<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
(Amendment No. 1)
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
DavCo Restaurants, Inc.
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(Name of Registrant as Specified in Its Charter)
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(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
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(2) Aggregate number of securities to which transaction applies:
5,957,165 shares of Common Stock
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(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
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(4) Proposed maximum aggregate value of transaction:
$119,143,300*
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(5) Total fee paid:
$23,829**
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/ / Fee paid previously with preliminary materials:
/ / 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:
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* 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 1/50th of 1% of the transaction value.
<PAGE>
DAVCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
January __, 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, LLC, a Delaware limited liability company ("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 February 20, 1998, at 10:00
a.m., local time, at the offices of the Company, located at 1657 Crofton
Boulevard, Crofton, Maryland 21114.
As explained in the enclosed Notice of Special Meeting of
Stockholders and Proxy Statement, the purpose of the Special Meeting is to
consider and vote upon a proposal to adopt the Restated Agreement and Plan
of Merger dated as of October 21, 1997 (the "Merger Agreement") among the
Company, DAC and DavCo Merger Sub Inc. ("DAC Sub"). Pursuant to the Merger
Agreement, DAC Sub will merge with and into the Company (the "Merger"), and
the Company will continue as the surviving corporation and a wholly-owned
subsidiary of DAC. As a stockholder, if the Merger is consummated, your
ownership interest in the Company will be converted automatically into the
right to receive $20.00 in cash, without interest, per share of common stock
of the Company you own, unless you exercise and perfect appraisal rights in
accordance with Delaware law. The treatment in the Merger of outstanding
stock options and warrants to purchase shares of common stock of the Company
is described in the accompanying Proxy Statement. Details of the
Merger Agreement and other important information appear in the attached Proxy
Statement. A copy of the Merger Agreement is attached as Annex A to the
Proxy Statement.
The Board of Directors has approved unanimously (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
<PAGE>
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
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 February 20, 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 February 20,
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,
LLC, a Delaware limited liability company ("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 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 Board of Directors has fixed the close of business on
January 16, 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 January 16, 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
<PAGE>
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.
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
January ___, 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.
<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 February 20, 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 February 20, 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 January __, 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, LLC, a Delaware limited liability company ("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
<PAGE>
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 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 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, 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."
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<PAGE>
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 January __, 1998.
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<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page Page
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<S> <C> <C> <C>
Summary............................................... 5 Certain Federal Income Tax Consequences................ 53
Introduction.......................................... 12 Appraisal Rights....................................... 54
Special Factors....................................... 15 Certain Information Concerning DAC, DAC Sub
Background of the Merger............................ 15 and Affiliates....................................... 57
Past Contacts with Wendy's.......................... 18 Business of the Company................................ 58
Fairness of the Merger; Recommendation of Selected Historical Financial Data of the Company...... 67
the Board of Directors; Position of DAC........... 23 Management's Discussion and Analysis of
Opinion of Financial Advisor........................ 29 Financial Condition and Results of Operations........ 68
Purpose of the Merger............................... 38 Certain Information Regarding the Directors and
Interests of Certain Persons in the Merger; Executive Officers of the Company and DAC............ 75
Conflicts of Interest............................. 39 Market Prices and Dividends on the Shares.............. 80
Certain Transactions in the Common Stock............... 80
Certain Effects of the Merger....................... 41 Security Ownership of the Company...................... 81
Plans for the Company After the Merger.............. 41 Incorporation of Certain Documents by Reference........ 83
Risk that the Merger Will Not Be Consummated........ 42 Additional Available Information....................... 84
Certain Risks in the Event of Bankruptcy............ 42 Independent Accountants................................ 84
Certain Litigation Challenging the Merger........... 43 Stockholder Proposals.................................. 85
Certain Projections................................. 44 Other Matters.......................................... 85
The Merger.......................................... 46 Index to Consolidated Financial Statements............. F-1
General............................................. 46
Effective Time of the Merger........................ 46 Annexes
Stockholder Adoption of the Merger Agreement........ 46 -------
Payment for Shares.................................. 47 Annex A - Amended and Restated Agreement
The Payment Fund.................................... 47 and Plan of Merger
Regulatory Matters.................................. 47 Annex B - Opinion of Equitable Securities
Conditions to Consummation of the Merger............ 47 Corporation dated November 6, 1997
Certain Covenants................................... 48 Annex C - Section 262 of the Delaware General
Termination......................................... 49 Corporation Law
Expenses............................................ 50
Indemnification of Directors and Officers........... 50 Schedules
Accounting Treatment of the Merger.................. 51 ---------
Financing of the Merger............................... 51 Schedule I - Purchases of Shares by DavCo
Debt Financing...................................... 51 and Certain Affiliates
Fees and Expenses................................... 53
</TABLE>
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<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 February 20, 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
January 16, 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 ____ holders of record. The
presence in person or by properly executed proxy of the holders of a majority
of the outstanding Shares entitled to vote is necessary to constitute a
quorum at the Special Meeting.
Vote Required to Approve the Merger Agreement
Under Delaware law, the affirmative vote of Stockholders entitled
to cast at least a majority of the votes that all Stockholders are entitled
to cast with respect to the Merger Agreement is required to adopt the Merger
Agreement. Pursuant to the Company's Restated Certificate of Incorporation
and the terms of the Merger Agreement, consummation of the Merger also
requires the affirmative vote of a majority of the outstanding Shares held by
Unaffiliated Stockholders. See "INTRODUCTION--Voting at the Special Meeting"
and "THE MERGER--Stockholder Adoption of Merger Agreement."
All Shares represented at the Special Meeting by properly executed
proxies received prior to or at the Special Meeting, and not revoked before
their use, will be voted in accordance with the instructions on
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<PAGE>
such proxies. If no instructions are given, proxies will be voted FOR adoption
of the Merger Agreement. A Stockholder who has given a proxy may revoke it at
any time before it is voted at the Special Meeting (or any postponement or
adjournment thereof) by filing with the Secretary of the Company a written
revocation bearing a later date than the proxy being revoked, or by submission
of a validly executed proxy bearing a later date than the proxy being revoked,
or by attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not in and of itself constitute revocation of a proxy).
The Merger
The Merger Agreement provides that, subject to the adoption of the
Merger Agreement by the Stockholders and the satisfaction or waiver of
certain other conditions, DAC Sub will merge with and into the Company and
the separate existence of DAC Sub will cease. The Company will be the
Surviving Corporation in the Merger and will continue as a wholly-owned
subsidiary of DAC. Each Share that is outstanding immediately prior to the
Effective Time (other than Shares held in the Company's treasury, by any
subsidiary of the Company, by DAC or by DAC Sub, which will be canceled
without payment, and other than Shares in respect of which appraisal rights
have been perfected properly under Delaware law) will be converted into the
right to receive $20.00 in cash, without interest. Upon consummation of the
Merger, Stockholders, other than DAC, will possess no further interest in, or
rights as Stockholders of, the Company, other than their right to receive
$20.00 per Share or to pursue dissenters' rights. For a more detailed
description of the terms of the Merger Agreement, see "THE MERGER."
Effective Time of the Merger
The Merger will become effective when the Certificate of Merger is
duly filed with the Secretary of State of the State of Delaware in accordance
with the relevant provisions of the Delaware General Corporation Law, as
amended (the "DGCL"), or at such later time as is specified in the
Certificate of Merger. The required filing is expected to be made promptly
after the adoption of the Merger Agreement by the Stockholders at the Special
Meeting and the satisfaction or waiver of the other conditions to
consummation of the Merger set forth in the Merger Agreement. See "THE
MERGER--Effective Time of the Merger," "--Conditions to Consummation of the
Merger" and "--Certain Covenants." See also "SPECIAL FACTORS--Risk that the
Merger Will Not Be Consummated."
Recommendation of the Board of Directors
The Board of Directors unanimously approved (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."
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<PAGE>
Background of the Merger; Fairness of the Merger
The Board of Directors' decision to approve, and to cause DavCo to
enter into, the Merger Agreement was based upon the Board of Directors'
belief that the Merger is fair to, and in the best interests of, all of the
Stockholders, including the Unaffiliated Stockholders. The principal reason
for the decision of the Board of Directors to approve the Merger is that the
Merger will enable Stockholders to realize in cash a premium over the prices
at which the Shares have traded historically. The Board of Directors
considered it to be a favorable factor that the affirmative vote of a
majority of the outstanding Shares held by Unaffiliated Stockholders is
required to adopt the Merger Agreement and in order to consummate the Merger.
In addition, Equitable Securities Corporation delivered its opinion to the
Board of Directors that, as of the date of its opinion, the consideration
proposed to be paid to the Unaffiliated Stockholders pursuant to the Merger
Agreement is fair to the Unaffiliated Stockholders from a financial point of
view. See "SPECIAL FACTORS Opinion of Financial Advisor." Factors not
considered favorable by the Board of Directors included the conflicts of
interest of certain of its members and management, certain conditions to
consummation of the Merger that make it possible that the Merger may not be
consummated, the absence of a recommendation from a special committee of
independent directors and the failure to retain an unaffiliated
representative to negotiate the terms of the Merger on behalf of the
Unaffiliated Stockholders. For a more detailed discussion of these and other
factors considered by the Board, see "SPECIAL FACTORS Fairness of the Merger;
Recommendation of the Board of Directors; Position of DAC." See "SPECIAL
FACTORS Background of the Merger" for a description of the events leading up
to the execution of the Merger Agreement.
Stockholders also should note that in reaching its conclusions, the
Board of Directors determined that it was unlikely that DavCo could be sold
in a transaction, or any transaction could be consummated, other than the
Merger or a similar transaction with the Affiliated Stockholders, in which
the Stockholders would have an opportunity to obtain a premium to market
price for the Shares, and that the only meaningful comparison was between the
$20.00 per Share payable in the Merger and the potential for market
appreciation in the Shares if DavCo remained public and continued with its
present business plan. See "SPECIAL FACTORS Fairness of the Merger;
Recommendation of the Board of Directors" and " Background of the Merger."
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, 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
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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 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 stock prior to
the Merger. Mr. Rothstein, Senior Executive Vice President and a director of
DavCo, is a Vice President and a director of DAC and is expected to own
(together with the Rothstein Investors) 16.5% of DAC's outstanding common
stock prior to the Merger. Mr. Knief is expected to own less than one
percent of DAC's outstanding common stock prior to the Merger. In addition
to Mr. Knief, one other of the nine directors, Charles E. Corpening, is an
employee of CVC, which has a direct financial interest in DAC and is expected
to own (together with the CVC Investors) 67% of DAC's outstanding common
stock prior to the Merger. Additionally, two directors, James D. Farley and
Harold O. Rosser II, are former employees of Citicorp, N.A., an affiliate of
CVC, or CVC, and another director, Barton J. Winokur, is a partner in the law
firm Dechert Price & Rhoads, which provides and has provided legal services
both to CVC and to DavCo and is acting as special outside counsel to DavCo in
connection with the Merger. See "SPECIAL FACTORS--Fairness of the Merger;
Recommendation of the Board of Directors; Position of DAC" and "--Background
of the Merger." 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
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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."
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
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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.
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 January
___, 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
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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."
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INTRODUCTION
This Proxy Statement is being furnished to the Stockholders in
connection with the solicitation by the Board of Directors of proxies from
the Stockholders for use at the Special Meeting to be held at DavCo's
principal office at 1657 Crofton Boulevard, Crofton, Maryland 21114, on
January 12, 1998, at 10:00 a.m., eastern time, and at any adjournments or
postponements thereof. This Proxy Statement, the attached Notice of Special
Meeting and the enclosed form of proxy are first being mailed to the
Stockholders on or about January ___, 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."
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Voting at the Special Meeting
The Board of Directors has fixed the close of business on January
16, 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 ______ holders of record, outstanding and
entitled to vote. Stockholders may cast one vote per Share, either in person
or by properly executed proxy, on each matter to be voted on at the Special
Meeting.
Under the provisions of the DGCL, the affirmative vote of the
Stockholders entitled to cast at least a majority of the votes that all
Stockholders are entitled to cast with respect to the Merger Agreement is
required to adopt the Merger Agreement. Pursuant to DavCo's Restated
Certificate of Incorporation and the terms of the Merger Agreement,
consummation of the Merger also requires the affirmative vote of a majority
of the outstanding Shares that are held by the Unaffiliated Stockholders.
The presence of a majority of the Shares entitled to vote, represented in
person or by proxy, is necessary to constitute a quorum at the Special
Meeting. As of the Record Date, the Affiliated Stockholders may be deemed to
have beneficially owned an aggregate of ______ Shares, constituting
approximately ___% of the Shares outstanding on such date. See "SPECIAL
FACTORS--Interests of Certain Persons in the Merger; Conflicts of
Interest" and "SECURITY OWNERSHIP OF THE COMPANY."
In the event that less than a majority of the outstanding Shares owned
by Unaffiliated Stockholders are voted for the Merger and there are
Unaffiliated Stockholders who did not deliver a proxy or otherwise vote at
the Special Meeting and whose shares, if voted in favor of the Merger, would
cause such requisite majority vote to be obtained, it is expected that the
Special Meeting will be adjourned and additional proxies from those
Unaffiliated Stockholders who have not previously delivered a proxy or
otherwise voted at the Special Meeting will be solicited until such time as a
definitive vote is obtained.
As of the Record Date, Unaffiliated Stockholders hold ______ Shares, the
affirmative vote of _______ of which Shares is required to adopt the Merger
Agreement. This special voting requirement has the effect of neutralizing
the ability of the Affiliated Stockholders 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
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STOCKHOLDERS THROUGH THEIR OWNERSHIP OF DAC) WILL CEASE IN EXCHANGE FOR THE
RIGHT TO RECEIVE A CASH PAYMENT OF $20.00 PER SHARE OR TO PURSUE APPRAISAL
RIGHTS. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND CONSIDER CAREFULLY
THE INFORMATION PRESENTED IN THIS PROXY STATEMENT.
Proxies
All Shares represented at the Special Meeting by properly executed
proxies received prior to or at the Special Meeting, and not revoked before
their use, will be voted in accordance with the instructions thereon. If no
instructions are given, properly executed proxies will be voted FOR adoption
of the Merger Agreement. If any other matters are properly presented to the
Special Meeting or any adjournments or postponements thereof, the persons
named in the enclosed form of proxy as acting thereunder will have discretion
to vote on such matters in accordance with their best judgment. The Company
does not know of any matters other than the adoption of the Merger
Agreement that will be presented at the Special Meeting.
A Stockholder who has given a proxy may revoke it at any time before it
is voted at the Special Meeting, or any postponements or adjournments
thereof, by filing with the Secretary of the Company, at the address of the
Company set forth on the first page of this Proxy Statement, a written
revocation bearing a later date than the proxy being revoked, or by
submission of a validly executed proxy bearing a later date than the proxy
being revoked, or by attending the Special Meeting, or any postponements or
adjournments thereof, and voting in person (although attendance at the
Special Meeting, or any postponements or adjournments thereof, will not in
and of itself constitute revocation of a proxy).
In the event that less than a majority of the outstanding Shares owned
by Unaffiliated Stockholders are voted for the Merger and there are
Unaffiliated Stockholders who did not deliver a proxy or otherwise vote at
the Special Meeting and whose shares, if voted in favor of the Merger, would
cause such requisite majority vote to be obtained, it is expected that the
Special Meeting will be adjourned and additional proxies from those
Unaffiliated Stockholders who have not previously delivered a proxy or
otherwise voted at the Special Meeting will be solicited until such time as a
definitive vote is obtained. Adjournment of the Special Meeting is expected
under such circumstances because the Affiliated Stockholders have indicated
to the Company that, in the event that less than a majority of the Shares
owned by Unaffiliated Stockholders are voted for the Merger and there are
Unaffiliated Stockholders who did not deliver a proxy or otherwise vote at
the Special Meeting and whose shares, if voted in favor of the Merger, would
cause such requisite majority vote to be obtained, they would vote for
adjournment of the Special Meeting. If the Special Meeting is postponed or
adjourned, a Stockholder who has given a proxy may revoke it any time before
it is voted at any postponement or adjournment of the Special Meeting in the
manner set forth above.
Proxies are being solicited by and on behalf of the Board of Directors.
The Company will bear the cost of the Special Meeting and the cost of
soliciting proxies therefor, including the cost of printing and mailing the
proxy material. In addition to the solicitation of proxies by mail, the
Company may utilize the services of some of its directors, officers and
regular employees (who will receive no compensation therefor in addition to
their regular remuneration) to solicit proxies personally or by telephone,
telegram or other form of wire or facsimile communication. The Company
intends to request brokers and other custodians, nominees and fiduciaries to
forward solicitation materials to the beneficial owners of Shares held of
record by such persons. The Company will reimburse such brokers and other
custodians, nominees and fiduciaries for their reasonable out-of-pocket
expenses incurred in connection therewith.
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In connection with the Merger, the Stockholders have the right to
exercise appraisal rights if they (i) do not vote for the adoption of the
Merger Agreement, (ii) deliver a written demand for appraisal to the Company
prior to the taking of a vote on the Merger Agreement at the Special Meeting,
or any postponements or adjournments thereof, and (iii) otherwise comply with
the requirements of Section 262 of the DGCL, a copy of which is included in
this Proxy Statement as Annex C. See "APPRAISAL RIGHTS" for a summary of the
rights of Stockholders to demand appraisal and a description of the procedure
required to be followed to exercise such rights.
SPECIAL FACTORS
Background of the Merger
On August 9, 1993, DavCo completed its initial public offering of
2,600,000 Shares at an initial price to the public of $12.00 per Share. The
Shares [^]traded between a high price of $18.50 per Share and a low price of
$6.69 per Share until the announcement of the September 5 Proposal (as
hereafter defined).
At various times after DavCo's initial public offering, the Board of
Directors discussed its concern over the prices at which the Shares were
trading in view of the Shares' initial public offering price, the performance
of the public markets generally and the Company's results of operations over
this time. The Board of Directors also took measures to improve the price at
which levels the Shares were trading. 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.
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 price range of the September 5 Proposal was based on a determination
by Messrs. Kirstien and Rothstein and CVC that the price range represented a
substantial premium over the Shares'
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existing market price and that, based on their discussions with investment
and commercial banks, the price range was reasonable in relation to DAC's
ability to obtain the financing necessary to complete the merger. The
September 5 Proposal was subject to certain conditions, including successful
negotiation of a definitive merger agreement, procurement of necessary
financing, regulatory approvals and approval of DavCo's Board of Directors.
The Company made a public announcement of the September 5 Proposal on the
same day.
Following the public announcement of the September 5 Proposal, DavCo
interviewed several investment banking firms to advise the Board of Directors
on the fairness, from a financial point of view, of the September 5 Proposal.
On September 10, 1997, the Company retained Equitable Securities Corporation
("Equitable") as financial advisor to the Board of Directors concerning the
September 5 Proposal. See " Opinion of Financial Advisor."
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 it would be appropriate for the Board to
consider formally the September 5 Proposal if it was modified to confirm the
offer price at $20 per Share. The Board ratified and approved at the
September 17, 1997 meeting the retention of Equitable as financial advisor to
the Board and directed Equitable to consider the Merger at a $20 per share
offer price. The Board also ratified and approved the retention of Dechert
Price & Rhoads as Special Counsel, and directed Special Counsel to begin
negotiation of the terms of a definitive merger agreement for the
transactions contemplated by the September 5 Proposal with counsel to Messrs.
