DAVCO RESTAURANTS INC, PRER14A, 1998-02-18

DAVCO RESTAURANTS INC
PRER14A, 1998-02-18
EATING PLACES

Previous: NTL INC /DE/, 424B3, 1998-02-18

Next: DAVCO RESTAURANTS INC, SC 13E3/A, 1998-02-18

<PAGE>
SCHEDULE 14A

(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

DAVCO RESTAURANTS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.001 per share
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
5,957,165 shares of Common Stock
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$20.00
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$119,143,300*
-----------------------------------------------------------------------
(5) Total fee paid:
$23,829**
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials: $23,829
---------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.

(1) Amount previously paid: (2) Form, Schedule or Registration
Statement no.:
---------------------------------------------------------------------------
(3) Filing party: (4) Date filed:
---------------------------------------------------------------------------

* 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 Registrant, 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 Registrant.

** The amount of the filing fee equals 1/50(th) of 1% of the transaction value.
<PAGE>
DAVCO RESTAURANTS, INC.
1657 CROFTON BOULEVARD
CROFTON, MARYLAND 21114

February , 1998

Dear Stockholder:

You are cordially invited to attend a Special Meeting of Stockholders of
DavCo Restaurants, Inc. (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 March 12, 1998, at 10:00
a.m., Eastern 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 Amended and 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 (with certain interested
directors abstaining) 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 and the Affiliated
Stockholders) 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 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
<PAGE>
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>
DAVCO RESTAURANTS, INC.
1657 CROFTON BOULEVARD
CROFTON, MARYLAND 21114

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 24, 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 (the "Company"),
will be held on March 24, 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 Amended and 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 (or ratable
portion thereof for fractional Shares) in cash, without interest, (for
estimated aggregate cash consideration of approximately $119.2 million);
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 approved (with Ronald
D. Kirstien, Harvey Rothstein, Byron L. Knief and Charles E. Corpening, as
interested directors, abstaining) 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. See "SPECIAL FACTORS--Interests
of Certain Persons in the Merger; Conflicts of Interests."

The Board of Directors has fixed the close of business on February 18, 1998
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 February 18, 1998 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.

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.
<PAGE>
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, (2) not
vote in favor of adoption of the Merger Agreement and (3) cause a petition for
appraisal to be filed in the Delaware Court of Chancery within 120 days after
the Effective Time. 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. The Company is party to certain litigation challenging
the Merger. See "SPECIAL FACTORS--Certain Litigation" in the accompanying Proxy
Statement.

A Stockholder who has given a proxy may revoke it at any time before it is
voted at the Special Meeting by filing with the Secretary of the Company a
written revocation bearing a later date than the date of the proxy being
revoked, by submitting a subsequent proxy bearing a later date than the date of
the proxy being revoked or by voting in person at the Special Meeting, all as
more fully described in the accompanying Proxy Statement under the caption
"INTRODUCTION--Proxies." Properly executed but unmarked proxies will be voted
FOR adoption of the Merger Agreement and approval of the Merger.

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
February , 1998

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.

2
<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 MARCH 24, 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 March 24, 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
February , 1998.

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 (whom the Company currently
expects to be Nora Kirstien Sibel, Kristina Kirstien and Ronald Kirstien Jr., as
beneficiaries of the Kirstien Family Trust) (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 (whom
the Company currently expects to be Jonathan Rothstein, Sean Drews and Patrick
Drews, as beneficiaries of the Jonathan Rothstein Trust, Sean Drews Trust and
Patrick Drews Trust) (together with Mr. Rothstein, the "Rothstein Investors'),
and Citicorp Venture Capital, Ltd., a principal stockholder of DavCo ("CVC"),
and certain affiliates of CVC (whom the Company currently expects to be Byron L.
Knief, David F. Thomas, James A. Urry and Sixty-Three BR Partnership) (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 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
<PAGE>

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. The $20.00 per Share price was
determined based on discussions between the Board and representatives of the
Affiliated Stockholders and, in the opinion of the Company's financial advisor,
was considered to be fair to DavCo's stockholders (other than the Affiliated
Stockholders) from a financial point of view. For further discussion concerning
the determination of the per Share price, see "SPECIAL FACTORS--Background of
the Merger" and "--Fairness of the Merger; Recommendation of the Board of
Directors; Position of DAC." For additional information concerning the terms and
conditions of the Merger, see "THE MERGER." If the Merger is consummated, the
CVC Investors are expected to receive approximately $40.6 million for conversion
of their Shares in the Merger, and directors and officers of DavCo are expected
to receive aggregate net proceeds (net of the exercise price of Shares held
under options) of approximately $11.3 million for conversion of their Shares in
the Merger. For further information concerning the ownership of DAC, a
description of the conflicts of interest of certain members of the Board of
Directors and the financial interests of certain Affiliated Stockholders and of
DavCo's officers and directors in the Merger, see "SPECIAL FACTORS--Interests of
Certain Persons in the Merger; Conflicts of Interest" 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 (with certain interested
directors abstaining) 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;
Conflicts of Interest."

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 February , 1998.

2
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary.................................................................................................... 5
Introduction............................................................................................... 11
Cautionary Statement Regarding Forward-Looking Statements.................................................. 14
Special Factors............................................................................................ 15
Background of the Merger................................................................................. 15
Past Contacts with Wendy's............................................................................... 17
Fairness of the Merger; Recommendation of the Board of Directors; Position of DAC........................ 24
Opinion of Financial Advisor............................................................................. 29
Purpose of the Merger.................................................................................... 37
Interests of Certain Persons in the Merger; Conflicts of Interest........................................ 38
Certain Effects of the Merger............................................................................ 40
Plans for the Company After the Merger................................................................... 40
Risk that the Merger Will Not Be Consummated............................................................. 40
Certain Risks in the Event of Bankruptcy................................................................. 41
Certain Litigation Challenging the Merger................................................................ 41
Certain Projections...................................................................................... 42
The Merger................................................................................................. 45
General.................................................................................................. 45
Effective Time of the Merger............................................................................. 45
Stockholder Adoption of the Merger Agreement............................................................. 45
Payment for Shares....................................................................................... 45
The Payment Fund......................................................................................... 46
Regulatory Matters....................................................................................... 46
Conditions to Consummation of the Merger................................................................. 46
Certain Covenants........................................................................................ 47
Termination.............................................................................................. 48
Expenses................................................................................................. 49
Indemnification of Directors and Officers................................................................ 49
Accounting Treatment of the Merger....................................................................... 49
Financing of the Merger.................................................................................... 50
Debt Financing........................................................................................... 50
Fees and Expenses........................................................................................ 51
Certain Federal Income Tax Consequences.................................................................... 52
Appraisal Rights........................................................................................... 53
Certain Information Concerning DAC, DAC Sub and Affiliates................................................. 55
Business of the Company.................................................................................... 56
Selected Historical Financial Data of the Company.......................................................... 64
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 66
Certain Information Regarding the Directors and Executive Officers of the Company and DAC.................. 72
Market Prices and Dividends on the Shares.................................................................. 76
Certain Transactions in the Common Stock................................................................... 76
Security Ownership of the Company.......................................................................... 77
Incorporation of Certain Documents by Reference............................................................ 78
Additional Available Information........................................................................... 79
Independent Accountants.................................................................................... 79
Stockholder Proposals...................................................................................... 80
Other Matters.............................................................................................. 80
Index to Consolidated Financial Statements................................................................. F-1
</TABLE>

3
<PAGE>
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 and Certain Affiliates

4
<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 March 24, 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 February
18, 1998, are entitled to notice of and to vote at the Special Meeting. At such
date there were an aggregate of 6,428,821 Shares outstanding and entitled to
vote held by 48 holders of record. The Company is unaware of any fractional
shares outstanding. 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 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).

5
<PAGE>
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 (with certain interested
directors abstaining) 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; Conflicts of Interest." 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."

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 (and confirmed as of the date hereof) the consideration proposed to be
paid to the Unaffiliated Stockholders pursuant to the Merger Agreement is fair
to the

6
<PAGE>
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." Further, in reaching its conclusions, the Board
considered the position of CVC expressed to a potential third party buyer in
August 1996 (when the market price for the Shares was $8.81 per Share), in June
1997 (when the market price for the Shares ranged between $9.37 and $11.50 per
Share) and in August 1997 (when the market price for the Shares was $13.00 per
Share) that CVC would not consider a sale of its shares at a price lower than
$30 per Share. The Board did not consider CVC's stated position to such third
party to have any meaningful bearing on the fairness of the price offered in the
Merger, but rather understood such position to indicate that CVC intended to
continue holding its investment in DavCo and would consider a sale only at a
price that reflected a very substantial premium on CVC's investment.

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 and the
Affiliated Stockholders) pursuant to the Merger Agreement is fair to such
Stockholders from a financial point of view. Equitable also delivered on
November 6, 1997 (and confirmed as of the date hereof), 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."

INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST

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

7
<PAGE>
the case of Messrs. Kirstien and Rothstein, the right to receive upon completion
of the Merger certain other significant cash payments (aggregating approximately
$3 million) in recognition of past services and as an inducement to continue in
the employ of DavCo in the future and to compensate them for the adverse tax
costs associated with the cancellation of the options and as a result of the
transaction.

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 equity 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 equity 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 equity 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." The aggregate number of Shares beneficially owned
by directors or officers of DavCo who are also Affiliated Stockholders
represents approximately 15.6% of the outstanding Shares.

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; Conflicts of Interest."

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.
Each of the conditions to the consummation of the Merger may be waived by the
party whose obligations are subject to the satisfaction of such condition;
provided that certain conditions, such as Stockholder approvals, would be
required to be satisfied by applicable law, notwithstanding any waiver. See "THE
MERGER--Conditions to Consummation of the Merger." See also "SPECIAL
FACTORS--Risk that the Merger Will Not Be Consummated."

8
<PAGE>
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 by the
Delaware Court of Chancery and paid to them in cash, if such Stockholders follow
the procedures 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 adoption 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.

9
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The receipt of cash for Shares pursuant to the Merger or pursuant to the
exercise of appraisal 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 February , 1998, 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 CHALLENGING THE MERGER

Two purported class actions were filed in September, 1997 against DavCo, its
Board of Directors and CVC in connection with the Merger. Plaintiffs in these
actions charge that the September 5 Proposal is, or consummation thereof would
be, wrongful, unfair and in breach of the individual defendants' fiduciary
duties. According to the plaintiffs, the price range referenced in the September
5 Proposal is grossly inadequate, DavCo is poised for significant growth and
earnings, the September 5 Proposal would be consummated without an auction of
the Company or other market check, and the defendants allegedly possess
non-public information concerning the condition and prospects of DavCo.

A third purported class action was filed in November, 1997 against DavCo and
its Board of Directors. Plaintiff in this action charges that the Board of
Directors breached its fiduciary duties in approving the Merger and that the per
Share price payable to Stockholders in the Merger is unfair. According to the
plaintiff, the per Share price is not the result of arm's-length negotiation,
the Board of Directors has failed to consider other alleged offers including an
alleged offer by Wendy's of as much as $25 per Share, the timing of the Merger
is unfair because the Company is now experiencing increasing growth and success,
and the Company's management possesses material non-public information
concerning the Company's assets, businesses and future prospects.

Defendants contest each of these claims. While the complaints in these
purported class actions seek preliminary and permanent injunctive relief against
the Merger, unspecified monetary damages and other relief, no proceedings to
obtain such injunctive relief have occurred. See "SPECIAL FACTORS--Certain
Litigation Challenging the Merger."

10
<PAGE>
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 March 24, 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 February , 1998.

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 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 entities 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; Conflicts of
Interest."

VOTING AT THE SPECIAL MEETING

The Board of Directors has fixed the close of business on February 18, 1998,
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 6,428,821 Shares, held by approximately
48 holders of record,

11
<PAGE>
outstanding and entitled to vote. The Company is unaware of any fractional
shares outstanding. 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 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 4,659,350 Shares, constituting
approximately 66.8% of the Shares outstanding on such date. See "SPECIAL
FACTORS--Interests of Certain Persons in the Merger; Conflicts of Interest" and
"SECURITY OWNERSHIP OF THE COMPANY."

As of the Record Date, the Company believes that Unaffiliated Stockholders
held 2,236,330 Shares, the affirmative vote of 1,118,166 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 that otherwise
would exist (but for the provisions of the Restated Certificate of Incorporation
and the Merger Agreement) to control the outcome of the vote through their
majority ownership of Shares. 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. 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 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

12
<PAGE>
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 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. Discretionary authority under a proxy
will not be used to vote such proxy in favor of any adjournment.

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.

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.

13
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The following statements are or may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"):

(i) Certain statements, including possible or assumed future results of
operations of DavCo contained in "SPECIAL FACTORS--Fairness of the Merger;
Recommendation of the Board of Directors; Position of DAC," "SPECIAL
FACTORS--Opinion of Financial Advisor," "SPECIAL FACTORS-- Purpose of the
Merger," "SPECIAL FACTORS--Certain Effects of the Merger," "SPECIAL
FACTORS--Plans for the Company after the Merger," "SPECIAL FACTORS--Risk that
the Merger will not be Consummated," "SPECIAL FACTORS--Certain Risks in the
Event of Bankruptcy," and "SPECIAL FACTORS--Certain Projections" including any
forecasts, projections and certain statements incorporated by reference from
documents filed with the Securities and Exchange Commission by DavCo, and
including any statements contained herein or therein regarding the development
of possible or assumed future results of operations of DavCo's businesses, the
markets for DavCo's services, anticipated capital expenditures, regulatory
developments, competition or the effects of the Merger;

(ii) any statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends" or similar expressions; and

(iii) other statements contained or incorporated by reference herein
regarding matters that are not historical facts.

Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements; factors that could cause actual results to differ
materially include, but are not limited to, assumptions with respect to
restaurant industry performance, food and supply costs (including fresh beef in
particular), labor costs and relations and assessments and other matters which
are beyond the control of DavCo. Stockholders are cautioned not to place undue
reliance on such statements, which speak only as of the date thereof.

The independent public accountants for DavCo have not examined or compiled
the accompanying forward-looking statements or any forecasts or other
projections referred to herein and, accordingly, do not provide any assurance
with respect to such statements.

The cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that may be issued by DavCo or persons acting on its behalf. DavCo
undertakes no obligation to release publicly any revisions to any forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.

14
<PAGE>
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 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 levels at which
the Shares were trading. These measures included the implementation of a stock
repurchase program in May 1996, the relisting of the Company's Shares from the
NASDAQ National Market System to the American Stock Exchange in December 1996
and, generally, the Company's acquisitions of Southern Hospitality Corporation
in September 1994 and certain Friendly's restaurants in July 1997. These
measures generally failed to produce significant improvement in the Shares'
trading price. In addition, in view of the position of CVC with respect to third
party sale transactions and the limitations placed on the transfer of the
Company's capital stock and the Company's operations by its franchise and
development agreements with Wendy's, the Board did not consider additional
business combinations or other strategic alternatives. See "SPECIAL
FACTORS--Fairness of the Merger; Recommendation of the Board of Directors;
Position of DAC."

