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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 30, 1998
                         Commission File Number 1-13226

                                DENAMERICA CORP.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

             Georgia                                    58-1861457
---------------------------------           ------------------------------------
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)

        7373 N. Scottsdale Road
      Suite D-120, Scottsdale, AZ                          85253
----------------------------------------                ----------
(Address of principal executive offices)                (Zip Code)

       Registrant's telephone number, including area code: (480) 483-7055

           Securities Registered Pursuant to Section 12(b) of the Act:

      Title of each class                   Name of Exchange on Which Registered
      -------------------                   ------------------------------------
 Common Stock, $.10 par value                       American Stock Exchange

           Securities Registered Pursuant to Section 12(g) of the Act:
                                      None

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to the Form 10-K. [X]

         The aggregate  market value of the Common Stock of the Registrant  held
by  non-affiliates  of the Registrant  (6,620,869  shares) on March 31, 1999 was
$6,620,869.  The aggregate market value was computed by reference to the closing
price of the Common Stock on such date.  For purposes of this  computation,  all
directors,  executive officers,  and 10% beneficial owners of the registrant are
deemed to be affiliates.  Such  determination  should not be deemed an admission
that such directors,  executive officers, or 10% beneficial owners are, in fact,
affiliates of the registrant.

         Number  of shares of Common  Stock  outstanding  as of March 31,  1999:
13,485,277 shares of Common Stock, $.10 par value.

         Documents incorporated by reference:  None.

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<PAGE>
                                DENAMERICA CORP.

                           ANNUAL REPORT ON FORM 10-K

                       FISCAL YEAR ENDED DECEMBER 30, 1998

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

                                     PART I

ITEM 1.     BUSINESS...........................................................1
ITEM 2.     PROPERTIES........................................................21
ITEM 3.     LEGAL PROCEEDINGS.................................................21
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............21

                                     PART II

ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
            RELATED STOCKHOLDER MATTERS.......................................22
ITEM 6.     SELECTED FINANCIAL DATA...........................................23
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS...............................24
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
            MARKET RISK.......................................................30
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................30
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE...............................30

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................31
ITEM 11.    EXECUTIVE COMPENSATION............................................33
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
            AND MANAGEMENT....................................................38
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................39

                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
            REPORTS ON FORM 8-K...............................................40
SIGNATURES  ..................................................................43

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1

                                   ----------

                 STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

THE  STATEMENTS  CONTAINED  IN THIS  REPORT  ON FORM  10-K  THAT ARE NOT  PURELY
HISTORICAL  ARE  FORWARD-LOOKING  STATEMENTS  WITHIN THE  MEANING OF  APPLICABLE
SECURITIES LAWS.  FORWARD-LOOKING  STATEMENTS INCLUDE  STATEMENTS  REGARDING THE
COMPANY'S   "EXPECTATIONS,"    "ANTICIPATION,"   "INTENTIONS,"   "BELIEFS,"   OR
"STRATEGIES"  REGARDING  THE FUTURE.  FORWARD-LOOKING  STATEMENTS  ALSO  INCLUDE
STATEMENTS  REGARDING  REVENUE,  MARGINS,  EXPENSES,  AND EARNINGS  ANALYSIS FOR
FISCAL 1999 AND  THEREAFTER;  FUTURE  RESTAURANT  OPERATIONS  AND NEW RESTAURANT
ACQUISITIONS OR DEVELOPMENT;  THE RESTAURANT INDUSTRY IN GENERAL;  AND LIQUIDITY
AND ANTICIPATED  CASH NEEDS AND  AVAILABILITY.  ALL  FORWARD-LOOKING  STATEMENTS
INCLUDED IN THIS REPORT ARE BASED ON INFORMATION  AVAILABLE TO THE COMPANY AS OF
THE FILING DATE OF THIS REPORT,  AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE
ANY SUCH FORWARD-LOOKING  STATEMENTS.  THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY  FROM THE  FORWARD-LOOKING  STATEMENTS.  AMONG THE FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER  MATERIALLY ARE THE FACTORS  DISCUSSED IN ITEM 1,
"SPECIAL CONSIDERATIONS."

                                      -i-
<PAGE>
                                     PART I

ITEM 1. BUSINESS.

GENERAL

         The  Company  currently  operates  201  family-oriented,   full-service
restaurants in 25 states,  primarily in the southwestern,  midwestern,  western,
and  southeastern  United  States.  The  restaurants  include 101 Black-eyed Pea
restaurants,  located primarily in Texas, Georgia, Arizona,  Oklahoma,  Florida,
and the Washington,  D.C. area, and 100 Denny's  restaurants,  which  represents
approximately  5.8% of the  Denny's  system and makes the  Company  the  largest
Denny's  franchisee in terms of revenue and the number of restaurants  operated.
The Company has sold or converted to the Denny's  concept all of the restaurants
it previously  operated under various other  restaurant  concepts  ("non-branded
restaurants").

         The Company currently intends to increase the number of its restaurants
primarily through the development of new Black-eyed Pea and Denny's restaurants.
In addition,  the Company may expand its operations  through the  acquisition of
one or more  restaurant  chains  or  multiple  restaurant  locations.  Any  such
acquisitions  would be made only if they can be  integrated  with the  Company's
existing  restaurant  operations and only if they would have a meaningful impact
on the Company's operations.  See Item 1, "Business - Strategy." As used in this
Report,  the term "Company"  refers to DenAmerica  Corp.  and its  predecessors,
subsidiaries, and operating divisions. The Company's principal executive offices
are located at 7373 N. Scottsdale Road, Suite D-120, Scottsdale,  Arizona 85253,
and its telephone number is (480) 483-7055.