Kirstien, Rothstein and CVC.
During the period from September 17, 1997 to October 1, 1997, Messrs.
Kirstien and Rothstein and representatives of CVC continued to pursue
arrangements for financing the Merger. During this time,
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Special Counsel also continued negotiations of the terms of the transaction
and a definitive merger agreement and Equitable continued its due diligence
investigations of DavCo.
On October 1, 1997, the Board held a special meeting at which Equitable
made a presentation on the procedures and financial analyses it proposed to
use in valuing the Shares and developing its opinion on the fairness of the
Merger. See "--Opinion of Financial Advisor." Equitable answered questions
and received input from the Board on its proposed procedures and
methodologies. Special Counsel reviewed with the Board the status of
negotiations on the terms of a definitive merger agreement. In the course of
the meeting, Messrs. Kirstien, Rothstein and Knief also updated the Board on
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 consents to the Merger and financing
from the Company's principal franchisor, Wendy's International, 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 previously requested by the Board (the September 5 Proposal, as so
modified, being referred to as the "Proposal"). At the meeting, Equitable
gave an oral presentation to the Board and its oral opinion, subsequently
confirmed in writing, that the cash consideration offered in the Proposal is
fair to the Unaffiliated Stockholders from a financial point of view. See
"--Opinion of Financial Advisor." Based upon the Equitable opinion and upon
consideration of the terms of the merger agreement, the Board voted
unanimously (with the 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
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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
Past Contracts with Wendy's
During the Company's two previous fiscal years, Messrs. Kirstien and
Rothstein and representatives of CVC have had communications with
representatives of Wendy's both in connection with the Company's operations
as a Wendy's franchisee (see "BUSINESS") and at certain times to discuss the
possibility of an acquisition of DavCo by Wendy's.
On August 23, 1996, representatives of DavCo, including Messrs. Kirstien,
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, and Larry N. Nelson, Vice
President and Assistant General Counsel 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
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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, Mr. Teter, Mr. Comfort,
Mr. Rothstein and representatives of J.P. Morgan had brief discussions in
order to schedule a meeting between Mr. Teter and Mr. Comfort on September
18, 1997. No terms of any potential transaction were discussed during these
telephone calls.
On September 12, 1997, Wendy's wrote the following letter to DavCo in
which it raised concerns about the September 5 Proposal:
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September 12, 1997
DavCo Restaurants, Inc.
Harvey Rothstein
Ron Kirstien
1657 Crofton Boulevard
Crofton, MD 21114
Re: DavCo
Gentlemen:
It is our understanding that a restructuring of DavCo is being
considered that would result in a substantial increase in the financial
obligations of DavCo. While we do not know the details of this proposed
transaction, Wendy's is preliminarily concerned with several aspects of such
a proposal. We would like to discuss with you the specifics of the
transaction in order to better understand the impact on our franchisee and
its Wendy's business.
As you know, Wendy's has various contractual rights which may be
affected by the proposal, including without limitation, various rights of
consent and first refusal. It is imperative that we have a clear
understanding of the proposed transaction or series of transactions so that
we can assess those rights. Wendy's expressly reserves all of its rights and
remedies under the Development Agreement and the Unit Franchise Agreements
and the various consents and modifications to those documents, including
without limitation, the Letter of Intent dated April 28, 1997.
Any transaction that substantially increases the obligations of the
company, especially so as to provide a dividend stream to a shareholder, is
of major concern to Wendy's. Wendy's is concerned that the proposed
transaction could render DavCo incapable of timely meeting its obligations to
Wendy's and other creditors as they become due and in the ordinary course of
business. These obligations include, without limitation, payment
obligations, development obligations, and operational and other performance
obligations. Any such plan to increase debt or divert the cash flow from the
business is in our view a short-term focus on the business which we believe
may be detrimental to the long-term success of the franchise. It should be
noted also that the unique involvement of a financial institution continues
to run contrary to Wendy's policies regarding personal liability and direct
ownership by individuals; to the extent security interests are taken by other
institutions or their affiliates, they should understand this policy and
Wendy's intent to enforce it.
Based on the publicly available information, it appears to us that the
proposed transaction is designed to enrich your largest shareholder at the
expense of your financial stability. In view of the fact that you are an
important franchisee, we are seriously concerned about the proposed
transaction.
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We look forward to receiving a detailed understanding of the transaction
so that we might work together in the best interest of DavCo.
Sincerely,
WENDY'S INTERNATIONAL, INC.
Larry N. Nelson
Vice President and
Assistant General Counsel
On September 18, 1997, Messrs. Comfort, Knief and Corpening met with Mr.
Teter and 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
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to other "rights and remedies." If you believe that our proposal would
violate any of these agreements or give rise to any rights or remedies, we
would again ask if you would point to the relevant provisions and explain the
applicability.
Very truly yours,
Ronald D. Kirstien
On November 5, 1997, Wendy's wrote the following letter to DavCo with
respect to the September 12, 1997 and the October 24, 1997 correspondence
between Wendy's and DavCo: November 5, 1997
DavCo Restaurants, Inc.
Harvey Rothstein
Ron Kirstien
1657 Crofton Boulevard
Crofton, MD 21114
Gentlemen:
I am in receipt (as of October 27, 1997) of Ron Kirstien's letter dated
October 24, 1997, requesting that Wendy's provide specifics as to the rights
which it asserts in the pending transaction whereby DavCo Restaurants, Inc.
("DavCo") would go private.
It is our understanding that the interest of Citicorp Venture Capital,
Ltd. ("CVC") will be transferred and at least 20% of DavCo will be owned by a
party other than CVC, which raises issues with respect to Wendy's rights.
However, until DavCo has provided Wendy's with copies of all relevant
documents (including the executed Merger Agreement with exhibits, the
specific terms of financing and completed proxy statement), a clear
understanding of the specific ownership of DavCo Acquisition Holding, Inc.
(pre and post-merger), and a clarification of how that entity purports to
acquire shares which are not held by the public, it is impossible for Wendy's
to properly assess all of its rights. Wendy's has made a request for
detailed information concerning the transaction in my letter of September
12, 1997 and to date has received only a draft proxy statement (with much of
the information material to Wendy's left blank) and none of the other
documents related to the transaction.
Be advised that Wendy's expressly reserves all of its rights under the
existing agreements (including, without limitation, any right it has to
review and comment on information, consent to any change in the franchisee of
the franchise structure, or to exercise any right of first refusal), until it
has a reasonable opportunity to examine all documents and understand the
transaction in its entirety. Upon receipt of the relevant documents and a
detailed understanding of the ownership of DavCo Acquisition Holding,
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Inc., and its acquisition of DavCo shares, we would be happy to respond to
your request and promptly address any rights Wendy's may have.
Sincerely,
WENDY'S INTERNATIONAL, INC.
Larry N. Nelson
Vice President and
Assistant General Counsel
On December 22, 1997, Wendy's wrote to each of DavCo and CVC advising
them that, in Wendy's opinion, the Merger transaction as proposed would
violate certain existing agreements between Wendy's, DavCo and CVC. In this
correspondence, Wendy's proposed reaching an agreement that would establish
the applicability of certain provisions of DavCo's existing agreements with
Wendy's to DAC.
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 and establish an agenda for a December
31, 1997 telephone conference among Messrs. Kirstien and Rothstein, as
representatives of DavCo and DAC, and representatives of Wendy's. On
December 31, 1997 Messrs. Kirstien, Rothstein, Norman, Teter, Reed and Nelson
discussed by telephone the terms of an agreement between Wendy's, DavCo and
the proponents of the Merger that would address the concerns raised by
Wendy's in its September 12, November 5 and December 22, 1997 letters and
provide for Wendy's consent to the Merger. 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 certain provisions of
DavCo's Development Agreement and Franchise Agreements with Wendy's and
comply with certain Wendy's policies, including with respect to future
acquisitions of Wendy's franchises, future operations of DavCo and future
transfers of equity interests in DAC. 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
"Page Number -- 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
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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 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.
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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 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.
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(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.
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
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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 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 "--
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<PAGE>
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.
DAC. DAC and the Affiliated Stockholders have not undertaken any
independent formal evaluation of the fairness of the Proposal to the
Unaffiliated Stockholders. Based, however, upon their consideration of, among
other things, (i) historical market prices for the Shares, including the
Shares' initial public offering price (and the fact that $20.00 per Share is
substantially higher than the market price per Share prior to the
announcement of the September 5 Proposal), (ii) the conclusions of the
Non-Participating Directors and the analysis of the Board described in the
foregoing discussion 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
-28-
<PAGE>
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 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 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
-29-
<PAGE>
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 evaluation of the results
of such analyses entirely mathematical, rather it involves necessarily
complex considerations of and judgments
-30-
<PAGE>
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>
<S> <C> <C> <C>
Category Range of Values Average Valu
-------- ---------------- -------------
QSR Revenues 0.6x to 3.3x 1.4x
EBITDA 6.6x to 10.7x 8.7x
EBIT 9.1x to 15.9x 13.0x
P/E TR12 14.5x to 31.5x 19.0x
P/E 1997 13.8x to 33.0x 18.2x
P/E 1998 12.6x to 26.5x 18.5x
Book Equity 1.1x to 4.7x 2.8x
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Franchisees -
Restricted Operators Revenues 0.6x to 1.8x 0.6x
EBITDA 6.2x to 13.2x 8.6x
EBIT 9.3x to 15.8x 12.6x
P/E TR12 17.4x to 20.3x 18.8x
P/E 1997 14.9x to 29.2x 15.7x
P/E 1998 12.3x to 23.3x 13.9x
Book Equity 0.6x to 3.5x 2.2x
Franchisees -
High Growth Consolidators Revenues 0.4x to 3.2x 1.7x
EBITDA 6.0x to 21.7x 12.7x
EBIT 10.2x to 26.7x 18.0x
P/E TR12 25.7x to 30.7x 28.2x
P/E 1997 8.0x to 23.9x 19.0x
P/E 1998 15.1x to 20.1x 17.6x
Book Equit 1.3x to 4.2x 3.6x
</TABLE>
Equitable compared the above-mentioned ranges and average multiples of
the Selected Companies to the Company's market multiples (based on the $18.06
per share closing market price as of October 16, 1997) on an actual basis.
Equitable calculated imputed valuation ranges of the Company by applying the
results of the Company to the average multiples derived from its analysis of
the Selected Companies.
The imputed values were then compared to the Company's average discount
over the trailing twelve month period. The averages were calculated based on
the multiples generated by dividing the Total Firm Value of each of the
Selected Companies by such company's net revenues, EBITDA and EBIT for the
latest four fiscal quarters as reported in publicly available information and
by dividing the closing market price per share on October 16, 1997 by EPS for
the latest four fiscal quarters as reported in publicly available information
("LTM P/E") and as projected for the 1997 and 1998 calendar years, as
represented by the mean estimate reported by publicly available sources. In
addition, Equitable analyzed the multiple of reported book equity, as
determined by multiplying the shares outstanding by the market closing price,
and dividing by the most recently reported book equity.
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>
<CAPTION>
<S> <C> <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
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<PAGE>
Selected Companies, discussing the operations of the Company with management
and reviewing other relevant data concerning the Company versus the Selected
Companies (including sales, relative size, profitability and growth
prospects) and the historic trading pattern of the Shares, Equitable
concluded that on a fully-distributed basis, the Shares of the Company would
most likely trade at a discount to the values implied by the average
multiples of the Selected Companies.
Analysis of Precedent Transactions for Selected Control Acquisitions in
the Restaurant Industry. Equitable analyzed the purchase prices and
multiples paid or proposed to be paid in selected merger and acquisition
transactions that have occurred since April 1994 in the restaurant industry
(the "Selected Restaurant Control Transactions"). This analysis was based on
the following publicly available information for Selected Restaurant Control
Transactions and included: Canteen Corp./Compass Group PLC; Ground Round
Restaurants Inc./Citicorp Venture Capital, Ltd.; Southern Hospitality/DavCo
Restaurants, Inc.; Westsphere Capital/Chase Manhattan Corp.; Denwest
Restaurant Corp./American Family Restaurants Inc.; TPI Enterprises
Inc./Shoney's Inc.; NPC International Inc./Investor Group; Volunteer Capital
Corp./Wendy's International, Inc.; Casa Bonita/CKE Restaurants, Inc.; Arby's
Inc./RTM Restaurant Group; Rally's Hamburgers Inc./Checker's Drive-In
Restaurants; Hardees Food Systems/CKE Restaurants; Krystal Company/Port Royal
Holdings Inc.; Perkins Family Restaurant LP/Restaurant Company; 30 Burger
King Restaurants/AmeriKing Inc.; El Chico Restaurants, Inc./Investor Group;
Sagebrush, Inc./WSMP, Inc.; Skyline Chili, Inc./Fleet Equity Partners; and
the Merger. Equitable selected transactions in which it believed that the
target company had operating characteristics and/or industry focus that
resembled those of the Company. Equitable calculated the Total Firm Value,
based on the purchase price, as a multiple of net sales, EBITDA and EBIT and
the shares outstanding multiplied by the applicable closing price ("Equity
Value") as a multiple of book equity and net income for each target company
for the four fiscal quarters immediately preceding the announcement. This
analysis indicated that the ranges of multiples derived from the Selected
Restaurant Control Transactions were (i) net sales: 0.3x to 1.8x; (ii)
EBITDA: 3.1x to 11.5x; (iii) EBIT: 4.3x to 15.4x; (iv) reported book equity:
1.0x to 6.0x; and (v) net income: 9.7x to 27.3x. The average multiples of
net sales, EBITDA, EBIT, reported book equity and net income (excluding the
maximum and minimum values) were 0.7x, 6.7x, 9.7x, 2.4x and 17.4x,
respectively. Considering the Offer Price, the Company's multiples of net
sales, EBITDA, EBIT, reported book equity and net income were 0.9x, 7.4x,
11.2x, 2.9x and 19.2x, respectively. Equitable then calculated the imputed
valuation ranges of the Company by applying the results for the preceding
four fiscal quarters and projected 1997 of the Company to the average
multiples derived from its analysis of the Selected Restaurant Control
Transactions. This analysis indicated a range of imputed values for the
Company of $14.00 to $16.50 per Share.
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.
<PAGE>
Analysis of Precedent Transactions for Selected Acquisitions of Remaining
Minority Interest. Equitable also analyzed transactions involving the purchase
of remaining minority interest transactions that have occurred since February
1994 (the "Selected Remaining Minority Interest Transactions"). The analysis of
Selected Remaining Minority Interest Transactions was generated from publicly
available information from the following transactions: Scripps Howard
Broadcasting Company/EW Scripps Company; FoxMeyer Corp./National Intergroup
Inc.; Castle & Cooke Homes Inc./Dole Food Company, Inc.; Pacific Telecom
Inc./PacifiCorp; Fleet Mortgage Group, Inc./Fleet Financial Group Inc.; Rust
International Inc./WMX Technologies Inc.; Club Med Inc./Club Mediterranee SA;
Riverwood International Corp./RIC Holdings Inc.; Bic Corp./Bic SA; NPC
International Inc./Investor Group; Arcus Inc./United Acquisition Company; Great
American Management and Investment Inc./Equity Holdings; Goulden Poultry Company
Inc./Gold Kist Inc.; Bankers Life Holding (Conseco)/Conseco Inc.; Crocker Realty
Trust Inc./Highwoods Properties Inc.; General Physics Corp./National Patent
Development Corporation; WCI Steel Inc./Renco Group Inc.; Leslie's
Poolmart/Investor Group; Central Tractor Farm & Country Inc./JW Childs Equity
Partners LP; Mafco Consolidated Group/Mafco Holdings Inc.; and the Merger (the
"Selected Remaining Minority Interest Acquisitions"). Equitable calculated the
Total Firm Value, based on the purchase price, as a multiple of net sales,
EBITDA and EBIT and the Equity Value as a multiple of reported book equity and
net income for each target company for the four fiscal quarters immediately
preceding the Initial Announcement. This analysis indicated that the ranges of
multiples derived from the Selected Remaining Minority Interest Acquisitions
were (i) net sales: 0.1x to 4.8x; (ii) EBITDA: 2.2x to 9.7x; (iii) EBIT: 3.1x to
15.4x; (iv) reported book equity: 0.9x to 5.0x; and (v) net income: 2.7x to
28.9x. The average multiples of net sales, EBITDA, EBIT, reported book equity
and net income (excluding the maximum and minimum values) were 1.2x, 6.4x, 9.5x,
2.3x, 15.5x, respectively. Considering the Offer Price, the Merger's multiples
of net sales, EBITDA, EBIT, reported book equity and net income were 0.9x, 7.4x,
11.2x, 2.9x and 19.2x, respectively. Equitable then calculated the imputed
valuation ranges of the Company's shares by applying the results for the
preceding four fiscal quarters and projected 1997 fiscal year end of the Company
to the average multiples derived from its analysis of the Selected Remaining
Minority Interest Acquisitions. This analysis indicated a range of values of the
Company of $16.00 to $18.75 per share.
Analysis of Premiums for Acquisitions of Remaining Minority Interest.
Equitable also presented an analysis of the premiums paid in connection with
Selected Remaining Minority Interest Transactions. Equitable calculated the
premium per share paid by the acquiror in each of the Selected Remaining
Minority Interest Transactions as a percentage of the stock price of the target
company one day, one week and four weeks prior to the original announcement of
the transaction. This analysis indicated that the 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
34
<PAGE>
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.
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
35
<PAGE>
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
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
36
<PAGE>
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, Equitable was paid
$225,000, plus expenses, in connection with this engagement. The fees payable to
Equitable were not contingent upon the consummation of the Merger. The Company
also has agreed to reimburse Equitable for all travel and other out-of-pocket
expenses incurred in connection with Equitable's engagement under the Engagement
Letter, including all reasonable fees and disbursements of Equitable's legal
counsel and other professional advisors. The Company has also agreed to
indemnify Equitable and its affiliates, the respective limited and general
partners, directors, officers, agents and employees of Equitable and its
affiliates and each other person, if any, controlling Equitable or any of its
affiliates to the full extent lawful from and against any losses, damages,
liabilities, expenses or claims (or actions in respect thereof, including
without limitation, shareholder and derivative actions and arbitration
proceedings) related to or otherwise arising out of the
37
<PAGE>
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.
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
38
<PAGE>
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 1,260,630 Shares, as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING SHARES
SHARES(1) (* DENOTES 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...................................................... 9,500 *
J. D. Farley........................................................ 51,416 *
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.
39
<PAGE>
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 shares of common
stock of DAC. These shares will not be converted in the Merger and will be
canceled without payment (other than the issuance of shares of DAC's common
stock to Messrs. Kirstien and Rothstein and the CVC Investors). Accordingly,
if the Merger is consummated, the directors of DavCo, as Stockholders, are
expected to receive aggregate net proceeds (net of the exercise price of
Shares held under options) of $11,248,334 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.............................................. 84,688
J. D. Farley................................................ 672,062
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 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
40
<PAGE>
will survive the Merger, and that the Certificate of Incorporation and Bylaws
of the Surviving Corporation will include indemnification provisions no less
comprehensive than those contained in the Surviving Corporation's Certificate
of Incorporation and Bylaws in effect as of the Effective Time. The Merger
Agreement also provides that all existing indemnification agreements between
the Company and its directors, officers, employees and agents will be
continued after the Effective Time. See " THE MERGER--Indemnification of
Directors and Officers."