On July 28, 1997, Mr. Knief telephoned Mr. Rothstein to discuss whether
Messrs. Kirstien and Rothstein would be interested in investigating with CVC the
feasibility of a "going private" transaction involving the Company. Messrs.
Kirstien, Rothstein and Knief discussed the idea further in person on the
evening of July 29, 1997.

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 Company believes that the
$18.00 to 20.00 per Share price range of the September 5 Proposal reflected the
view of Messrs. Kirstien and Rothstein and CVC that a price within that range
represented a substantial premium over the Shares' historic trading prices and
would be supported by the Unaffiliated Stockholders; that, after discussions
with investment and commercial banks regarding financing for the transaction,
the price range created a prudent capital structure for the Company giving
effect to the transaction and related financing; that the price range reflected
appropriate market multiples for the Shares; and that the price range reflected
desirable return parameters on the equity to be contributed to the transaction
by Messrs. Kirstien and Rothstein and CVC. The Company believes that in
establishing the price range Messrs. Kirstien and Rothstein and CVC also
considered the degree of control of the Company's business by Wendy's, the
Company's principal franchisor, and the history of the Company's relationship
with Wendy's. The Company believes that the proponents of the September 5
Proposal did not undertake any formal, third party valuation of DavCo in
formulating the September 5 Proposal. The September 5 Proposal was subject

15
<PAGE>
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."

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"). See "--Fairness of the
Merger; Recommendation of the Board of Directors; Position of DAC" for a
discussion of the credentials of the Non-Participating Directors in
understanding the terms and evaluating the fairness of the September 5 Proposal.
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") on August 12, 19 and 25 and September 7, 1997 and by correspondence
of September 12, 1997, 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." The Company believes that
Wendy's contacts were with Messrs. Kirstien and Rothstein and, through Mr.
Knief, CVC because they are stockholders holding a controlling interest in
DavCo, and because Wendy's regularly discussed issues relating to the business
and operations of DavCo with Messrs. Kirstien and Rothstein. Each of Messrs.
Kirstien, Rothstein and Knief is also both a director of DavCo and an Affiliated
Stockholder. For a discussion of certain conflicts of interest of Messrs.
Kirstien, Rothstein and Knief, see "Interests of Certain Persons in the Merger;
Conflicts of Interests."

At the conclusion of the September 17, 1997 meeting, the Non-Participating
Directors who were present advised Messrs. Kirstien, Rothstein, Knief and
Corpening that the Board would be prepared to consider formally the September 5
Proposal only if the September 5 Proposal were modified to confirm the offer
price at $20 per Share. The Board indicated no acceptance of the price range or
a $20.00 per Share price. 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

16
<PAGE>
the meeting, Messrs. Kirstien, Rothstein and Knief also updated the Board on
certain discussions with Wendy's on September 18, 1997. 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. The
Company believes that the Affiliated Stockholders selected GAF based on the
competitiveness of its terms, including with respect to quoted commitment and
other fees and amortization and interest rates. See "FINANCING OF THE MERGER"
for a discussion of the terms of the GAF financing. 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
conditions to the financing that were unacceptable to the Non-Participating
Directors. These conditions related to GAF's request for Wendy's consent to the
Merger and financing and broad financial and business due diligence
requirements. 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.

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 required
by the Board to consider the September 5 Proposal (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 Non-Participating Directors voting unanimously and 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. For a discussion of the Board's analysis, see "--Fairness of the
Merger; Recommendation of the Board of Directors; Position of DAC." 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.

17
<PAGE>

On August 23, 1996, representatives of DavCo, including Messrs. Kirstien,
Rothstein, Knief, Winokur, David J. Norman, a partner in a law firm acting as
general outside counsel to DavCo, and Ray Harlin, a partner of Arthur Anderson
LLP, the Company's external auditors, met with representatives of Wendy's,
including Gordon Teter, President of Wendy's, W. Stephen Wirt, Vice President
for franchising of Wendy's, and Larry N. Nelson, Vice President and Assistant
General Counsel 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 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. During June 1997, the Shares
traded at market prices between $9.37 and $11.50 per Share.

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). On August 19, 1997, the market
price for the Shares was $13.00 per Share.

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,

18
<PAGE>
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:

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.

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

19
<PAGE>
On September 18, 1997, Messrs. Comfort, Knief and Corpening met with Mr.
Teter and Fritz Reed, General Counsel and Chief Financial Officer 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 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:

20
<PAGE>
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, 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

21
<PAGE>
On December 22, 1997, Wendy's wrote the following letters to each of DavCo
and CVC, respectively:

December 22, 1997

DavCo Restaurants, Inc.
Mr. Harvey Rothstein
Mr. Ronald D. Kirstien
1657 Crofton Boulevard
Crofton, MD 21114

Gentlemen:

In my letters to you of September 12, 1997 and November 5, 1997, I
advised you that Wendy's might have significant concerns with respect
to the proposed transaction (the "Transaction") by which you propose
to take DavCo Restaurants, Inc. ("DavCo") private. At the time of
those letters, Wendy's did not have all the information it needed to
form a clear understanding of the Transaction in its final form.

Since then, we have reviewed the materials filed by DavCo with the
Securities and Exchange Commission on November 19, 1997, including the
Proxy Statement and related exhibits; and based upon those documents,
it is now apparent that the Transaction is prohibited by the Unit
Franchise Agreements ("UFAs") between Wendy's and DavCo (as modified
in part by Paragraph 6.4 of the August 3, 1993 Consent and Waiver
Agreement). In addition, that portion of the Transaction under which
Citicorp Venture Capital, Ltd. ("CVC") will transfer DavCo shares to
the new entity, DavCo Acquisition Holding, Inc. ("DAC") is prohibited,
absent a waiver of Wendy's right of first refusal, by Paragraph
4.2.B.(iii) of the April 28, 1997 Letter of Intent between Wendy's on
the one hand, and DavCo, MDF, Inc., Southern Hospitality Corporation,
CVC, and you individually, on the other hand (the "Letter of Intent").
We have written separately to CVC regarding Wendy's rights under the
Letter of Intent, and a copy of that letter is enclosed.

Violation of these provisions, as the Transaction contemplates,
would result in immediate, significant, and irreparable harm to
Wendy's. We would prefer to work with you as we have in the past to
address the concerns that Wendy's has about the Transaction. In
particular, the creation of DAC to be the new sole shareholder of
DavCo raises significant concerns for Wendy's, including, for example,
issues relating to the acquisition of new Wendy's franchises by DAC;
the conditions under which DAC could offer stock to the public; and
the ownership and transfer of equity interests in DAC by DAC or its
stockholders. We believe this also raises concerns for DavCo.

We believe that Wendy's and DavCo's concerns can and should be
addressed by an agreement which establishes the applicability of
certain provisions of existing agreements to DAC. Without an agreement
on these issues, Wendy's would have no choice but to rely on the
rights it has as a result of the Transaction.

In light of the timing proposed in the Proxy Statement for
approval and consummation of the Transaction, this issue requires your
immediate attention. We look forward to your reply.

Sincerely,
WENDY'S INTERNATIONAL,
INC.
Larry N. Nelson
Vice President and
Assistant General Counsel

22
<PAGE>
December 22, 1997

William T. Comfort, Jr.
Chairman, Citicorp Venture
Capital, Ltd.
399 Park Avenue
14th Floor, Zone 4
New York, NY 10043

Dear Mr. Comfort:

I am sure you are aware of my letters of September 12, 1997
and November 5, 1997 to DavCo Restaurants, Inc. ("DavCo") and
Messrs. Rothstein and Kirstien, regarding Wendy's concerns about,
and rights with respect to, the proposed transaction for taking
DavCo private (the "Transaction"). At the time of those letters,
Wendy's did not have all the information it needed to form a clear
understanding of the Transaction in its final form. As a result of
our review of additional information, Wendy's has concluded that
it has valid and enforceable rights which would be violated if the
Transaction is consummated as proposed. We have advised DavCo of
our position on this matter by letter dated December 22, 1997, a
copy of which is attached.

Specifically with respect to Citicorp Venture Capital, Ltd.
("CVC"), please be advised that the transfer of CVC's DavCo shares
to DavCo Acquisition Holding Inc. ("DAC") as contemplated under
the Transaction, without a waiver of Wendy's right of first
refusal, would constitute a violation of Paragraph 4.2.B.(iii) of
the April 28, 1997 Letter of Intent to which CVC is a party.
Wendy's would prefer to resolve this issue through agreement,
along the lines described in our December 22, 1997 letter to
DavCo. Any such agreement would require immediate action, given
our understanding of the proposed timetable for approval and
consummation of the transaction. I therefore, look forward to your
prompt reply.

Sincerely,

WENDY'S INTERNATIONAL,
INC.
Larry N. Nelson
Vice President and
Assistant General Counsel

Following the Wendy's correspondence of December 22, 1997, David J. Norman,
DavCo's General Counsel, had several brief telephone discussions variously with
Dana Kline, Mr. Reed and Larry N. Nelson, each of the Wendy's General Counsel's
Office, to schedule a telephone conference among Messrs. Kirstien and Rothstein,
as representatives of DavCo and DAC, and representatives of Wendy's. On December
30, 1997, Messrs. Norman and Nelson had a brief telephone discussion to discuss
the bases for Wendy's belief that the proposed Merger was prohibited by DavCo's
existing agreements with Wendy's, and to establish an agenda for a telephonic
meeting among DavCo's and Wendy's representatives to reach an agreement that
would address each party's concerns. During the December 30, 1997 telephone
conversation, Mr. Nelson identified Wendy's concerns as regarding DAC's
compliance with DavCo's existing franchise obligations and restrictions on
transfers of capital stock then applicable to DavCo, CVC, Mr. Rothstein and Mr.
Kirstien. Mr. Norman indicated to Mr. Nelson that DavCo had no intention to use

23
<PAGE>
DAC as a vehicle for avoiding existing franchise obligations and restrictions.
On December 31, 1997, Messrs. Kirstien, Rothstein and Norman of DavCo and
Messrs. Teeter, Reed and Nelson of Wendy's had a telephone conference call
during which the concerns raised by Mr. Nelson in his telephone conversation of
the previous day with Mr. Norman were reiterated. During this conference call,
Mr. Kirstien confirmed that there was no intention on the part of the Affiliated
Stockholders to use DAC as a vehicle for avoiding the Company's existing
franchise obligations with Wendy's or the restrictions placed by DavCo's
agreements with Wendy's on the transfer of DavCo's capital stock, and stated
that, upon the effectiveness of the Merger, CVC and Messrs. Kirstien and
Rothstein would cause DAC to become a co-franchisee with DavCo under the Wendy's
franchise agreements and would agree to restrictions on the transfer of the
capital stock in DAC similar to the existing restrictions on the transfer of
DavCo's capital stock. Similarly, Mr. Kirstien indicated that DAC would not seek
to acquire any other Wendy's franchisee without obtaining a waiver from Wendy's,
unless otherwise permitted by the existing agreements with Wendy's.

On January 7, 1998, Wendy's, DavCo, Southern Hospitality Corporation, DAC,
CVC and Messrs. Kirstien and Rothstein entered into an agreement (the "January 7
Agreement") pursuant to which DAC, CVC and Messrs. Kirstien and Rothstein agreed
with Wendy's that, in exchange for Wendy's consent to the Merger and upon the
effectiveness of the Merger, they would comply with and be bound by DavCo's
Development Agreement and Franchise Agreements with Wendy's and comply with
certain Wendy's policies, as described above. For a description of DavCo's
principal existing agreements with Wendy's, see "BUSINESS--Franchise and
Development Agreements." In addition, for a discussion of the Board's
consideration of the concerns raised by Wendy's in its contacts with DavCo, DAC
and CVC, see "-- Fairness of the Merger; Recommendation of the Board of
Directors; Position of DAC."

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.
Each of the Non-Participating Directors either serves or has served in an
executive capacity in the restaurant service industry or has engaged regularly,
in a principal or legal advisory capacity, in the valuation of businesses and
securities in connection with various transactions. See "CERTAIN INFORMATION
REGARDING THE DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY" for a description
of each of the Non-Participating Directors' significant business experience
during the past five years.

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

24
<PAGE>
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's 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 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 FINANCIAL DATA OF
DAVCO." 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 FINANCIAL DATA OF DAVCO." 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

25
<PAGE>
those holding a large number of Shares, an opportunity to realize immediate
value for their Shares at a substantial premium.

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 and potential market appreciation in the
Shares. The Board concluded that, based on the discount historically applied by
the market to DavCo's Shares, it was unlikely that future trading values would
compare favorably with the $20.00 price per Share payable in the Merger.

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
considered CVC's expressions that it would not consider selling its Shares at
less than a $30 per Share price and Mr. Knief's indication to Mr. Rothstein that
at $25 per Share CVC would rather be a buyer than a seller of Shares. The Board
noted that CVC maintained this position consistently in August 1996 (when the
market price for the Shares was $8.81 per Share), in June 1997 (when the market
price for the Shares ranged between $9.37 and $11.50 per Share) and in August
1997 (when the market price for the Shares was $13.00 per Share). The Board did
not consider CVC's stated position to have any meaningful bearing on DavCo's
value or the fairness of the price offered in the Merger. Rather, the Board
understood this position to indicate that CVC intended to continue holding its
investment in DavCo and would consider a sale only at a price that reflected a
very substantial premium on CVC's investment.

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 would 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. In view of CVC's position and the
considerations set forth above, the Board did not consider additional business
combinations or strategic alternatives to the Merger.

26
<PAGE>
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."

The Board also considered the concerns expressed by Wendy's that the merger
was designed to enrich the Company's largest shareholder and that the merger
would have an adverse impact on the Company's ability to meet its obligations to
Wendy's and other creditors of the Company. The Board noted that the Affiliated
Stockholders were leaving substantial equity in DavCo through DAC and that
otherwise all Stockholders would participate ratably in the Merger
consideration. The Board also concluded that the terms of the financing of the
Merger would be reasonable in relation to DavCo's ability to sustain such
leverage and to meet its obligations to creditors.

(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
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 Merger Agreement also provided
for certain conditions to the obligations of DAC to complete the Merger. These
conditions included principally (i) the completion of the Financing, (ii) the
assertion of appraisal rights under Delaware law by holders of no more than 5%
of the Shares, (iii) the adoption of the Merger Agreement and approval of the
Merger by the Stockholders as required under Delaware law and by a majority of
the outstanding Shares held by Unaffiliated Stockholders, (iv) the making of all
filings and the obtaining of all consents from governmental authorities or third
parties, which, if not obtained or made, would have a material adverse effect on
the financial condition, results of operation or business of DavCo, (v) the
absence of any effective restraining order, injunction or order preventing
consummation of the Merger and (vi) the absence of any legal proceeding that
challenges

27
<PAGE>
the consummation of the Merger or that, if adversely determined, would have a
material adverse effect on the financial condition, results of operation or
business of DavCo. The Board noted that any or all of the conditions to the
completion of the Merger may be waived by the party whose obligations are
subject to the satisfaction of such condition; provided that certain conditions,
such as stockholder approvals, would be required to be satisfied by applicable
law, notwithstanding any waiver. 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 the 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 these
conditions would not entitle DAC or DAC Sub to reimbursement of their expenses,
nor entitle DavCo to reimbursement of its expenses or 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 (x) completion of the
Merger is conditioned upon receiving the affirmative vote of a majority of the
outstanding Shares held by Unaffiliated Stockholders, (y) 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 and (z) the Board
conducted certain of its deliberations regarding the Merger while excusing the
Participating Directors and approved the Merger Agreement by the unanimous vote
of the Non-Participating Directors (including a majority of directors who are
not employees of DavCo), 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.

