the
other parties contained in this Agreement. Any agreement on the part of a party
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. The failure of any party
to this Agreement to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of such rights.
- 28 -
<PAGE>
SECTION 7.6. Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3 or an extension or waiver pursuant to Section
7.4 shall, in order to be effective and in addition to requirements of
applicable law, require, in the case of Parent, Sub or the Company, action by
its Board of Directors or the duly authorized designee of its Board of
Directors.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time, including, without
limitation, Section 5.7.
SECTION 8.2. Fees and Expenses. Except as provided otherwise in Sections
5.2 and 7.3, whether or not the Merger shall be consummated, each party hereto
shall pay its own expenses incident to preparing for, entering into and carrying
out this Agreement and the consummation of the transactions contemplated hereby.
SECTION 8.3. Definitions. For purposes of this Agreement:
(a) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act;
(b) "person" means an individual, corporation, partnership, joint venture,
association, trust, unincorporated organization or other entity; and
(c) a "subsidiary" of any person means another person 50% of the equity
securities of which are owned directly or indirectly by such first person;
provided, however, that joint ventures or partnerships engaged in the business
of real estate development, management or ownership shall not be deemed to be
subsidiaries unless such first person owns directly or indirectly 80% of the
equity securities of such joint venture or partnership.
SECTION 8.4. Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent
- 29 -
<PAGE>
by overnight courier (providing proof of delivery) or telecopy 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 Sub, to
DavCo Acquisition Holding Inc.
1657 Crofton Boulevard
Crofton, Maryland 21114
Attention: Ronald D. Kirstien
with a copy to:
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Kirk A. Radke
(b) if to the Company, to
DavCo Restaurants, Inc.
1657 Crofton Boulevard
Crofton, Maryland 21114
Attention: Board of Directors
with a copy to:
Dechert Price & Rhoads
Bell Atlantic Tower
40th Floor
1717 Arch Street
Philadelphia, Pennsylvania 19103
Attention: G. Daniel O'Donnell
SECTION 8.5. Interpretation. When a reference is made in this Agreement to
a Section or Schedule, such reference shall be to a Section of, or a Schedule
to, this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include," "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation."
SECTION 8.6. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
- 30 -
<PAGE>
SECTION 8.7. Entire Agreement; Third-Party Beneficiaries. This Agreement
and the other agreements referred to herein constitute the entire agreement, and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter of this Agreement. This Agreement
is not intended to confer upon any person, other than the parties hereto and the
third party beneficiaries referred to in the following sentence, any rights or
remedies. The parties hereto expressly intend the provisions of Section 5.6 to
confer a benefit upon and be enforceable by, as third party beneficiaries of
this Agreement, the third persons referred to in, or intended to be benefitted
by, such provisions.
SECTION 8.8. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 8.9. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties, and any such assignment that is not
consented to shall be null and void, except that Parent may assign this
Agreement (i) to any wholly owned subsidiary of Parent or (ii) together with all
of the outstanding capital stock of Sub, to an entity organized under the
corporate or limited liability laws of a jurisdiction of one of the United
States of America, the ownership interests of which entity are substantially
identical to the ownership interests of Parent and which entity specifically and
expressly assumes by written agreement the obligations of Parent under this
Agreement; in either case without Parent being released from liability
hereunder. Subject to the preceding sentence, this Agreement will 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 any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
(without requirement to post a bond) the terms and provisions of this Agreement,
this being in addition to any other remedy to which they are entitled at law or
in equity.
SECTION 8.11. Severability. Whenever possible, each provision or portion of
any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision
- 31 -
<PAGE>
of this Agreement is held to be invalid, illegal or unenforceable in any respect
under any applicable law or rule in any jurisdiction, such invalidity,
illegality or unenforceability will not affect any other provision or portion of
any provision in such jurisdiction, and this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision or portion of any provision had never been contained
herein.
- 32 -
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.
DAVCO RESTAURANTS, INC.