THE COMPANY

         The Company began  operations  in 1986 through one or more  predecessor
entities  under  common  control.  The  Company  was  incorporated  in 1989  and
initially  pursued an  aggressive  program  of growth  through  acquisitions  of
Denny's  and  other   restaurants   and  through   development  of  new  Denny's
restaurants.  The Company resulted from the March 29, 1996 merger (the "Merger")
of Denwest  Restaurant  Corp.  ("DRC") and  American  Family  Restaurants,  Inc.
("AFR").  The Company acquired  Black-eyed Pea U.S.A., Inc. ("BEP") in July 1996
(the "BEP  Acquisition").  The table below sets forth information  regarding the
number of restaurants that the Company has acquired, developed, converted to the
Denny's  concept,  and sold or closed in each year since the beginning of fiscal
1993, including restaurants  developed,  sold, or closed by BEP prior to the BEP
Acquisition.

           RESTAURANTS ACQUIRED, DEVELOPED, CONVERTED, SOLD, OR CLOSED
<TABLE>
<CAPTION>
                                          1993    1994    1995    1996    1997    1998
                                          ----    ----    ----    ----    ----    ----
<S>                                       <C>     <C>     <C>     <C>     <C>     <C>
BLACK-EYED PEA RESTAURANTS:
   Number open beginning of period .....    82      97     103     105      93     104
   Acquired ............................     0       0       0       0       9       2
   Developed ...........................    15       6       5       0       4       0
   Sold or closed ......................     0       0      (3)    (12)     (2)     (5)
                                          ----    ----    ----    ----    ----    ----
   Number open at end of period ........    97     103     105      93     104     101
                                          ====    ====    ====    ====    ====    ====
DENNY'S RESTAURANTS:
   Number open beginning of period .....    89     102     148     168     182     174
   Acquired ............................     2      40       3       0       0       0
   Developed ...........................     4       6       8       5       1       0
   Converted from other concept ........     7       1      10      15      10       0
   Sold or closed ......................     0      (1)     (1)     (6)    (19)    (74)
                                          ----    ----    ----    ----    ----    ----
   Number open at end of period ........   102     148     168     182     174     100
                                          ====    ====    ====    ====    ====    ====
NON-BRANDED RESTAURANTS:
   Number open beginning of period .....    43      59      56      82      20       3
   Acquired ............................    21       1      36       0       0       0
   Converted ...........................    (7)     (1)    (10)    (15)    (10)      0
   Sold or closed ......................    (1)     (3)     (0)    (47)     (7)     (3)
                                          ----    ----    ----    ----    ----    ----
   Number open at end of period ........    59      56      82      20       3       0
                                          ====    ====    ====    ====    ====    ====
TOTAL NUMBER OF RESTAURANTS OPEN AT END
OF PERIOD ..............................   258     307     355     295     283     201
                                          ====    ====    ====    ====    ====    ====
</TABLE>
<PAGE>
         The following table sets forth certain  information with respect to the
Company's restaurants as of March 31, 1999.

              BLACK-EYED PEA   DENNY'S                  BLACK-EYED PEA   DENNY'S
              --------------   -------                  --------------   -------
Alabama.......                     1      Nebraska......                     4
Arizona.......       7            13      Nevada........                     1
Arkansas......                     1      New Mexico....       2
Colorado......                     7      North Carolina       1
Florida.......       3            19      Oklahoma......       5             7
Georgia.......       8                    Oregon........                     1
Idaho.........                     5      South Carolina       1
Iowa..........                     4      South Dakota..                     1
Kansas........       2             1      Tennessee.....       1
Louisiana.....                     1      Texas.........      61            23
Maryland......       4                    Utah..........                     8
Minnesota.....                     1      Virginia......       5
Missouri......       1             1      Wisconsin.....                     1
                                                            ----          ----
                                               Totals...     101           100
                                                            ====          ====

STRATEGY

         The  Company's  business  strategy is to (i)  enhance  its  operational
efficiencies;  (ii) refinance  existing  indebtedness  and match cash flows from
operations  with  debt  service  obligations;   (iii)  enhance  and  refine  the
Black-eyed Pea restaurant concept; (iv) continue to develop new restaurants; (v)
sell or close certain underperforming  restaurants;  and (vi) acquire additional
restaurants.

ENHANCEMENT OF OPERATING EFFICIENCIES

         The  Company   intends  to  enhance  its  operating   efficiencies   by
concentrating its restaurant  development and acquisition  efforts, as described
below, in selected  markets where it operates  existing  restaurants in order to
capitalize on certain operating  efficiencies that such concentration  generally
provides.  The Company's experience indicates that operating multiple restaurant
locations  in targeted  markets  enables  each  restaurant  within the market to
achieve  increased  customer  recognition  and to obtain  greater  benefits from
advertising  and  marketing   expenditures   than  can  be  obtained  by  single
restaurants in isolated  markets.  In addition,  concentration of restaurants in
specific markets  generally  produces  economies of scale and costs savings as a
result of lower overall  management costs, lower costs of goods sold as a result
of lower  distribution  costs,  more efficient  utilization  of advertising  and
marketing programs, and other administrative  savings. The Company believes that
this strategy has been particularly  successful in Texas, Oklahoma, and Arizona,
where the Company operates the majority of its Black-eyed Pea  restaurants.  See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - General."

REFINANCING EXISTING INDEBTEDNESS

         During 1998, the Company sold or refinanced certain assets in an effort
to reduce its  outstanding  indebtedness  and  better  match its cash flows from
operations with its debt service  obligations.  To that end, the Company sold 76
restaurants  in March 1998 and applied the  proceeds  from those sales to reduce
its  outstanding  debt.  The Company  also  refinanced  certain of its  existing
obligations during 1998.

         In April 1999,  the Company  obtained a commitment  for new  borrowings
totaling  $20.1  million.  The Company  intends to use the  proceeds  from these
borrowings  primarily to permanently  retire its existing credit facility and to
repay other outstanding  obligations.  See Item 7, "Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital   Resources."   The  Company  intends  to  continue  to  pursue  various
alternatives to refinance other assets during 1999 in an effort to further match
its cash flows to its debt service obligations.