(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.

In connection with its evaluation of the fairness of the Merger, the Board
did not consider valuations of DavCo based solely on net book value, going
concern value, or liquidation value, because it considered the valuation
methodologies undertaken by its financial advisor, after discussion with the
Board, to be the most relevant to the values that would be realistically
available to Stockholders.

28
<PAGE>
DAC. DAC and the Affiliated Stockholders have not undertaken any
independent formal evaluation of the fairness of the Proposal to the
Unaffiliated Stockholders. However, in reaching their determination on the
fairness of the Merger consideration, DAC and the Affiliated Stockholders adopt
the analysis of the Board described in the foregoing discussion. Based upon such
analysis and 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

Following receipt of the September 5 Proposal, 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 DAC and 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 (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 DAC and 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

29
<PAGE>
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
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

30
<PAGE>
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.

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, including revenues and earnings growth trends, leverage ratios, market
capitalization, historical stock prices and ranges, as well as publicly
available operating and balance sheet information, 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 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 0.6xto 3.3x 1.4x
EBITDA 6.6xto 10.7x 8.7x
EBIT 9.1xto 15.9x 13.0x
P/E TR12 14.5xto 31.5x 19.0x
P/E 1997 13.8xto 33.0x 18.2x
P/E 1998 12.6xto 26.5x 18.5x
Book Equity 1.1xto 4.7x 2.8x
Franchisees --
Restricted Operators Revenues 0.6xto 1.8x 0.6x
EBITDA 6.2xto 13.2x 8.6x
EBIT 9.3xto 15.8x 12.6x
P/E TR12 17.4xto 20.3x 18.8x
</TABLE>

31
<PAGE>
<TABLE>
<CAPTION>
CATEGORY RANGE OF VALUES AVERAGE VALUE
---------------------- ---------------------- ---------------
<S> <C> <C> <C>
P/E 1997 14.9xto 29.2x 15.7x
P/E 1998 12.3xto 23.3x 13.9x
Book Equity 0.6xto 3.5x 2.2x
Franchisees --
High Growth Consolidators Revenues 0.4xto 3.2x 1.7x
EBITDA 6.0xto 21.7x 12.7x
EBIT 10.2xto 26.7x 18.0x
P/E TR12 25.7xto 30.7x 28.2x
P/E 1997 8.0xto 23.9x 19.0x
P/E 1998 15.1xto 20.1x 17.6x
Book Equity 1.3xto 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.

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:

<TABLE>
<S> <C>
QSR 24.5% to 41.5%
Franchisees
-- High Growth Consolidators 41.7% to 54.8%
-- Restricted Operators 6.7% to 22.7%
</TABLE>

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

32
<PAGE>
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.

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

33
<PAGE>
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 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. These analyses were based upon the following: (i) an estimate
of projected financial performance for the Company with the operations of all of
the Company's existing divisions, as prepared by the Company's senior management
beginning with fiscal year 1998 through 2002, and (ii) an estimate of projected
financial performance for the Company assuming the sale of the Company's Midwest
Division, as prepared by the Company's senior management beginning with fiscal
year 1998 through 2002.

The Company's senior management provided to Equitable the following
financial projections relating to the operation of the Company for the fiscal
years 1998 through 2003. The Company does not as a matter of course make public
forecasts or projections as to future revenues or earnings. Such projections
were not prepared with a view to complying with published guidelines of the
American Institute of Certified Public Accountants or the Securities and
Exchange Commission regarding projections and forecasts and were not prepared in
accordance with GAAP. None of such projections have been reviewed by the
Company's independent public accountants. In addition, because the projections
are based on a number of assumptions, as described herein and under the caption
"SPECIAL FACTORS--Certain Projections," which are inherently subject to
significant economic and competitive uncertainties and contingencies, many of
which are beyond the control of the Company, and upon assumptions, as described
herein and under the caption "SPECIAL FACTORS--Certain Projections," with
respect to future business decisions that are subject to change, there can be no
assurance that they will be realized, and actual results may vary materially
from those projected.

In calculating the values for the discounted cash flow analyses, Equitable
based residual values for the Company on senior management's projections as
outlined below, as well as senior management's projections for (i) depreciation
expense, (ii) balance sheet information and (iii) capital expenditure
requirements.

34
<PAGE>
Base Case - No Sale of the Midwest Division. Equitable analyzed the
valuation of the Company based upon a discounted cash flow analysis of the
financial performance of the Company as presented in the financial projections
prepared by senior management of the Company. The table below shows the
projected summary income statements for the Company through the fiscal year 2003
as projected by the senior management of the Company.

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Sales........................... $ 229,096 $ 259,368 $ 278,530 $ 316,196 $ 353,971 $ 393,145 $ 427,001
Cost of Rest. Sales................... 139,520 157,945 169,545 192,552 215,651 239,636 260,370
Rest. Op. Expense..................... 46,254 51,845 54,697 60,334 65,535 70,995 75,701
Gross Profit.......................... 43,322 49,578 54,288 63,310 72,786 82,514 90,930
Operating Income...................... 16,443 20,562 24,062 29,582 35,562 41,410 47,509
EBITDA................................ 26,253 29,912 33,244 39,701 46,808 53,986 60,194
DavCo Oil EBITDA...................... N/A 212 223 234 245 258 271
Net Income............................ 7,182 4,131 5,669 7,348 9,636 12,044 15,004
</TABLE>

For a discussion of the assumptions underlying the foregoing projections,
see "--Certain Projections."

Base Case - Sale of the Midwest Division. Equitable analyzed the valuation
of the Company based upon the assumption that the Company's Midwest Division was
sold and accounted for in fiscal 1997. The table below shows the projected
summary income statements for the Company through the fiscal year 2003 with the
sale of the Company's Midwest Division as projected by the senior management of
the Company.

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Sales........................... $ 229,096 $ 228,235 $ 246,774 $ 283,805 $ 320,932 $ 359,445 $ 392,627
Cost of Rest. Sales................... 139,520 137,422 148,612 171,201 193,872 217,422 237,712
Rest. Op. Expense..................... 46,254 44,610 47,318 52,806 57,857 63,163 67,713
Gross Profit.......................... 43,322 46,202 50,844 59,798 69,203 78,860 87,203
Operating Income...................... 16,443 20,257 23,616 29,038 34,954 40,766 46,309
EBITDA................................ 26,253 28,313 31,612 38,037 45,111 52,255 58,428
DavCo Oil EBITDA...................... N/A 212 223 234 245 258 271
Net Income............................ 7,182 3,845 5,273 6,803 9,079 11,426 14,277
</TABLE>

Although Equitable made certain non-material adjustments which it deemed
appropriate to the amortization of intangibles and to the accretion schedule of
pay-in-kind preferred shares, it relied solely upon the financial projections
prepared by the Company's senior management in performing its analysis described
herein and assumes no responsibility for the accuracy or the completeness of
such projections or the information presented in the foregoing tables. For the
reasons set forth above, projections are inherently uncertain and the inclusion
of the projected results set forth above should not be regarded as a
representation by Equitable, the Company or any other entity that the projected
results will be achieved. Future performance may be significantly less favorable
or more favorable than as set forth above, and holders of Shares are cautioned
not to rely on the information set forth above as being indicative of the
Company's future financial performance.

Using this financial information, Equitable calculated the projected free
cash flow in each 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

35
<PAGE>
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 as mentioned above, 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 estimated 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 senior management's projections as
described in the Discounted Cash Flow Analysis section 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 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 senior management's projections combined with an
assumed leverage structure deemed consistent with present financial market
conditions based on Equitable's experience. 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 arising out of the
litigation challenging the Merger, 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

36
<PAGE>
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 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.

37
<PAGE>
As a result of the Merger, the Kirstien Investors will increase their
percentage beneficial ownership of the common 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."

INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST

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 1,258,936 Shares, as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
NUMBER SHARES
OF (* DENOTES
SHARES(1) LESS THAN 1%)
----------- -----------------------
<S> <C> <C>
R. D. Kirstien (2).......................................... 595,769 8.79
H. Rothstein (3)............................................ 449,274 6.78
B. L. Knief (4)............................................. 45,742 *
C. E. Corpening (5)......................................... -- --
E. H. Chambers.............................................. 11,100 *
J. D. Farley................................................ 48,122 *
G. Marchetti................................................ 13,600 *
H. O. Rosser................................................ 71,329 1.12
B. J. Winokur............................................... 24,000 *
</TABLE>

- ------------------------
(1) Includes all stock options which are exercisable within 60 days of the
Record Date.
(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.

In addition, as of the Record Date, CVC beneficially owned 3,133,049 Shares,
representing approximately 40.60% of the outstanding Shares.

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 common equity of DAC. These

38
<PAGE>
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 $11,239,665
in respect of the conversion of their Shares in the Merger as follows:

<TABLE>
<S> <C>
R. D. Kirstien.................................................. $5,528,339
H. Rothstein.................................................... 2,636,380
B. L. Knief..................................................... 631,160
C. E. Corpening................................................. --
E. H. Chambers.................................................. 116,688
J. D. Farley.................................................... 631,393
G. Marchetti.................................................... 114,375
H. O. Rosser.................................................... 1,387,080
B. J. Winokur................................................... 194,250
</TABLE>

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 common equity interests in DAC. See "CERTAIN
INFORMATION CONCERNING DAC, DAC SUB AND AFFILIATES."

BONUSES. Upon consummation of the Merger, DAC has agreed that Mr. Kirstien
and Mr. Rothstein will receive one-time cash payments aggregating approximately
$3,040,000 in recognition of past services and as an inducement to continue in
the employ of DavCo in the future and to compensate them for the adverse tax
costs associated with the cancellation of the options and as a result of the
transaction.

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 in connection with the performance of their duties to DavCo (including,
without limitation, in connection with the Merger) and 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

39
<PAGE>
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 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

40
<PAGE>
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 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 CHALLENGING THE MERGER

On September 8, 1997, a purported class action complaint (the "Harbor
Finance Complaint") was filed in the Court of Chancery of the State of Delaware
(the "Court of Chancery") naming DavCo, the individual members of its board of
directors and Citicorp (an affiliate of CVC) as defendants. This action,
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, charges 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 Harbor
Finance Complaint, (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 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 Harbor Finance Complaint seeks, 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

41
<PAGE>
may be granted and to stay discovery with respect thereto pending determination
of the motion to dismiss. No hearing on the motion to dismiss has been scheduled
and no other proceedings have occurred in the case.

On September 9, 1997, a second purported class action complaint (the "Gorin
Complaint") was filed in the Court of Chancery against the same defendants. That
action, captioned 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, likewise charges that consummation of the
September 5 Proposal would be unfair and in violation of defendants' fiduciary
duties because, according to the Gorin Complaint, (i) the September 5 Proposal
was made at a time DavCo was on the verge of attaining sustained profitability,
(ii) management of DavCo allegedly has a controlling interest in DavCo such that
none of its directors can meaningfully consider the September 5 Proposal or
engage in arm's-length bargaining with respect to it, (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 Gorin Complaint seeks, 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.
The Gorin Complaint has not been served and, accordingly, the defendants are not
obligated to respond thereto.

On November 25, 1997, a third purported stockholder class action complaint
was filed in the Court of Chancery, captioned Steve Silberg v. Davco
Restaurants, Ronald D. Kirstien, Harvey Rothstein, Gino Marchetti, James D.
Farley, Harold O. Rosser, Byron L. Knief, Barton J. Winokur, Edward H. Chambers
and Charles Corpening, Del. Ch., C.A. No. 16057NC. The complaint in this action
was amended on February 9, 1998 (as amended, the "Silberg Complaint") to add
additional allegations to the original complaint and to name CVC as an
additional defendant. The Silberg Complaint charges that defendants breached
their fiduciary duties in approving the Merger in that, among other things, the
$20 per Share price payable to Stockholders upon consummation of the Merger is
unfair. The Silberg Complaint also alleges, among other things, that: (i) the
$20 per Share price payable to Stockholders upon consummation of the Merger was
not the result of negotiation, but was merely accepted by the directors, (ii)
CVC was allegedly willing to buy DavCo for at least $25 per Share and might
consider doing so at a price up to $30 per Share, (iii) Equitable did not
consider certain matters in its analysis, (iv) the payment of certain bonuses to
Messrs. Kirstien and Rothstein would violate certain provisions of the Restated
Certificate of Incorporation of the Company if not approved by requisite
stockholder vote, (v) the defendants are in possession of material, non-public
information concerning the Company's assets, businesses and future prospects,
(vi) the defendants have not considered unspecified other possible purchases of
and offers for the assets or stock of the Company but have unfairly favored the
Proposal, and (vii) the timing of the Merger is unfair because the Company is
now experiencing increasing growth and success. The Silberg Complaint seeks,
among other things, a declaration that the defendants have breached their
fiduciary duties, preliminary and permanent injunctive relief against the
Merger, rescissory relief or damages if the Merger is consummated, and other
equitable relief. The time in which defendants may move, answer or otherwise
respond to the Silberg Compaint has not yet expired.

CERTAIN PROJECTIONS

DavCo does not as a matter of course make public forecasts as to future
sales or earnings. DavCo generally prepares internal financial forecasts only
one year in advance and solely for internal use in capital budgeting and other
management decisions. However, in connection with the valuation analyses of
Equitable in connection with the Merger, the Company prepared certain
projections of DavCo's consolidated financial performance for the fiscal years
1998 through 2003. Accordingly, these projections give effect to the Merger and
the related Financing. See "SPECIAL FACTORS--Fairness of the Merger;
Recommendation of the Board of Directors; Position of DAC." A summary of these
projections is set forth below.

42
<PAGE>
SUMMARY PROJECTED FINANCIAL INFORMATION
FISCAL YEARS ENDED SEPTEMBER 1998-2003
(IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Restaurant Sales............. $ 259,368 $ 278,530 $ 316,196 $ 353,971 $ 393,145 $ 427,001
Operating Income............. 20,562 24,062 29,582 35,562 41,410 47,059
Net Income................... 4,131 5,669 7,348 9,636 12,044 15,004
EBIT*........................ 21,493 25,074 30,664 36,716 42,640 48,366
EBITDA*...................... 29,912 33,244 39,701 46,808 53,986 60,194
</TABLE>

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

* EBIT is defined as earnings before interest and taxes. EBITDA is defined as
earnings before interest, taxes, depreciation and amortization.

The foregoing projections should be read together with the information
contained in the consolidated financial statements and accompanying notes of
DavCo and with the following assumptions made in preparing such projections:

(a) The foregoing projections assume consummation of the Merger and the
incurrence of the Financing relating thereto. See "FINANCING OF THE MERGER"
for a discussion of the terms of the Financing.

(b) In July 1997, DavCo acquired 34 franchised Friendly's restaurants
from Friendly's Ice Cream Company. See "BUSINESS--Recent Developments." The
projections set forth above reflect sales revenue attributable to these
acquired franchised restaurants.