Other. Messrs. Kirstien, Rothstein, Knief and Corpening and David F. Thomas
are currently the directors of DAC and DAC Sub. See "CERTAIN INFORMATION
CONCERNING DAC, DAC SUB AND AFFILIATES." The Merger Agreement provides that the
directors of DAC Sub will be the directors of the Surviving Corporation, and
that the officers of DavCo will be the officers of the Surviving Corporation
upon the consummation of the Merger. See "CERTAIN INFORMATION CONCERNING THE
DIRECTORS AND OFFICERS OF DAVCO." The compensation levels and employee benefit
plans and programs for directors, officers and employees of DavCo after the
Merger are expected to be substantially the same as those currently provided by
DavCo.
Certain Effects of the Merger
Upon consummation of the Merger, the Stockholders will be entitled to
receive a payment in cash of $20.00 per Share, without interest, or to exercise
appraisal rights under Section 262 of the DGCL if properly demanded prior to the
vote on the Merger at the Special Meeting. The Stockholders (other than the
Affiliated Stockholders through their ownership of DAC), as of the Effective
Time, will have no continuing ownership interest in the Company and will no
longer participate in the future earnings and potential growth of the Company.
The Affiliated Stockholders, as the holders of all of the outstanding 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.
41
<PAGE>
Except as described in this Proxy Statement, DAC has no present plans or
proposals that relate to or would result in an extraordinary corporate
transaction involving the Company's corporate structure, business or management,
such as a merger, reorganization, liquidation, relocation of any operations of
the Company or sale or transfer of a material amount of assets. However, DAC
will continue to evaluate the business and operations of the Surviving
Corporation following the Merger and may propose or develop new plans and
proposals which it considers to be in the best interests of the Surviving
Corporation and its stockholders.
RISK THAT THE MERGER WILL NOT BE CONSUMMATED
Consummation of the Merger is subject to several conditions, including
receipt of the required Stockholder approval, the absence of an injunction or
other order restraining consummation of the transactions contemplated by the
Merger Agreement, receipt by DAC and/or DAC Sub of the required financing to
complete the Merger and to pay related fees and expenses and holders of not more
than 5% of the outstanding Shares electing to demand appraisal rights. See "THE
MERGER--Conditions to Consummation of the Merger." Although, as described in
"FINANCING OF THE MERGER," DAC has obtained a commitment for the required
financing, this commitment contains several conditions. Therefore, even if the
requisite Stockholder approval is obtained, there can be no assurance that the
Merger will be consummated.
The Merger Agreement provides that DAC and DAC Sub are entitled to
reimbursement from DavCo for their expenses incurred in connection with the
Merger Agreement and consummation of the transactions contemplated thereby in
the event that the Merger Agreement is terminated by DavCo because of the
exercise by the Board of Directors of its right under the Merger Agreement to
accept another acquisition proposal consistent with its fiduciary obligations to
stockholders under Delaware law, or if the 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
42
<PAGE>
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 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
(the "Silberg 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
Silberg Complaint charges that the Board of Directors breached its fiduciary
duties in approving the Merger and that the $20 per Share price payable to
Stockholders upon consummation of the Merger is unfair. The Silberg Complaint
asserts that Wendy's has offered as
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<PAGE>
much as $25 per Share. The Silberg Complaint further alleges, among other
things, that: (i) the $20 per Share price payable to Stockholders upon
consummation of the Merger is not the result of arm's length negotiation;
(ii) the defendants are in possession of material, non-public information
concerning the Company's assets, businesses and future prospects, (iii) 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 (iv) 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 within which defendants may respond to the Silberg
Complaint has been extended and no judicial proceedings have occurred in the
case.
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. Neither the summary nor the projections give
effect to the Merger or the related financing.
<TABLE>
<CAPTION>
SUMMARY PROJECTED FINANCIAL
INFORMATION FISCAL YEARS ENDED SEPTEMBER 1998-2003
(IN THOUSANDS)
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.
44
<PAGE>
(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;QSC'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.;QDC"
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
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. None of DavCo, DAC, DAC Sub or any other person
makes any representation whatsoever with respect to, nor assumes any
responsibility for the accuracy of, any of the projections described above.
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.
45
<PAGE>
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.
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."
46
<PAGE>
PAYMENT FOR SHARES
After consummation of the Merger, Stockholders must surrender their stock
certificates or certificates representing unexercised options or warrants to
purchase Shares (collectively "Warrants") to a bank or trust company to be
designated by DAC Sub (the "Paying Agent") in order to receive $20.00 per Share
or, in the case of Warrants, an aggregate amount equal to $20.00 multiplied by
the aggregate number of Shares issuable upon the exercise in full of all
Warrants held by the holder thereof as of the Effective Time, less the aggregate
cash exercise price payable upon exercise of all such Warrants. No interest will
be paid or accrued on the cash payable upon the surrender of such certificates.
Detailed instructions with regard to the surrender of certificates, together
with a letter of transmittal, will be forwarded to holders of Shares by the
paying Agent promptly following the Effective Time. Stockholders should not
submit their certificates to the Company or the Paying Agent until they have
received such materials.
Payment for Shares will be made to former Stockholders as promptly as
practicable following receipt by the Paying Agent of such certificates and other
required documents. Until stock certificates and other required documents are
received by the paying Agent, each certificate formerly representing Shares or
Warrants shall represent solely (i) the right to receive $20.00 per Share in
cash, without interest (less, in the case of Warrants, the aggregate cash
exercise price payable upon exercise of such Warrants), or (ii) in the case of
Shareholders who have properly perfected appraisal rights with respect to their
Shares, the right to seek payment pursuant to Section 262 of the DGCL. See
"APPRAISAL RIGHTS."
THE PAYMENT FUND
At or before the Effective Time, DAC Sub (or the Company, as the Surviving
Corporation) will deposit with the Paying Agent, in trust for the benefit of all
Stockholders receiving cash for their Shares, an amount of cash sufficient to
satisfy the payment of $20.00 for each outstanding Share and Warrant owned by
such Stockholders. At any time at least 120 days after the Effective Time, the
Surviving Corporation may request the Paying Agent to return to it an amount
equal to $20.00 multiplied by the number of shares in respect of which appraisal
rights have been properly perfected.
REGULATORY MATTERS
Other than the requirements of the Exchange Act, premerger notification
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the filing of the Certificate of Merger pursuant to the DGCL, neither the
Company, DAC nor DAC Sub is aware of any federal or state regulatory approvals
or consents that must be obtained in connection with the Merger.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of DAC, DAC Sub and DavCo to effect the Merger
are subject to the satisfaction or waiver, at or prior to the Effective Time, of
each of the following conditions: (i) the
47
<PAGE>
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 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
48
<PAGE>
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.
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
49
<PAGE>
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 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
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<PAGE>
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.
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>
51
<PAGE>
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 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
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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>
<S> <C>
Financing Fees.................................................. $2,213,000
Investment Banking.............................................. $ 200,000
Legal and Accounting............................................ $1,700,000
Printing and Distribution....................................... $ 10,000
SEC Filings..................................................... $ 22,600
Miscellaneous................................................... $ 247,400
----------
TOTAL........................................................... $4,393,000
----------
----------
</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."
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.
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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.
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.
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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 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
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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 pproval 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.
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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.
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CERTAIN INFORMATION CONCERNING
DAC, DAC SUB AND AFFILIATES
DAC and its wholly-owned Subsidiary, DAC Sub, are newly formed Delaware
corporations organized at the direction of the Affiliated Stockholders for the
purpose of consummating the Merger. The address of DAC's and DAC Sub's principal
executive offices is 1657 Crofton Boulevard, Crofton, Maryland 21114 and their
telephone number is (410) 721-3770. It is not anticipated that, prior to the
Merger, DAC or DAC Sub will have any significant assets or liabilities (other
than those obtained or incurred in connection with the Merger, including the
Financing) or will engage in any activities other than those incident to their
formation and capitalization, the arrangement of the financing and the Merger.
All of the outstanding capital stock of DAC Sub is owned by DAC. All of the
outstanding capital stock of DAC is expected to be owned by the Affiliated
Stockholders. The Affiliated Stockholders are comprised of the Kirstien
Investors, the Rothstein Investors and the CVC Investors.
Immediately prior to the Merger, DAC's outstanding common stock is expect to
be owned substantially as follows:
PERCENT OF
OUTSTANDING
HOLDERS COMMON STOCK
- -------------------------------- --------------
CVC Investors................... 67.0%
Kirstien Investors.............. 16.5
Rothstein Investors............. 16.5
Each stockholder of DAC will enter into an agreement with DAC pursuant to
which the shares of DAC's common stock to be acquired by such investor will
be issued. It is contemplated that these agreements will contain certain
restrictions on the transfer or disposition of such shares customary in
transactions of this type, including provisions for the repurchase under
certain circumstances, of the shares held by the investor if such
individual's employment with the Company is terminated or if he dies or
becomes disabled or retired.
Ronald D. Kirstien presently serves as President and a director of both DAC
and DAC Sub. Harvey Rothstein presently serves as Vice President, Secretary and
a director of such companies. Messrs. Knief, Corpening and Thomas also serve as
directors of DAC and DAC Sub. The name, citizenship, business address, present
principal occupation and five-year employment history of each of the foregoing
directors and executive officers of DAC and DAC Sub are set forth in "CERTAIN
INFORMATION REGARDING THE DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY."
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BUSINESS OF THE COMPANY
GENERAL
As of September 27, 1997, the Company operated 229 "Wendy's Old Fashioned
Hamburgers" restaurants, making it the world's largest franchisee of Wendy's.
The Company maintains exclusive franchise territories in metropolitan Baltimore
and Washington, D.C., the eastern shore of Maryland and portions of northern
Virginia (collectively, the "Mid-Atlantic"), where it operates 138 restaurants
as of September 27, 1997. In fiscal 1997, the Company opened five new
Mid-Atlantic restaurants and closed two existing Mid-Atlantic restaurants. The
Mid-Atlantic restaurants had an average sales of $1,121,000 for the fiscal year
ended September 27, 1997. The average restaurant operating profit margin for the
Mid-Atlantic restaurants was $236,000 for fiscal 1997.
As of September 27, 1997, the Company also operated 53 Wendy's restaurants
in metropolitan St. Louis and central Illinois (the "Midwest"). The Company does
not maintain exclusive franchise territories in the Midwest. In fiscal 1997, the
Company opened no new Midwest restaurants. Average sales for the Midwest
restaurants were $614,000 for the fiscal year ended September 27, 1997. The
average restaurant operating profit margin for the Midwest restaurants was
$48,000 for fiscal 1997.
Effective September 24, 1994, the Company acquired 34 restaurants in the
metropolitan Nashville, Tennessee area (the "Southern Market") through the
acquisition of all of the outstanding common stock of Southern Hospitality
Corporation ("Southern Hospitality"). The consideration paid to the stockholders
of Southern Hospitality was approximately $14,225,000. The Company also retired
pre-existing debt and satisfied certain other obligations of Southern
Hospitality in the amount of approximately $7,000,000. The acquisition was
financed through an $18,250,000 loan from First National Bank of Maryland and
from working capital of the Company. The transaction was accounted for as a
purchase for financial reporting purposes. During fiscal years 1995 and 1996,
the Company opened four additional restaurants in Tennessee. Average sales for
the Southern restaurants for the fiscal year ended September 27, 1997, were
$959,000 and the average restaurant operating profit margin was $174,000.
RECENT DEVELOPMENTS
On July 14, 1997, the Company acquired 34 Franchised Friendly's Restaurants
from Friendly Ice Cream Company of Wilbraham, Massachusetts ("F.I.C.C.") along
with an exclusive development territory consisting of Delaware, Maryland,
Washington, D.C. and Northern Virginia for consideration of approximately $8.5
million and the agreement to develop an additional 74 Friendly's Restaurants in
this exclusive territory by the end of calendar 2003. In addition, the Company
manages 14 Friendly's Restaurants for F.I.C.C. in this exclusive territory, with
an option to acquire these managed restaurants under certain conditions.
On September 24, 1997, the Company entered into an agreement to sell the
operations of 46 Wendy's restaurants in its Midwestern region to Western &
Southern Food Service, L.L.C. ("W&S") and to sublease the real estate and
improvements held by the Company under lease for these restaurants for
consideration of approximately $4.75 million. The 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
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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 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
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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.
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.
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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.
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
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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.
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.
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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. 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.
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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, owned the building and held long-term land
leases for 57 restaurants, and held leases covering land and building for 149
restaurants. The Company's land and building leases are most commonly written
for initial term of 20 years, with one or more five year renewal options.
Certain leases require the payment of additional rent equal to a percentage
(usually between 2% and 7%) of annual sales in excess of specified amounts.
The Company leases approximately 30,000 square feet of office space in a
building in Crofton, Maryland, which it uses as a headquarters and operations
center. The Company also leases office space in Nashville, Tennessee and St.
Louis, Missouri for the local operations of Southern Hospitality, and MDF, Inc.
respectively.
The following lists the locations of the restaurants operated by the Company
(by market) as of September 27, 1997:
LOCATION NO.
----------------------------------------------------------------- ---
Mid-Atlantic Market:
Maryland....................................................... 90
Virginia....................................................... 37
District of Columbia........................................... 7
---
138
Midwest Market:
Illinois....................................................... 27
Missouri....................................................... 29
---
53
Southern Market:
Tennessee...................................................... 38
---
TOTAL ALL MARKETS.............................................. 229
---
---
LEGAL PROCEEDINGS
From time to time, the Company is a party to routine litigation incidental
to its business. The Company maintains commercial, general liability, workers'
compensation and directors and officers insurance policies which cover most of
the actions brought against the Company.
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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 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 of 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
(the "Silberg 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. 16057. The Silberg
Complaint charges that the Board of Directors breached its fiduciary duties in
approving the Merger and that the $20 per Share price payable to Stockholders
upon consummation of the Merger is unfair. The Silberg Complaint asserts that
Wendy's has offered as much as $25 per Share. the Silberg Complaint further
alleges, among other things, that: (i) the $20 per Share price payable to
Stockholders upon consummation of the Merge is not the result of arm's length
negotiation; (ii) the defendants are in possession of material, non-public
information concerning the company's assets, businesses and future prospects,
(iii) the defendants have not considered
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unspecified other possible purchases of and offers for the assets or stock of
the Company but have unfairly favored the Proposal, and (iv) 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 within which defendants may respond to the Silberg Complaint has
been extended and no judicial proceedings have occurred in the case.
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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 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
-------------------------------------------------------------
PREDECESSOR
AND COMPANY
COMPANY COMPANY COMPANY COMPANY COMBINED
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 24, SEPT. 25,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -------------
OPERATIONS (in 000's)(1):
Restaurant sales............................. $ 299,096 $ 206,903 $ 208,671 $ 163,355 $ 152,702
Operating income............................. 15,130 8,071(3) 17,290 14,558 6,525
Income (loss) before
extraordinary item......................... 6,344 2,391(3) 8,415 7,034 (1,813)
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
Net income (loss)............................ 6,344 2,391(3) 8,415 7,034 (4,197)
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
Ratio of earnings to fixed
charges(2)................................. 2.56 1.60 2.69 3.09 1.12
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
PER SHARE DATA:
Earnings per Share
assuming full dilution..................... $ 0.89 $ 0.34(3) $ 1.18 $ 0.98 --
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
<CAPTION>
AS OF
-------------------------------------------------------------
PREDECESSOR
AND
COMPANY
COMPANY COMPANY COMPANY COMPANY PREDECESSOR
---------- ---------- ---------- ---------- -------------
SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 24, SEPT. 25,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION(1)
(in 000's except per Share amounts)
Property and equipment, net................ $ 58,074 $ 49,521 $ 41,661 $ 33,521 $ 12,321
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
Leased properties, net..................... 34,355 37,918 43,828 44,300 42,734
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
Franchise rights, net...................... 5,015 3,551 4,095 4,154 3,025
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
Total assets............................... 126,434 117,558 115,700 113,428 82,400
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
Long-term debt, net of current portion
and discount............................. 17,487 11,699 14,778 17,928(4) 1,734
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
Capital lease obligations, net
of current portion....................... 25,374 28,404 31,083 32,838 30,722
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
Stockholders' equity....................... 51,634 45,526 44,219 35,804 28,770
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
Book value per Share assuming
full dilution............................ 7.28 6.46 6.18 4.97 3.98
---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- -------------
</TABLE>
- ------------------------
(1) On September 24, 1994, the Company acquired Southern Hospitality for
approximately $17.5 million cash (net of cash acquired) and the assumption
of certain liabilities. The acquisition was accounted for as a purchase.
(2) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and extraordinary items, plus
fixed charges. Fixed charges include interest expenses on all indebtedness
and capital lease obligations and the Company's interest factor for
operating leases.
(3) Income for the fiscal year ended September 28, 1996 includes a pre-tax
charge of $5.5 million related to SFAS No. 121 (Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of).
(4) Increase in long-term debt relates to financing obtained in conjunction with
the acquisition of Southern Hospitality.
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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 FISCAL YEAR ENDED
-------------------------------------
SEPT. 27, SEPT. 28, SEPT. 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Statement of Operations Data:
Restaurant sales................................................................... 100.0% 100.0% 100.0%
Cost of restaurant sales........................................................... 60.9 61.0 60.0
Restaurant operating expenses...................................................... 20.8 20.5 19.8
----- ----- -----
Restaurant operating profit........................................................ 18.3 18.5 20.2
Franchise royalties................................................................ 4.0 4.0 4.0
General and administrative......................................................... 3.8 3.6 3.8
Depreciation and amortization...................................................... 3.9 4.3 4.1
Loss on write-down of impaired
</TABLE>
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<TABLE>
<S> <C>
long-lived assets................................................................ -- 2.7 --
Operating income................................................................... 6.6% 3.9% 8.3%
----- ----- -----
----- ----- -----
</TABLE>
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The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the related notes thereto appearing
elsewhere in this proxy statement.
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 A "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
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.
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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 under performing 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 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
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by the severe weather experienced during 1996 and the Federal Government
shutdown. There was a 3.9% decrease in same store sales for the fiscal year
1996 compared to fiscal year 1995. Same store sales for fiscal year 1996 for
the Mid-Atlantic market decreased by 3.7%, 4.0% for the Midwest market, and
4.3% for the Southern market. To counteract this trend, management identified
and introduced new strategies for building sales. As these initiatives were
combined with the Company's other strategies, same store sales began
improving during the later part of fiscal 1996. Same store sales for the
fourth quarter fiscal 1996 increased 3.2% from the fourth quarter fiscal 1995.
The average sales per Company restaurant decreased to $933,300 for the 52
weeks ended September 28, 1996 from $984,800 for the 53 weeks ended September
30, 1995. The weighted average number of restaurants open during the year was
221.7 for 1996 and 211.9 for 1995. The weighted average number of Mid-Atlantic
restaurants open was 128.5 for 1996 and 122.5 for 1995, and average sales per
restaurant in the Mid-Atlantic region decreased to $1,073,000 from $1,131,000.