By: /s/ David J. Norman
-----------------------------
Name: David J. Norman
Title: Secretary
Attest:
/s/ Richard H. Borchers
--------------------------------
Name: Richard H. Borchers
Title: Executive Vice President
DAVCO ACQUISITION HOLDING INC.
By: /s/ Ronald D. Kirstien
-----------------------------
Name: Ronald D. Kirstien
Title: President
Attest:
/s/ Harvey Rothstein
--------------------------------
Name: Harvey Rothstein
Title: Vice President
DAVCO MERGER SUB INC.
By: /s/ Ronald D. Kirstien
-----------------------------
Name: Ronald D. Kirstien
Title: President
Attest:
/s/ Harvey Rothstein
--------------------------------
Name: Harvey Rothstein
Title: Vice President
- 33 -
<PAGE>
DISCLOSURE SCHEDULE
Section 3.1(b) - Subsidiaries
Section 3.1(c) - Capitalization
Section 3.1(d) - Authority
Section 3.1(d)(iii) - Consents
Section 3.1(f) - Absence of Changes
Section 4.1(v) - Conduct of Business: Assets
Section 4.1(vii) - Conduct of Business: Indebtedness
<PAGE>
Section 3.1(b)
Subsidiaries
Name Jurisdiction Capitalization Ownership*
Southern Hospi- Tennessee 100 shares Company
tality Corporation common stock
outstanding
MDF, Inc. Delaware 100 shares Company
common stock
outstanding
FriendCo Rest- Maryland 100 shares Company
aurants, Inc. common stock
outstanding
Heron Realty Maryland 100 shares Company
Corporation common stock
("Heron") outstanding
DavCo Oil Company Maryland 100 shares Heron
common stock
outstanding
- ------------------------
* All shares are owned 100% by the entity shown.
<PAGE>
Section 3.1(c)
Capitalization
See "Stock Option Summary by Individual", attached hereto as Attachment A.
<PAGE>
Attachment A
<TABLE>
<CAPTION>
Stock Option Summary by Individual
Option Price: $16.125 $8.500 $9.875
------- ------ ------
Executives 1994 Pool 1996 Pool 1997 Pool Totals
--------------- --------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. Kirstien * Orig. Issued 0 7,500 7,500 15,000
Cancelled 0 0
--------------- --------------- -------------- --------------- -----------
Remaining 0 7,500 7,500 15,000
H. Rothstein * Orig. Issued 0 7,500 7,500 15,000
Cancelled 0 0
0
--------------- --------------- -------------- --------------- -----------
Remaining 0 7,500 7,500 15,000
J. Cunnane Orig. Issued 5,000 3,000 3,000 11,000
Cancelled 0
0
--------------- --------------- -------------- --------------- -----------
Remaining 5,000 3,000 3,000 11,000
R. Borchers Orig. Issued 5,000 3,000 3,000 11,000
Cancelled 0
0
--------------- --------------- -------------- --------------- -----------
Remaining 5,000 3,000 3,000 11,000
P. Campisi Orig. Issued 0 3,000 0 3,000
Cancelled 4,000 3,000 7,000
Re-Issued 5,000 5,000
---------------- ---------------- -------------- --------------- -----------
Remaining 1,000 0 0 1,000
C. Graham Orig. Issued 5,000 0 0 5,000
Cancelled 5,000 5,000
0
---------------- ---------------- -------------- --------------- -----------
Remaining 0 0 0 0
P. Albright Orig. Issued 5,000 0 0 5,000
Cancelled 3,000 3,000
0
---------------- ---------------- ------------- --------------- -----------
Remaining 2,000 0 0 2,000
C. McGuire Orig. Issued 0 1,000 3,000 4,000
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 1,000 3,000 4,000
<PAGE>
R. Jacobs Orig. Issued 0 1,500 1,500 3,000
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 1,500 1,500 3,000
D. Jones Orig. Issued 0 1,500 2,000 3,500
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 1,500 2,000 3,500
D. Norman Orig. Issued 0 0 2,000 2,000
Cancelled 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 0 2,000 2,000
Total Exec.'s Total Issued 20,000 28,000 29,500 77,500
Cancelled 12,000 3,000 0 15,000
Re-Issued 5,000 0 0 5,000
---------------- ---------------- ------------- --------------- -----------