(c) In September 1997, DavCo entered into an agreement to sell the
operations of 46 Midwestern Wendy's restaurants to Western & Southern Food
Service, L.L.C. See "BUSINESS--Recent Developments." The restaurant sales
and operating income projections set forth above, however, include sales
revenue and operating expenses attributable to these 46 Wendy's restaurants
and does not include sales revenue or operating expenses attributable to 7
Wendy's restaurants to be closed.

(d) Operating income, EBIT and EBITDA do not reflect contributions from
DavCo Oil Co., a new subsidiary expected to commence sales operations on
February 1, 1998.

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."

None of the foregoing projections should be regarded as an accurate
prediction of future events. They were prepared solely for the exploratory and
analytical purposes of Equitable, which understood the inherent unreliability of
projections as predictions of future results and were expected to make their own
independent judgments about the estimates and assumptions made.

Additionally, the projections described above were not prepared with a view
toward public disclosure or to be in compliance with the published guidelines of
the Commission or the guidelines established by the American Institute of
Certified Public Accountants regarding projections or forecasts. DavCo generally
prepares internal financial forecasts only one year in advance and solely for
internal use in capital budgeting and other management decisions. The Company's
internal forecasts and the projections described above are subjective in many
respects and thus susceptible to various interpretations and periodic revision
based on actual experience and business developments. The projections were based
on a number of assumptions that are beyond the control of DavCo. Many of the
assumptions upon which the projections were based are dependent upon economic
forecasting (both general and specific to DavCo's business), which is inherently
uncertain and subjective, including assumptions with respect to restaurant

43
<PAGE>
industry performance, food and supply costs (including fresh beef in
particular), labor costs and relations and assessments and other matters which
are beyond the control of DavCo.

Inclusion of the foregoing forecasts should not be regarded as a
representation by DavCo, DAC, DAC Sub, any of their respective financial
advisors or any other entity or person that the forecasts and projected results
would be achieved or as to any future event, occurrence or non-occurrence and
none of the foregoing parties assumes any responsibility for the accuracy of
such information. In addition, because the forecasts and projections are based
on a number of assumptions, including consummation of the Merger and the related
Financing, and are subject to significant economic and competitive uncertainties
and contingencies, which are beyond the control of DavCo, there can be no
assurance that the forecasts and projections will be realized, and actual
results may be higher or lower than those shown, possibly by material amounts.

The projections described above were prepared and utilized as described
above, and have not been and will not be revised or updated from the date of
their preparation to reflect subsequent events, facts or other information of
which any person or entity has become aware.

44
<PAGE>
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 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 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; Conflicts of Interest."

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,

45
<PAGE>
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 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

46
<PAGE>
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.

Each of the conditions to the consummation of the Merger may be waived by
the party whose obligations are subject to the satisfaction of such condition;
provided that certain conditions, such as Stockholder approvals, would be
required to be satisfied by applicable law, notwithstanding any waiver.

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, 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.

47
<PAGE>
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 adoption of the
Merger Agreement by the Stockholders: (i) by mutual written consent of 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 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 under the Merger
Agreement 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

48
<PAGE>
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 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.

49
<PAGE>
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:

<TABLE>
<S> <C>
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
-----------
-----------
</TABLE>

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 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

50
<PAGE>
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 to 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 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:

<TABLE>
<CAPTION>
<S> <C>
Financing Fees.................................................. $2,205,000
Investment Banking.............................................. $ 240,000
Legal and Accounting............................................ $1,700,000
Printing and Distribution....................................... $ 10,000
SEC Filings..................................................... $ 23,829
Miscellaneous................................................... $ 214,171
---------
TOTAL....................................................... $4,393,000
---------
---------
</TABLE>

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; Conflicts of Interest."

51
<PAGE>
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 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.

52
<PAGE>
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 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 payment within the meaning of Section 262.

STOCKHOLDERS ELECTING TO EXERCISE APPRAISAL RIGHTS UNDER SECTION 262 MUST
NOT VOTE FOR ADOPTION OF THE MERGER AGREEMENT. A VOTE BY A STOCKHOLDER AGAINST
ADOPTION OF THE MERGER AGREEMENT 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 ADOPTION OF THE MERGER AGREEMENT OR A
DIRECTION TO ABSTAIN, THE PROXY, IF NOT REVOKED, WILL BE VOTED FOR ADOPTION OF
THE MERGER AGREEMENT, 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 properly
demanded appraisal in accordance with the 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

53
<PAGE>
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 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.

54
<PAGE>
It is a condition to the obligations of DAC and DAC Sub to consummate the
Merger, which condition may be waived by DAC and DAC Sub, that the holders of
not more than five percent of the outstanding Shares properly demand appraisal
rights under the DGCL.

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 the Kirstien
Investors, the Rothstein Investors and the CVC Investors.

Immediately prior to the Merger, DAC's outstanding common equity is expect
to be owned substantially as follows:

<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
HOLDERS COMMON EQUITY
- ------------------------------------------------------------------------------ -----------------
<S> <C>
CVC Investors................................................................. 67.0%
Kirstien Investors............................................................ 16.5
Rothstein Investors........................................................... 16.5
</TABLE>

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."

55
<PAGE>
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 material conditions to
consummation of the agreement with W&S are 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. The
transaction with W&S is unrelated to, and is not a condition to or conditioned
upon, the Merger.

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

56
<PAGE>
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.

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.

57
<PAGE>
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 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.

58
<PAGE>
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 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.

59
<PAGE>
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.

FRIENDLY'S. On July 10, 1997, FriendCo Restaurants, Inc. executed 34
franchise agreements with Friendly's Restaurant Franchise, Inc. ("F.R.F.I.")
covering operational requirements for the 34 restaurants acquired by FriendCo
from Friendly Ice Cream Corporation ("F.I.C.C."). Pursuant to the franchise
agreement, FriendCo agrees to operate the restaurants 365 days a year during
established business hours, to pay an annual royalty fee of 4% of gross sales,
and to contribute 3% of gross sales to a marketing fund. F.R.F.I. retains the
right to approve and require menu items and to approve distributors or suppliers
of products used in the restaurants.

FriendCo and the Company have agreed with F.R.I.C. and F.I.C.C. that they
will not engage in competitive mid-scale sit-down family style restaurant
concepts for a period of two years following the termination or expiration of
the franchise agreements.

On July 10, 1997, the Company's subsidiary, FriendCo Restaurants, Inc.,
signed a Development Agreement with F.I.C.C., providing FriendCo with an
exclusive development territory in Delaware, Maryland, the District of Columbia
and certain counties in northern Virginia. FriendCo Restaurants, Inc. is
required to have open or under construction 74 new Friendly's Restaurants by
December 31, 2003 in order to maintain territorial exclusivity, and is entitled
to open an additional 26 new restaurants through December 31, 1997.

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
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.

60
<PAGE>
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.

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, and held long term leases covering land or both
land and building for 206 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.

61
<PAGE>
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:

<TABLE>
<CAPTION>
LOCATION NO.
- -------------------------------------------------------------------------------------------------- ---
<S> <C>
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
---
---
</TABLE>

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.

On September 9, 1997, a second purported class action complaint (the "Gorin
Complaint") was filed in the Court of Chancery against the same defendants. That
action, captioned Gorin Brothers, L.P. v.

62
<PAGE>

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,
likewise charges that consummation of the September 5 Proposal would be unfair
and in violation of defendants' fiduciary duties because, according to the Gorin
Complaint, (i) the September 5 Proposal was made at a time DavCo was on the
verge of attaining sustained profitability, (ii) management of DavCo allegedly
has a controlling interest in DavCo such that none of its directors can
meaningfully consider the September 5 Proposal or engage in arm's-length
bargaining with respect to it, (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 Gorin Complaint seeks, 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. The Gorin Complaint has not
been served and, accordingly, the defendants are not obligated to respond
thereto.

On November 25, 1997, a third purported stockholder class action complaint
was filed in the Court of Chancery, captioned Steve Silberg v. Davco
Restaurants, Ronald D. Kirstien, Harvey Rothstein, Gino Marchetti, James D.
Farley, Harold O. Rosser, Byron L. Knief, Barton J. Winokur, Edward H. Chambers
and Charles Corpening, Del. Ch., C.A. No. 16057NC. The complaint in this action
was amended on February 9, 1998 (as amended, the "Silberg Complaint") to add
additional allegations to the original complaint and to name CVC as an
additional defendant. The Silberg Complaint charges that defendants breached
their fiduciary duties in approving the Merger in that, among other things, the
$20 per Share price payable to Stockholders upon consummation of the Merger is
unfair. The Silberg Complaint also alleges, among other things, that: (i) the
$20 per Share price payable to Stockholders upon consummation of the Merger was
not the result of negotiation, but was merely accepted by the directors, (ii)CVC
was allegedly willing to buy DavCo for at least $25 per Share and might consider
doing so at a price up to $30 per Share, (iii) Equitable did not consider
certain matters in its analysis, (iv) the payment of certain bonuses to Messrs.
Kirstien and Rothstein would violate certain provisions of the Restated
Certificate of Incorporation of the Company if not approved by requisite
Stockholder vote; (v) the defendants are in possession of material, non-public
information concerning the Company's assets, businesses and future prospects,
(vi) the defendants have not considered unspecified other possible purchases of
and offers for the assets or stock of the Company but have unfairly favored the
Proposal, and (vii) the timing of the Merger is unfair because the Company is
now experiencing increasing growth and success. The Silberg Complaint seeks,
among other things, a declaration that the defendants have breached their
fiduciary duties, preliminary and permanent injunctive relief against the
Merger, rescissory relief or damages if the Merger is consummated, and other
equitable relief. The time in which defendants may move, answer or otherwise
respond to the Silberg Complaint has not yet expired.

63
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY

The selected financial data as of September 25, 1993, September 24, 1994,
September 30, 1995, September 28, 1996 and September 27, 1997 and for the years
ended September 25, 1993, September 24, 1994, September 30, 1995, September 28,
1996 and September 27, 1997 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 the 13 weeks ended
December 28, 1996 and December 27, 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>
FISCAL YEAR ENDED
FOR THE 13 WEEKS ENDED -------------------------------------------------------------
-------------------------- PREDECESSOR
AND COMPANY
COMPANY COMPANY COMPANY COMPANY COMPANY COMPANY COMBINED
------------ ------------ ---------- ---------- ---------- ---------- -------------
DECEMBER 27, DECEMBER 28, SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 24, SEPT. 25,
1997 1996 1997 1996 1995 1994 1993
------------ ------------ ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS (in 000's)(1):
Restaurant sales............. $ 61,381 $ 52,029 $ 299,096 $ 206,903 $ 208,671 $ 163,355 $ 152,702
Operating income............. 3,593 3,290 15,130 8,071(3) 17,290 14,558 6,525
Income (loss) before
extraordinary item......... 2,513 2,324 6,344 2,391(3) 8,415 7,034 (1,813)
Net income (loss)............ 1,400 1,363 6,344 2,391(3) 8,415 7,034 (4,197)
Ratio of earnings to fixed
charges(2)................. 2.45 2.36 2.56 1.60 2.69 3.09 1.12

PER SHARE DATA:
Earnings per Share assuming
full dilution.............. $ 0.20 $ 0.20 $ 0.89 $ 0.34(3) $ 1.18 $ 0.98 --
</TABLE>

<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------------------------------------------
PREDECESSOR
AND COMPANY
COMPANY COMPANY COMPANY COMPANY COMPANY COMPANY PREDECESSOR
------------ ------------ ---------- ---------- ---------- ---------- -------------
DECEMBER 27, DECEMBER 28, SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 24, SEPT. 25,
1997 1996 1997 1996 1995 1994 1993
------------ ------------ ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION(1) (in 000's
except per Share amounts)
Property and equipment,
net........................ $ 59,433 $ 51,868 $ 58,074 $ 49,521 $ 41,661 $ 33,521 $ 12,321
Leased properties, net....... 33,551 37,043 34,355 37,918 43,828 44,300 42,734
Franchise rights, net........ 4,911 3,470 5,015 3,551 4,095 4,154 3,025
Total assets................. 129,175 118,203 126,434 117,558 115,700 113,428 82,400
Long-term debt, net of
current portion and
discount................... 16,755 11,549 17,487 11,699 14,778 17,928(4) 1,734
Capital lease obligations,
net of current portion..... 24,680 27,616 25,374 28,404 31,083 32,838 30,722
Stockholders' equity......... 53,034 46,653 51,634 45,526 44,219 35,804 28,770
</TABLE>

64
<PAGE>

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

(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.

65
<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 Wendy's restaurant sales
to an advertising fund, which consists of an amount (2.5% of sales) for Wendy's
National Advertising Program, Inc. and the remainder for Wendy's local
advertising. The Company is required to contribute 3% of its Friendly's
restaurant sales to an advertising fund managed by Friendly's Restaurants
Franchise, Inc. The fund will be used to enhance recognition of the trademark
products and patronage of Friendly's Restaurants and Friendly's proprietary
branded products. As of September 27, 1997 the fund has not yet been
established. Until such time the fund is established the Company may spend up to
1/2% of Friendly's restaurant sales on local advertising.

Franchise royalties, as required by the Company's Franchise agreements with
Wendy's International Inc. and Friendly's Restaurant Franchise, Inc. 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.

Note: Friendly's operations began on July 14, 1997 (11 weeks in Fiscal 1997)
and are not indicative of a full year results.

<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE FISCAL YEAR ENDED
-------------------------------- -------------------------------------
DECEMBER 27, DECEMBER 28, SEPT. 27, SEPT. 28, SEPT. 30,
1997 1996 1997 1996 1995
--------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Restaurant sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of restaurant sales........................... 62.0 61.6 60.9 61.0 60.0
Restaurant operating expenses...................... 20.5 20.3 20.8 20.5 19.8
Restaurant operating profit........................ 17.5 18.1 18.3 18.5 20.2
Franchise royalties................................ 4.0 4.0 4.0 4.0 4.0
General and administrative......................... 3.7 3.6 3.8 3.6 3.8
Depreciation and amortization...................... 3.9 4.2 3.9 4.3 4.1
Loss on write-down of impairedlong-lived assets.... -- -- -- 2.7 --
Operating income................................... 5.9% 6.3% 6.6% 3.9% 8.3%
</TABLE>

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.

66
<PAGE>

13 WEEKS ENDED DECEMBER 27, 1997 COMPARED TO 13 WEEKS ENDED DECEMBER 28, 1996

WENDY'S

REVENUES. Wendy's restaurant sales increased to $54.3 million for the 13
weeks ended December 27, 1997 from $52.0 million for the 13 weeks ended December
28, 1996, an increase of 4.4%. The increase in sales is attributed to new stores
opened since December 28, 1996 and an increase in same store sales overall. Same
store sales overall increased 2.6% from the same period in fiscal year 1997.
Same store sales for the Mid-Atlantic market increased by 4.2%, for the Mid-West
market increased by 0.7%, and for the Southern market decreased by 2.1%. The
overall improvement in sales is attributable to improved operations, an expanded
menu and continued guest satisfaction.