The weighted average number of Midwest restaurants open was 55.3 for 1996 and
54.3 for 1995, and average sales per restaurant decreased to $615,700 from
$643,800. The weighted average number of Southern restaurants open for 1996 was
37.9 compared to 35.1 for 1995, and average sales per restaurant for 1996 were
$922,700 compared to $1,001,900 for 1995. Average guest count per Company
restaurant decreased to 303,900 in 1996 from 330,300 in 1995. The overall
decrease in average sales and average guest count per Company restaurant for the
1996 period compared to the 1995 period can be attributed to the additional week
in the 1995 period and the above mentioned reasons for decreased revenue.
Average guest check increased to $3.07 for fiscal 1996 from $2.98 for fiscal
1995. This increase was primarily the result of the $0.99 Chicken Nuggets
addition, which is a value added menu item.
COST AND EXPENSES. Cost of restaurant sales increased to $126.3 million in
1996 from $125.2 million in 1995. As a percent of sales, cost of restaurant
sales increased to 61.0% in 1996 from 60.0% in 1995. Cost of restaurant sales as
a percent of sales for the Mid-Atlantic restaurants increased to 59.1% in 1996
from 58.4% in 1995. Comparing the components of cost of restaurant sales for the
Mid-Atlantic restaurants, the cost of food and supplies increased to 33.2% of
sales in 1996 from 32.7% of sales in 1995. Payroll and benefits expense
increased to 25.9% in 1996 from 25.7% in 1995. Cost of restaurant sales as a
percent of sales in the Midwest restaurants increased to 67.6% for the 1996
period from 66.9% for the 1995 period. Comparing the components of cost of
restaurant sales for the Midwest restaurants, the cost of food and supplies
increased to 35.8% of sales in 1996 from 35.5% of sales in 1995. Payroll and
benefits expense increased to 31.8% of sales in 1996 from 31.4% of sales in
1995. The Southern restaurants' cost of sales for fiscal 1996 were 62.5%
compared to 59.5% in 1995. Comparing the components of cost of restaurant sales
for the Southern restaurants, the cost of food and supplies increased to 33.3%
for the 1996 period from 31.6% in the 1995 period. Payroll and benefits expenses
increased to 29.3% for the 1996 period from 27.9% in the 1995 period due to the
very low unemployment rate in the Southern market. The overall increase in the
cost of restaurant sales can be attributed to increased labor cost, increased
food cost, primarily related to product mix change, and the cost leveraging
effect of lower same store sales for fiscal year 1996.
Restaurant operating expenses increased to $42.4 million in 1996 from $41.4
million in 1995. As a percent of sales, this represents a increase to 20.5% in
1996 from 19.8% in 1995. Restaurant operating expenses in the Mid-Atlantic
restaurants remained consistent at 19.5% of sales in 1996 and in 1995.
Restaurant operating expenses in the Midwest restaurants increased to 25.0% of
sales in 1996 from 22.9% of sales in 1995. Restaurant operating expenses in the
Southern restaurants increased to 19.9% of sales for 1996 from 18.3% of sales in
1995. The increase in restaurant operating expenses is related to the cost
leveraging effect of the additional week in the fiscal 1995 period and the
additional expenses in the 1996
73
<PAGE>
period related to the severe weather, such as increased utilities, snow
removal and roof repairs. The impact as a percentage of sales was less in the
Mid-Atlantic restaurants due to the larger sales base.
General and administrative expenses decreased to $7.4 million in fiscal year
1996 from $7.9 million in fiscal year 1995, representing as a percent of sales,
3.6% for 1996 and 3.8% for 1995. This decrease was due to the implementation of
curbs on administrative costs and the impact of reduced expenses directly
related to sales and profit, such as bonuses.
Depreciation and amortization expense increased to $8.9 million in 1996 from
$8.5 million in 1995, representing an increase, as a percent of sales, to 4.3%
in 1996 from 4.1% in 1995. This increase was due to lower sales in the 1996
period and incurrence of additional depreciation expense on capital expenditures
for new store openings and existing store improvements.
The implementation of SFAS No. 121 (Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of) resulted in a pre-tax
charge of $5,513,000 during the 1996 period.
NON-OPERATING CHARGES. Interest expense decreased to $5.0 million in 1996
from $5.8 million in 1995. The decrease was due to a decline in interest rates,
additional capitalization of interest relating to construction in progress and
the reduction in the principal amount of the Company's long term debt. Interest
income decreased $169,000 between periods due to a reduction in overnight
investments. Other income decreased slightly between periods.
The provision for income taxes decreased to $1.8 million for fiscal 1996
from $4.5 million for fiscal 1995. The Company's effective tax rate for fiscal
1996 was 42.6% and 34.6% for fiscal 1995. The increase in the effective tax rate
was due to the reevaluation of the Company's deferred tax liability during the
1995 period and the impact of changes in certain states' tax rates.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUES. Company restaurant sales increased to $208.7 million in 1995 from
$163.4 million in 1994, an increase of 27.7%. This increase was mainly due to
the acquisition of Southern Hospitality which contributed approximately $35.2
million of total restaurant sales, and the addition in 1995 of nine new
restaurants. Part of the increase in sales can also be attributed to an
additional week included in the fiscal 1995 period as a result of the Company's
52/53 week reporting basis. Same store sales decreased by 0.8% for the fiscal
year 1995 compared to fiscal year 1994. Same store sales for fiscal year 1995
increased for the Southern market by 2.6% and for the Midwest market by 1.2%,
and decreased for the Mid-Atlantic market by 2.2%.
The average sales per Company restaurant increased to $984,800 in 1995 from
$971,600 in 1994, a 1.4% increase due to the acquisition of Southern Hospitality
in September 1994 and improvements in Midwest average sales offset by a decrease
in Mid-Atlantic sales. The weighted average number of restaurants open during
the year was 211.9 for 1995 and 168.1 for 1994. The weighted average number of
Mid-Atlantic restaurants open was 122.5 for 1995 and 114.1 for 1994, and average
sales per restaurant in the Mid-Atlantic region decreased to $1,131,000 in 1995
from $1,138,000 in 1994, a 0.6% decrease. The weighted average number of Midwest
restaurants open was 54.3 for 1995 and 54.0 for 1994, and average restaurant
sales increased to $643,800 in 1995 from $620,600 in 1994, a 3.7% increase. The
Southern restaurants which were acquired on September 24, 1994 had 35.1 weighted
average number of restaurants open for 1995 and average restaurant sales of
$1,001,900. Average guest count per Company restaurant
74
<PAGE>
increased to 330,300 in 1995 from 324,900 in 1994. Average guest check
decreased to $2.98 for fiscal 1995 from $2.99 for fiscal 1994.
COST AND EXPENSES. Cost of restaurant sales increased to $125.2 million in
1995 from $96.9 million in 1994. As a percent of sales, cost of restaurant sales
increased to 60.0% in 1995 from 59.3% in 1994. Cost of restaurant sales as a
percent of sales for the Mid-Atlantic restaurants increased to 58.4% in 1995
from 57.7% in 1994. Comparing the components of cost of restaurant sales for the
Mid-Atlantic restaurants, the cost of food and supplies decreased slightly to
32.7% of sales in 1995 from 32.8% of sales in 1994. Payroll and benefits expense
increased to 25.7% of sales in 1995 from 25.0% of sales in 1994. Cost of
restaurant sales as a percent of sales in the Midwest restaurants increased to
66.9% for the 1995 period from 65.4% for the 1994 period. Comparing the
components of cost of restaurant sales for the Midwest restaurants, the cost of
food and supplies increased to 35.5% of sales in 1995 from 35.2% of sales in
1994. Payroll and benefits expense increased to 31.4% of sales in 1995 from
30.2% of sales in 1994. The Southern restaurants' cost of sales for fiscal 1995
was 59.5% of revenue which consisted of food and supplies of 31.6% and payroll
and benefit expense of 27.9% of revenue. The overall increase in the cost of
restaurant sales can be attributed to increased labor cost offset by overall
favorable food costs, primarily beef and chicken, and the cost leveraging effect
of slightly lower same store sales for fiscal year 1995.
Restaurant operating expenses increased to $41.4 million in 1995 from $32.8
million in 1994, primarily due to the inclusion of the Southern restaurants in
1995. As a percent of sales, this represents a decrease to 19.8% in 1995 from
20.1% in 1994. Restaurant operating expenses in the Mid-Atlantic restaurants
increased to 19.5% of sales in 1995 from 19.2% of sales in 1994. Restaurant
operating expenses in the Midwest restaurants decreased to 22.9% of sales in
1995 from 23.5% of sales in 1994. Restaurant operating expenses in the Southern
restaurants were 18.3% of sales for the year ended September 30, 1995. The lower
restaurant operating expense as a percentage of sales in the Southern region
were primarily due to lower workers' compensation and general liability
expenses.
General and administrative expenses increased to $7.9 million in fiscal year
1995 from $6.5 million in fiscal year 1994, primarily due to the inclusion of
the Southern restaurants in 1995. General and administrative expenses decreased
as a percent of sales to 3.8% for 1995 from 4.0% for 1994. This slight decrease
in percent of sales was due primarily to the leveraging effect of the additional
week included in the 1995 fiscal year.
Depreciation and amortization expenses increased to $8.5 million in 1995
from $6.1 million in 1994, representing an increase, as a percent of sales, to
4.1% in 1995 from 3.7% in 1994. This increase was due to additional amortization
expenses related to the goodwill and other assets which arose from the
acquisition of Southern Hospitality, and additional depreciation expense
incurred on capital expenditures for new store openings and existing store
improvements.
NON-OPERATING CHARGES. Interest expense increased to $5.8 million in 1995
from $3.8 million in 1994. The increase was due to the additional interest
expense related to the borrowing of approximately $18.3 million secured on
September 24, 1994, to fund the acquisition of Southern Hospitality, and the
inclusion of interest expense on capital leases for the Southern restaurants.
Interest income decreased slightly between periods. Other income increased $0.9
million mainly due to the disposition of assets.
The provision for income taxes increased to $4.5 million for fiscal 1995
from $4.2 million for fiscal 1994. The Company's effective tax rate for fiscal
1995 was 34.6% and 37.6% for fiscal 1994. This decrease can be attributed to a
reevaluation of the Company's deferred tax liability requirements.
75
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its business activities primarily from
cash generated from operating activities, long-term debt, "build-to-suit"
leases, ground leases, and sale-leasebacks. The Company has reviewed its policy
of leasing all of its new restaurants and has determined that it may be in the
Company's best interest to own certain properties. Accordingly, during 1997 and
1996, the Company purchased the land and/or buildings for certain of its new
restaurants.
Cash flow provided by operating activities was $14.3 million for the 39
weeks ended June 28, 1997, $16.7 million in 1996 and $13.9 million in 1995. Net
cash used in investing activities was $8.5 million for the fiscal 1997 period,
$14.0 million in 1996, and $11.7 million in 1995. Cash used in investing
activities typically represents capital expenditures for the building of new
restaurants. These expenditures also include franchise fees, deferred
pre-opening costs and leasehold improvements on existing restaurants.
Financing activities during the 39 weeks ended June 28, 1997 used net cash
of $6.8 million, which reflected short-term borrowings offset by capital lease
and debt repayments. Financing activities in fiscal 1996 used net cash of $1.1
million, which related to debt and capital lease repayments offset by short-term
borrowings. Financing activities in fiscal 1995 used net cash of 4.9 million,
which related to debt and capital lease repayments.
The Company opened 5 new restaurants and closed 2 restaurants in the
Mid-Atlantic market and 3 in the Mid-West market during the 39 weeks ended June
28, 1997.
The Company anticipates that its future capital requirements will be
primarily for the development of new restaurants, upgrading of existing
restaurants and possible acquisitions. On July 15, 1997 the Company signed an
agreement to combine the revolving line of credit for $13 million and the $5
million credit facility to form an $18 million revolving credit facility. Also,
on July 15, 1997, the Company's wholly own subsidiary FriendCo Restaurants, Inc.
signed a $10 million term loan facility which was mainly used to fund the
purchase price and start up cost for the Friendly's transaction which was
disclosed on Form 8-K filed on July 25, 1997. Management anticipates that cash
provided by operating activities, cash on hand, the revolving line of credit
facility of $18 million, and the term loans will enable the Company to meet its
cash requirements through the remainder of fiscal 1997. The Company may take
advantage of opportunities to finance some of its new restaurant development
with more permanent debt or sale/leaseback financing, if such financing is
available at attractive rates and terms.
INFLATION
Certain of the Company's operating costs are subject to inflationary
pressures, of which the most significant are food and labor costs. As of
September 27, 1997, approximately 43% of the Company's employees were paid wages
equal to or based on the federal minimum hourly wage rate. Recent changes in the
federal minimum hourly wage rate will serve to increase labor costs in fiscal
year 1998 and beyond. Economic growth that would reduce unemployment or make
more jobs available in higher paying industries, would directly affect the
Company's labor costs.
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<PAGE>
CERTAIN INFORMATION REGARDING THE DIRECTORS
AND EXECUTIVE OFFICERS OF THE COMPANY 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
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
YEARS IN
PRESENT POSITION WITH PRESENT
NAME AGE THE COMPANY OR DAC POSITION +
- --------------------------------------------- ------------- --------------------------------------------- ---------------
<S> <C> <C> <C>
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
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.
78
<PAGE>
<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.
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.
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AND OTHER INFORMATION
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>
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.
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.
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AND OTHER INFORMATION
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>
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
Furnishings International Inc., a manufacturer of residential furniture
and decorative home furnishings fabrics.
</TABLE>
81
<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 January , 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
82
<PAGE>
controlling the Company or (iv) any director or executive officer of the
persons ultimately in control of the Company, DAC or DAC Sub.
SECURITY OWNERSHIP OF THE COMPANY
The table below sets forth certain information regarding beneficial
ownership of the Shares as of September 27, 1997, by each person or entity known
to the Company who owns of record or beneficially five percent or more of the
Shares, by each named executive officer and director and all officers and
directors as a group. Unless otherwise indicated, the business address of each
person or entity listed below is 399 Park Avenue, New York, New York 10043.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
NUMBER OF SHARES OF COMMON STOCK
NAME COMMON STOCK (1) (*DENOTES LESS THAN 1%)
- ------------------------------------------------------------- ------------------- ------------------------
<S> <C> <C> <C>
Citicorp Venture Capital, Ltd. (2)........................... 3,133,049 40.60%
Ronald D. Kirstien (3)....................................... 595,769 7.72
Harvey Rothstein (3)(4)...................................... 449,274 5.82
James D. Farley.............................................. 51,416 *
Byron L. Knief (5)........................................... 45,742 *
Harold O. Rosser (6)......................................... 71,329 0.94
Gino Marchetti (7)........................................... 13,600 *
Barton J. Winokur (8)........................................ 24,000 *
Edward H. Chambers (9)....................................... 9,500 *
Charles E. Corpening (10).................................... -- *
Joseph F. Cunnane, III (3)................................... 12,600 *
Richard H. Borchers (3)...................................... 11,900 *
David J. Norman (3).......................................... 2,200 *
All officers and directors as a group (12 Persons)........... 1,296,830 16.00
World Equity Partners, L.P. (11)............................. 441,026 5.72
</TABLE>
- ------------------------
(1) In determining the number of Shares beneficially owned, Shares issuable
pursuant to options and warrants exercisable within 60 days of 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.
83
<PAGE>
(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.
84
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Securities and Exchange Commission (the "Commission") pursuant to the Exchange
Act (File No. 1-12481), are incorporated in this Proxy Statement by reference
and shall be deemed to be a part hereof for purposes of the Exchange Act:
(a) The Company's Annual Report on Form 10-K for the year ended September
28, 1996 (the "Company's Form 10-K");
(b) The portions of the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders held on January 29, 1997 that have been incorporated by
reference into the Company's Form 10-K;
(c) The Company's Annual Report on Form 10-K for the year ended September
27, 1997.
(d) The Company's Quarterly Report on Form 10-Q for the quarter ended
December 28, 1996;
(e) The Company's Quarterly Report on Form 10-Q for the quarter ended March
29, 1997;
(f) The Company's Current Report on Form 8-K dated June 10, 1997;
(g) The Company's Current Report on Form 8-K dated July 25, 1997;
(h) The Company's Quarterly Report on Form 10-Q for the quarter ended June
28, 1997;
(i) The Company's Current Report on Form 8-K dated September 12, 1997; and
(j) The Company's Current Report on Form 8-K dated November 5, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the Special Meeting and any adjournment or postponement thereof, shall
be deemed to be incorporated by reference in this Proxy Statement and to be a
part hereof for purposes of the Exchange Act from the date of the filing of such
documents. Any statement contained in this Proxy Statement, in a supplement to
this Proxy Statement or in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein or in any
subsequently filed supplement to this Proxy Statement or in any document that
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Proxy
Statement.
85
<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.
86
<PAGE>
STOCKHOLDER PROPOSALS
If the Merger is not consummated, the next Annual Meeting of Stockholders of
the Company is expected to be held on , 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
, 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.
87
<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
</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.
Arthur Andersen LLP/s/
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 ENDED YEAR ENDED YEAR 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 27, SEPTEMBER 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) -- -- -- (1,804)
------------- --------- ----------- ----------- --------- ------------
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>
F-6
<PAGE>
The accompanying notes are an integral part of these statements.
F-7
<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-8
<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-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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.
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
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
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 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.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COST OF RESTAURANT SALES AND RESTAURANT OPERATING EXPENSES: (Continued)
<TABLE>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
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, SEPTEMBER30,
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>
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, SEPTEMBER30,
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):
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
<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-14
<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
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT AND FINANCING ARRANGEMENTS: (CONTINUED)
Loan principal amount, for the duration of the loan, through an additional
interest rate swap arrangement 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.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITION OF FRIENDLY'S FRANCHISE RIGHTS:
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.
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
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT INFORMATION: (CONTINUED)
<TABLE>
FISCAL YEAR ENDED
SEPTEMBER 27, 1997
------------------
<S> <C>
Depreciation & Amortization:
Wendy's.......................... $ 8,782
Friendly's....................... 89
Total............................ $ 8,871
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%--
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INCENTIVE OPTION PLAN: (CONTINUED)
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 $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
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS: (Continued)
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-21
<PAGE>
Annex A
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 21, 1997
AMONG
DAVCO ACQUISITION HOLDING INC.,
DAVCO MERGER SUB INC.