Remaining 13,000 25,000 29,500 67,500
================ ================ ============= =============== ===========
<PAGE>
Directors 1994 Pool 1996 Pool 1997 Pool Totals
---------------- ---------------- ------------- --------------- -----------
B. Winokur Orig. Issued 10,000 10,000 4,000 24,000
Cancelled 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 10,000 10,000 4,000 24,000
G. Marchetti Orig. Issued 5,000 3,000 4,000 12,000
Cancelled 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 5,000 3,000 4,000 12,000
R. Habeck Orig. Issued 2,500 3,000 4,000 9,500
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 2,500 3,000 4,000 9,500
E. Chambers Orig. Issued 2,500 3,000 4,000 9,500
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 2,500 3,000 4,000 9,500
J. Farley * Orig. Issued 0 1,000 4,000 5,000
Cancelled 0 0 0
Re-Issued 0 0
---------------- ---------------- -------------- ------------- ------------
Remaining 0 1,000 4,000 5,000
H. Rosser Orig. Issued 0 0 4,000 4,000
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 0 4,000 4,000
Total Directors Total Issued 20,000 20,000 24,000 64,000
Cancelled 0 0 0 0
Re-Issued 0 0 0 0
---------------- ---------------- -------------- ------------- ------------
Remaining 20,000 20,000 24,000 64,000
================ ================ ============== ============= ============
*********** ********** **************** **************** ************** ************* ************
Combined Total Issued 40,000 48,000 53,500 141,500
Cancelled 12,000 3,000 0 15,000
Re-Issued 5,000 0 0 5,000
---------------- ---------------- -------------- ------------- ------------
Remaining 33,000 45,000 53,500 131,500
---------------- ---------------- ============== ============= ============
</TABLE>
<PAGE>
* Footnote: The above does not include any options received as part of the
Companys' IPO. Those options are as follows:
R. Kirstien 330,769
H. Rothstein 184,274
J. Farley/S. Day 40,575
Warrants: WEP 441,026
----------
Subtotal: 996,644
Per Above 131,500
Total Options/Warrants: 1,128,144
<PAGE>
Section 3.1(d)
Authority
None.
<PAGE>
Section 3.1(d)(iii)
Consents
[Premerger notification and clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.]
<PAGE>
Section 3.1(f)
Absence of Changes
1. The Company has entered into that certain Asset Purchase and Sale
Agreement, dated as of September 24, 1997, by and among the Company, MDF,
and Western and Southern Food Services I, L.L.C., providing for the sale of
certain MDF restaurants.
<PAGE>
Section 4.1(v)
Conduct of Business: Assets
1. The Company has entered into that certain Asset Purchase and Sale
Agreement, dated as of September 24, 1997, by and among the Company, MDF,
and Western and Southern Food Services I, L.L.C., providing for the sale of
certain MDF restaurants.
<PAGE>
Section 4.1(vii)
Conduct of Business: Indebtedness
None.
<PAGE>
Exhibit A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DAVCO RESTAURANTS, INC.
ARTICLE ONE
The name of the corporation is DavCo Restaurants, Inc. (hereinafter called
the "Corporation").
ARTICLE TWO
The address of the Corporation's registered office in the state of Delaware
is 1013 Centre Road, Wilmington, Delaware 19805, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is
Corporation Service Company.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE FOUR
The total number of shares which the Corporation shall have the authority
to issue is one thousand (1,000) shares, all of which shall be shares of Common
Stock, with a par value of $0.001 per share.
ARTICLE FIVE
The Corporation is to have perpetual existence.
ARTICLE SIX
The directors shall have the power to adopt, amend or repeal By-Laws,
except as may be otherwise be provided in the By-Laws.