                                       2
<PAGE>
ENHANCEMENT OF AND REFINEMENTS TO THE BLACK-EYED PEA CONCEPT

         The  Company  has  initiated  a  program  to  enhance  and  refine  the
Black-eyed Pea restaurant  concept in order to improve the unit economics of its
Black-eyed Pea restaurants.  During 1998, the Company completed development of a
number of changes to its "prototype"  Black-eyed Pea  restaurant.  These changes
are designed to improve unit economics by reducing the costs required to develop
and equip each new restaurant. The changes include the following:

         *  de-emphasizing  bar sales,  which currently account for only 2.0% of
            sales at Black-eyed Pea restaurants, in order to eliminate the costs
            associated with installing, equipping, and stocking a full bar;

         *  reducing the overall  size of its  prototype  restaurant  to between
            approximately  4,900 and 5,400 square feet from the previous average
            of 5,400 square feet, which reduces  construction,  furnishing,  and
            equipment costs; and

         *  increasing  emphasis on take-out sales,  which grew to approximately
            11.4% of per-store  sales in fiscal 1998 from  approximately  11% in
            fiscal 1997.

The Company currently plans to open eight new Black-eyed Pea restaurants  during
1999 utilizing the new prototype  design.  Although the Company  acquired all of
the remaining  franchised  Black-eyed Pea restaurants during 1998, it may resume
its franchising activities in the future.

NEW RESTAURANT DEVELOPMENT

         The Company plans to continue to develop new restaurants,  particularly
in markets where it currently  operates  restaurants,  in order to capitalize on
positive  demographic and traffic patterns,  an existing  management  structure,
established  advertising  programs,  and reduced  distribution costs of food and
beverages.   The  development   efforts  will   concentrate  on  Black-eyed  Pea
restaurants  because of the better unit economics provided by those restaurants.
The  Company  believes  that it is  positioned  for  growth  as a result  of the
development  of the new Black-eyed  Pea prototype and  anticipates  that it will
open eight new Black-eyed  Pea  restaurants by the end of 1999. The Company also
has a development  arrangement  with Denny's,  Inc.,  the  franchiser of Denny's
restaurants,  under which the Company will develop seven new Denny's restaurants
at specific sites over the next several years.

SALE OR CLOSURE OF CERTAIN RESTAURANTS

         The Company continually  evaluates the operating results of each of its
restaurants and seeks to sell or close any restaurants that do not meet criteria
based on operating  results,  location,  renovation  costs, or other competitive
factors.  Based on these  criteria,  during  1997 and 1998 the  Company  sold or
closed a total of seven Black-eyed Pea restaurants, 93 Denny's restaurants,  and
10 non-branded restaurants, including the 76 restaurants sold in March 1998. The
Company  applied  the  proceeds  from  certain  of  those  sales to  reduce  its
outstanding indebtedness to a level that the Company believes its operations can
support  profitably or to provide capital for additional  growth. As a result of
those  sales and debt  reduction  and its  current  commitments  for  additional
financing,  the Company  believes  that it is now  positioned  to resume  growth
through  development and acquisitions of additional  restaurants.  To the extent
that the Company deems it  appropriate  to sell  additional  restaurants  in the
future,  the Company  intends to apply the  proceeds  from such sales to further
reduce its outstanding indebtedness.

RESTAURANT ACQUISITIONS

         The Company plans to acquire  restaurants  when it believes it can take
advantage of its organizational infrastructure and management expertise to bring
improved quality and operating  efficiencies to the acquired  restaurants.  From
January  1, 1994  through  July 3,  1996,  the  Company  acquired a total of 179
restaurants in nine transactions.  Of these restaurants,  99 were Black-eyed Pea
restaurants  purchased in the BEP  Acquisition  and 43 were Denny's  restaurants
acquired  either from Denny's,  Inc. or from other Denny's  franchisees.  During
fiscal  1997  and  1998,  the  Company  acquired  a total of 11  Black-eyed  Pea
restaurants from the franchisees operating

                                       3
<PAGE>
those  restaurants.  These  strategic  acquisitions  increased  market  share in
existing  marketplaces or extended geographic coverage and generally resulted in
a  decrease  in  administrative  expenses  as a  percentage  of sales  without a
proportionate cost increase.

BLACK-EYED PEA RESTAURANTS

CONCEPT

         The Company  currently  operates 101 Black-eyed  Pea  restaurants in 13
states.   Black-eyed   Pea   restaurants   are   full-service,   casual   dining
establishments  featuring wholesome  home-style meals. The Company believes that
the  emphasis  of  Black-eyed  Pea  restaurants  on  quality  food,  comfortable
atmosphere,  friendly  service,  and reasonable prices attracts a broad range of
customers,  including  families and business people.  Black-eyed Pea restaurants
generally are open for lunch and dinner seven days a week,  typically from 11:00
a.m. to 10:00 p.m.

MENU

         Black-eyed Pea restaurants offer a variety of entrees  accompanied by a
broad selection of fresh vegetables and freshly baked breads,  large servings of
iced tea and soft drinks (with complimentary refills), and fruit cobblers, pies,
and other  freshly  prepared  desserts.  Entrees  include  chicken  fried steak,
grilled chicken, seasoned meat loaf, pot roast with gravy, and roast turkey with
dressing.  Black-eyed Pea restaurants  also offer a range of freshly made soups,
salads,  appetizers,  and  sandwiches.  In addition to its standard  menu items,
Black-eyed Pea  restaurants  offer regular daily  specials,  such as chicken pot
pie, fried fish, and chicken and dumplings. Vegetable offerings are an important
component of the Black-eyed  Pea restaurant  menu.  Each  restaurant  features a
dozen vegetables daily, from which customers can make two or three selections to
accompany their meals, as well as a vegetable plate entree, which consists of up
to five  vegetable  selections.  To  encourage  family  dining,  Black-eyed  Pea
restaurants  feature a children's menu, which offers smaller portions of regular
menu items as well as special items, such as peanut butter and jelly and grilled
cheese  sandwiches.  As of December 30, 1998,  the average check per customer at
the Company's  Black-eyed Pea  restaurants  was  approximately  $7.95. In fiscal
1998,  liquor  sales  accounted  for  approximately  2.0% of  total  revenue  of
Black-eyed Pea restaurants.