AND
DAVCO RESTAURANTS, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER.....................................................................2
SECTION 1.1. The Merger.....................................................2
SECTION 1.2. Closing........................................................2
SECTION 1.3. Effective Time.................................................2
SECTION 1.4. Effects of the Merger..........................................2
SECTION 1.5. Certificate of Incorporation; By-laws..........................3
SECTION 1.6. Directors......................................................3
SECTION 1.7. Officers.......................................................3
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT
CORPORATIONS...................................................................3
SECTION 2.1. Effect on Capital Stock........................................3
SECTION 2.2. Stock Option Plans.............................................5
SECTION 2.3. Exchange of Certificates.......................................5
ARTICLE III
REPRESENTATIONS AND WARRANTIES.................................................8
SECTION 3.1. Representations and Warranties
of the Company.................................................8
SECTION 3.2. Representations and Warranties
of Parent and Sub......................................13
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
PRIOR TO MERGER...............................................................16
SECTION 4.1. Conduct of Business of the Company............................16
SECTION 4.2. Other Actions.................................................18
ARTICLE V
ADDITIONAL AGREEMENTS.........................................................18
SECTION 5.1. Meeting of Stockholders.......................................18
SECTION 5.2. Proxy Statement; Schedule 13E-3...............................18
SECTION 5.3. Access to Information; Confidentiality........................19
SECTION 5.4. Commercially Reasonable Efforts...............................20
SECTION 5.5. Financing.....................................................20
SECTION 5.6. Indemnification; Directors' and
Officers' Insurance...........................................20
SECTION 5.7. Public Announcements..........................................22
SECTION 5.8. Acquisition Proposals.........................................22
SECTION 5.9. Stockholder Litigation........................................23
- i -
<PAGE>
SECTION 5.10. Board Action Relating to Stock
Option Plans and Warrants..............................23
ARTICLE VI
CONDITIONS PRECEDENT..........................................................24
SECTION 6.1. Conditions to Each Party's Obligation
to Effect the Merger..........................................24
SECTION 6.2. Conditions to Obligations of Parent
and Sub.......................................................25
SECTION 6.3. Conditions to Obligations of
the Company............................................25
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER.............................................26
SECTION 7.1. Termination...................................................26
SECTION 7.2. Effect of Termination.........................................27
SECTION 7.3. Expenses......................................................28
SECTION 7.4. Amendment.....................................................28
SECTION 7.5. Extension; Waiver.............................................28
SECTION 7.6. Procedure for Termination,
Amendment, Extension or Waiver................................28
ARTICLE VIII
GENERAL PROVISIONS............................................................29
SECTION 8.1. Nonsurvival of Representations
and Warranties................................................29
SECTION 8.2. Fees and Expenses.............................................29
SECTION 8.3. Definitions...................................................29
SECTION 8.4. Notices.......................................................29
SECTION 8.5. Interpretation................................................30
SECTION 8.6. Counterparts..................................................30
SECTION 8.7. Entire Agreement;
Third-Party Beneficiaries.....................................30
SECTION 8.8. Governing Law.................................................31
SECTION 8.9. Assignment....................................................31
SECTION 8.10. Enforcement...................................................31
SECTION 8.11. Severability..................................................31
- ii -
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 21, 1997
AMONG
DAVCO ACQUISITION HOLDING INC.,
A DELAWARE CORPORATION ("PARENT"),
DAVCO MERGER SUB INC.,
A DELAWARE CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF
PARENT ("SUB"),
AND
DAVCO RESTAURANTS, INC.,
A DELAWARE CORPORATION (THE "COMPANY").
W I T N E S S E T H :
WHEREAS, the Board of Directors of each of Parent, Sub and the Company has
adopted resolutions approving this Agreement, pursuant to which Sub shall be
merged with and into the Company and the Company shall become a wholly owned
direct subsidiary of the Parent (the "Merger"); and
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
WHEREAS, as of the date hereof, Ronald D. Kirstien, Harvey Rothstein and
Citicorp Venture Capital, Ltd. (collectively, the "Affiliated Stockholders") own
or have the power to vote 3,996,578 shares of the common stock of the Company
(representing approximately 57% of the total number of outstanding shares of the
Company's common stock as of the date hereof);
WHEREAS, in accordance with applicable law, the Company's Restated
Certificate of Incorporation and the terms of this Agreement, the affirmative
vote of the holders of a majority of the outstanding common stock of the Company
and the affirmative vote of holders of a majority of the outstanding shares of
common stock that are not beneficially owned by the Affiliated Stockholders or
by persons that are Affiliates or Associates (as such terms are defined in
Section 8.3) of the Affiliated Stockholders are required to adopt and approve
this Agreement and the Merger and to consummate the Merger; and
WHEREAS, as of November 4, 1997, the parties hereto determined to amend and
restate this Agreement in accordance herewith.
<PAGE>
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.1. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement and Plan of Merger (the "Agreement"), and in accordance
with the Delaware General Corporation Law (the "DGCL") Sub shall be merged with
and into the Company at the Effective Time (as hereinafter defined). Upon the
Effective Time, the separate existence of Sub shall cease, and the Company shall
continue as the surviving corporation (the "Surviving Corporation").
SECTION 1.2. Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Section 7.1, and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "Closing") will take place
at 10:00 a.m. New York City time on the second business day following the date
on which the last to be fulfilled or waived of the conditions set forth in
Article VI shall be fulfilled or waived in accordance with this Agreement (the
"Closing Date"), at the offices of Dechert Price & Rhoads, Bell Atlantic Tower,
1717 Arch Street, Philadelphia, Pennsylvania, unless another date, time or place
is agreed to in writing by the parties hereto.
SECTION 1.3. Effective Time. The parties hereto will file with the
Secretary of State of the State of Delaware (the "Delaware Secretary of State")
on the date of the Closing (or on such other date as Parent and the Company may
agree) a certificate of merger or other appropriate documents, executed in
accordance with the relevant provisions of the DGCL, and make all other filings
or recordings required under the DGCL in connection with the Merger. The Merger
shall become effective upon the filing of the certificate of merger with the
Delaware Secretary of State, or at such later time as is specified in the
certificate of merger (the "Effective Time").
SECTION 1.4. Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the properties,
rights, privileges, powers and franchises of the Company and Sub shall vest in
the Surviving Corporation, and all debts, liabilities and duties of the Company
and Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
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SECTION 1.5. Certificate of Incorporation; By-laws. (a) At the Effective
Time, the Company's Restated Certificate of Incorporation shall be amended so as
to read in its entirety as set forth in Exhibit A to this Agreement and as so
amended shall become the certificate of incorporation of the Surviving
Corporation.
(b) The By-Laws of Sub as in effect at the Effective Time shall be, from
and after the Effective Time, the By-Laws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
SECTION 1.6. Directors. The directors of Sub at the Effective Time shall
become, from and after the Effective Time, the directors of the Surviving
Corporation, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
SECTION 1.7. Officers. At the Effective Time, the officers of the Company
shall become the officers of the Surviving Corporation, until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT
CORPORATIONS
SECTION 2.1. Effect on Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of any holder:
(a) Common Stock of Sub. Each share of common stock of Sub issued and
outstanding immediately prior to the Effective Time shall be converted into and
become one validly issued, fully paid and nonassessable share of Common Stock,
par value $0.001 per share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Parent - Owned Stock. Each share of
the capital stock of the Company issued or outstanding immediately prior to the
Effective Time that is owned by the Company or by Parent or Sub shall be
cancelled automatically and shall cease to exist, and no cash or other
consideration shall be delivered or deliverable in exchange therefor.
(c) Conversion of Company Shares. At the Effective Time, each share of the
common stock, par value $.001 per share, of the Company (the "Common Stock")
that is then issued and outstanding (such shares of Common Stock being
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hereinafter referred to collectively as the "Company Shares") (in each case,
other than shares to be cancelled pursuant to subsection 2.1(b) above and other
than shares held by Dissenting Shareholders (as hereinafter defined), which
shares will not constitute "Company Shares" hereunder), and, subject to Section
2.2 hereof, each Warrant (as defined in Section 2.2 hereof) that by its terms is
exercisable from and after the Effective Time only for the amount of Merger
Consideration that such Warrant would have been entitled to receive if it had
been exercised prior to the Effective Time, or that is amended in accordance
with Section 5.10, shall be converted into and become the right to receive, upon
surrender of the certificate representing such Company Share or Warrant in
accordance with Section 2.3, $20.00 in cash, without interest thereon (the
"Merger Consideration"), less, in the case of any Warrant, the amount of any
cash exercise price payable upon exercise of such Warrant.
(d) Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Common Stock issued and outstanding immediately prior to the
Effective Time held by a holder (a "Dissenting Shareholder") (if any) who has
the right to demand, and who properly demands, an appraisal of such shares in
accordance with Section 262 of the DGCL (or any successor provision)
("Dissenting Shares") shall not be converted into a right to receive the Merger
Consideration unless such Dissenting Shareholder fails to perfect or otherwise
loses such Dissenting Shareholder's right to such appraisal, if any. If, after
the Effective Time, such Dissenting Shareholder fails to perfect or loses any
such right to appraisal, each such share of such Dissenting Shareholder shall be
treated as a share that had been converted as of the Effective Time into the
right to receive the Merger Consideration in accordance with this Section 2.1.
The Company shall give prompt notice to Parent of any demands received by the
Company for appraisal of any Company Shares, and Parent shall have the right to
participate in and direct all negotiations and proceedings with respect to such
demands. The Company shall not, except with the prior written consent of Parent,
make any payment with respect to, or settle or offer to settle, any such
demands.
(e) Cancellation and Retirement of Common Stock. As of the Effective Time,
all certificates representing shares of Common Stock, other than certificates
representing shares to be cancelled in accordance with Section 2.1(b) or
Dissenting Shares, issued and outstanding immediately prior to the Effective
Time, shall no longer be outstanding and shall automatically be cancelled and
shall cease to exist, and each holder of a certificate representing any such
shares of Common Stock shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration upon surrender of such
certificate in accordance with Section 2.3.
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SECTION 2.2. Stock Option Plans. For purposes of this Agreement, the term
"Warrant" means each unexercised option (including without limitation any
Company Stock Option, as hereafter defined) or warrant to purchase Company
Shares from the Company (whether such option or warrant is vested or not) that
is outstanding at the Effective Time. The term "Company Stock Option" means each
outstanding option to purchase shares of Common Stock (a "Company Stock Option")
issued under the Company's 1994 Employee Stock Option Plan, 1996 Employee Stock
Option Plan, 1997 Employee Stock Option Plan, 1994 Director Stock Option Plan,
1996 Director Stock Option Plan and 1997 Director Stock Option Plan
(collectively, the "Company Stock Option Plans"). As of the date hereof, the
unexercisable portion of each Company Stock Option shall become immediately
exercisable for the amount of Merger Consideration that would have been payable
in respect of any Company Shares issuable for any such Company Stock Option, if
such Company Stock Option had been exercised immediately prior to the Effective
Time, subject to all expiration, lapse, exercise price and other terms and
conditions thereof. Each holder of Warrants that by their terms are exercisable
from and after the Effective Time only for the amount of Merger Consideration
that such Warrants would have been entitled to receive if they had been
exercised prior to the Effective Time, or that are amended in accordance with
Section 5.10, shall be entitled to receive an aggregate amount equal to the
Merger Consideration multiplied by the aggregate number of Company Shares
issuable upon the exercise in full of all Warrants held by such holder as of the
Effective Time, less the aggregate cash exercise price payable upon exercise of
all Warrants held by such holder.
SECTION 2.3. Exchange of Certificates. (a) Paying Agent. As of the
Effective Time, Sub (or the Company, as the Surviving Corporation) shall
deposit, or shall cause to be deposited, with or for the account of a bank or
trust company designated by Sub, which shall be reasonably satisfactory to the
Company (the "Paying Agent"), for the benefit of the holders of shares of Common
Stock and the holders of the Warrants, cash in an aggregate amount equal to (i)
the product of (x) the number of shares of Common Stock and Warrants issued and
outstanding at the Effective Time (other than shares to be cancelled pursuant to
subsection 2.1(b) above and Dissenting Shares) and (y) Merger Consideration less
(ii) the aggregate cash exercise price payable upon exercise of all Warrants
(such amount being hereinafter referred to as the "Payment Fund").
(b) Exchange Procedures. As soon as practicable after the Effective Time,
each holder of an outstanding certificate or certificates which prior thereto
represented Company Shares or Warrants (other than shares to be cancelled
pursuant to subsection 2.1(b) above and Dissenting Shares) shall, upon surrender
to the Paying Agent of such certificate or
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certificates and acceptance thereof by the Paying Agent, be entitled to the
amount of cash which the aggregate number of Company Shares or Warrants
previously represented by such certificate or certificates surrendered shall
have been converted into the right to receive pursuant to subsection 2.1(c). The
Paying Agent shall accept such certificates upon compliance with such reasonable
terms and conditions as the Paying Agent may impose to effect an orderly
exchange thereof in accordance with normal exchange practices. If the
consideration to be paid in the Merger (or any portion thereof) is to be
delivered to any person other than the person in whose name the certificate
representing Company Shares or Warrants surrendered in exchange therefor is
registered, it shall be a condition to such exchange that the certificate so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such exchange shall pay to the Paying
Agent any transfer or other taxes required by reason of the payment of such
consideration to a person other than the registered holder of the certificate
surrendered, or shall establish to the satisfaction of the Paying Agent that
such tax has been paid or is not applicable. After the Effective Time, there
shall be no further transfer on the records of the Company or its transfer agent
of certificates representing Company Shares or Warrants and if such certificates
are presented to the Company for transfer, they shall be cancelled against
delivery of the Merger Consideration as hereinabove provided. Until surrendered
as contemplated by this subsection 2.3(b), each certificate representing Company
Shares or Warrants (other than certificates representing shares to be cancelled
in accordance with Section 2.1(b) or Dissenting Shares), shall be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration, without any interest thereon, as
contemplated by Sections 2.1 and 2.2. No interest will be paid or will accrue on
any cash payable as Merger Consideration to any holder of Company Shares or
Warrants.
(c) Letter of Transmittal. Promptly after the Effective Time (but in no
event more than five days thereafter), the Surviving Corporation shall require
the Paying Agent to mail to each record holder of certificates that immediately
prior to the Effective Time represented Company Shares or Warrants which have
been converted pursuant to Section 2.1, a form of letter of transmittal and
instructions for use in surrendering such certificates and receiving the
consideration to which such holder shall be entitled therefor pursuant to
Section 2.1.
(d) No Further Ownership Rights in Common Stock or Preferred Stock. The
Merger Consideration paid upon the surrender for exchange of certificates
representing Company Shares or Warrants in accordance with the terms of this
Article II shall be deemed to have been issued and paid in full
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<PAGE>
satisfaction of all rights pertaining to the Company Shares or Warrants
theretofore represented by such certificates.
(e) Termination of Payment Fund. Any portion of the Payment Fund which
remains undistributed to the holders of the certificates representing Company
Shares or Warrants for 120 days after the Effective Time shall be delivered to
the Surviving Corporation, upon demand, and any holders of Company Shares or
Warrants who have not theretofore complied with this Article II shall thereafter
look only to the Surviving Corporation and only as general creditors thereof for
payment of their claim for the Merger Consideration.
(f) No Liability. None of Parent, Sub, the Surviving Corporation or the
Paying Agent shall be liable to any person in respect of any cash, shares,
dividends or distributions payable from the Payment Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any certificates representing Company Shares or Warrants shall not have been
surrendered prior to five years after the Effective Time (or immediately prior
to such earlier date on which the Merger Consideration in respect of such
certificate would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.1(c))), any such cash, shares,
dividends or distributions payable in respect of such certificate shall, to the
extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person previously
entitled thereto.
(g) Investment of Payment Fund. The Paying Agent shall invest the Payment
Fund, as directed by the Surviving Corporation, in (i) direct obligations of the
United States of America, (ii) obligations for which the full faith and credit
of the United States of America is pledged to provide for the payment of
principal and interest, (iii) commercial paper rated the highest quality by
either Moody's Investors Services, Inc. or Standard & Poor's Corporation, or
(iv) certificates of deposit, bank repurchase agreements or bankers, acceptances
of commercial banks with capital exceeding $100 million, and any net earnings
with respect thereto shall be paid to the Surviving Corporation as and when
requested by the Surviving Corporation; provided that any such investment or any
such payment of earnings shall not delay the receipt by holders of Company
Shares or Warrants of the Merger Consideration or otherwise impair such holders'
respective rights hereunder.
(h) Withholding Rights. The Surviving Corporation, Parent or Sub shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of Company Shares or Warrants such
amounts as the Surviving Corporation, Parent or Sub is required
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to deduct and withhold with respect to the making of such payment under the Code
(as hereinafter defined), or any provision of state, local or foreign tax law,
including, without limitation, withholdings required in connection with payments
with respect to Company Stock Options held by employees of the Company. To the
extent that amounts are so withheld by the Surviving Corporation, Parent or Sub,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder in respect of which such deduction and
withholding was made.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of the Company. The Company
represents and warrants to Parent and Sub as follows:
(a) Organization, Standing and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority to
carry on its business as now being conducted. The Company is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) would not have a material adverse effect on the business, financial
condition or results of operations of the Company and the Subsidiaries (as
defined in subsection 3.1(b) hereof) taken as a whole ("Material Adverse
Effect"). The Company has delivered to Parent complete and correct copies of its
Restated Certificate of Incorporation (the "Certificate of Incorporation") and
By-laws, as amended to the date of this Agreement.
(b) Subsidiaries. Section 3.1(b) of the disclosure schedule attached hereto
(the "Disclosure Schedule") sets forth the name, jurisdiction of incorporation,
capitalization and number of shares of outstanding capital stock of each class
owned, directly or indirectly, by the Company of each corporation of which the
Company owns, directly or indirectly, a majority of the outstanding capital
stock (individually, a "Subsidiary" and, collectively, the "Subsidiaries"). All
the issued and outstanding shares of capital stock of each Subsidiary are
validly issued, fully paid and nonassessable. All such shares owned, directly or
indirectly, by the Company are owned by the Company beneficially and of record,
free and clear of all liens, pledges, encumbrances or restrictions of any kind.
No Subsidiary has outstanding any
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securities convertible into or exchangeable or exercisable for any shares of its
capital stock, there are no outstanding options, warrants or other rights to
purchase or acquire any capital stock of any Subsidiary, there are no
irrevocable proxies with respect to such shares, and there are no contracts,
commitments, understandings, arrangements or restrictions by which any
Subsidiary or the Company is bound to issue additional shares of the capital
stock of a Subsidiary. Except for the Subsidiaries, and as otherwise disclosed
in Section 3.1(b) of the Disclosure Schedule, the Company does not own, directly
or indirectly, any capital stock or other equity securities of any corporation
or have any direct or indirect equity interest in any business. Each Subsidiary
(a) is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation; (b) has all requisite corporate
power and authority and any necessary governmental authority to carry on its
business as it is now being conducted and to own, operate and lease its
properties; and (c) is qualified or licensed to do business as a foreign
corporation and is in good standing in each of the jurisdictions in which (i)
the ownership or leasing of real property or the conduct of its business
requires such qualification or licensing and (ii) the failure to be so qualified
or licensed, either singly or in the aggregate, would have a Material Adverse
Effect. The Company has previously delivered to Parent and Sub complete and
correct copies of the Certificates or Articles of Incorporation and By-Laws of
each Subsidiary, each as amended to date. All such Certificates or Articles of
Incorporation and By-Laws are in full force and effect.
(c) Capitalization. As of the date hereof, the authorized capital stock of
the Company consists of 11,400,000 shares of Common Stock. At the close of
business on September 27, 1997, 6,428,821 shares of Common Stock were issued and
outstanding, 131,500 shares of Common Stock were reserved for issuance pursuant
to outstanding Company Stock Options, 996,644 shares of Common Stock were
reserved for issuance upon conversion of Warrants (other than Company Stock
Options), and 158,807 shares of Common Stock were held by the Company in its
treasury. Except as set forth above, at the close of business on September 27,
1997, no shares of capital stock or other equity securities of the Company were
issued, reserved for issuance or outstanding. All outstanding shares of capital
stock of the Company are, and all shares which may be issued pursuant to the
Company Stock Option Plan or any other outstanding Warrants will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights. Except as set forth above or in Section 3.1(c) of
the Disclosure Schedule, the Company has no outstanding option, warrant,
subscription or other right, agreement or commitment which either (i) obligates
the Company to issue, sell or transfer, repurchase, redeem or otherwise acquire
or vote any shares of the capital stock of the
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Company or (ii) restricts the transfer of Common Stock. Except as set forth in
Section 3.1(c) of the Disclosure Schedule, the Company has no outstanding stock
appreciation rights, phantom stock or stock equivalents. Section 3.1(c) of the
Disclosure Schedule accurately sets forth the number of Company Shares issuable
upon exercise of each outstanding Warrant, and the applicable exercise price
with respect to each such Warrant.