The weighted average number of Wendy's restaurants open was 228.0 for the 13
weeks ended December 27, 1997 and 227.6 for the comparable period in fiscal
1996. Average sales per Wendy's restaurant increased to $238,300 for the 13
weeks ended December 27, 1997 from $228,600 for the 13 weeks ended December 28,
1996, a 4.2% increase. The weighted average number of Mid-Atlantic restaurants
open was 137.0 for the 13 weeks ended December 27, 1997 and 133.9 for the
comparable period in fiscal 1996, and average sales per restaurant increased to
$273,700 from $259,900, a 5.3% increase. The weighted average number of Midwest
restaurants open was 53.0 for the 13 weeks ended December 27, 1997 and 55.7 for
the comparable period in fiscal 1996, and average sales per restaurant increased
2.5%, to $151,900 from $148,200. The weighted average number of restaurants
operating in the South was 38 for the 13 weeks ended December 27, 1997 and for
the 13 weeks ended December 28, 1996, and average sales per restaurant decreased
to $231,100 from $236,100, a 2.1% decrease.

Average guest count per Wendy's restaurant increased to 71,600 for the 13
weeks ended December 27, 1997 from 71,400 for the 13 weeks ended December 28,
1996. Average guest check increased to $3.33 from $3.20 for the related periods.
This increase is primarily due to the change in product mix, such as the "Fresh
Stuffed PITA" sandwiches and strategically selected menu items price increases.

COSTS AND EXPENSES. Cost of Wendy's restaurant sales increased to $33.2
million or 61.1% of sales for the 13 weeks ended December 27, 1997 from $32.1
million or 61.6% of sales for the 13 weeks ended December 28, 1996. Cost of
restaurant sales as a percentage of sales in the Mid-Atlantic restaurants
decreased to 59.3% for the 13 weeks ended December 27, 1997 from 59.8% for the
comparable period in fiscal 1996. Comparing the components of cost of restaurant
sales for the Mid-Atlantic restaurants, the cost of food and supplies remained
constant at 33.2% of sales in the 13 weeks ended December 27, 1997 and December
28, 1996. Payroll and benefits expense decreased to 26.1% of sales for the 13
weeks ended December 27, 1997 from 26.6% of sales for the comparable period in
fiscal 1996. Cost of restaurant sales as a percentage of sales in the Midwest
restaurants decreased to 67.2% for the 13 weeks ended December 27, 1997 from
67.8% for the comparable period in fiscal 1996. Comparing the components of cost
of restaurant sales for the Midwest restaurants, the cost of food and supplies
decreased to 34.7% of sales for the 13 weeks ended December 27, 1997 from 35.6%
of sales for the comparable period in fiscal 1996. As a percentage of sales,
payroll and benefits expense increased to 32.5% of sales for the 13 weeks ended
December 27, 1997 from 32.3% of sales for the comparable period in fiscal 1996.
For the restaurants operating in the South, cost of restaurant sales was 62.9%
of sales for the 13 weeks ended December 27, 1997, and 63.0% of sales for the 13
weeks ended December 28, 1996. Comparing the components of cost of restaurant
sales for the South restaurants, the cost of food and supplies decreased as a
percentage of sales to 33.3% for the 13 weeks ended December 27, 1997 from 33.9%
for the comparable period in fiscal 1996. As a percentage of sales, payroll and
benefits expense increased to 29.6% of sales for the 13 weeks ended December 27,
1997 from 29.1% of sales for the comparable period in fiscal 1996. Wendy's
consolidated decrease in food and supply cost is related to a change in the
product mix such as the new "Fresh Stuffed PITA" sandwiches which produced
slightly better margins, removal of salad bars and selected menu items price
increases. The consolidated decrease in labor cost as a percentage of sales is
related to Wendy's operating more efficiently and the leveraging effect of
increased sales. These factors more than offset the negative impact of the
increase in the Federal minimum wage.

67
<PAGE>

Restaurant operating expenses increased to $10.9 million for the 13 weeks
ended December 27, 1997 from $10.5 million for the 13 weeks ended December 28,
1996. Restaurant operating expenses as a percentage of sales were 20.0% and
20.3% for the 13 weeks ended December 27, 1997 and December 28, 1996,
respectively. Restaurant operating expenses in the Mid-Atlantic restaurants
decreased to 19.6% for the 13 weeks ended December 27, 1997 from 19.9% for the
comparable period in fiscal 1996. Restaurant operating expenses in the Midwest
restaurants decreased to 23.6% of sales for the 13 weeks ended December 27, 1997
from 23.7% of sales for the comparable period in fiscal 1996. As a percentage of
sales, restaurant operating expenses for the restaurants operating in the South
decreased to 18.2% for the 13 weeks ended December 27, 1997 from 18.5% for the
13 weeks ended December 28, 1996. The overall slight decrease in Wendy's
restaurant operating expenses as a percentage of sales can be attributed to the
leveraging effect of increased sales.

FRIENDLY'S

The operations of Friendly's restaurants began on July 14, 1997, and
therefore there is no comparable information for the 13 weeks ended December 28,
1996. The revenue from Friendly's operations was $7.0 million for the 13 weeks
ended December 27, 1997. Cost of Friendly's restaurant sales was 69.2% of sales,
which is comprised of 34.3% for food and supplies and 34.9% for payroll and
benefits. Friendly's restaurant operating expenses constituted 24.2% of sales.
Due to seasonal fluctuations, management believes that these results are not
necessarily indicative of an entire year's results.

CONSOLIDATED COMPANY

General and administrative expenses increased as a percentage of sales to
3.7% for the 13 weeks ended December 27, 1997 from 3.6% of sales for the 13
weeks ended December 28, 1996. The slight increase in general and administrative
expenses can be related to the additional expenses incurred with increased sales
such as bonus accruals.

Depreciation and amortization expense decreased as a percentage of sales
from 4.2% for the 13 weeks ended December 28, 1996 to 3.9% for the 13 weeks
ended December 27, 1997. The decrease as a percentage of sales directly related
to the leveraging effect of higher sales. Depreciation and amortization
increased to $2.4 million from $2.2 million in the related periods. The
additional depreciation and amortization related to new assets acquired since
December 28, 1996, which included assets acquired from the Friendly's
acquisition.

NON-OPERATING CHARGES. Interest expense decreased slightly to $1,176,000
for the 13 weeks ended December 27, 1997 from $1,228,000 for the 13 weeks ended
December 28, 1996. Interest income decreased to $5,000 for the 13 weeks ended
December 27, 1997 from $9,000 for the comparable period in fiscal 1996. The
provision for income taxes increased to $1,113,000 for the 13 weeks ended
December 27, 1997 from $961,000 for the 13 weeks ended December 28, 1996. The
Company's effective tax rate for the fiscal year 1998 is expected to be the same
as fiscal year 1997.

FISCAL 1997 COMPARED TO FISCAL 1996

WENDY'S

REVENUES. Wendy's restaurant sales increased to $222.1 million in 1997 from
$206.9 million in 1996, an increase of 7.3%. This increase is due to the
successful introduction of the "Fresh Stuffed PITA" sandwiches, favorable winter
weather, and increased attention to our guest first service philosophy. Wendy's
same store sales increased by 2.7% for fiscal year 1997 compared to fiscal year
1996. Same store sales for fiscal year 1997 increased for the Southern market by
4.6% and for the Mid-Atlantic market by 3.3%, and decreased for the Mid-West
market by 1.9%.

The average sales per Wendy's restaurant increased to $973,800 for fiscal
year 1997 from $933,300 for fiscal year 1996. The weighted average number of
Wendy's restaurants open during the year was 228.1 for 1997 and 221.7 for 1996.
The weighted average number of Mid-Atlantic Wendy's restaurants was 136.0 for

68
<PAGE>
1997 and 128.5 for 1996, and average sales per restaurant in the Mid-Atlantic
region increased to $1,121,200 from $1,073,000. The weighted average number of
Midwest restaurants open was 54.1 for 1997 and 55.3 for 1996, and average
restaurant sales decreased to $614,400 from $615,700. The weighted average
number of Southern restaurants open for 1997 was 38.0 compared to 37.9 for 1996,
and average restaurant sales for 1997 were $958,600 compared to $922,700 for
1996. Average guest count per Wendy's restaurant was 291,500 for fiscal 1997.
Average guest check was $3.34 for fiscal year 1997. These figures are not
comparable to fiscal year 1996 figures 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 prices.

COST AND EXPENSES. Cost of Wendy's restaurant sales increased to $134.7
million in 1997 from $126.3 million in 1996. As a percent of sales, cost of
restaurant sales decreased to 60.6% in 1997 from 61.0% in 1996. Cost of
restaurant sales as a percent of sales for the Mid-Atlantic restaurants
decreased to 58.8% in 1997 from 59.1% in 1996. Comparing the components of cost
of Wendy's restaurant sales for the Mid-Atlantic restaurants, the cost of food
and supplies decreased to 33.0% of sales in 1997 from 33.2% of sales in 1996.
Payroll and benefits expense decreased slightly to 25.8% of sales for 1997
compared to 25.9% of sales for 1996. Cost of restaurant sales as a percent of
sales in the Midwest Wendy's restaurants decreased to 66.7% for the 1997 period
from 67.6% for the 1996 period. Comparing the components of cost of restaurant
sales for the Midwest restaurants, the cost of food and supplies decreased to
34.8% of sales in 1997 from 35.8% of sales in 1996. Payroll and benefits expense
increased slightly to 31.9% of sales in 1997 from 31.8% of sales in 1996. The
Southern Wendy's restaurants cost of sales for fiscal 1997 increased slightly to
62.7% from 62.5% in 1996. Comparing the components of cost of restaurant sales
for the Southern restaurants, the cost of food and supplies increased to 33.6%
for the 1997 period from 33.3% in the 1996 period. Payroll and benefits expenses
decreased to 29.1% for the 1997 period from 29.3% in the 1996 period. The
overall decrease in the Wendy's cost of restaurant sales can be attributed to
favorable food cost, and the leveraging effect of higher same store sales for
fiscal year 1997. Higher labor cost due to the newly enacted Federal Minimum
Wage increase was offset, as a percentage of sales, by the leveraging effect of
higher same store sales.

Wendy's restaurant operating expenses increased to $45.8 million in 1997
from $42.4 million in 1996. As a percent of sales, this represents a slight
increase to 20.6% in 1997 from 20.5% in 1996. Restaurant operating expenses in
the Mid-Atlantic Wendy's restaurants decreased slightly to 19.4% of sales in
1997 from 19.5% in 1996. Restaurant operating expenses in the Midwest Wendy's
restaurants increased slightly to 29.0% of sales in 1997 from 25.0% of sales in
1996. This increase was due to a $1,300,000 reserve expense for six
underperforming stores, which are to be closed. Restaurant operating expenses in
the Southern Wendy's restaurants decreased to 18.4% of sales for 1997 from 19.9%
of sales in 1996. Overall restaurant operating expenses as a percentage of
sales, excluding the above reserve, decreased as a percentage of sales from
fiscal year 1996 due to the cost leveraging effect of higher same store sales
for fiscal year 1997 and the additional expenses in the 1996 period related to
the severe weather, such as increased utilities, snow removal and roof repairs.

FRIENDLY'S

The operations of Friendly's restaurants began on July 14, 1997, which
translates to 11 weeks in fiscal year 1997. The revenue from the Friendly's
operations was $7.0 million for the 11 week period. Cost of Friendly's
restaurant sales was 69.1% of sales, which is comprised of 37.3% for food and
supplies and 31.8% for payroll and benefits. Friendly's restaurant operating
expenses constituted 24.7% of sales. Due to the short operating period
management believes that these results are not necessarily indicative of an
entire year's results.

CONSOLIDATED COMPANY

General and administrative expenses increased to $8.8 million in fiscal year
1997 from $7.4 million in fiscal year 1996, representing as a percent of
consolidated sales for both Wendy's and Friendly's, 3.8% for

69
<PAGE>
1997 and 3.6% for 1996. This increase is directly related to incentive type
expenses, such as bonuses, incurred due to the Company's improved performance
when compared to fiscal 1996 and additional expenses related to the operating of
the Friendly's restaurants.

Depreciation and amortization expense was $8.9 million in fiscal year 1997
and 1996, representing a decrease, as a percent of sales, to 3.9% in 1997 from
4.3% in 1996. This decrease is related to asset write offs in 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). This decrease more than offset the additional depreciation and
amortization expense incurred on capital expenditures for new store openings,
existing improvements and the Friendly's operations acquisition.

NON-OPERATING CHARGES. Interest expense decreased slightly to $4.9 million
in fiscal year 1997 from $5.0 million in 1996. With additional borrowing for
expansion and the acquisition of Friendly's operations interest expense is
expected to increase in the future periods. During fiscal year 1997, other
income was $791,000 compared to other income of $1.1 million for fiscal year
1996.

The provision for income taxes increased to $4.7 million for fiscal 1997
from $1.8 million for fiscal 1996. The Company's effective tax rate for fiscal
1997 was 42.7% and 42.6% for fiscal 1996.

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 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.

70
<PAGE>
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 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%.

71
<PAGE>
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 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.

72
<PAGE>
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.

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 and the 13 weeks ended December 27, 1997, the Company purchased the land
and/or buildings for certain of its new restaurants. The Company plans to
continue this policy during the remainder of fiscal 1998.

Cash flow provided by operating activities was $431,000 for the 13 weeks
ended December 27, 1997, and $2.7 million and $1.1 million for the comparable
periods in fiscal 1997 and fiscal 1996, respectively. Net cash used in investing
activities was $2.7 million for the 13 weeks ended December 27, 1997. Cash used
in investing activities typically represents capital expenditures and related
land acquisitions for new Company restaurants opened during the period, and for
additional restaurants under construction. These expenditures also include
franchise fees, deferred pre-opening costs and leasehold improvements on
existing restaurants.

Financing activities during the 13 weeks ended December 27, 1997 provided
net cash of $2.9 million, which reflected short-term borrowings offset by
capital lease and debt repayments. Financing activities during the comparable
period in fiscal 1997 used net cash of $144,000, which related to debt and
capital lease repayments offset by short-term borrowings. Financing activities
during the comparable period in fiscal 1996 provided net cash of $5.9 million,
which related to debt and capital lease repayments.

The Company did not open any new restaurants nor closed any restaurants in
the Mid-Atlantic market and the Mid-West market during the 13 weeks ended
December 27, 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 1998. 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.