         Each Black-eyed Pea restaurant has a full-service kitchen,  which gives
it the  flexibility  to prepare  daily and  seasonal  specials  and to otherwise
expand its food  offerings.  The  Company  regularly  reviews  and  revises  the
existing  Black-eyed Pea restaurant menu and conducts consumer tests of new menu
items in order to improve  the  quality  and  breadth of food  offerings  and to
encourage repeat business. The Company maintains a test kitchen facility,  which
includes a full  Black-eyed  Pea  restaurant  cookline,  for use in its  product
development efforts.

RESTAURANT LAYOUT

         Black-eyed  Pea  restaurants  feature a casual and  comfortable  dining
atmosphere  that appeals to a broad  customer  base,  including  families.  Most
Black-eyed Pea restaurants have booth and table seating as well as a small lunch
counter/bar  on one  side of the  dining  room,  which  also  provides  take-out
service.  Black-eyed Pea restaurants  generally range in size from approximately
4,000  square feet to 6,000  square feet and have dining room seating for 160 to
210 customers and counter/bar  seating for  approximately 10 additional  guests.
The  Company's  current  prototype  restaurant is  approximately  4,900 to 5,400
square feet and has dining room seating for  approximately  170 to 200 customers
plus a take-out service counter.

UNIT ECONOMICS

         The  Company  estimates  that  its  total  costs  of  developing  a new
Black-eyed Pea restaurant currently ranges from $400,000 to $450,000,  exclusive
of annual  operating costs and assuming that the land and buildings are obtained
under a lease  arrangement.  These costs include  approximately  (i) $350,000 to
$400,000  for  furniture,   fixtures,  and  equipment,   and  (ii)  $50,000  for
pre-opening  costs,  including  hiring and training costs,  employee wages,  and
advertising.  The Company currently plans to lease  substantially all of its new
Black-eyed Pea restaurant  sites. See Item 1, "Business - Financing and Leasing"
and Item 2, "Properties."

                                       4
<PAGE>
SITE SELECTION

         The  Company  believes  that  proper  site  selection  is  critical  to
maximizing  the success of a particular  Black-eyed Pea  restaurant.  Therefore,
senior  management  devotes  significant  time and  resources in  selecting  and
evaluating each  prospective  site. The Company analyzes a variety of factors in
the site selection  process,  including local market  demographics,  acquisition
cost, site visibility and accessibility, and proximity to significant generators
of  potential  customers  such  as  major  retailers,   retail  centers,  office
complexes,  hotels and entertainment  centers.  The Company develops stand-alone
Black-eyed  Pea  restaurants  as well as  in-line  store  front  restaurants  in
locations that offer visibility and convenient customer access.

FRANCHISING

         The Company  previously  franchised  or licensed a number of Black-eyed
Pea  restaurants  to third  parties.  The Company  acquired all of the remaining
franchised Black-eyed Pea restaurants during fiscal 1998. The Company may resume
its franchising activities in the future.

DENNY'S RESTAURANTS

         The Company  currently  operates 100 Denny's  restaurants in 19 states,
representing  approximately  5.8% of the  Denny's  system.  The  Company  is the
largest  Denny's  franchisee  in terms of revenue and the number of  restaurants
operated.

DENNY'S, INC.

         The Company  operates  its Denny's  restaurants  pursuant to  franchise
agreements  with  Denny's,  Inc. See Item 1,  "Business - Denny's  Restaurants -
Denny's  Franchise  Agreements."  Denny's,  Inc. is a wholly owned subsidiary of
Advantica  Restaurant  Group,  Inc., the successor to Flagstar  Companies,  Inc.
("Advantica"),  one of the largest  restaurant  companies in the United  States.
Advantica currently conducts its restaurant operations through several principal
chains,  the  largest  of  which  is  Denny's,   the  largest   family-oriented,
full-service  restaurant  chain in the  United  States,  with  more  than  1,700
corporate-owned  or  franchised  units in 49 states and six  foreign  countries.
Advantica emerged from bankruptcy  protection in late 1997. See Item 1, "Special
Considerations - The Company relies on Denny's, Inc."

CONCEPT

         Denny's are family-oriented, full-service restaurants, featuring a wide
variety of traditional  family fare. The  restaurants  are designed to provide a
casual  dining  atmosphere  with  moderately  priced  food and quick,  efficient
service.  Denny's  restaurants  generally are open 24 hours a day,  seven days a
week.

MENU AND PRICING

     All Denny's  restaurants  throughout  the United  States have uniform menus
with some regional and seasonal variations. Denny's restaurants serve breakfast,
lunch,  and dinner  and also  feature a "late  night"  menu.  Breakfasts,  which
include Denny's popular breakfast combinations  consisting of a variety of eggs,
omelets,  pancakes,  waffles,  cereals,  and muffins, are served 24 hours a day.
Lunch  and  dinner  entrees  include  a broad  range  of  hamburgers  and  other
sandwiches, steaks, pork chops, and chicken pot pies. The restaurants also offer
a variety of soups, salads, sandwiches,  appetizers, side orders, beverages, and
desserts.  Appetizers include mozzarella sticks,  buffalo wings, chili,  chicken
strips,  and quesadillas.  Desserts include cakes, pies, ice cream, and sundaes.
The restaurants offer free refills on coffee,  soft drinks,  lemonade,  and tea.
Special menus are available for senior citizens and children. As of December 30,
1998, the average check per customer at the Company's  Denny's  restaurants  was
approximately $5.45.

                                       5
<PAGE>
RESTAURANT DESIGN

         The Company's  Denny's  restaurants  generally operate in free-standing
locations  in   high-traffic   commercial   areas.   The   restaurants   average
approximately  4,800 to 5,200 square feet, with seating capacity ranging from 90
to 210 people.  Generally,  the dining areas are fully  carpeted and informal in
design and  contain  booths,  tables,  and counter  seating.  The layout of each
restaurant is designed to easily  accommodate both smaller groups of two to four
as well as large  groups of guests.  All guests are greeted and seated by a host
or hostess when they enter the restaurant.