ARTICLE SEVEN
The Corporation expressly elects not to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
<PAGE>
ARTICLE EIGHT
Section 1. Nature of Indemnity. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he (or a person of whom
he is the legal representative), is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent which it is empowered to do so by the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding and such indemnification shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except as provided
in Section 2 of this Article Eight, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding initiated by such
person only if such proceeding was authorized by the Board of Directors of the
Corporation. The right to indemnification conferred in this Article Eight shall
be a contract right and, subject to Sections 2 and 5 of this Article Eight,
shall include the right to payment by the Corporation of the expenses incurred
in defending any such proceeding in advance of its final disposition. The
Corporation may, by action of the Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
Section 2. Procedure for Indemnification of Directors and Officers. Any
indemnification of a director or officer of the Corporation under Section 1 of
this Article Eight or advance of expenses under Section 5 of this Article Eight
shall be made promptly, and in any event within 30 days, upon the written
request of the director or officer. If a determination by the Corporation that
the director or officer is entitled to indemnification pursuant to this Article
Eight is required, and the Corporation fails to respond within sixty days to a
written request for indemnity, the Corporation shall be deemed to have approved
the request. If the Corporation denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within 30 days, the right to indemnification or
advances as granted by this Article Eight shall be enforceable by the director
or officer in any court of competent jurisdiction. Such person's costs and
expenses incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to
2
<PAGE>
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any, has been tendered
to the Corporation) that the claimant has not met the standards of conduct which
make it permissible under the General Corporation Law of the State of Delaware
for the Corporation to indemnify the claimant for the amount claimed, but the
burden of such defense shall be on the Corporation. Neither the failure of the
Corporation (including the Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law of the State of Delaware, nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
Section 3. Nonexclusivity of Article Eight. The rights to indemnification
and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article Eight shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 4. Insurance. The Corporation may purchase and maintain insurance
on its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the Corporation or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not the Corporation would have the power to indemnify such
person against such liability under this Article Eight.
Section 5. Expenses. Expenses incurred by any person described in Section 1
of this Article Eight in defending a proceeding shall be paid by the Corporation
in advance of such proceeding's final disposition unless otherwise determined by
the Board of Directors in the specific case upon receipt of an undertaking by or
on behalf of the director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation. Such
expenses incurred by other employees and agents may be so paid upon such terms
and conditions, if any, as the Board of Directors deems appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
foregoing provisions of this Article Eight and who are or were employees or
agents of the Corporation, or who are or were serving at the request of the
Corporation as employees or agents of another corporation, partnership, joint
venture, trust or other enterprise, may
3
<PAGE>
be indemnified to the extent authorized at any time or from time to time by the
Board of Directors.
Section 7. Contract Rights. The provisions of this Article Eight shall be
deemed to be a contract right between the Corporation and each director or
officer who serves in any such capacity at any time while this Article Eight and
the relevant provisions of the General Corporation Law of the State of Delaware
or other applicable law are in effect, and any repeal or modification of this
Article Eight or any such law shall not affect any rights or obligations then
existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article Eight,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article
Eight with respect to the resulting or surviving corporation as he or she would
have with respect to such constituent corporation if its separate existence had
continued.
ARTICLE NINE
The Corporation reserves the right to amend or repeal any provisions
contained in this Certificate of Incorporation from time to time and at any time
in the manner now or hereafter prescribed by the laws of the State of Delaware,
and all rights conferred upon stockholders and directors are granted subject to
such reservation.
4
<PAGE>
Annex B
November 6, 1997
Board of Directors
DavCo Restaurants, Inc.