(d) Authority; Enforceability; Noncontravention. The Company has the
requisite corporate power and authority to enter into this Agreement and,
subject to the approval of its stockholders as set forth in subsection 6.1(a)
with respect to the consummation of the Merger, to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement by
the Company and the consummation by the Company of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Company, subject to the approval of its stockholders as set forth in
subsection 6.1(a). This Agreement has been duly executed and delivered by the
Company and, assuming this Agreement constitutes the valid and binding agreement
of Parent and Sub, constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except that the
enforceability hereof may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally and that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought. Except as disclosed in Section 3.1(d) of the Disclosure
Schedule, the execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated by this Agreement and compliance
with the provisions hereof will not, (i) violate any of the provisions of the
Restated Certificate of Incorporation or By-laws of the Company, (ii) subject to
the governmental filings and other matters referred to in the following
sentence, conflict with, result in a breach of or default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of a material benefit
under, or require the consent of any person under, any indenture or other
agreement, permit, concession, franchise, license or similar instrument or
undertaking to which the Company is a party or by which the Company or any of
its assets is bound or affected, or (iii) subject to the governmental filings
and other matters referred to in the following sentence, contravene any law,
rule or regulation of any state or of the United States or any political
subdivision thereof or therein, or any order, writ, judgment, injunction,
decree, determination or award currently in effect, which, in the case of
clauses (ii) and (iii) above, singly or in the aggregate, would have a Material
Adverse Effect or prevent consummation of the transactions contemplated hereby.
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<PAGE>
No consent, approval or authorization of, or declaration or filing with, or
notice to, any governmental agency or regulatory authority (a "Governmental
Entity"), which has not been received or made, is required by or with respect to
the Company in connection with the execution and delivery of this Agreement by
the Company or the consummation by the Company of the transactions contemplated
hereby, except for (i) the requirements or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), (ii) the filing of the certificate of merger
with the Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business,
(iii) such other consents, approvals, authorizations, filings or notices as are
set forth in Section 3.1(d)(iii) of the Disclosure Schedule and (iv) any
applicable filings under state antitakeover laws, or filings, authorizations,
consents or approvals the failure to make or obtain which, in the aggregate,
would not have a Material Adverse Effect or prevent consummation of the
transactions contemplated hereby.
(e) Financial Statements; SEC Reports. The Company has previously furnished
Parent and Sub with true and complete copies of (i) its Annual Report on Form
10-K for the year ended September 28, 1996 (the "Annual Report") filed by the
Company with the Securities and Exchange Commission (the "SEC"), (ii) its
Quarterly Reports on Form 10-Q for the quarters ended December 28, 1996, March
29, 1997 and June 28, 1997 (collectively, the "Quarterly Reports" and, together
with the Annual Report, the "Reports") filed by the Company with the SEC, (iii)
proxy statements relating to all of the Company's meetings of shareholders
(whether annual or special) held or scheduled to be held since September 28,
1996 and (iv) each other registration statement, proxy or information statement
or current report on Form 8-K filed since September 28, 1996 by the Company with
the SEC. Since September 1, 1993, the Company has complied in all material
respects with its SEC filing obligations under the Exchange Act. The financial
statements and related schedules and notes thereto of the Company contained in
the Reports (or incorporated therein by reference) were prepared in accordance
with generally accepted accounting principles applied on a consistent basis
except as noted therein, and fairly present in all material respects the
consolidated financial position of the Company and its consolidated Subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended, subject (in the case of interim unaudited
financial statements) to normal year-end audit adjustments, and such financial
statements complied as of their respective dates in all material respects with
applicable rules and regulations of the SEC. Each such registration statement,
proxy statement and Report was prepared in accordance with the requirements of
the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange
Act and did not, on the date
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of effectiveness in the case of such registration statements, on the date of
mailing in the case of such proxy statements and on the date of filing in the
case of such Reports, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(f) Absence of Certain Changes or Events. Except as may be disclosed in the
Reports or as otherwise disclosed in Section 3.1(f) of the Disclosure Schedule,
since June 28, 1997 there has not been (a) any material adverse change in the
business, assets, financial condition or operations of the Company and the
Subsidiaries taken as a whole; (b) any damage, destruction or loss, whether
covered by insurance or not, having a material adverse effect upon the
properties or business of the Company and the Subsidiaries taken as a whole; (c)
any declaration, setting aside or payment of any dividend, except for the
Company's regular dividend to stockholders, or other distribution in respect of
the capital stock of the Company or any redemption or other acquisition by the
Company of any of its capital stock; (d) any issuance by the Company, or
commitment of the Company to issue, any shares of its Common Stock or securities
convertible into or exchangeable for shares of its Common Stock; (e) any
increase in the rate or terms of compensation payable or to become payable by
the Company or any Subsidiary to its directors, officers of key employees,
except increases occurring in the ordinary course of business in accordance with
its customary past practices; (f) any increase in the rate or terms of any
bonus, insurance, pension or other employee benefit plan, payment or arrangement
made to, for or with any directors, officers or key employees, except increases
occurring in the ordinary course of business in accordance with its customary
past practices; (g) any change by the Company in accounting methods, principles
or practices except as required by generally accepted accounting principles; (h)
an entry into any agreement, commitment or transaction by the Company or any
Subsidiary which is material to the Company and its Subsidiaries taken as a
whole, except agreements, commitments or transactions in the ordinary course of
business; (i) any material breach by the Company of any of its material
obligations under its franchise agreements with Wendy's International, Inc.
("Wendy's") or, to the Company's knowledge, by Wendy's of its material
obligations thereunder; (j) any incurrence, other than in the ordinary course of
business, of material indebtedness for money borrowed; or (k) any agreement or
commitment, whether in writing or otherwise, to take any action described in
this subsection 3.1(f). Since June 28, 1997, the Company and the Subsidiaries
have conducted their respective businesses in all material respects only in the
ordinary course, consistent with past custom and practice, except as
contemplated by this Agreement.
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(g) Company Schedule 13E-3 and Proxy Materials. All of the information
supplied by the Company for inclusion in the Rule 13e-3 Transaction Statement on
Schedule 13E-3 (the "Schedule 13E-3") referred to in Section 5.2 hereof will
not, on the date the Schedule 13E-3 is first filed, and all of the information
supplied by the Company for inclusion in the definitive proxy statement (the
"Definitive Proxy Statement") referred to in Section 5.2 hereof will not, on the
date when the Definitive Proxy Statement is first mailed to the Company's
shareholders, and the Schedule 13E-3 and the Definitive Proxy Statement, as then
amended or supplemented, will not, on the date of the Company's stockholders'
meeting referred to in Section 5.1 hereof or on the Closing Date (as defined in
Section 1.2 hereof), contain any statement which is false or misleading with
respect to any material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Notwithstanding
the foregoing, the Company makes no representation or warranty regarding
information furnished by Parent or Sub for inclusion in the Schedule 13E-3 or
the Definitive Proxy Statement (or any amendment or supplement thereto). The
Definitive Proxy Statement will comply as to form and, with respect to
information supplied or to be supplied in writing by or on behalf of the Company
for inclusion in the Definitive Proxy Statement, substance in all material
respects with the requirements of the Exchange Act and the applicable rules and
regulations of the SEC thereunder.
(h) Board Recommendation. The Board of Directors of the Company has
recommended that the stockholders of the Company vote for approval and adoption
of this Agreement.
(i) Brokers. No broker, investment banker, financial advisor or other
person, the fees and expenses of which will be paid by the Company, is entitled
to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement.
SECTION 3.2. Representations and Warranties of Parent and Sub. Parent and
Sub represent and warrant to the Company as follows:
(a) Organization, Standing and Corporate Power. Parent is a corporation
duly organized and validly existing under the laws of the jurisdiction in which
it is incorporated. Sub is a corporation duly organized, validly existing, and
in good standing under the laws of the jurisdiction in which it is incorporated.
Each of Parent and Sub has the requisite corporate power and authority to carry
on its business as now being conducted. Each of Parent and Sub is duly qualified
or licensed
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to do business and is in good standing in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed (individually or in the aggregate) would
not have a Material Adverse Effect.
(b) Capitalization. As of the date of this Agreement, the authorized
capital stock of Parent consists of 1,000 shares of Common Stock, par value
$0.01 per share, no shares of which are presently issued and outstanding. As of
the date of this Agreement, the authorized capital stock of Sub consists of
1,000 shares of Common Stock, par value $0.01 per share, 1,000 shares of which
are presently issued and outstanding, which constitutes all of the issued and
outstanding capital stock of Sub. All of the issued and outstanding shares of
capital stock of Parent and Sub are validly issued, fully paid and
nonassessable. As of the Effective Time of the Merger, the capitalization of
Parent and Sub and the ownership of the issued and outstanding shares of
Parent's and Sub's capital stock will be in all material respects as described
in the Definitive Proxy Statement.
(c) Authority; Enforceability; Noncontravention. Parent and Sub have all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement by Parent and Sub and the consummation by Parent and
Sub of the transactions contemplated by this Agreement have been duly authorized
by all necessary corporate action on the part of Parent and Sub. This Agreement
has been duly executed and delivered by and, assuming this Agreement constitutes
the valid and binding agreement of the Company, constitutes a valid and binding
obligation of each of Parent and Sub, enforceable against such party in
accordance with its terms, except that the enforceability hereof may be subject
to bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights generally and that the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought. The execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
by this Agreement and compliance with the provisions of this Agreement will not
(i) violate any of the provisions of the charter documents of Parent, or the
Certificate of Incorporation or Bylaws of Sub, (ii) subject to the governmental
filings and other matters referred to in the following sentence, conflict with,
result in a breach of or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a material benefit under, or require
the consent of any person
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under, any indenture, or other agreement, permit, concession, franchise, license
or similar instrument or undertaking to which Parent or any of its subsidiaries
is a party or by which Parent or any of its subsidiaries or any of their assets
is bound or affected, or (iii) subject to the governmental filings and other
matters referred to in the following sentence, contravene any law, rule or
regulation of any state or of the United States or any political subdivision
thereof or therein, or any order, writ, judgment, injunction, decree,
determination or award currently in effect, which, in the case of clauses (ii)
and (iii) above, singly or in the aggregate, would have a material adverse
effect on the business, financial condition or results of operations of Parent
and Sub taken as a whole or prevent consummation of the transactions
contemplated hereby. No consent, approval or authorization of, or declaration or
filing with, or notice to, any Governmental Entity which has not been received
or made is required by or with respect to Parent or Sub in connection with the
execution and delivery of this Agreement by Parent or Sub or the consummation by
Parent or Sub, as the case may be, of any of the transactions contemplated by
this Agreement, except for (i) the requirements or the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), (ii) the filing of the certificate of
merger with the Delaware Secretary of State and appropriate documents with the
relevant authorities of other states in which the Company is qualified to do
business, (iii) such other consents, approvals, authorizations, filings or
notices as are set forth in Section 3.1(d)(iii) of the Disclosure Schedule and
(iv) any applicable filings under state antitakeover laws, or filings,
authorizations, consents or approvals the failure to make or obtain which, in
the aggregate, would not have a material adverse effect on the business,
financial condition or results of operations of Parent and Sub taken as a whole
or prevent consummation of the transactions contemplated hereby.
(d) Financing. Parent and Sub have received a written commitment (the
"Commitment") from Global Alliance Finance Company, L.L.C. dated as of October
17, 1997, to provide debt financing on or prior to the Closing Date of an amount
not less than $180 million (the "Financing"). Parent has accepted the
Commitment, which, to the knowledge of Parent and Sub, is valid and in full
force and effect. A true and correct copy of the Commitment is attached as
Exhibit 3.2(d) hereto.
(e) No Undisclosed Material Developments; Sale of the Company. Parent is
unaware of any information or plans relating to the Company, its business,
assets, financial condition or prospects, which would have a material positive
effect on the value of the Company or the Company Shares and which have not been
disclosed either in any filings of the Company, Parent or Sub under the Exchange
Act or to the Board of Directors of the Company. Parent does not have any
present plan or present intention to sell, dispose of or otherwise transfer,
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or cause to be sold, disposed of or otherwise transferred, directly or
indirectly, (i) more than 50% of the beneficial ownership of the outstanding
voting capital stock of the Surviving Corporation or (ii) assets constituting
more than 50% of the earning power of the Company and its subsidiaries or with a
book value in excess of 50% of the book value of all assets of the Company and
its subsidiaries.
(f) Schedule 13E-3 and Proxy Materials. All of the information to be
furnished by Parent or Sub for inclusion in the Schedule 13E-3 and the
Definitive Proxy Statement (or any amendment or supplement thereto) will not, in
the case of the Schedule 13E-3, on the date it is first filed, and in the case
of the Definitive Proxy Statement, on the date it is first mailed to the
Company's shareholders, and in the case of the Schedule 13E-3 and the Definitive
Proxy Statement, as then amended or supplemented, on the date of the Company's
stockholders' meeting referred to in Section 5.1 hereof or on the Closing Date,
contain any statement which is false or misleading with respect to any material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Notwithstanding the foregoing,
Parent and Sub make no representation or warranty regarding information
furnished by the Company for inclusion in the Schedule 13E-3 (or any amendment
or supplement thereto). The Schedule 13E-3 will comply as to form and, with
respect to information supplied or to be supplied in writing by or on behalf of
Parent or Sub for inclusion in the Schedule 13E-3, substance in all material
respects with the requirements of the Exchange Act and the applicable rules and
regulations of the SEC thereunder.
(g) Brokers. No broker, investment banker, financial advisor or other
person, the fees and expenses of which will be paid by Parent of Sub, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
PRIOR TO MERGER
SECTION 4.1. Conduct of Business of the Company. (a) Except as contemplated
by this Agreement, during the period from the date of this Agreement to the
Effective Time, the Company shall operate, and shall cause each Subsidiary to
operate, its business in the ordinary course of business. Without limiting the
generality of the foregoing, during the
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period from the date of this Agreement to the Effective Time, except as
expressly contemplated by this Agreement, the Company shall not, without the
prior written consent of Parent:
(i) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any of
the Company's outstanding capital stock, except for the Company's regular
dividend to stockholders (y) split, combine or reclassify any of its
outstanding capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
outstanding capital stock, or (z) purchase, redeem or otherwise acquire any
shares of outstanding capital stock or any rights, warrants or options to
acquire any such shares;
(ii) issue, sell, grant, pledge or otherwise encumber any shares of
its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities, except for the
issuance of shares of Common Stock upon exercise of Warrants outstanding
prior to the date of this Agreement and disclosed in Section 3.1(c), or
take any action that would make the Company's representations and
warranties set forth in Section 3.1(c) not true and correct in all material
respects;
(iii) amend its Restated Certificate of Incorporation or By-laws or
other comparable charter or organizational documents;
(iv) acquire any business or any corporation, partnership, joint
venture, association or other business organization or division thereof (or
any interest therein), or form any subsidiaries;
(v) sell or otherwise dispose of any of its substantial assets, except
in the ordinary course of business, or as disclosed in Section 4.1(a)(v) of
the Disclosure Schedule;
(vi) make any capital expenditures or commitments with respect
thereto, except capital expenditures or commitments not exceeding
$20,000,000 in the aggregate as the Company may, in its discretion, deem
appropriate;
(vii) (x) incur any indebtedness for borrowed money or guaranty any
such indebtedness of another person, other than (A) borrowings in the
ordinary course under
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existing lines of credit (or under any refinancing of such existing lines),
(B) indebtedness owing to, or guaranties of indebtedness owing to, the
Company or (C) in connection with the Financing, or (y) make any loans or
advances to any other person, other than to the Company and other than
routine advances to employees, except in the case of either (x) or (y) as
disclosed in Section 4.1(a)(vii) of the Disclosure Schedule;
(viii) grant or agree to grant to any employee any increase in wages
or bonus, severance, profit sharing, retirement, deferred compensation,
insurance or other compensation or benefits, or establish any new
compensation or benefit plans or arrangements, or amend or agree to amend
any existing Company Plans, except as may be required under existing
agreements or in the ordinary course of business consistent with past
practices;
(ix) merge, amalgamate or consolidate with any other entity in any
transaction, sell all or substantially all of its business or assets, or
acquire all or substantially all of the business or assets of any other
Person;
(x) enter into or amend any employment, consulting, severance or
similar agreement with any individual;
(xi) change its accounting policies in any material respect, except as
required by generally accepted accounting principals; or
(xii) commit or agree to take any of the foregoing actions.
SECTION 4.2. Other Actions. The Company and Parent shall not take any
action that would, or that could reasonably be expected to, result in (i) any of
the representations and warranties of such party set forth in this Agreement
that are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect or (iii) any of the conditions of the Merger set forth in
Article VI not being satisfied.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1. Meeting of Stockholders. The Company will take all action
necessary in accordance with applicable law
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and its Restated Certificate of Incorporation and By-laws to duly call, give
notice of, and convene a meeting of its stockholders (the "Stockholders'
Meeting") to consider and vote upon the adoption and approval of this Agreement
and the Merger and all actions contemplated hereby which require approval and
adoption by the Company's stockholders.
SECTION 5.2. Proxy Statement; Schedule 13E-3. Parent will prepare and file,
and the Company will cooperate with Parent in the preparation and filing of, the
Schedule 13E-3 with the SEC with respect to the transactions contemplated by
this Agreement. The Company shall pay the filing fee for such Schedule 13E-3. In
connection with the Stockholders' Meeting contemplated hereby, the Company will
prepare and file, and Parent will cooperate with the Company in the preparation
and filing of, a preliminary Proxy Statement relating to the transactions
contemplated by this Agreement (the "Preliminary Proxy Statement") with the SEC
and will use its commercially reasonable best efforts to respond to the comments
of the SEC and to cause the Definitive Proxy Statement to be mailed to the
Company's stockholders, in each case as soon as reasonably practicable. Each
party to this Agreement will notify the other parties promptly of the receipt of
the comments of the SEC, if any, and of any request by the SEC for amendments or
supplements to the Schedule 13E-3, the Preliminary Proxy Statement or the
Definitive Proxy Statement or for additional information, and will supply the
others with copies of all correspondence between such party or its
representatives, on the one hand, and the SEC or members of its staff, on the
other hand, with respect to the Schedule 13E-3, the Preliminary Proxy Statement,
the Definitive Proxy Statement or the Merger. If at any time prior to the
Stockholders' Meeting, any event should occur relating to the Company or any of
the Subsidiaries which should be set forth in an amendment of, or a supplement
to, the Schedule 13E-3 or the Definitive Proxy Statement, the Company will
promptly inform Parent. If at any time prior to the Stockholders' Meeting, any
event should occur relating to Parent or Sub or any of their respective
Associates or Affiliates, or relating to the plans of any such persons for the
Surviving Corporation after the Effective Time of the Merger, or relating to the
Financing, that should be set forth in an amendment of, or a supplement to, the
Schedule 13E-3 or the Definitive Proxy Statement, the Company, with the
cooperation of Parent, will, upon learning of such event, promptly prepare, file
and, if required, mail such amendment or supplement to the Company's
stockholders; provided that, prior to such filing or mailing the Company shall
consult with Parent with respect to such amendment or supplement and shall
afford Parent reasonable opportunity to comment thereon. Parent will furnish to
the Company the information relating to Parent and Sub, their respective
Associates and Affiliates and the plans of such persons for the Surviving
Corporation after the Effective Time of the Merger, and relating to the
Financing, which is required to
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be set forth in the Schedule 13E-3, the Preliminary Proxy Statement or the
Definitive Proxy Statement under the Exchange Act and the rules and regulations
of the SEC thereunder.