UNIT ECONOMICS

         The Company  estimates  that its total cost of developing a new Denny's
restaurant  currently  ranges from  $290,000 to  $390,000,  exclusive  of annual
operating  costs and assuming that the land and  buildings are obtained  under a
lease  arrangement.  These costs include  approximately (i) $230,000 to $330,000
for furniture,  fixtures,  and equipment;  (ii) $40,000 for  pre-opening  costs,
including hiring and training costs, employee wages, and advertising;  and (iii)
$20,000 for the initial  franchise fee. The Company leases  substantially all of
its restaurant  sites in order to minimize the costs of acquiring and developing
new restaurants.  The Company currently intends to lease its restaurant sites in
the  future.  See  Item 1,  "Business  -  Financing  and  Leasing"  and  Item 2,
"Properties."

SITE SELECTION

         When evaluating whether and where to develop a new Denny's  restaurant,
the Company conducts an internal  screening  process to determine a restaurant's
estimated profit  potential.  The Company considers the location of a restaurant
to be one of the most critical elements of the restaurant's  long-term  success.
Accordingly,   the  Company   expends   significant   time  and  effort  in  the
investigation  and evaluation of potential  restaurant  sites. In conducting the
site selection  process,  the Company primarily  evaluates site  characteristics
(such  as  visibility,   accessibility,   and  traffic  volume),  considers  the
restaurant's  proximity to demand  generators (such as shopping malls,  lodging,
and office  complexes),  reviews  potential  competition,  and analyzes detailed
demographic  information  (such  as  population  characteristics,  density,  and
household income levels).  Because Denny's  restaurants are often impulse rather
than destination restaurants, the Company emphasizes visibility and high traffic
patterns in its site selection and places somewhat less importance on population
demographics. Senior corporate management evaluates and approves each restaurant
site prior to its development.  Denny's, Inc. provides site selection guidelines
and  criteria  as well as site  selection  counseling  and  assistance  and must
approve sites selected by the Company.

THE DENNY'S SYSTEM

         Denny's  restaurants are developed and operated pursuant to a specified
system developed by Denny's, Inc. (the "Denny's System"). Denny's, Inc. prepares
and maintains the detailed standards, policies,  procedures,  manuals, and other
requirements  that  constitute  the Denny's  System in order to  facilitate  the
consistent operation and success of all Denny's restaurants.  The Denny's System
includes  distinctive  interior and exterior  designs,  decors,  color  schemes,
furnishings,  and employee uniforms;  uniform  specifications and procedures for
restaurant  operations;  standardized  menus  featuring  unique recipes and menu
items;  procedures for inventory and  management  control;  formal  training and
assistance  programs;   advertising  and  promotional   programs;   and  special
promotional   items.   The  Denny's  System   includes   established,   detailed
requirements  regarding (i) the quality and  uniformity of products and services
offered;  (ii) the purchase or lease, from suppliers approved by Denny's,  Inc.,
of equipment, fixtures,  furnishings,  signs, inventory,  ingredients, and other
products and materials that conform with the standards and specifications of the
Denny's  System;  and (iii)  standards  for the  maintenance,  improvement,  and
modernization of restaurants,  equipment, furnishings, and decor. To ensure that
the highest degree of quality and service is maintained,  each  franchisee  must
operate  each  Denny's   restaurant  in  strict  conformity  with  the  methods,
standards, and specifications designated by Denny's, Inc.

                                       6
<PAGE>
DENNY'S FRANCHISE AGREEMENTS

         The Company is a party to a separate franchise  agreement with Denny's,
Inc. for each of its Denny's  restaurants (the "Denny's Franchise  Agreements").
The  Denny's  Franchise  Agreements  generally  require  payment  of an  initial
franchise fee and a royalty equal to 4% of weekly gross sales (as defined in the
Denny's  Franchise  Agreements)  and an advertising  contribution of 2% to 3% of
weekly  gross  sales  in  markets  where  Denny's,   Inc.  conducts  significant
institutional  advertising.  Initial franchise fees for the Denny's  restaurants
operated by the Company  have ranged from $0 to $35,000.  The Company  currently
pays a franchise fee of $20,000 for each new Denny's  restaurant  that it opens.
The  Denny's  Franchise  Agreements  generally  have a term of 20  years  or the
earlier  expiration  of the  relevant  building  lease  (including  options  for
extensions). A Denny's Franchise Agreement may be terminated by the Company only
upon the occurrence of a material breach by Denny's, Inc.

         The  Denny's  Franchise  Agreements  entitle  the  Company  to use  the
"Denny's" name,  trade symbols,  and  intellectual  property,  including  menus,
symbols,  labels,  and  designs,  to promote  the  restaurants  and the  Denny's
affiliation. Denny's, Inc. also furnishes training and supervisory materials for
maintaining  modern and efficient  operation of the restaurants and helps fund a
national advertising  campaign.  The Company generally is required to maintain a
standard  exterior  decor and  exterior  signs and a consistent  interior  color
scheme and layout at its Denny's  restaurants.  Each Denny's restaurant employee
is required to wear a standard uniform. The Company is free to establish its own
prices  at its  Denny's  restaurants,  which  may  differ  by  location  and are
influenced by geographic and other considerations.

         An agreement between the Company and Denny's,  Inc. gives Denny's, Inc.
the right to terminate  substantially all of the Denny's Franchise Agreements in
the event that Banque  Paribas  takes  certain  actions  while the Company is in
default  under the terms of its credit  facility  with  Banque  Paribas  and the
Company's  other  senior  lenders.  The  cancellation  of the Denny's  Franchise
Agreements  as a result of a default by the  Company  under its credit  facility
would  have a  material  adverse  effect on the  Company.  In the event that the
Company assigns its rights under any of the Denny's Franchise Agreements,  those
agreements  give  Denny's,  Inc.  the  option to  purchase  the  interest  being
transferred.  As  long  as  the  Company  is a  publicly  held  corporation,  an
assignment will be deemed to have occurred only if any person,  entity, or group
of persons (other than a group which includes Jack M. Lloyd,  William J. Howard,
and  William G. Cox,  each of whom is an officer and  director  of the  Company,
Jeffrey D. Miller,  a former officer and director of the Company,  or BancBoston
Ventures,  Inc.  ("BancBoston"),  a  significant  shareholder  of  the  Company)
acquires voting control of the Company's Board of Directors.