1657 Crofton Boulevard
Crofton, MD 21114
Dear Sirs:
We understand that DavCo Restaurants, Inc. ("DavCo" or the "Company")
is contemplating entering into a definitive agreement (the "Agreement") with
DavCo Acquisition Holding Inc. ("DAC" or "Newco"), a company formed by Citicorp
Venture Capital, Ltd. ("CVC") and certain of its affiliates and certain members
of management and their affiliates (collectively, the "Affiliated
Shareholders"), which together control approximately 55.3% of the total
fully-diluted shares outstanding of DavCo, under which DAC and a wholly-owned
subsidiary of DAC (the "Subsidiary"), will offer to purchase for $20.00 in cash
all issued and outstanding shares of common stock (the "Common Stock"), par
value $0.001, of the Company owned by shareholders other than CVC and certain
members of management (the "Proposed Transaction"). We additionally understand
that the consummation of the offer requires and will be conditioned on: (i) the
holders of a majority of the outstanding shares held by shareholders other than
CVC, certain members of management and their respective affiliates and
associates (the "Non-Affiliated Shareholders"), vote to approve the Proposed
Transaction, (ii) approval of the Proposed Transaction or the expiration of
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
(iii) the holders of not more than 5.0% of the Company's fully-diluted shares
outstanding exercise their dissenters' rights with respect to the Proposed
Transaction and (iv) other conditions customary to transactions of this type. We
further understand that, pursuant to the Agreement, after receiving shareholder
approval, DAC and the Subsidiary will cause the Subsidiary to be merged with and
into the Company (the "Merger") with the Company surviving the Merger as a
direct wholly-owned subsidiary of DAC. We further understand that, pursuant to
the Agreement, the holders of any issued and outstanding shares of Common Stock
not tendered pursuant to the Proposed Transaction (other than DAC, the
Subsidiary and holders of shares of Common Stock who have validly exercised
appraisal rights under the Delaware General Corporate Law) will receive $20.00
per share in cash in the Merger.
You have asked for our opinion as investment bankers (the "Opinion") as
to the fairness, from a financial point of view, of the cash consideration to be
paid to the Non-Affiliated Shareholders under the terms of the Proposed
Transaction.
Equitable Securities Corporation ("Equitable"), as part of its
investment banking business, is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Equitable has received a fee for rendering this opinion; however, our fee was
not contingent upon the consummation of the Proposed Transaction. We do not
currently publish research reports or actively trade the Common Stock of the
Company.
<PAGE>
For the purposes of the Opinion set forth herein, we have:
1. reviewed the audited and unaudited financial statements for the
four most recent fiscal years and interim periods of DavCo;
2. discussed the past and current operations, the financial condition
and the prospects of the Company with the management of DavCo and
its subsidiaries;
3. reviewed with the management of DavCo and its subsidiaries certain
business plans of the Company and certain financial projections
prepared by the management of DavCo and pertaining to DavCo and
its subsidiaries;
4. reviewed the terms of the Proposed Transaction with DavCo and its
legal advisors;
5. reviewed the historical market prices and reported trading volumes
of the Common Stock;
6. compared the price per share offered in the Proposed Transaction
to historical market prices of the Common Stock;
7. compared the financial performance of DavCo with, and reviewed the
prices and reported trading activity of the securities of, certain
publicly traded companies whose operating characteristics and/or
industry focus we believe resemble those of DavCo;
8. reviewed the financial terms of selected acquisitions of the
remaining minority interest of other publicly-traded companies;
9. reviewed the financial terms of selected control acquisitions of
companies whose operating characteristics and/or industry focus we
believe resemble those of DavCo;
10. performed a discounted cash flow analysis of DavCo based upon the
financial information and financial projections provided to us by
the management of DavCo;
11. performed a stand-alone leveraged buyout analysis utilizing
operating assumptions provided to us by the management of DavCo
and the capital structure as outlined by the Company's lender;
12. performed a leveraged recapitalization analysis of DavCo based
upon financial information provided to us by the management of
DavCo; and
13. reviewed such other information and performed such other analyses
as we have deemed appropriate.