73
<PAGE>
CERTAIN INFORMATION REGARDING THE DIRECTORS
AND EXECUTIVE OFFICERS OF THE COMPANY AND DAC

Set forth below is certain information regarding the directors and executive
officers of the Company and DAC. 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

<TABLE>
<CAPTION>
YEARS IN
PRESENT POSITION WITH PRESENT
NAME AGE THE COMPANY OR DAC POSITION +
- --------------------------------------------- ------------- --------------------------------------------- ---------------
<S> <C> <C> <C>

Ronald D. Kirstien........................... 52 Chairman of the Board, Chief Executive 9
1657 Crofton Boulevard Officer, President and Director of the
Crofton, MD 21114 Company; President and Director of DAC

Harvey Rothstein............................. 54 Senior Executive Vice President of Real 9
1657 Crofton Boulevard Estate and Development and Director of the
Crofton, MD 21114 Company; Vice President, Secretary and a
Director of DAC

Gino Marchetti............................... 71 Director of the Company 4
324 Devon Way
West Chester, PA 19380

James D. Farley.............................. 71 Director of the Company 4
425 Park Avenue
3rd Floor
New York, NY 10022

Harold O. Rosser............................. 49 Director of the Company 4
126 East 56th Street
New York, NY 10022

Byron L. Knief............................... 55 Director of the Company and DAC 4
399 Park Avenue,
14th Floor
New York, NY 10043

Barton J. Winokur............................ 57 Director of the Company 4
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103

Edward H. Chambers........................... 60 Director of the Company 2
260 Baltimore Pike
Wawa, PA 19063

Charles E. Corpening......................... 32 Director of the Company and DAC 2
399 Park Avenue,
14th Floor
New York, NY 10043
</TABLE>

74
<PAGE>
<TABLE>
<CAPTION>
YEARS IN
PRESENT POSITION WITH PRESENT
NAME AGE THE COMPANY OR DAC POSITION +
- --------------------------------------------- ------------- --------------------------------------------- ---------------
<S> <C> <C> <C>
Joseph F. Cunnane, III....................... 49 Executive Vice President of Operations of the *
1657 Crofton Boulevard Company
Crofton, MD 21114

Richard H. Borchers.......................... 43 Executive Vice President of Human Resources *
1657 Crofton Boulevard of the Company
Crofton, MD 21114

David J. Norman.............................. 38 General Counsel and Secretary of the Company *
1657 Crofton Boulevard
Crofton, MD 21114

David F. Thomas.............................. 48 Director of DAC +
399 Park Avenue
14th Floor
New York, NY 10043
</TABLE>

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

* Denotes less than one year in present position

+ All positions held with DAC have been held for less than one year.

<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AND OTHER INFORMATION
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>

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
of the Company since December 1987. Director and officer of DAC since
October 1997.

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 of the
Company since December 1987. Director and officer of DAC since October
1997.

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.
</TABLE>

75
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AND OTHER INFORMATION
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>
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 of the Company since September 1993.
Director of DAC since October 1997.

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.
</TABLE>

76
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AND OTHER INFORMATION
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>
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 of the
Company since 1995. Director of DAC since October 1997.

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.

David F. Thomas...................... David F. Thomas has been a director of DAC since October 1997. Mr. Thomas
has been a Managing Director of CVC for more than five years and has been
the President of 399 Venture Partners, Inc., a venture capital and
leveraged buyout company which is a subsidiary of Citibank N.A. and an
affiliate of CVC, since December 1994. Mr. Thomas is a director of
Lifestyle Furnishings International Inc., a manufacturer of residential
furniture and decorative home furnishings fabrics Galey & Lord, Inc.,
Anvil Knitwear, Inc. and Stage Stores, Inc.
</TABLE>

77
<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 February __, 1998, 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.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
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
Fourth Quarter................................................................................. 18.12 10.88

1998
First Quarter.................................................................................. 20.00 17.67
</TABLE>

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.

78
<PAGE>
SECURITY OWNERSHIP OF THE COMPANY

The table below sets forth certain information regarding beneficial
ownership of the Shares as of December 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...................................................... 48,122 *
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)............................................... 11,100 *
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 the Record
Date 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.

79
<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;

(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.

(j) The Company's Annual Report on Form 10-K for the year ended
September 27, 1997.

(k) The Company's Quarterly Report on Form 10-Q for the quarter ended
December 27, 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.

80
<PAGE>
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 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.

81
<PAGE>
STOCKHOLDER PROPOSALS

If the Merger is not consummated, the next Annual Meeting of Stockholders of
the Company is expected to be held on June 24, 1998. 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 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 February 23, 1998
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.

82
<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 27, 1997, September 28,
1996, and September 30, 1995............................................................................. F-3
Consolidated Balance Sheets of the Company as of September 27, 1997
and September 28, 1996................................................................................... F-4
Consolidated Statements of Changes In Stockholders' Equity of the Company for the years
ended September 27, 1997, September 28, 1996, September 30, 1995,
and September 24, 1994................................................................................... F-5
Consolidated Statements of Cash Flows of the Company for the years ended September 27, 1997, September 28,
1996, and September 30, 1995............................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
Consolidated Statements of Operations of the Company for the 13 weeks ended December 27, 1997 (Unaudited)
and December 28, 1996 (Unaudited)........................................................................ F-20
Consolidated Balance Sheets of the Company as of December 27, 1997 (Unaudited) and September 27, 1997
(Audited)................................................................................................ F-21
Consolidated Statements of Cash Flows of the Company for the 13 weeks ended December 27, 1997 (Unaudited)
and December 28, 1996 (Unaudited)........................................................................ F-22
Notes to Unaudited Consolidated Financial Statements....................................................... F-23
</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 27, 1997 and September 28, 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended September 27, 1997, September 28, 1996 and September 30, 1995. 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 27, 1997 and September 28, 1996, and the results of
their operations and their cash flows for the years ended September 27, 1997,
September 28, 1996 and September 30, 1995, in conformity with generally accepted
accounting principles.

/S/ ARTHUR ANDERSEN LLP

Baltimore, Maryland
November 4, 1997

F-2
<PAGE>
DAVCO RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
RESTAURANT SALES.................................................... $ 229,096 $ 206,903 $ 208,671

COSTS AND EXPENSES:
Cost of restaurant sales............................................ 139,520 126,309 125,242
Restaurant operating expenses....................................... 47,558 42,408 41,373
Franchise royalties................................................. 9,179 8,277 8,346
General and administrative.......................................... 8,838 7,407 7,881
Depreciation and amortization....................................... 8,871 8,918 8,539
Loss on write-down of impaired long-lived assets.................... -- 5,513 --
------------- ------------- -------------
213,966 198,832 191,381
------------- ------------- -------------

Operating income.................................................. 15,130 8,071 17,290

Interest expense.................................................... (4,886) (5,048) (5,775)
Interest income..................................................... 42 36 205
Other income, net................................................... 791 1,105 1,146
------------- ------------- -------------
Income before income taxes........................................ 11,077 4,164 12,866

PROVISION FOR INCOME TAXES.......................................... (4,733) (1,773) (4,451)
------------- ------------- -------------
Net income........................................................ $ 6,344 $ 2,391 $ 8,415
------------- ------------- -------------
------------- ------------- -------------

EARNINGS PER COMMON SHARE:
Net income per common share......................................... $ 0.89 $ 0.34 $ 1.18
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of shares outstanding--assuming full
dilution.......................................................... 7,089 7,052 7,157
------------- ------------- -------------
------------- ------------- -------------
</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 SEPTEMBER
27, 28,
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 640 $ 1,948
Receivables...................................................... 580 652
Inventories...................................................... 1,879 1,421
Prepaid expenses................................................. 1,321 1,377
Deferred tax asset............................................... 1,514 1,004
----------- -----------
Total Current Assets....................................... 5,934 6,402
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $11,945
and $8,378, respectively......................................... 58,074 49,521
----------- -----------
LEASED PROPERTIES, net of accumulated amortization of $11,704 and
$8,044, respectively............................................. 34,355 37,918
----------- -----------
OTHER ASSETS:
Franchise rights, net............................................ 5,015 3,551
Development rights, net.......................................... 492 --
Goodwill, net.................................................... 21,514 18,730
Deferred tax asset............................................... -- 1,156
Other............................................................ 1,050 280
----------- -----------
Total Other Assets........................................... 28,071 23,717
----------- -----------
Total Assets................................................. $ 126,434 $ 117,558
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 6,808 $ 5,615
Accrued advertising and royalty fees............................. 2,426 2,588
Accrued salaries and wages....................................... 3,420 2,732
Accrued expenses................................................. 10,200 7,997
Short-term borrowings............................................ 2,099 6,768
Current portion of long-term debt................................ 3,674 3,055
Current portion of capital lease obligations..................... 3,034 3,174
----------- -----------
Total Current Liabilities.................................... 31,661 31,929

LONG-TERM DEBT, less current portion............................... 17,487 11,699

CAPITAL LEASE OBLIGATIONS, less current portion.................... 25,374 28,404

DEFERRED TAX LIABILITY............................................. 278 --
----------- -----------
Total Liabilities.................................................. 74,800 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................................................ 18,846 12,502
----------- -----------
Total Stockholders' Equity................................... 51,634 45,526
----------- -----------
Total Liabilities and Stockholders' Equity................... $ 126,434 $ 117,558
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-4
<PAGE>
DAVCO RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN 000'S)

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON TREASURY PAID-IN WARRANTS RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL OUTSTANDING EARNINGS EQUITY
----------- --------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>

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 ($ 1,084) $ 31,101 $ 3,000 $ 12,502 $ 45,526

Purchase of Treasury Stock
(26,700 shares)............................... -- (236) -- -- -- (236)

Net Income...................................... -- -- -- -- 6,344 6,344
----------- --------- ----------- ----------- --------- ------------

BALANCE, September 27, 1997....................... $ 7 ($ 1,320) $ 31,101 $ 3,000 $ 18,846 $ 51,634
----------- --------- ----------- ----------- --------- ------------
----------- --------- ----------- ----------- --------- ------------
</TABLE>

F-5
<PAGE>
DAVCO RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................ $ 6,344 $ 2,391 $ 8,415
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Loss on write down of impaired long-lived assets................ -- 5,513 --
Depreciation and amortization................................... 8,871 8,918 8,539
Net loss (gain) on disposition of assets........................ 156 (356) (420)
Deferred tax provision (benefit)................................ 924 (2,278) (1,204)
Amortization of debt discount................................... -- -- 36
Net change in operating assets and liabilities
Decrease (increase) in receivables............................ 72 (80) (240)
Decrease (increase) in refundable income taxes................ -- 1,175 (806)
Increase in inventories....................................... (458) (114) (30)
Decrease (increase) in prepaid expenses....................... 56 216 (520)
Increase (decrease) in accounts payable and accrued
expenses.................................................... 3,396 (33) 771
(Decrease) increase in accrued advertising and
royalty fees................................................ (162) 358 33
Increase (decrease) in accrued salaries and wages............. 668 149 (9)
Increase (decrease) in income taxes payable................... -- 521 (626)
------------- ------------- -------------

Net Cash Flows Provided By Operating Activities............. 19,887 16,380 13,939
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in other assets............................... (812) 71 (100)
Property and equipment acquired and constructed................... (10,229) (14,243) (13,384)
Proceeds from disposition of assets............................... -- 528 500
Payment for acquisition of company, net of cash acquired.......... (8,486) -- --
Proceeds from redemption of restricted asset...................... -- -- 1,236
------------- ------------- -------------

Net Cash Flows Used In Investing Activities................... (19,527) (13,644) (11,748)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations........................... (3,170) (3,094) (2,608)
Purchase of treasury stock........................................ (236) (1,084) --
Repayments of long-term obligations............................... (2,843) (3,709) (2,317)
Proceeds from long-term debt...................................... 9,250 -- --
Short-term borrowings............................................. (4,669) 6,768 --
------------- ------------- -------------

Net Cash Flows Used In Financing Activities................... 1,668 (1,119) (4,925)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................ (1,308) 1,617 (2,734)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................... 1,948 331 3,065
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $ 640 $ 1,948 $ 331
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest............................................ $ 4,886 $ 5,419 $ 5,885
------------- ------------- -------------
------------- ------------- -------------

Cash paid for income taxes, net of refunds........................ $ 3,571 $ 2,358 $ 7,433
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS:

As of September 27, 1997, DavCo Restaurants, Inc., a Delaware corporation
(the "Company"), operated 263 restaurants of which 229 are "Wendy's Old
Fashioned Hamburgers" restaurants, making it the world's largest franchisee of
Wendy's International, Inc. ("Wendy's"), and 34 Friendly's restaurants. The
Company also manages under contract 14 other Friendly's restaurants. The Company
maintains exclusive Wendy's 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 138 Wendy's restaurants. The
Company also maintains exclusive rights to develop and operate Friendly's
restaurants in Maryland, northern Virginia, Delaware and Washington, D.C. where
it operates 34 Friendly's restaurants (see Note 12). The Company also operates
53 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"). The Company does not maintain exclusive franchise
territories in the Midwest or 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 buy out 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 buy out; 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 $27,600,000, along with certain 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.

In September 1994, the Company acquired most of the Wendy's restaurants in
the metropolitan Nashville, Tennessee area. The acquisition, which was accounted
for as a purchase, was effected through Southern Hospitality Corporation, a
wholly owned subsidiary of the Company.

F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 and second-tier subsidiaries. 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 27, 1997 (fiscal
1997) and September 28, 1996 (fiscal 1996) 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:

<TABLE>
<CAPTION>
USEFUL
LIVES
-------------
<S> <C>
Buildings...................................................................... 25 years
Building equipment............................................................. 10-20 years
Furniture, fixtures and equipment.............................................. 5-10 years
</TABLE>

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.

FRANCHISE RIGHTS

The franchise agreements with Wendy's International, Inc. and Friendly's
Restaurant Franchise, 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 or acquired. Additional franchise rights were acquired in the Friendly's
transaction, (see Note 12) in the amount of $860,000. 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 27, 1997 and
September 28, 1996, was approximately $1,417,000 and $1,053,000, respectively
(see Note 5).

F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
DEVELOPMENT RIGHTS

The franchise agreements with Friendly's Restaurant Franchise, Inc. includes
specific development rights in the Mid-Atlantic market (see Note 12).
Development rights are being amortized over the ten-year term of the development
agreement.

GOODWILL

The Company has classified the cost in excess of fair value of the net
assets (including tax attributes) of companies or assets acquired in purchase
transactions as goodwill. Goodwill is being amortized on a straight-line method
over 30 years. Additional goodwill of $3,496,000 was recorded as part of the
Friendly's transaction (see Note 12). Accumulated amortization was approximately
$2,766,000 and $2,054,000 as of September 27, 1997 and September 28, 1996,
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.

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.

PRIOR YEAR RECLASSIFICATIONS

Certain reclassifications have been made to the prior years' balances in
order to conform to fiscal 1997 presentation.

F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (SFAS No. 128), which establishes new standards
for computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Adoption of this pronouncement will require the
restatement of all prior period earnings per share data presented.

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS No. 130), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Management has not yet
determined whether the implementation of SFAS No. 130 will have any impact on
the Company's financial reporting.

In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS
No.131), which establishes a new approach for determining segments within a
company and reporting information on those segments. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. Management has not yet
determined whether the implementation of SFAS No. 131 will have any impact on
the Company's current method of disclosing business segment information.

3. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following (amounts in 000's):

<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Buildings........................................................................... $ 20,264 $ 14,708
Land................................................................................ 13,589 10,339
Furniture, fixtures and equipment................................................... 33,511 26,992
Construction in progress............................................................ 2,655 5,860
------------- -------------
70,019 57,899

Less: Accumulated depreciation...................................................... (11,945) (8,378)
------------- -------------

Property and equipment, net......................................................... $ 58,074 $ 49,521
------------- -------------
------------- -------------
</TABLE>

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 Standards 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 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

F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO
BE DISPOSED OF: (CONTINUED)
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 $89,900,000 were
impaired and reduced their carrying value by $5,500,000 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 Wendy's 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.
Franchise agreements with Friendly's Restaurant Franchise, Inc. provide the
Company with an exclusive Mid-Atlantic territory as long as it is opening new
Friendly's restaurants in accordance with the requirements of the development
agreement between the Company's subsidiary, FriendCo, and Friendly's Restaurant
Franchise, Inc.