         Without the consent of Denny's,  Inc.,  the Company may not directly or
indirectly own, operate,  control,  or have any financial interest in any coffee
shop or  family-style  restaurant  business  or any other  business  that  would
compete  with the  business of any Denny's  restaurant,  Denny's,  Inc.,  or any
affiliate,  franchisee,  or subsidiary of Denny's,  Inc. (other than restaurants
currently  operated  by the  Company).  For two years  after the  expiration  or
termination of a Denny's Franchise Agreement, the Company will not be permitted,
without the consent of Denny's,  Inc.,  directly or indirectly to own,  operate,
control,  or have any  financial  interest  in any coffee  shop or  family-style
restaurant substantially similar to a Denny's located within a 15-mile radius of
a Denny's  restaurant  subject to the  expired or  terminated  agreement.  These
restrictions  will not apply to the operation of another  Denny's  restaurant or
the ownership of less than 5% of the publicly traded stock of any other company.

NON-BRANDED RESTAURANTS

         The Company  previously  operated a number of  non-branded  restaurants
under  various  names.  During  fiscal 1998,  the Company  closed its  remaining
non-branded restaurant.

EXPANSION OF OPERATIONS

         The  Company's  current  growth  plan  is  to  develop  Black-eyed  Pea
restaurants, primarily in Texas, Oklahoma, and Arizona. In addition, the Company
currently plans to develop seven Denny's restaurants over the

                                       7
<PAGE>
next  several  years.  The  Company  also may  acquire  or  develop  restaurants
operating  under different  concepts,  but currently has no plans to do so. This
growth plan emphasizes a continued focus on restaurant locations and operations.
Before  developing or acquiring any restaurants in a particular  location within
its target market,  the Company evaluates factors such as the size of the market
area, demographic and population trends,  competition,  and the availability and
cost of suitable  restaurant  locations.  See Item 1, "Business - Black-eyed Pea
Restaurants  - Site  Selection"  and  "Business  -  Denny's  Restaurants  - Site
Selection."

         The Company  believes it is able to achieve  significant  cost  savings
when it incorporates newly developed or acquired restaurants into its operations
by taking advantage of certain economies of scale associated with administrative
overhead and management personnel and systems. As a result, the Company believes
that its corporate  infrastructure  enables it to eliminate  administrative  and
managerial  redundancies  and  to  reduce  the  overall  operating  costs  on  a
per-restaurant basis. The Company intends to continue developing new restaurants
in order to  enhance  its  presence  in its target  markets;  to  establish  the
necessary  base  from  which it can  further  penetrate  these  markets;  and to
capitalize on purchasing,  advertising,  managerial,  administrative,  and other
efficiencies  that  result from the  concentration  of  restaurants  in specific
markets.

RESTAURANT DEVELOPMENT

         Since 1986,  the  Company has  developed  and/or  converted  67 Denny's
restaurants. In the three and one-half year period prior to the BEP Acquisition,
BEP developed 11 and franchised four Black-eyed Pea restaurants. The Company has
accelerated  the  development  of  additional  Black-eyed  Pea  restaurants  and
anticipates that it will open eight new Black-eyed Pea restaurants  during 1999.
The  Company  also  has  a  development  arrangement  with  Denny's,  Inc.,  the
franchiser  of Denny's  restaurants,  under which the Company will develop seven
new Denny's  restaurants  at specific  sites over the next  several  years.  The
following  table sets forth  certain  information  with respect to the Company's
current restaurant development plans.

                                            PLANNED DEVELOPMENT -
                                            NUMBER OF RESTAURANTS
                                            ---------------------
                        STATE          BLACK-EYED PEA         DENNY'S
                        -----          --------------         -------

                 Arizona ............         2                   1
                 Colorado ...........        --                   2
                 Florida ............        --                   2
                 Oklahoma ...........         1                  --
                 Texas ..............         5                   2
                                             --                  --
                    Totals ..........         8                   7
                                             ==                  ==


The specific time frame in which the Company is able to develop new  restaurants
will be determined by the Company's success in

         *        identifying suitable sites;

         *        obtaining  financing for  construction,  tenant  improvements,
                  furniture, fixtures, and equipment;

         *        negotiating acceptable lease or purchase terms;

         *        securing the  appropriate  governmental  permits and approvals
                  (including  those relating to zoning,  environmental,  health,
                  and liquor licenses);

         *        managing restaurant construction; and

         *        recruiting and training qualified personnel.

There can be no assurance as to the number of new  restaurants  that the Company
will be  able to open or the  ultimate  success  of any  such  restaurants.  The
development of new  restaurants  also may be affected by increased  construction
costs and delays resulting from governmental  regulatory  approvals,  strikes or
work stoppages, and adverse weather conditions.  Newly developed restaurants may
operate at a loss for a period following their initial

                                       8
<PAGE>
opening.  The  length of this  period  will  depend  upon a number  of  factors,
including  the  time of year the  facility  is  opened,  sales  volume,  and the
Company's  ability to control costs.  There can be no assurance that the Company
will be  successful  in achieving  its  expansion  goals  through the opening of
additional  restaurants or that any additional  restaurants that are opened will
be profitable.

RESTAURANT ACQUISITIONS

         The Company actively  evaluates the opportunities to acquire additional
restaurants  or  franchise  rights to existing  restaurants  that it can operate
profitably by integrating the acquired  restaurants with the Company's  existing
operations.  The Company evaluates such opportunities based on numerous factors,
including location, operating history, future potential,  acquisition price, and
the terms and  availability  of financing  for such  restaurants  or  additional
franchise rights. The acquisition of any such existing restaurants or additional
franchise  rights may require the approval of Denny's,  Inc.  and the  Company's
lenders.  There can no be  assurance  that the  Company  will be able to acquire
additional  restaurants,  or that any such restaurants that are acquired will be
profitable to the Company.