<PAGE>
In rendering this opinion, we have assumed and relied upon, without
assuming responsibility for independent verification, the accuracy and
completeness of the information reviewed by us or that was furnished to us by or
on behalf of the Company. With respect to the financial projections provided to
us, we have assumed that they have been reasonably prepared and reflect the best
currently available estimates and good faith judgments of the management of
DavCo as to the future financial performance of DavCo. We have also assumed,
based upon the information which has been provided to us and without assuming
responsibility for independent verification thereof, that no material
undisclosed or contingent liability (disclosed or undisclosed) exists with
respect to DavCo. Our opinion is based necessarily on the economic, market, and
other conditions as in effect on, and the information made available to us as
of, the date hereof. We have not made an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of DavCo, nor were we
furnished with such evaluations or appraisals. We have not been requested to,
and did not, solicit third party indications of interest in DavCo, and have
assumed with your permission that DAC has no present intention to sell the
Company after consummating the Proposed Transaction.
DavCo acknowledges that the opinion and any advice or materials
provided by Equitable in connection with its engagement hereunder is intended
for the benefit and use of the Board of Directors in considering the Proposed
Transaction to which the opinion, advice or material relate and the Company
agrees that no such opinion, advice or material shall be used for any other
purpose or be reproduced, disseminated, quoted or referred to at any time, in
whole or in part, in any filing, report, document, release or other
communication used in connection with the Proposed Transaction (unless required
to be filed, quoted or referred to by applicable regulatory requirements), nor
shall this opinion be used for any other purposes, without Equitable's prior
written consent, which consent shall not be unreasonably withheld. This letter
does not constitute a recommendation to any shareholder of the Company as to how
such shareholder should vote at a shareholders' meeting that may be held in
connection with the Proposed Transaction.
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, that the cash consideration to be received by the holders of
Common Stock (other than the Affiliated Shareholders) in the Proposed
Transaction is fair from a financial point of view to such holders.
Very Truly Yours,
Equitable Securities Corporation
<PAGE>
Annex C
DELAWARE GENERAL CORPORATION LAW
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to sec. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to sec. 251 (other than a merger effected pursuant to sec. 251(g) of
this title), sec. 252, sec. 254, sec. 257, sec. 258 or sec. 263 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record
date fixed to determine the stockholders entitled to receive notice of
and to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or (ii) held of record by more than 2,000
stockholders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of sec.
251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation
pursuant to secs. 251, 252, 254, 257, 258, 263 and 264 of this title to
accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in
respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts
at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated
as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
<PAGE>
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior
to the meeting, shall notify each of its stockholders who was such on
the record date for such meeting with respect to shares for which
appraisal rights are available pursuant to subsections (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal
of his shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A
proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by
a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228 or
sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in
such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to
all such holders of any class or series of stock of a constituent
corporation that are entitled to appraisal rights. Such notice may,
and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand
2
<PAGE>
will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send
a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to
all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
3
<PAGE>
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
4
<PAGE>
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
5
<PAGE>
SCHEDULE I
PURCHASES OF SHARES BY DAVCO
SINCE AUGUST 31, 1995
Number of Price Paid
Shares Purchased Per Share
---------------- ---------
Year Ended September 28, 1996
June 5, 1996 38,600 $ 8
June 5, 1996 51,000 7 15/16
June 12, 1996 2,100 8 5/16
June 19,1996 9,800 8 9/16
June 21, 1996 8,500 8 7/16
July 1, 1996 1,700 8 7/16
July 15, 1996 1,300 8 5/8
July 16, 1996 6,000 8 5/8
July 23, 1996 8,000 8 15/16
July 24, 1996 1,600 8 13/16
August 13, 1996 2,107 8 13/16
August 29, 1996 1,400 8 15/16
September 25, 1996 700 8 15/16
Number of Price Paid
Shares Purchased Per Share
---------------- ---------
Year Ended September 27, 1997
December 11, 1996 25,000 $ 8 3/4
<PAGE>
EXHIBIT (d)(4)
- --------------------------------------------------------------------------------
PROXY- COMMON STOCK
DAVCO RESTAURANTS, INC.