The Company is also required to pay royalty and advertising fees on both
Wendy's and Friendly's restaurants sales as defined by the applicable franchise
agreement. Royalties under both agreements are 4% of annual restaurant sales.
The advertising fee for Wendy's is 4% of restaurant sales which is a combination
of 2.5% to Wendy's National Advertising Program, Inc. for national advertising,
with the remainder for local advertising. The advertising fee for Friendly's is
3% of restaurant sales, contributed to an advertising fund managed by Friendly's
Restaurant Franchise, Inc. The fund will be used to enhance recognition of the
trademark products and patronage of Friendly's Restaurants and Friendly's
proprietary branded products. As of September 27, 1997, the fund has not been
established. Until such time the fund is established the Company may spend up to
1/2% of Friendly's restaurant sales on 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
$109,000, $107,000 and $94,000 for the years ended September 27, 1997, September
28, 1996 and September 30, 1995, respectively.

F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Cost of restaurant sales --
Food and supplies............................................... $ 76,683 $ 69,603 $ 68,856
Labor........................................................... 62,837 56,706 56,386
-------------- -------------- --------------
$ 139,520 $ 126,309 $ 125,242
-------------- -------------- --------------
Restaurant operating expenses --
Advertising..................................................... $ 9,863 $ 8,869 $ 9,448
Rent............................................................ 8,903 7,675 7,261
Utilities....................................................... 8,299 7,915 7,620
Maintenance and repairs......................................... 6,224 5,891 5,100
Other........................................................... 14,269 12,058 11,944
-------------- -------------- --------------

$ 47,558 $ 42,408 $ 41,373
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

8. INCOME TAXES:

The provision (benefit) for income taxes was comprised of the following
(amounts in 000's):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Federal:
Current......................................................... $ 3,057 $ 2,927 $ 4,621
Deferred........................................................ 601 (1,457) (1,023)

State:
Current......................................................... 752 603 1,034
Deferred........................................................ 323 (300) (181)
------ ------ ------

Provision for income taxes........................................ $ 4,733 $ 1,773 $ 4,451
------ ------ ------
------ ------ ------
</TABLE>

F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES: (CONTINUED)
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):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Computed federal tax provision (benefit) at statutory rate:......... $ 3,767 $ 1,416 $ 4,374
State income taxes (net of federal income tax effect)............... 775 329 563
Nondeductible expenses.............................................. 24 15 --
Targeted jobs tax credit............................................ (90) (10) (382)
Goodwill amortization............................................... 283 238 238
Reevaluation of deferred tax liability.............................. (54) (200) (383)
Other, net.......................................................... 28 (15) 41
------ ------ ------

Provision for income taxes.......................................... $ 4,733 $ 1,773 $ 4,451
------ ------ ------
------ ------ ------
</TABLE>

As of September 27, 1997 and September 28, 1996, the Company had federal net
operating loss carry-forwards for income tax purposes of approximately
$1,804,000 and $3,023,000, 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 $765,000 as of September 27, 1997.

Total deferred tax liabilities and deferred tax assets as of September 27,
1997 and September 28, 1996, 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 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment............................................................ $ 2,217 $ 1,958
Leased properties................................................................. 638 546
Franchise properties.............................................................. 548 628
Other............................................................................. 21 141
------ ------

Total........................................................................... $ 3,424 $ 3,273
------ ------
------ ------
Deferred tax assets:
Accrued expenses and reserves..................................................... 1,538 1,169
Covenants not to compete.......................................................... 2,237 2,396
Operating loss carryforwards and credits.......................................... 226 1,343
Capitalized development costs..................................................... 333 278
Other............................................................................. 326 247
------ ------

Total........................................................................... $ 4,660 $ 5,433
------ ------
------ ------
</TABLE>

F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. LONG-TERM DEBT AND FINANCING ARRANGEMENTS:

Long-term debt consisted of the following (amounts in 000's):

<TABLE>
<CAPTION>
SEPT. 27, SEPT. 28,
1997 1996
--------- ---------
<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........ $ 295 $ 714

SHC Term Loan from a bank (as described below).............................................. 11,770 14,040

FriendCo Term Loan from a bank (as described below)......................................... 9,096 --
--------- ---------
21,161 14,754

Less: Current portion....................................................................... (3,674) (3,055)
--------- ---------

Long-term debt.............................................................................. $ 17,487 $ 11,699
--------- ---------
--------- ---------
</TABLE>

Aggregate maturities of the Company's long-term debt as of September 27,
1997, are as follows (amounts in 000's):

<TABLE>
<CAPTION>
MATURING FISCAL YEAR
- -----------------------------------------------------------------------
<S> <C>
1998................................................................... $ 3,674
1999................................................................... 10,242
2000................................................................... 925
2001................................................................... 925
2002................................................................... 5,395
---------
$ 21,161
---------
---------
</TABLE>

FINANCING ARRANGEMENTS

In September 1994, the Company borrowed $18,250,000 (the "SHC Term Loan")
from a bank. The proceeds from the SHC Term Loan were used to consummate the
acquisition of Southern Hospitality Corporation. The SHC Term Loan is secured by
the common stock of Southern Hospitality Corporation. The SHC 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 any excess cash flow, as defined, within 120
days of its fiscal year end. Beginning with the first such additional payment,
the Company's monthly principal payment drops by 10% of the excess cash flow
payment. After that period of time, the monthly payment reverts back to $152,000
unless there has been an additional excess cash flow payment. The interest rate
is 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 SHC Term Loan principal amount, for the
duration of the loan, 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 SHC Term Loan principal amount, for the duration of the loan, through an
additional interest rate swap arrangement

F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. LONG-TERM DEBT AND FINANCING ARRANGEMENTS: (CONTINUED)
with the bank. As of September 27, 1997, the estimated fair market value of
interest rate swap arrangements was approximately $14,000 based on a dealer
quote.

During fiscal 1996, the Company established a $13,000,000 Revolving Credit
Facility. The Revolving Credit Facility includes a sub-limit for letters of
credit up to $7,000,000. In July 1997, the Company modified its bank credit
facilities. The Revolving Credit Facility was increased to $18,000,000, with the
sub-limit for letters of credit increased to $8,000,000.

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 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 years
ended September 27, 1997 and September 28, 1996 was $5,048,000 and $4,353,000,
respectively. The weighted average interest rate under the Revolving Line of
Credit for the year ended September 27, 1997 and September 28, 1996 was 6.99%
and 7.03%, respectively. The balance outstanding at September 27, 1997 and
September 28, 1996 was $2,099,000 and $6,768,000, respectively.

In July 1997, in conjunction with the modification of its Revolving Credit
Facility, the Company borrowed $9,250,000 (the "FriendCo Term Loan") from a
bank. The proceeds from this loan were used to consummate the acquisition of
assets and operating rights of 34 Friendly's Restaurants (see Note 12). The
transaction was accounted for under the purchase method of accounting. The loan
is secured by the capital stock of FriendCo Restaurants, Inc. and is
cross-guaranteed by DavCo Restaurants, Inc. and Southern Hospitality
Corporation. The FriendCo Term Loan provides for fixed principal payments of
approximately $77,000 per month plus interest beginning in July 1997 and ending
with a balloon payment in July 2002. In addition, each year the agreement
requires the Company to repay against the FriendCo Term Loan, a certain
percentage of any excess cash flow, as defined, within 120 days of its fiscal
year end. Beginning with the first such additional payment, the Company's
monthly principal payment for the following 12 months would drop by 10% of the
excess cash flow payment. After that period of time, the monthly payment reverts
back to $77,000, unless there has been an additional excess cash flow payment.
The FriendCo Term Loan bears interest at either (1) the floating rate per annum
equal to the banks 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 150 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 150 basis points per annum. As of September 27, 1997, the
FriendCo Term Loan rate was 7.16%.

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 27, 1997, the Company was in compliance with
all applicable covenants.

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
noncancelable term of 20 years and provide for additional

F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. LEASES: (CONTINUED)
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 $690,000, $579,000 and $764,000 for
the years ended September 27, 1997, September 28, 1996, and September 30, 1995,
respectively.

As of September 27, 1997, future minimum lease payments related to leases
were as follows (amounts in 000's):

<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- ----------------------------------------------------------- --------- ----------
<S> <C> <C>
1998....................................................... $ 6,227 $ 9,151
1999....................................................... 5,614 8,830
2000....................................................... 5,348 8,849
2001....................................................... 5,103 8,834
2002....................................................... 4,853 8,638
2003 and thereafter........................................ 20,016 58,514
--------- ----------

$ 47,161 $ 102,816
----------
----------

Less: Amount representing interest......................... (18,753)
---------
Present value of future minimum lease payments............. $ 28,408
---------
---------
</TABLE>

Rent expense under operating leases, including percentage rentals based on
sales, was approximately $9,380,000, $8,313,000 and $7,895,000 for the years
ended September 27, 1997, September 28, 1996 and September 30, 1995,
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 27, 1997, the Company was contingently liable for outstanding
letters of credit relating to liability insurance and Wendy's International,
Inc. current royalty requirements, aggregating approximately $4,670,000.

OTHER

During fiscal year 1998, the Company will be required to pledge additional
collateral in the amount of approximately $600,000 in connection with the
Company's worker compensation insurance policy.

F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. ACQUISITION OF FRIENDLY'S FRANCHISE RIGHTS:

DavCo Restaurants, Inc.'s wholly owned subsidiary FriendCo Restaurants, Inc.
("FriendCo") entered into agreements with Friendly's Ice Cream Corporation and
Friendly's Restaurants Franchise, Inc. signed July 11, 1997, effective July 14,
1997. The agreements set forth the terms pursuant to which FriendCo purchased
certain assets and rights to 34 existing restaurants, and will manage under
contract with an option to purchase, 14 other Friendly's locations and have
exclusive rights to develop and operate Friendly's Restaurants in Maryland,
northern Virginia, Delaware and the District of Columbia. The purchase was
accounted for under the purchase method of accounting whereby the purchase price
of $8,486,000 was recorded as follows: $860,000 to initial franchise fees,
$2,700,000 to equipment and tenant improvements, $3,496,000 to goodwill,
$500,000 to franchise development rights and $930,000 as payment of one-half of
the initial franchise fee for the first 74 restaurants to be developed. The
transaction was financed through a term loan for $10,000,000, signed July 15,
1997.

13. BUSINESS SEGMENT INFORMATION:

Prior to July 14, 1997, the Company's operations consisted primarily of
Wendy's Restaurants. As of July 14, 1997, the Company began operations of
Friendly's Restaurants (see Note 12) in addition to Wendy's Restaurants. For the
fiscal year ended September 27, 1997, the Friendly's operations do not meet the
criteria for a reportable segment under Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise."
The Company expects its Friendly's operations to meet the reportable segment
criteria in the future fiscal year periods and therefore has determined the
Friendly's Restaurant operations and Wendy's Restaurant operations are
reportable business segments. Segment information is shown only for fiscal year
1997, which includes operations for Friendly's from July 14, 1997 to September
27, 1997 (11 weeks). Prior to July 14, 1997, the Company's operations consisted
primarily of Wendy's operations, therefore segment information is not
applicable.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 27, 1997
------------------
<S> <C>
Revenue:
Wendy's................................................................. $ 222,141
Friendly's.............................................................. 6,955
--------
Total................................................................. $ 229,096
--------
--------
Operating Income:
Wendy's................................................................. $ 15,165
Friendly's.............................................................. (35)
--------
Total................................................................. $ 15,130
--------
--------
Total Assets:
Wendy's................................................................. $ 117,221
Friendly's.............................................................. 9,213
--------
Total................................................................. $ 126,434
--------
--------
Depreciation & Amortization:
Wendy's................................................................. $ 8,782
Friendly's.............................................................. 89
--------
Total................................................................. $ 8,871
--------
--------
</TABLE>

F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. BUSINESS SEGMENT INFORMATION: (CONTINUED)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 27, 1997
------------------
<S> <C>
Capital Expenditures:
Wendy's................................................................. $ 10,276
Friendly's.............................................................. 8,439
--------
Total................................................................. $ 18,715
--------
--------
</TABLE>

There were no significant intersegment sales or transfers during the period.
Operating income or loss by business segment excludes interest income and
expense and net unallocated corporate expenses which decreased income by
$4,053,000 in fiscal year 1997. Allocated corporate expenses are applied to each
segment based on actual expenses.

14. CAPITAL STOCK AND WARRANTS:

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 nonvoting common stock. As of September 27, 1997, there were 6,587,628 shares
of voting common stock outstanding and no shares of nonvoting 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 the date of issuance. These warrants expire February 10,
2003.

Effective May 1, 1996, the Company adopted a stock repurchase plan where up
to 1,000,000 shares of the Company's voting common stock can be purchased,
depending on price and market conditions. As of September 27, 1997, the Company
had purchased 158,807 shares at an aggregate cost of $1,319,505.

15. INCENTIVE OPTION PLAN:

The Company adopted an Incentive Plan (the "Plan"). The Plan generally
provides for the granting of stock, stock options, stock appreciation rights,
restricted shares or any combination of the foregoing to the eligible
participants, as defined. The exercise price of an option granted under the Plan
may not be less than the fair market value of the underlying shares of common
stock on the date of grant and the options expire at the earlier of termination
of employment or ten years from the date of grant.

As of September 27, 1997, options for 697,118 shares had been granted under
the Plan at exercise prices ranging from $6.80 - $16.13 per share and options
for 687,118 shares were exercisable at September 27, 1997.

The Company has computed for pro forma disclosure purposes the value of all
compensatory options granted during fiscal year 1995, 1996 and 1997, using the
Black-Scholes option pricing model as prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
No. 123). Assumptions used for the pricing model include a range of 5.7% - 5.9%
for the risk-free interest rate, expected lives of 1-3 years, expected dividend
yield of 0% and expected volatility of 35%. Options were assumed to be exercised
upon vesting for the purposes of this valuation. Adjustments are made for
options forfeited prior to vesting. Had compensation costs for compensatory
options been determined consistent with SFAS No. 123, the Company's pro forma
net income would have been

F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. INCENTIVE OPTION PLAN: (CONTINUED)
$6,266,000, $2,381,000 and $8,415,000 in fiscal year 1997, 1996 and 1995,
respectively. Pro forma earnings per share would have been $.88, $.34 and $1.18
in fiscal year 1997, 1996 and 1995, respectively.