RESTAURANT OPERATIONS

MANAGEMENT SERVICES

         The Company  believes  that  successful  execution of basic  restaurant
operations  is  essential  to achieve  and  maintain  a high  level of  customer
satisfaction  in order to enhance  the  Company's  success  and  future  growth.
Therefore,  the Company  devotes  significant  efforts to ensure that all of its
restaurants offer quality food and service.  The Company maintains standards for
the  preparation  and service of quality  food,  the  maintenance  and repair of
restaurant facilitates, and the appearance and conduct of employees.

         Once a  restaurant  is  integrated  into its  operations,  the  Company
provides a variety of corporate  services to assure the  operational  success of
the restaurant and the proper execution of standards required by the Company for
all  of its  restaurants  and by  Denny's,  Inc.  in  the  case  of its  Denny's
restaurants.  The Company's executive management continually monitors restaurant
operations;  maintains management controls;  inspects individual  restaurants to
assure the quality of products and services and the  maintenance  of facilities;
develops employee programs for efficient staffing, motivation, compensation, and
career  advancement;  institutes  procedures  to enhance  efficiency  and reduce
costs; and provides centralized support systems.

         The Company also maintains  quality  assurance  procedures  designed to
ensure  compliance with the high quality of products and services mandated by it
and by Denny's,  Inc. in the case of its Denny's restaurants.  Company personnel
make unannounced visits to its restaurants to evaluate the facilities, products,
employees,  and services.  The Company  believes that its quality review program
and executive oversight enhance restaurant  operations,  reduce operating costs,
improve  customer  satisfaction,  and facilitate the highest level of compliance
with the Company's standards and, in the case of its Denny's restaurants,  those
mandated by Denny's, Inc.

         One vice president of operations  currently  administers the operations
of Black-eyed Pea  restaurants.  The  Black-eyed  Pea restaurant  system has two
regional vice presidents,  who report to the vice president of operations.  Each
regional vice  president is  responsible  for eight to nine  districts,  each of
which is in turn supervised by a district  manager.  Most district  managers are
responsible for six or seven  restaurant  locations.  The management  staff of a
typical  Black-eyed Pea restaurant  consists of a general manager,  an assistant
general  manager,  and  one or  two  assistant  managers.  Each  Black-eyed  Pea
restaurant employs approximately 60 persons.

         The  Company's  two regional vice  presidents  for Denny's  restaurants
currently  administer  the  operations  of the  Company's  Denny's  restaurants.
District managers are responsible for the six to eight restaurants  within their
district.   Restaurant  managers  are  responsible  for  day-to-day  operations,
including  customer  relations,  food  preparation  and service,  cost  control,
restaurant  maintenance,  and personnel relations. As required by Denny's, Inc.,
the  Company  staffs  each of its Denny's  restaurants  with an on-site  general
manager,  two  assistant  managers,  and 20 to 50 full-time or part-time  hourly
employees.

                                       9
<PAGE>
TRAINING

         The Company seeks to attract and retain  high-quality  individuals with
prior restaurant  experience for restaurant  management  positions.  The Company
believes that the training of its management and other  restaurant  employees is
important to its ability to maintain the quality and consistency of its food and
service and to develop the personnel  necessary to achieve its expansion  plans.
Newly hired employees are reviewed at regular intervals during their first year,
and all restaurant  personnel receive annual  performance  reviews.  The Company
generally  seeks to promote  existing  employees to fill  restaurant  management
positions.

         The Company employs a full-time  training  director to oversee training
for its  Black-eyed  Pea  restaurants.  The  Company  requires  each  restaurant
management  employee to participate in a training program at designated training
restaurants. The restaurant management training program utilizes manuals, tests,
and a scheduled  evaluation  process.  In  addition,  the Company has  developed
procedures  for  coordinating  and  overseeing the opening of new Black-eyed Pea
restaurants  in order to maintain  quality and  consistency of food and service.
Special  training teams are on hand at new locations,  generally for a period of
one week before and one week after each restaurant opens.

         The Company  maintains a comprehensive  training  program that provides
all instructors,  facilities, and required training materials necessary to train
its Denny's restaurant managers and other restaurant management  personnel.  The
training  covers all aspects of  management  philosophy  and overall  restaurant
operations,  including  supervisory  skills,  customer  interaction,   operating
standards,  cost control techniques,  accounting procedures,  employee selection
and training,  risk  management,  and the skills  required to perform all duties
necessary for restaurant operations.  New managers work closely with experienced
managers  and district  managers to solidify  their  skills and  expertise.  The
Company designates certain experienced employees as "Certified Trainers" who are
responsible for training newly hired Denny's restaurant employees. The Company's
district  managers  and  general  managers  regularly  participate  in  on-going
training efforts.

MAINTENANCE AND IMPROVEMENT OF RESTAURANTS

         The Company  maintains its Black-eyed Pea and Denny's  restaurants  and
all  associated  fixtures,  furnishings,  and equipment in  conformity  with the
Black-eyed  Pea and the  Denny's  System  concepts,  respectively.  The  Company
operates a centralized  call-in center that  restaurant  managers can contact to
report maintenance or repair  requirements.  The Company then dispatches service
technicians  that it  employs  or  independent  contractors  with  which  it has
maintenance contracts. The Company also makes necessary additions,  alterations,
repairs,  and  replacements to its restaurants,  such as periodic  repainting or
replacement of obsolete  signs,  furnishings,  equipment,  and decor,  including
those  required by Denny's,  Inc.  in the case of its Denny's  restaurants.  The
Company  may be  required,  subject to certain  limitations,  to  modernize  its
Denny's restaurants to the then-current standards and specifications of Denny's,
Inc.