SECTION 5.3. Access to Information; Confidentiality. From and after the
date hereof, the Company will provide to Parent complete access to the Company's
facilities, books and records and shall cause the directors, employees,
accountants, and other agents and representatives (collectively,
"Representatives") of the Company to cooperate fully with Parent and Parent's
Representatives in connection with Parent's due diligence investigation of the
Company and the Company's assets, contracts, liabilities, operations, records
and other aspects of its business (including any environmental investigation of
the companies facilities). Parent shall keep all information supplied or made
available to Parent hereunder in confidence and shall not disclose the same to
any party other than its employees or advisors on a "need to know" basis and
only for purposes of evaluating the Merger. Parent will not use such information
except for evaluating the Merger, in connection with procurement of the
Financing and in connection with Parent and Sub's filings under the Exchange Act
as contemplated by this Agreement. If the Merger is not consummated and this
Agreement is terminated in accordance with its terms, Parent shall return any
information provided hereunder.
SECTION 5.4. Commercially Reasonable Efforts. Upon the terms and subject to
the conditions and other agreements set forth in this Agreement, each of the
parties agrees to use commercially reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
with the other parties in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by this Agreement, including the
satisfaction of the respective conditions set forth in Article VI.
SECTION 5.5. Financing. Each of Parent and Sub shall use their commercially
reasonable efforts to obtain the Financing on terms satisfactory to them and to
deliver to the Company true and correct copies of the fully executed and
delivered Definitive Financing Agreements with respect thereto on or before the
Closing Date. Parent and Sub shall use their best efforts to satisfy on or
before the Closing Date all requirements of the Definitive Financing Agreements
which are conditions to closing the transactions constituting the Financing and
to drawing the cash proceeds thereunder. The obligations contained herein are
not intended, nor shall they be construed, to benefit or confer any rights upon
any person, firm or entity other than the Company.
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SECTION 5.6. Indemnification; Directors' and Officers' Insurance. (a) From
and after the Effective Time, Parent shall, and shall cause the Surviving
Corporation to, indemnify and hold harmless each person who is now, at any time
has been or who becomes prior to the Effective Time a director, officer,
employee or agent of the Company or any of its subsidiaries (the "Indemnified
Parties") against any and all losses, claims, damages, liabilities, costs,
expenses (including reasonable fees and expenses of legal counsel), judgments,
fines or amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation (each a "Claim") arising out of the or pertaining to
any action or omission occurring prior to the Effective Time (including, without
limitation, any which arise out of or relate to the transactions contemplated by
this Agreement), regardless of whether such Claim is asserted or claimed prior
to, at or after the Effective Time, to the full extent permitted under Delaware
law or the Surviving Corporation's Certificate of Incorporation or By-laws in
effect as of the Effective Date or under any indemnification agreement in effect
as of the date of this Agreement. Without limiting the generality of the
preceding sentence, in the event any Indemnified Party becomes involved in any
Claim, after the Effective Time, Parent shall, and shall cause the Surviving
Corporation to, periodically advance to such Indemnified Party its legal and
other expenses (including the cost of any investigation and preparation incurred
in connection therewith), subject to the provisions of paragraph (b) of this
Section 5.6, and subject to the providing by such Indemnified Party of an
undertaking to reimburse all amounts so advanced in the event of a final and
non-appealable determination by a court of competent jurisdiction that such
Indemnified Party is not entitled thereto.
(b) The Indemnified Party shall control the defense of any Claim with
counsel selected by the Indemnified Party, which counsel shall be reasonably
acceptable to Parent, provided that Parent and the Surviving Corporation shall
be permitted to participate in the defense of such Claim at their own expense,
and provided further that if any D&O Insurance (as defined in paragraph (c) of
this Section 5.6) in effect at the time shall require the insurance company to
control such defense in order to obtain the full benefits of such insurance and
such provision is consistent with the provisions of the Company's D&O Insurance
existing as of the date of this Agreement, then the provisions of such policy
shall govern. Neither Parent nor the Surviving Corporation shall be liable for
any settlement effected without its written consent, which consent shall not be
withheld unreasonably.
(c) For a period of six years after the Effective Time, Parent or the
Surviving Corporation shall provide officers' and directors' liability insurance
("D&O Insurance") covering each Indemnified Party who is presently covered by
the Company's
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officers' and directors' liability insurance or will be so covered at the
Effective Time with respect to actions or omissions occurring prior to the
Effective Time, on terms no less favorable than such insurance maintained in
effect by the Company as of the date hereof in terms of coverage and amounts,
provided that Parent and the Surviving Corporation shall not be required to pay
in the aggregate an annual premium for D&O Insurance in excess of 200% of the
last annual premium paid prior to the date hereof, but in such case shall
purchase as much coverage as possible for such amount.
(d) The Certificate of Incorporation and By-laws of the Surviving
Corporation shall contain the provisions with respect to indemnification set
forth in the Certificate of Incorporation and By-laws of the Surviving
Corporation as of the Effective Date, which provisions shall not be amended,
repealed or otherwise modified after the Effective Time in any manner that would
adversely affect the rights thereunder of the Indemnified Parties in respect of
actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement), unless
such modification is required by law. Parent, Sub and the Company agree that all
rights existing in favor of any Indemnified Party under any indemnification
agreement in effect as of the date hereof shall survive the Merger and shall
continue in full force and effect, without any amendment thereto. In the event
any Claim is asserted or made, any determination required to be made with
respect to whether an Indemnified Party's conduct complies with standards set
forth under such provisions of the Certificate of Incorporation or By-laws or
under the DGCL or any indemnification agreement, as the case may be, shall be
made by independent legal counsel selected by such Indemnified Party and
reasonably acceptable to Parent; and provided that nothing in this Section 5.6
shall impair any rights or obligations of any current or former director or
officer of the Company or any of its subsidiaries, including pursuant to the
respective certificates of incorporation or bylaws of Parent, the Surviving
Corporation or the Company, or their respective subsidiaries, under the DGCL or
otherwise.
(e) The provisions of this Section 5.6 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, his or her
heirs and his or her personal representatives and shall be binding on all
successors and assigns of Parent, Sub, the Company and the Surviving
Corporation.
SECTION 5.7. Public Announcements. Parent and Sub, on the one hand, and the
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press release
or other public statements with respect to the transactions
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contemplated by this Agreement, including the Merger, and shall not issue any
such press release or make any such public statement prior to such consultation,
except as may be required by applicable law, court process or by obligations
pursuant to any listing agreement with any national securities exchange.
SECTION 5.8. Acquisition Proposals. The Company shall not, nor shall it
authorize or permit any of its Representatives to, directly or indirectly, (i)
solicit, initiate or encourage the submission of any Acquisition Proposal (as
hereinafter defined) or (ii) participate in any discussions or negotiations
regarding, or furnish to any person any non-public information with respect to,
or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal; provided, however, that the foregoing shall not prohibit
the Board of Directors of the Company from furnishing information to, or
entering into discussions or negotiations with, any person in connection with an
unsolicited bona fide Acquisition Proposal by such person if, and to the extent
that, the Board of Directors of the Company, after consultation with independent
legal counsel (which may include its regularly engaged independent legal
counsel), determines in good faith that such action is required for the Board of
Directors of the Company to comply with its fiduciary obligations to
stockholders under applicable law. The Company shall provide prompt written
notice to Parent to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or entity, such written
notice shall include the material terms and conditions of such Acquisition
Proposal or inquiry, and the identity of the person making any such Acquisition
Proposal or inquiry; provided that the Company shall not be required to provide
such notice of such terms or conditions or identity if the Company's Board of
Directors, after consultation with independent legal counsel (which may include
its regularly engaged independent legal counsel), determines in good faith that
giving such notice would be inconsistent with its fiduciary obligations to
stockholders under applicable law. For purposes of this Agreement, "Acquisition
Proposal" means any proposal with respect to a merger, consolidation, share
exchange or similar transaction involving the Company, or any purchase of all or
any significant portion of the assets of the Company, or any equity interest in
the Company, other than the transactions contemplated hereby.
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SECTION 5.9. Stockholder Litigation. The Company shall give Parent the
opportunity to participate in the defense or settlement of any stockholder
litigation against the Company and its directors relating to the transactions
contemplated by this Agreement; provided, however, that no such settlement shall
be agreed to without Parent's consent, which consent shall not be unreasonably
withheld if such settlement would entail solely the payment of monetary relief.
SECTION 5.10. Board Action Relating to Stock Option Plans and Warrants. As
soon as practicable following the date of this Agreement, the Board of Directors
of the Company (or, if appropriate, any committee administering a Company Stock
Option Plan) shall adopt such resolutions or take such actions as may be
required to adjust the terms of all outstanding Company Stock options in
accordance with Section 2.2 and shall make such other changes to the Company
Stock Option Plans as it deems appropriate to give effect to the Merger. In
addition, prior to the Effective Time, the Board of Directors of the Company
shall adopt such resolutions and take such actions as may be required to amend
the terms of all outstanding Warrants in accordance with Section 2.2 and shall
make such other changes to the Warrants as it deems appropriate to give effect
to the Merger.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1. Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
adopted and approved by (i) the affirmative vote of the stockholders of the
Company as required under the laws of the State of Delaware and (ii) the
affirmative vote of holders of a majority of the outstanding shares of Common
Stock that are not beneficially owned by the Affiliated Stockholders or by
persons that are Affiliates or Associates of the Affiliated Stockholders.
(b) Governmental and Regulatory Consents. All filings required to be made
prior to the Effective Time with, and all consents, approvals, permits and
authorizations required to be obtained prior to the Effective Time from,
Governmental Entities, including, without limitation, those set forth in Section
3.1(d)(iii) of the Disclosure Schedule, in connection with the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby by the Company, Parent and Sub, and which, either individually or in the
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aggregate, if not obtained would have a Material Adverse Effect or would prevent
consummation of the Merger, will have been made or obtained (as the case may
be).
(c) No Injunctions, Restraints or Litigation. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; provided, however, that the
parties invoking this condition shall use reasonable efforts to have any such
order or injunction vacated. There shall not be threatened, instituted or
pending any action, proceeding, application or counterclaim by any Governmental
Entity before any court or governmental regulatory or administrative agency,
authority or tribunal (i) which if adversely determined would have a material
adverse effect on the Surviving Corporation or the ability of any party to this
Agreement to perform its obligations hereunder or (ii) which challenges or seeks
to challenge, restrain or prohibit the consummation of the Merger.
SECTION 6.2. Conditions to Obligations of Parent and Sub. The obligations
of Parent and Sub to effect the Merger are further subject to the following
conditions:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in Section 3.1 that are qualified by materiality shall be
true and correct and such representations and warranties of the Company set
forth in Section 3.1 that are not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date, except to the extent
such representations and warranties speak as of an earlier date and except for
changes permitted or contemplated by this Agreement, and Parent shall have
received an officers' certificate signed on behalf of Parent to the effect set
forth in this paragraph.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Parent shall have
received an officers' certificate signed on behalf of the Company to such
effect.
(c) Financing. On or prior to the Effective Time, Parent and/or Sub shall
have completed their arrangements for the Financing and received the cash
proceeds thereof.
(d) Dissenting Shares. Parent shall have received evidence, in form and
substance reasonably satisfactory to it, that the number of Dissenting Shares
shall constitute no greater than 5% of the total number of shares of Common
Stock
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outstanding immediately prior to the Effective Time, on a fully diluted basis.
SECTION 6.3. Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger is further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent and Sub set forth in Section 3.2 that are qualified by materiality shall
be true and correct and such representations and warranties of Parent and Sub
set forth in Section 3.2 that are not so qualified shall be true and correct in
all material respects, in each case as of the date of this Agreement and as of
the Closing Date as though made on and as of the Closing Date, except to the
extent such representations and warranties speak as of an earlier date and
except for changes permitted or contemplated by this Agreement, and the Company
shall have received a certificate signed on behalf of Parent by the chief
executive officer and the chief financial officer of Parent to the effect set
forth in this paragraph.
(b) Performance of Obligations of Parent and Sub. Parent and Sub shall have
performed in all material respects all obligations required to be performed by
them under this Agreement at or prior to the Closing Date, and the Company shall
have received a certificate signed on behalf of Parent by the chief executive
officer and the chief financial officer of Parent to such effect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. Termination. This Agreement may be terminated and abandoned at
any time prior to the Effective Time, whether before or after approval of
matters presented in connection with the Merger by the stockholders of the
Company:
(a) by mutual written consent of Parent and the Company; or
(b) by either Parent or the Company:
(i) if, upon a vote at the Stockholders Meeting, or any adjournment
thereof, the adoption and approval of this Agreement and the Merger by the
stockholders of the Company required by Delaware law, the Company's
Restated Certificate of Incorporation or the terms of this Agreement shall
not have been obtained; or
- 26 -
<PAGE>
(ii) if the Merger shall not have been consummated on or before April
1, 1998, provided that the failure to consummate the Merger is not
attributable to the failure of the terminating party to fulfill its
obligations pursuant to this Agreement; or
(iii) if any Governmental Entity shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable; or
(c) by the Company, if the Board of Directors of the Company shall have
approved an Acquisition Proposal after determining, upon the basis of written
advice of outside counsel (who may be the Company's regularly retained outside
counsel) that such approval is necessary in the exercise of its fiduciary
obligations under applicable law; or
(d) by Parent, if the Board of Directors of the Company shall have (i)
withdrawn or modified, in a manner adverse to Parent or Sub, the approval or
recommendation by the Board of Directors of the Company of this Agreement or the
Merger or (ii) approved another Acquisition Proposal; or
(e) by Parent, if any of the conditions set forth in Section 6.2 shall have
become incapable of fulfillment, and shall not have been waived by Parent, or if
the Company shall breach in any material respect any of its representations,
warranties or obligations hereunder and such breach shall not have been cured in
all material respects or waived and the Company shall not have provided
reasonable assurance that such breach will be cured in all material respects on
or before the Closing Date, but only if such breach, singly or together with all
other such breaches, constitutes a failure of the condition contained in Section
6.2 as of the date of such termination; or
(f) by the Company, if any of the conditions set forth in Section 6.3 shall
have become incapable of fulfillment, and shall not have been waived by the
Company, or if Parent or Sub shall breach in any material respect any of their
respective representations, warranties or obligations hereunder and such breach
shall not have been cured in all material respects or waived and Parent or Sub,
as the case may be, shall not have provided reasonable assurance that such
breach will be cured in all material respects on or before the Closing Date, but
only if such breach, singly or together with all other such breaches,
constitutes a failure of the condition contained in Section 6.3 as of the date
of such termination;
- 27 -
<PAGE>
provided, however, that the party seeking termination pursuant to clause (e) or
(f) hereof is not in breach of any of its material representations, warranties,
covenants or agreements contained in this Agreement.
SECTION 7.2. Effect of Termination. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Parent, Sub or the Company, other than the last
three sentences of Section 5.3 and Sections 7.2, 7.3 and 8.2. Nothing contained
in this Section shall relieve any party from any liability resulting from any
material breach of the representations, warranties, covenants or agreements set
forth in this Agreement.
SECTION 7.3. Expenses. In the event that this Agreement is terminated by
the Company pursuant to subsection 7.1(c) or by Parent pursuant to subsection
7.1(d), Parent and Sub shall be entitled to reimbursement by the Company for
their out-of-pocket expenses incurred in connection with the negotiation,
execution, delivery and performance of this Agreement and the Financing,
provided that such reimbursement for expenses shall not exceed $1,000,000.
SECTION 7.4. Amendment. Subject to the applicable provisions of the DGCL,
at any time prior to the Effective Time, the parties hereto may modify or amend
this Agreement, by written agreement executed and delivered by duly authorized
officers of the respective parties; provided, however, that after approval of
the Merger by the stockholders of the Company, no amendment shall be made which
reduces the consideration payable in the Merger or adversely affects the rights
of the Company's stockholders hereunder without the approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing' signed on behalf of each of the parties.
SECTION 7.5. Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or (c) subject
to Section 7.3, waive compliance with any of the agreements or conditions of the
other parties contained in this Agreement. Any agreement on the part of a party
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. The failure of any party
to this Agreement to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of such rights.
- 28 -
<PAGE>
SECTION 7.6. Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3 or an extension or waiver pursuant to Section
7.4 shall, in order to be effective and in addition to requirements of
applicable law, require, in the case of Parent, Sub or the Company, action by
its Board of Directors or the duly authorized designee of its Board of
Directors.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time, including, without
limitation, Section 5.7.
SECTION 8.2. Fees and Expenses. Except as provided otherwise in Sections
5.2 and 7.3, whether or not the Merger shall be consummated, each party hereto
shall pay its own expenses incident to preparing for, entering into and carrying
out this Agreement and the consummation of the transactions contemplated hereby.
SECTION 8.3. Definitions. For purposes of this Agreement:
(a) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act;
(b) "person" means an individual, corporation, partnership, joint venture,
association, trust, unincorporated organization or other entity; and
(c) a "subsidiary" of any person means another person 50% of the equity
securities of which are owned directly or indirectly by such first person;
provided, however, that joint ventures or partnerships engaged in the business
of real estate development, management or ownership shall not be deemed to be
subsidiaries unless such first person owns directly or indirectly 80% of the
equity securities of such joint venture or partnership.
SECTION 8.4. Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent
- 29 -
<PAGE>
by overnight courier (providing proof of delivery) or telecopy to the parties at
the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Parent or Sub, to
DavCo Acquisition Holding Inc.
1657 Crofton Boulevard
Crofton, Maryland 21114
Attention: Ronald D. Kirstien
with a copy to:
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Kirk A. Radke
(b) if to the Company, to
DavCo Restaurants, Inc.
1657 Crofton Boulevard
Crofton, Maryland 21114
Attention: Board of Directors
with a copy to:
Dechert Price & Rhoads
Bell Atlantic Tower
40th Floor
1717 Arch Street
Philadelphia, Pennsylvania 19103
Attention: G. Daniel O'Donnell
SECTION 8.5. Interpretation. When a reference is made in this Agreement to
a Section or Schedule, such reference shall be to a Section of, or a Schedule
to, this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include," "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation."
SECTION 8.6. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
- 30 -
<PAGE>
SECTION 8.7. Entire Agreement; Third-Party Beneficiaries. This Agreement
and the other agreements referred to herein constitute the entire agreement, and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter of this Agreement. This Agreement
is not intended to confer upon any person, other than the parties hereto and the
third party beneficiaries referred to in the following sentence, any rights or
remedies. The parties hereto expressly intend the provisions of Section 5.6 to
confer a benefit upon and be enforceable by, as third party beneficiaries of
this Agreement, the third persons referred to in, or intended to be benefitted
by, such provisions.