The following table summarizes the stock option activity for the years ended
September 30, 1995, September 28, 1996 and September 27, 1997:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Options outstanding as of September 24, 1994....................... 595,618 $ 6.80-$16.13
Granted.......................................................... 5,000 $ 13.81
Exercised/Canceled............................................... (5,000) $ 16.13
--------- --------------

Options outstanding as of September 30, 1995....................... 595,618 $ 6.80-$16.13
Granted.......................................................... 48,000 $ 8.50
Exercised/Canceled............................................... (10,000) $ 8.50-$16.13
--------- --------------

Options outstanding as of September 28, 1996....................... 633,618 $ 6.80-$16.13
Granted.......................................................... 53,500 $ 9.88
Exercised/Canceled............................................... -- --
--------- --------------

Options outstanding as of September 27, 1997....................... 687,118 $ 6.80-$16.13
--------- --------------
--------- --------------
</TABLE>

16. SUBSEQUENT EVENTS:

DavCo Restaurants, Inc. 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,
following unanimous approval of the proposed transaction by the Board of
Directors of DavCo (after a vote in which the interested directors abstained
from voting).

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 Kirstien, Rothstein and 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 a limitation on the number of dissenting
shareholders, regulatory approvals and the receipt of necessary financing. The
investor group has obtained a commitment from Global Alliance Finance Company,
L.L.C., a wholly-owned subsidiary of Deutsche Bank North America, to provide up
to $150 million of debt financing to complete the merger.

In September 1997, the Company entered into an agreement to sell operations
of 46 Midwestern Wendy's restaurants 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. 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
six under performing restaurants.

F-19
<PAGE>

DAVCO RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

(IN 000'S EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE 13
WEEKS ENDED
--------------------------
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
RESTAURANT SALES..................................................................... $ 61,381 $ 52,029

COSTS AND EXPENSES
Cost of restaurant sales............................................................. 38,069 32,075
Restaurant operating expenses........................................................ 12,561 10,543
Franchise royalties.................................................................. 2,462 2,082
General and administrative........................................................... 2,274 1,865
Depreciation and amortization........................................................ 2,422 2,174
------------ ------------
57,788 48,739
------------ ------------

OPERATING INCOME................................................................... 3,593 3,290

Interest expense..................................................................... (1,176) (1,228)
Interest income...................................................................... 5 9
Other income, net.................................................................... 91 253
------------ ------------

INCOME BEFORE PROVISION FOR INCOME TAXES........................................... 2,513 2,324

PROVISION FOR INCOME TAXES........................................................... (1,113) (961)
------------ ------------

NET INCOME........................................................................... $ 1,400 $ 1,363
------------ ------------
------------ ------------

EARNINGS PER COMMON SHARE--BASIC..................................................... $ .22 $ .21

EARNINGS PER COMMON SHARE--DILUTED................................................... $ .20 $ .20
------------ ------------
------------ ------------

WEIGHTED AVERAGE SHARES OUTSTANDING--
ASSUMING FULL DILUTION............................................................. 7,115 6,947
------------ ------------
------------ ------------
</TABLE>

See notes to the unaudited consolidated financial statements.

F-20
<PAGE>

DAVCO RESTAURANTS, INC.

CONSOLIDATED BALANCE SHEETS
(IN 000'S EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 27,
1997 1997
------------- -------------
<S> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 1,309 $ 640
Receivables....................................................................... 936 580
Inventories....................................................................... 1,966 1,879
Prepaid expenses.................................................................. 3,527 2,121
Deferred tax asset................................................................ 1,514 1,514
------------- -------------
TOTAL CURRENT ASSETS........................................................ 9,252 6,734
------------- -------------
PROPERTY AND EQUIPMENT, NET......................................................... 59,433 58,074
------------- -------------
LEASED PROPERTIES, NET.............................................................. 33,551 34,355
------------- -------------
OTHER ASSETS:
Franchise rights, net............................................................. 4,911 5,015
Development rights, net........................................................... 479 492
Goodwill, net..................................................................... 21,311 21,514
Other............................................................................. 238 250
------------- -------------
TOTAL OTHER ASSETS............................................................ 26,939 27,271
------------- -------------
TOTAL ASSETS.................................................................. $ 129,175 $ 126,434
------------- -------------
------------- -------------
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 6,523 $ 6,808
Accrued advertising and royalty fees.............................................. 2,195 2,426
Accrued salaries and wages........................................................ 1,599 3,420
Accrued expenses.................................................................. 9,897 10,200
Short-term borrowings............................................................. 6,548 2,099
Current portion of long-term debt................................................. 3,640 3,674
Current portion of capital lease obligations...................................... 2,936 3,034
Income taxes payable.......................................................... 1,090 --
------------- -------------
TOTAL CURRENT LIABILITIES........................................................... 34,428 31,661

LONG-TERM DEBT, LESS CURRENT PORTION................................................ 16,755 17,487
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION..................................... 24,680 25,374
DEFERRED TAXES PAYABLE.............................................................. 278 278
------------- -------------

TOTAL LIABILITIES................................................................... 76,141 74,800
------------- -------------

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 shares........................................... (1,320) (1,320)
Additional paid-in capital........................................................ 31,101 31,101
Warrants outstanding.............................................................. 3,000 3,000
Retained earnings................................................................. 20,246 18,846
------------- -------------
TOTAL STOCKHOLDERS' EQUITY.................................................... 53,034 51,634
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 129,175 $ 126,434
------------- -------------
------------- -------------
</TABLE>

See notes to the unaudited consolidated financial statements.

F-21
<PAGE>

DAVCO RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN 000'S)

<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED
--------------------------
<S> <C> <C>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income......................................................................... $ 1,400 $ 1,363
Adjustments to reconcile net income to net cash flows provided by operating
activities-
Depreciation and amortization.................................................... 2,422 2,174
Net change in assets and liabilities............................................. (3,391) (795)
------------ ------------

Net Cash Flows Provided By Operating Activities.............................. 431 2,742
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in other assets................................................ (26) 49
Property and equipment acquired and constructed.................................... (2,627) (3,330)

Net Cash Flows Used In Investing Activities.................................... (2,653) (3,281)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations............................................ (792) (818)
Repayments of long-term debt, net.................................................. (766) (576)
Purchase of treasury stock......................................................... -- (236)
Short-term borrowings, net......................................................... 4,449 1,486
------------ ------------

Net Cash Flows Provided by (Used In) Financing Activities...................... 2,891 (144)
------------ ------------

NET DECREASE IN CASH AND CASH EQUIVALENTS............................................ 669 (683)
------------ ------------

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....................................... 640 1,948
------------ ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD............................................. $ 1,309 $ 1,265
------------ ------------
------------ ------------

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest............................................................. $ 1,241 $ 1,284
------------ ------------
------------ ------------

Cash paid for income taxes, net of refunds......................................... $ 263 $ 108
------------ ------------
------------ ------------
</TABLE>

See notes to the unaudited consolidated financial statements.

F-22
<PAGE>

DAVCO RESTAURANTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

As of December 27, 1997, DavCo Restaurants, Inc., a Delaware corporation
(the "Company"), operated 264 restaurants of which 230 are "Wendy's Old
Fashioned Hamburgers" Restaurants, making it the world's largest franchisee of
"Wendy's International, Inc. ("Wendy's"), and 34 Friendly's restaurants. The
company also manages under contract 14 other Friendly's restaurants. The Company
maintains exclusive Wendy's 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 139 Wendy's restaurants. The
Company also maintains exclusive rights to develop and operate Friendly's
restaurants in Maryland, northern Virginia, Delaware and Washington, D.C. where
it operates 34 Friendly's restaurants. The Company also operates 53 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"). The Company does not maintain exclusive franchise
territories in the Midwest or Southern Market.

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 December 27, 1997 and the results of its operations and
its cash flows for the periods ended December 27, 1997 and December 28, 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 27, 1997
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 1998 and 1997 periods contained 13 weeks.

2. EARNINGS PER COMMON SHARE

In February 1997, the Financial Accounting Standards Board Issued Statement
No. 128 (SFAS 128). "Earnings Per Share" which establishes new standards for
computing and presenting earnings per share. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. This statement requires presentation of basic and diluted earnings per
share.

F-23
<PAGE>

DAVCO RESTAURANTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

2. EARNINGS PER COMMON SHARE (CONTINUED)

The Company's adoption of this pronouncement does not impact earnings per
share for the 13 weeks ended December 28, 1996, as previously reported. The
Company's earnings per share according to SFAS 128 are follows (in 000's except
per share data):

<TABLE>
<CAPTION>
13 WEEKS ENDED
DECEMBER 27, 1997
---------------------- PER SHARE
INCOME SHARES AMOUNT
--------- ----------- -----------
<S> <C> <C> <C>
Basic EPS (Income available to common stockholders)............. $ 1,400 6,429 $ 0.22
Dilutive effect of options...................................... -- 245
Dilutive effect of warrants..................................... -- 441
--------- ----- -----
Diluted EPS (Income available to common stockholders plus
assumed conversions).......................................... $ 1,400 7,115 $ 0.20
--------- ----- -----
</TABLE>

<TABLE>
<CAPTION>
13 WEEKS ENDED
DECEMBER 28, 1996
---------------------- PER SHARE
INCOME SHARES AMOUNT
--------- ----------- -----------
<S> <C> <C> <C>
Basic EPS (Income available to common stockholders)............. $ 1,363 6,451 $ 0.21
Dilutive effect of options...................................... -- 55
Dilutive effect of warrants..................................... -- 441
--------- ----- -----
Diluted EPS (Income available to common stockholders plus
assumed conversions).......................................... $ 1,363 6,947 $ 0.20
--------- ----- -----
</TABLE>

Options to purchase 220,274 shares of common stock between $12.00 and $16.13
were outstanding during the 13 weeks ended December 28, 1996 were not included
in the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares during the quarter.
During the quarter ended December 27, 1997, no exercise prices were greater than
the average market price.

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 December 27, 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
$4,970,000.

F-24
<PAGE>

DAVCO RESTAURANTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

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 December 27, 1997, the Company purchased 158,807
shares of its common stock for $1,319,505. The Company is accounting for the
treasury stock at cost.

6. GOING PRIVATE TRANSACTION

DavCo Restaurants, Inc. 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 the Company's issued and
outstanding shares (other than shares held by DavCo Acquisition Holding, Inc.)
for $20 cash per share. The terms of the merger agreement require approval by a
majority of the Company's stockholders, including approval by a majority of the
stockholders unaffiliated with the investor group. In addition, the merger is
subject to certain conditions, including a limitation on the number of
dissenting shareholders, regulatory approvals and receipt of necessary
financing. The investor group has obtained a commitment from Global Alliance
Finance Company, L.L.C., a wholly-owned subsidiary of Deutsche Bank North
America, to provide up to $150 million of debt financing to complete the merger.

F-25
<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

<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
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
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
</TABLE>

i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
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
</TABLE>

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.

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.
<PAGE>
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.

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
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

2
<PAGE>
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.

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

3
<PAGE>
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 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 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

4
<PAGE>
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 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,

5
<PAGE>
encumbrances or restrictions of any kind. No Subsidiary has outstanding any
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 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

6
<PAGE>
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. 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 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

7
<PAGE>
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.

(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:

8
<PAGE>
(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 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 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

9
<PAGE>
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, 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 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:

10
<PAGE>
(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 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.

11
<PAGE>
ARTICLE V
ADDITIONAL AGREEMENTS

SECTION 5.1. MEETING OF STOCKHOLDERS. The Company will take all action
necessary in accordance with applicable law 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 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.

12
<PAGE>
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.

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 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

13
<PAGE>
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 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

14
<PAGE>
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.

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
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:

15
<PAGE>
(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 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

(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

16
<PAGE>
(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; 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

17
<PAGE>
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.

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 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

18
<PAGE>
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.

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

19
<PAGE>
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 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.

20
<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.

<TABLE>
<S> <C> <C>
DAVCO RESTAURANTS, INC.

By: /s/ DAVID J. NORMAN
-----------------------------------------
Name: David J. Norman
Title: Secretary

Attest:

By: /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:

By: /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:

By: /s/ HARVEY ROTHSTEIN
-----------------------------------------
Name: Harvey Rothstein
Title: Vice President
</TABLE>

21
<PAGE>
DISCLOSURE SCHEDULE

<TABLE>
<S> <C> <C>
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
</TABLE>

<PAGE>
Section 3.1(b)

SUBSIDIARIES

<TABLE>
<CAPTION>
NAME JURISDICTION CAPITALIZATION OWNERSHIP*
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>

Southern Hospitality....... Tennessee 100 shares Company
Corporation common stock
outstanding

MDF, Inc................... Delaware 100 shares Company
common stock
outstanding

FriendCo Restaurants,...... Maryland 100 shares Company
Inc. common stock
outstanding

Heron Realty............... Maryland 100 shares Company
Corporation ("Heron") common stock
outstanding

DavCo Oil Company.......... Maryland 100 shares Heron
common stock
outstanding
</TABLE>

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

* 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

STOCK OPTION SUMMARY BY INDIVIDUAL
Option Price: $16.125 $8.500 $9.875

<TABLE>
<CAPTION>
EXECUTIVES 1994 POOL 1996 POOL 1997 POOL TOTALS
- ----------------------------------------------------- ----------- ----------- ----------- ---------
<S> <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
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
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
DIRECTORS 1994 POOL 1996 POOL 1997 POOL TOTALS
- --------------------------------------------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
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>

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

* Footnote: The above does not include any options received as part of the
Companys' IPO. Those options are as follows:

<TABLE>
<S> <C>
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
</TABLE>
<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

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.

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

A-1
<PAGE>
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 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

A-2
<PAGE>
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 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.

A-3
<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.

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;
<PAGE>
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.

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;

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.

C-1
<PAGE>
(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 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

C-2
<PAGE>
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.

(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,

C-3
<PAGE>
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.

(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.

C-4
<PAGE>
SCHEDULE I

PURCHASES OF SHARES BY DAVCO
AND CERTAIN AFFILIATES
<TABLE>
<CAPTION>
NUMBER OF PRICE PAID
YEAR ENDED SEPTEMBER 28, 1996 SHARES PURCHASED PER SHARE
- ---------------------------------------------------------------- ----------------- -----------
<S> <C> <C>

Purchases by DavCo
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

Purchases by CVC
None

Purchases by Mr. Kirstien
None

Purchases by Mr. Rothstein
None

YEAR ENDED SEPTEMBER 27, 1997
- ----------------------------------------------------------------
<S> <C> <C>

Purchases by DavCo
December 11, 1996............................................. 25,000 $ 8 3/4

Purchases by CVC
None

Purchases by Mr. Kirstien
None

Purchases by Mr. Rothstein
None
</TABLE>
<PAGE>
PROXY--COMMON STOCK
DAVCO RESTAURANTS, INC.

(SOLICITED BY AND ON BEHALF OF THE BOARD OF DIRECTORS)
SPECIAL MEETING OF STOCKHOLDERS--MARCH 24, 1998

The undersigned hereby appoints David J. Norman and Charles C. McGuire, III,
jointly and severally, proxies, with power of substitution, to vote at the
Special Meeting of Stockholders (including any adjournments and postponements
thereof) of DAVCO RESTAURANTS, INC., to be held on March 24, 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 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 (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 (or ratable portion
thereof for fractional Shares) in cash, without interest, (for estimated
aggregate cash consideration of approximately $119.2 million) all as more fully
described in the Company's Proxy Statement dated February , 1998, receipt of
which is hereby acknowledged.

/ / 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.

<TABLE>
<S> <C>
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 your 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).
</TABLE>