(Solicited by and on Behalf of the Board of Directors)
SPECIAL MEETING OF STOCKHOLDERS- January 12, 1998
The undersigned hereby appoints________________ and ___________, jointly
severally, proxies, with power of substitution, to vote at the Special Meeting
of Stockholders (including any adjournments thereof) of DAVCO RESTAURANTS, INC.,
to be held on January 12, 1998, with all powers the undersigned would possess if
personally present, as specified on the ballot below on the proposal set forth
and revokes all proxies previously given by the undersigned with respect to the
shares of Common Stock, par value $.001 per share (the "Shares"), of DavCo
Restaurants, Inc. covered hereby.
Proposal to adopt the Amended and Restated Agreement and Plan of Merger,
dated as of October 21, 1997, among DavCo Restaurants, Inc. (the "Company"),
DavCo Acquisition Holdings, Inc., a Delaware corporation ("DAC"), and DavCo
Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of DAC ("DAC
Sub"), pursuant to which: (a) DAC Sub will be merged with and into the Company
(the "Merger"), and the Company, as the surviving corporation in the Merger,
will become a wholly-owned subsidiary of DAC; and (b) each share that is issued
and outstanding at the effective time of the Merger (other than Shares held in
the Company's treasury, by any subsidiary of the Company, by DAC or by DAC Sub,
which will be cancelled without payment, and other than Shares in respect of
which appraisal rights have been perfected properly in accordance with Delaware
law) will be converted into the right to receive $20.00 in cash, without
interest, all as more fully described in the Company's Proxy Statement dated
__________, receipt of which is hereby acknowledge.
FOR |_| AGAINST |_| ABSTAIN |_|
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
This Proxy, when properly executed, will be voted in the manner directed
herein. If no direction is made, this Proxy will be voted FOR the proposal on
the reverse side hereof and at the discretion of the proxies on any other matter
that may properly come before the Special Meeting.
Dated
--------------------
Signature
----------------------------
Print name
----------------------------
Signature
----------------------------
Print name
----------------------------
Please sign exactly as name appears hereon.
When signing as attorney, executor,
administrator, trustee or guardian, please
give full title as such. When stock is in the
names of more than one person, each person
should sign the proxy.
Holders of DavCo Restaurants, Inc. Common
Stock are urged to sign, date and return this
proxy in the enclosed envelope (no postage is
required if mailed in the United States).
- --------------------------------------------------------------------------------
<PAGE>
Exhibit (d)(5)
FOR IMMEDIATE RELEASE
- ---------------------
DAVCO AGREES TO MERGER
Crofton, MD, October 22, 1997
CROFTON, MD. (October 22, 1997) -- DavCo Restaurants, Inc. (ASE: DVC)
today announced that it has executed a definitive merger agreement with DavCo
Acquisition Holding Inc., for a merger transaction in which DavCo Acquisition
Holding Inc. would acquire all of DavCo's issued and outstanding shares (other
than shares held by DavCo Acquisition Holding Inc.) for $20 cash per share.
As previously disclosed, DavCo Acquisition Holding Inc. is owned by an
investor group that is headed by Ronald D. Kirstien, the Company's President and
Chief Executive Officer, and Harvey Rothstein, Executive Vice President of the
Company, and includes the Company's principal stockholder, Citicorp Venture
Capital, Ltd., which currently holds approximately 48% of the Company's
outstanding shares, and certain affiliates of CVC.
The terms of the merger agreement require approval by a majority of the
Company's stockholders, including approval by a majority of stockholders
unaffiliated with the investor group. In addition, the merger is subject to
certain conditions, including regulatory approvals and the receipt of necessary
financing. The investor group has obtained a commitment from Global Alliance
Finance Company, L.L.C. to provide up to $150 million of debt financing to
complete the merger.
DavCo Restaurants, Inc. is the largest franchisee of Wendy's
International, Inc. The Company operates 229 Wendy's restaurants in Maryland,
Northern Virginia, Washington, D.C., Metropolitan St. Louis, Central Illinois,
and Nashville, Tennessee. The Company also operates 34 Friendly's Restaurants in
the Mid- Atlantic market for a total of 263 restaurants.