SECTION 8.8. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 8.9. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties, and any such assignment that is not
consented to shall be null and void, except that Parent may assign this
Agreement (i) to any wholly owned subsidiary of Parent or (ii) together with all
of the outstanding capital stock of Sub, to an entity organized under the
corporate or limited liability laws of a jurisdiction of one of the United
States of America, the ownership interests of which entity are substantially
identical to the ownership interests of Parent and which entity specifically and
expressly assumes by written agreement the obligations of Parent under this
Agreement; in either case without Parent being released from liability
hereunder. Subject to the preceding sentence, this Agreement will be binding
upon, inure to the benefit of, and be enforceable by, the parties and their
respective successors and assigns.
SECTION 8.10. Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
(without requirement to post a bond) the terms and provisions of this Agreement,
this being in addition to any other remedy to which they are entitled at law or
in equity.
SECTION 8.11. Severability. Whenever possible, each provision or portion of
any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision
- 31 -
<PAGE>
of this Agreement is held to be invalid, illegal or unenforceable in any respect
under any applicable law or rule in any jurisdiction, such invalidity,
illegality or unenforceability will not affect any other provision or portion of
any provision in such jurisdiction, and this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision or portion of any provision had never been contained
herein.
- 32 -
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.
DAVCO RESTAURANTS, INC.
By: /s/ David J. Norman
-----------------------------
Name: David J. Norman
Title: Secretary
Attest:
/s/ Richard H. Borchers
--------------------------------
Name: Richard H. Borchers
Title: Executive Vice President
DAVCO ACQUISITION HOLDING INC.
By: /s/ Ronald D. Kirstien
-----------------------------
Name: Ronald D. Kirstien
Title: President
Attest:
/s/ Harvey Rothstein
--------------------------------
Name: Harvey Rothstein
Title: Vice President
DAVCO MERGER SUB INC.
By: /s/ Ronald D. Kirstien
-----------------------------
Name: Ronald D. Kirstien
Title: President
Attest:
/s/ Harvey Rothstein
--------------------------------
Name: Harvey Rothstein
Title: Vice President
- 33 -
<PAGE>
DISCLOSURE SCHEDULE
Section 3.1(b) - Subsidiaries
Section 3.1(c) - Capitalization
Section 3.1(d) - Authority
Section 3.1(d)(iii) - Consents
Section 3.1(f) - Absence of Changes
Section 4.1(v) - Conduct of Business: Assets
Section 4.1(vii) - Conduct of Business: Indebtedness
<PAGE>
Section 3.1(b)
Subsidiaries
Name Jurisdiction Capitalization Ownership*
Southern Hospi- Tennessee 100 shares Company
tality Corporation common stock
outstanding
MDF, Inc. Delaware 100 shares Company
common stock
outstanding
FriendCo Rest- Maryland 100 shares Company
aurants, Inc. common stock
outstanding
Heron Realty Maryland 100 shares Company
Corporation common stock
("Heron") outstanding
DavCo Oil Company Maryland 100 shares Heron
common stock
outstanding
- ------------------------
* All shares are owned 100% by the entity shown.
<PAGE>
Section 3.1(c)
Capitalization
See "Stock Option Summary by Individual", attached hereto as Attachment A.
<PAGE>
Attachment A
<TABLE>
<CAPTION>
Stock Option Summary by Individual
Option Price: $16.125 $8.500 $9.875
------- ------ ------
Executives 1994 Pool 1996 Pool 1997 Pool Totals
--------------- --------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. Kirstien * Orig. Issued 0 7,500 7,500 15,000
Cancelled 0 0
--------------- --------------- -------------- --------------- -----------
Remaining 0 7,500 7,500 15,000
H. Rothstein * Orig. Issued 0 7,500 7,500 15,000
Cancelled 0 0
0
--------------- --------------- -------------- --------------- -----------
Remaining 0 7,500 7,500 15,000
J. Cunnane Orig. Issued 5,000 3,000 3,000 11,000
Cancelled 0
0
--------------- --------------- -------------- --------------- -----------
Remaining 5,000 3,000 3,000 11,000
R. Borchers Orig. Issued 5,000 3,000 3,000 11,000
Cancelled 0
0
--------------- --------------- -------------- --------------- -----------
Remaining 5,000 3,000 3,000 11,000
P. Campisi Orig. Issued 0 3,000 0 3,000
Cancelled 4,000 3,000 7,000
Re-Issued 5,000 5,000
---------------- ---------------- -------------- --------------- -----------
Remaining 1,000 0 0 1,000
C. Graham Orig. Issued 5,000 0 0 5,000
Cancelled 5,000 5,000
0
---------------- ---------------- -------------- --------------- -----------
Remaining 0 0 0 0
P. Albright Orig. Issued 5,000 0 0 5,000
Cancelled 3,000 3,000
0
---------------- ---------------- ------------- --------------- -----------
Remaining 2,000 0 0 2,000
C. McGuire Orig. Issued 0 1,000 3,000 4,000
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 1,000 3,000 4,000
<PAGE>
R. Jacobs Orig. Issued 0 1,500 1,500 3,000
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 1,500 1,500 3,000
D. Jones Orig. Issued 0 1,500 2,000 3,500
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 1,500 2,000 3,500
D. Norman Orig. Issued 0 0 2,000 2,000
Cancelled 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 0 2,000 2,000
Total Exec.'s Total Issued 20,000 28,000 29,500 77,500
Cancelled 12,000 3,000 0 15,000
Re-Issued 5,000 0 0 5,000
---------------- ---------------- ------------- --------------- -----------
Remaining 13,000 25,000 29,500 67,500
================ ================ ============= =============== ===========
<PAGE>
Directors 1994 Pool 1996 Pool 1997 Pool Totals
---------------- ---------------- ------------- --------------- -----------
B. Winokur Orig. Issued 10,000 10,000 4,000 24,000
Cancelled 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 10,000 10,000 4,000 24,000
G. Marchetti Orig. Issued 5,000 3,000 4,000 12,000
Cancelled 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 5,000 3,000 4,000 12,000
R. Habeck Orig. Issued 2,500 3,000 4,000 9,500
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 2,500 3,000 4,000 9,500
E. Chambers Orig. Issued 2,500 3,000 4,000 9,500
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 2,500 3,000 4,000 9,500
J. Farley * Orig. Issued 0 1,000 4,000 5,000
Cancelled 0 0 0
Re-Issued 0 0
---------------- ---------------- -------------- ------------- ------------
Remaining 0 1,000 4,000 5,000
H. Rosser Orig. Issued 0 0 4,000 4,000
Cancelled 0 0
0
---------------- ---------------- ------------- --------------- -----------
Remaining 0 0 4,000 4,000
Total Directors Total Issued 20,000 20,000 24,000 64,000
Cancelled 0 0 0 0
Re-Issued 0 0 0 0
---------------- ---------------- -------------- ------------- ------------
Remaining 20,000 20,000 24,000 64,000
================ ================ ============== ============= ============
*********** ********** **************** **************** ************** ************* ************
Combined Total Issued 40,000 48,000 53,500 141,500
Cancelled 12,000 3,000 0 15,000
Re-Issued 5,000 0 0 5,000
---------------- ---------------- -------------- ------------- ------------
Remaining 33,000 45,000 53,500 131,500
---------------- ---------------- ============== ============= ============
</TABLE>
<PAGE>
* Footnote: The above does not include any options received as part of the
Companys' IPO. Those options are as follows:
R. Kirstien 330,769
H. Rothstein 184,274
J. Farley/S. Day 40,575
Warrants: WEP 441,026
----------
Subtotal: 996,644
Per Above 131,500
Total Options/Warrants: 1,128,144
<PAGE>
Section 3.1(d)
Authority
None.
<PAGE>
Section 3.1(d)(iii)
Consents
[Premerger notification and clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.]
<PAGE>
Section 3.1(f)
Absence of Changes
1. The Company has entered into that certain Asset Purchase and Sale
Agreement, dated as of September 24, 1997, by and among the Company, MDF,
and Western and Southern Food Services I, L.L.C., providing for the sale of
certain MDF restaurants.
<PAGE>
Section 4.1(v)
Conduct of Business: Assets
1. The Company has entered into that certain Asset Purchase and Sale
Agreement, dated as of September 24, 1997, by and among the Company, MDF,
and Western and Southern Food Services I, L.L.C., providing for the sale of
certain MDF restaurants.
<PAGE>
Section 4.1(vii)
Conduct of Business: Indebtedness
None.
<PAGE>
Exhibit A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DAVCO RESTAURANTS, INC.
ARTICLE ONE
The name of the corporation is DavCo Restaurants, Inc. (hereinafter called
the "Corporation").
ARTICLE TWO
The address of the Corporation's registered office in the state of Delaware
is 1013 Centre Road, Wilmington, Delaware 19805, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is
Corporation Service Company.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE FOUR
The total number of shares which the Corporation shall have the authority
to issue is one thousand (1,000) shares, all of which shall be shares of Common
Stock, with a par value of $0.001 per share.
ARTICLE FIVE
The Corporation is to have perpetual existence.
ARTICLE SIX
The directors shall have the power to adopt, amend or repeal By-Laws,
except as may be otherwise be provided in the By-Laws.
ARTICLE SEVEN
The Corporation expressly elects not to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
<PAGE>
ARTICLE EIGHT
Section 1. Nature of Indemnity. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he (or a person of whom
he is the legal representative), is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent which it is empowered to do so by the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding and such indemnification shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except as provided
in Section 2 of this Article Eight, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding initiated by such
person only if such proceeding was authorized by the Board of Directors of the
Corporation. The right to indemnification conferred in this Article Eight shall
be a contract right and, subject to Sections 2 and 5 of this Article Eight,
shall include the right to payment by the Corporation of the expenses incurred
in defending any such proceeding in advance of its final disposition. The
Corporation may, by action of the Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
Section 2. Procedure for Indemnification of Directors and Officers. Any
indemnification of a director or officer of the Corporation under Section 1 of
this Article Eight or advance of expenses under Section 5 of this Article Eight
shall be made promptly, and in any event within 30 days, upon the written
request of the director or officer. If a determination by the Corporation that
the director or officer is entitled to indemnification pursuant to this Article
Eight is required, and the Corporation fails to respond within sixty days to a
written request for indemnity, the Corporation shall be deemed to have approved
the request. If the Corporation denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within 30 days, the right to indemnification or
advances as granted by this Article Eight shall be enforceable by the director
or officer in any court of competent jurisdiction. Such person's costs and
expenses incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to
2
<PAGE>
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any, has been tendered
to the Corporation) that the claimant has not met the standards of conduct which
make it permissible under the General Corporation Law of the State of Delaware
for the Corporation to indemnify the claimant for the amount claimed, but the
burden of such defense shall be on the Corporation. Neither the failure of the
Corporation (including the Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law of the State of Delaware, nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
Section 3. Nonexclusivity of Article Eight. The rights to indemnification
and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article Eight shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 4. Insurance. The Corporation may purchase and maintain insurance
on its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the Corporation or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not the Corporation would have the power to indemnify such
person against such liability under this Article Eight.
Section 5. Expenses. Expenses incurred by any person described in Section 1
of this Article Eight in defending a proceeding shall be paid by the Corporation
in advance of such proceeding's final disposition unless otherwise determined by
the Board of Directors in the specific case upon receipt of an undertaking by or
on behalf of the director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation. Such
expenses incurred by other employees and agents may be so paid upon such terms
and conditions, if any, as the Board of Directors deems appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
foregoing provisions of this Article Eight and who are or were employees or
agents of the Corporation, or who are or were serving at the request of the
Corporation as employees or agents of another corporation, partnership, joint
venture, trust or other enterprise, may
3
<PAGE>
be indemnified to the extent authorized at any time or from time to time by the
Board of Directors.
Section 7. Contract Rights. The provisions of this Article Eight shall be
deemed to be a contract right between the Corporation and each director or
officer who serves in any such capacity at any time while this Article Eight and
the relevant provisions of the General Corporation Law of the State of Delaware
or other applicable law are in effect, and any repeal or modification of this
Article Eight or any such law shall not affect any rights or obligations then
existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article Eight,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article
Eight with respect to the resulting or surviving corporation as he or she would
have with respect to such constituent corporation if its separate existence had
continued.
ARTICLE NINE
The Corporation reserves the right to amend or repeal any provisions
contained in this Certificate of Incorporation from time to time and at any time
in the manner now or hereafter prescribed by the laws of the State of Delaware,
and all rights conferred upon stockholders and directors are granted subject to
such reservation.
4
<PAGE>
Annex B
November 6, 1997
Board of Directors
DavCo Restaurants, Inc.
1657 Crofton Boulevard
Crofton, MD 21114
Dear Sirs:
We understand that DavCo Restaurants, Inc. ("DavCo" or the "Company")
is contemplating entering into a definitive agreement (the "Agreement") with
DavCo Acquisition Holding Inc. ("DAC" or "Newco"), a company formed by Citicorp
Venture Capital, Ltd. ("CVC") and certain of its affiliates and certain members
of management and their affiliates (collectively, the "Affiliated
Shareholders"), which together control approximately 55.3% of the total
fully-diluted shares outstanding of DavCo, under which DAC and a wholly-owned
subsidiary of DAC (the "Subsidiary"), will offer to purchase for $20.00 in cash
all issued and outstanding shares of common stock (the "Common Stock"), par
value $0.001, of the Company owned by shareholders other than CVC and certain
members of management (the "Proposed Transaction"). We additionally understand
that the consummation of the offer requires and will be conditioned on: (i) the
holders of a majority of the outstanding shares held by shareholders other than
CVC, certain members of management and their respective affiliates and
associates (the "Non-Affiliated Shareholders"), vote to approve the Proposed
Transaction, (ii) approval of the Proposed Transaction or the expiration of
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
(iii) the holders of not more than 5.0% of the Company's fully-diluted shares
outstanding exercise their dissenters' rights with respect to the Proposed
Transaction and (iv) other conditions customary to transactions of this type. We
further understand that, pursuant to the Agreement, after receiving shareholder
approval, DAC and the Subsidiary will cause the Subsidiary to be merged with and
into the Company (the "Merger") with the Company surviving the Merger as a
direct wholly-owned subsidiary of DAC. We further understand that, pursuant to
the Agreement, the holders of any issued and outstanding shares of Common Stock
not tendered pursuant to the Proposed Transaction (other than DAC, the
Subsidiary and holders of shares of Common Stock who have validly exercised
appraisal rights under the Delaware General Corporate Law) will receive $20.00
per share in cash in the Merger.
You have asked for our opinion as investment bankers (the "Opinion") as
to the fairness, from a financial point of view, of the cash consideration to be
paid to the Non-Affiliated Shareholders under the terms of the Proposed
Transaction.
Equitable Securities Corporation ("Equitable"), as part of its
investment banking business, is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Equitable has received a fee for rendering this opinion; however, our fee was
not contingent upon the consummation of the Proposed Transaction. We do not
currently publish research reports or actively trade the Common Stock of the
Company.
<PAGE>
For the purposes of the Opinion set forth herein, we have:
1. reviewed the audited and unaudited financial statements for the
four most recent fiscal years and interim periods of DavCo;
2. discussed the past and current operations, the financial condition
and the prospects of the Company with the management of DavCo and
its subsidiaries;
3. reviewed with the management of DavCo and its subsidiaries certain
business plans of the Company and certain financial projections
prepared by the management of DavCo and pertaining to DavCo and
its subsidiaries;
4. reviewed the terms of the Proposed Transaction with DavCo and its
legal advisors;
5. reviewed the historical market prices and reported trading volumes
of the Common Stock;
6. compared the price per share offered in the Proposed Transaction
to historical market prices of the Common Stock;
7. compared the financial performance of DavCo with, and reviewed the
prices and reported trading activity of the securities of, certain
publicly traded companies whose operating characteristics and/or
industry focus we believe resemble those of DavCo;
8. reviewed the financial terms of selected acquisitions of the
remaining minority interest of other publicly-traded companies;
9. reviewed the financial terms of selected control acquisitions of
companies whose operating characteristics and/or industry focus we
believe resemble those of DavCo;
10. performed a discounted cash flow analysis of DavCo based upon the
financial information and financial projections provided to us by
the management of DavCo;
11. performed a stand-alone leveraged buyout analysis utilizing
operating assumptions provided to us by the management of DavCo
and the capital structure as outlined by the Company's lender;
12. performed a leveraged recapitalization analysis of DavCo based
upon financial information provided to us by the management of
DavCo; and
13. reviewed such other information and performed such other analyses
as we have deemed appropriate.
<PAGE>
In rendering this opinion, we have assumed and relied upon, without
assuming responsibility for independent verification, the accuracy and
completeness of the information reviewed by us or that was furnished to us by or
on behalf of the Company. With respect to the financial projections provided to
us, we have assumed that they have been reasonably prepared and reflect the best
currently available estimates and good faith judgments of the management of
DavCo as to the future financial performance of DavCo. We have also assumed,
based upon the information which has been provided to us and without assuming
responsibility for independent verification thereof, that no material
undisclosed or contingent liability (disclosed or undisclosed) exists with
respect to DavCo. Our opinion is based necessarily on the economic, market, and
other conditions as in effect on, and the information made available to us as
of, the date hereof. We have not made an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of DavCo, nor were we
furnished with such evaluations or appraisals. We have not been requested to,
and did not, solicit third party indications of interest in DavCo, and have
assumed with your permission that DAC has no present intention to sell the
Company after consummating the Proposed Transaction.
DavCo acknowledges that the opinion and any advice or materials
provided by Equitable in connection with its engagement hereunder is intended
for the benefit and use of the Board of Directors in considering the Proposed
Transaction to which the opinion, advice or material relate and the Company
agrees that no such opinion, advice or material shall be used for any other
purpose or be reproduced, disseminated, quoted or referred to at any time, in
whole or in part, in any filing, report, document, release or other
communication used in connection with the Proposed Transaction (unless required
to be filed, quoted or referred to by applicable regulatory requirements), nor
shall this opinion be used for any other purposes, without Equitable's prior
written consent, which consent shall not be unreasonably withheld. This letter
does not constitute a recommendation to any shareholder of the Company as to how
such shareholder should vote at a shareholders' meeting that may be held in
connection with the Proposed Transaction.
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, that the cash consideration to be received by the holders of
Common Stock (other than the Affiliated Shareholders) in the Proposed
Transaction is fair from a financial point of view to such holders.
Very Truly Yours,
Equitable Securities Corporation
<PAGE>
ANNEX C
DELAWARE GENERAL CORPORATION LAW
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to sec. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258 or sec. 263 of
this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
stockholders; and further provided that no appraisal rights shall be available
for any shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to secs. 251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
<PAGE>
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares described in the foregoing subparagraphs
a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under sec. 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228 or sec.
253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand
2
<PAGE>
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify stockholders
of the effective date of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the effective date
of the merger or consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are entitled to
appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided,
however, that if such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance, a
record date that shall be not more than 10 days prior to the date the notice
is given, provided, that if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
3
<PAGE>
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
4
<PAGE>
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
5
<PAGE>
SCHEDULE I
PURCHASES OF SHARES BY DAVCO
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
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>