MANAGEMENT INFORMATION SYSTEMS

         The Company maintains a centralized, computerized accounting system for
financial  controls and reporting  functions for all of its  Black-eyed  Pea and
Denny's restaurants.  The Company generally has a point-of-sale reporting system
in each of its Black-eyed Pea and Denny's restaurants,  which provides sales mix
information,  labor scheduling  functions,  and weekly close-out processes.  The
Company's  point-of-sale  compliance  center at its  headquarters in Scottsdale,
Arizona,   handles  point-of-sale  hardware,   software,  and  training  issues.
Restaurant  managers  submit  weekly  reports on sales volume and mix,  customer
counts,  and labor costs to the Company's  corporate  management.  The Company's
Black-eyed  Pea  restaurants  perform  weekly  inventory  counts.  Each  of  the
Company's  Denny's  restaurants  maintains  "par stock"  inventory  levels.  The
Company's  accounting  department  prepares  monthly profit and loss statements,
which  operational  managers  review and  compare  with the  Company's  prepared
budgets.  See  Item  7,  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Year 2000 Compliance."

                                       10
<PAGE>
FINANCING AND LEASING

         It is the  Company's  current  strategy to lease,  rather than own, the
land  and  buildings   associated  with  the  operations  of  its   restaurants.
Historically,  the Company has entered into  sale-leaseback  transactions  under
which the financing  company  purchases the identified  parcel of land and funds
the costs of the restaurant  construction,  excluding the initial franchise fee,
equipment costs, and restaurant pre-opening expenses. The financing company then
leases the restaurant property back to the Company for up to 30 years, including
renewal option  periods,  under the terms of a triple-net  lease.  The Company's
ability  to  effect  its new  restaurant  development  strategy  depends  on the
availability of financing on terms and conditions that the Company  believes are
appropriate  for the risk of the  development.  The  inability of the Company to
secure  sufficient  additional  sale-leaseback  or other financing in the future
could have a  significant  impact on its  ability  to  acquire  or  develop  new
restaurants.

         The Company  entered into a credit  facility  with Banque  Paribas,  as
agent,  and the Company's other senior lenders in connection with the Merger and
the BEP  Acquisition  in 1996.  The Company took a number of steps during fiscal
1998 that  reduced its  outstanding  indebtedness  under the credit  facility in
order to better  match its cash  flows  from  operations  with its debt  service
obligations.  See Item 7,  "Management's  Discussion  and  Analysis of Financial
Condition  and  Results  of  Operations  -  Liquidity  and  Capital  Resources."
Reference is made to Item 13, "Certain  Relationships and Related  Transactions"
for additional  information  regarding sale and lease transactions in connection
with the BEP Acquisition.

         In April 1999, the Company  obtained  financing  commitments in amounts
that it believes will be sufficient for its ongoing  operations and  anticipated
restaurant  development  activities  during  1999.  See  Item  7,  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources."

EQUIPMENT, FOOD PRODUCTS, AND OTHER SUPPLIES

         A purchasing director coordinates  purchasing decisions with respect to
the Company's Black-eyed Pea restaurants. The Company strives to obtain supplies
of a high and consistent  quality at competitive  prices from reliable  sources.
The Company negotiates  directly with food manufacturers for the majority of its
purchases and with local suppliers for fresh produce,  dairy, and meat products.
In addition,  the Company contracts with a centralized  distribution  company to
store and deliver  substantially  all of the  products and supplies it purchases
(other than fresh produce, meat and dairy products).

         The Company's  ability to maintain  consistent  quality  throughout its
Denny's  restaurants  depends in part upon its ability to acquire from  reliable
sources the equipment,  food products,  and related items  necessary to meet the
standards  set by Denny's,  Inc. The Company  believes the  maintenance  of this
uniformity and consistency  enables it to capitalize on the name recognition and
goodwill associated with Denny's restaurants. As a result, the Company leases or
purchases all fixtures, furnishings,  equipment, signs, food products, supplies,
inventory,  and other products and materials  required for the  development  and
operation of its Denny's restaurants from suppliers approved by Denny's, Inc. In
order to be approved as a supplier,  a prospective  supplier must demonstrate to
the  reasonable   satisfaction  of  Denny's,   Inc.  its  ability  to  meet  the
then-current  standards and specifications of Denny's, Inc. for such items, must
possess  adequate  quality  controls,  and must  possess the capacity to provide
supplies promptly and reliably.  Although the Company is not required to acquire
its  equipment  or  supplies  from any  specified  supplier,  it must obtain the
approval  of  Denny's,  Inc.  before  purchasing  or  leasing  any items from an
unapproved supplier.

         The Company's Denny's restaurants operate on a par stock system,  which
enables restaurant managers to place weekly inventory orders based on historical
sales volumes,  thereby  focusing on customer  service rather than on purchasing
decisions.  The Company  purchases  most of its food  inventory  for its Denny's
restaurants  from a single supplier that  specializes in providing food products
to Denny's  franchisees.  The  Company  believes  that its  purchases  from this
supplier enable the Company to maintain a high level of quality  consistent with
Denny's restaurants;  to realize convenience and dependability in the receipt of
its supplies;  to avoid the costs of maintaining a large purchasing  department,
large inventories,  and product  warehouses;  and to attain cost advantages as a
result of volume purchases.  The Company has a supply agreement with its primary
supplier.

                                       11
<PAGE>
The Company  believes  that food goods could be readily  purchased  from a large
number of vendors  throughout  its regions of  operation in the event that it is
unable to purchase sufficient  inventory from its primary supplier.  Each of the
Company's Denny's  restaurants  purchases dairy,  bakery, and produce goods from
approved local vendors.

ADVERTISING AND MARKETING

         The Company uses television,  radio and print advertising,  and special
promotions to increase the traffic and sales at its Black-eyed Pea  restaurants.
The  Company's  strategy is to develop a  sufficient  number of  Black-eyed  Pea
restaurants  in its markets to permit the  cost-effective  use of television and
radio  advertising.   The  Company's   advertising  campaigns  are  designed  to
communicate  the  distinctive  aspects of the  Black-eyed  Pea  concept  and are
targeted to appeal to its customer  base.  The Company  employs a full-time vice
president of marketing who plans, develops, and implements advertising campaigns
for  its  Black-eyed  Pea  restaurants.   The  Company  also  uses  full-service
advertising  agencies.  Expenditures  for Black-eyed Pea advertising  (including
local  promotions)  were  approximately  4.3% of Black-eyed Pea restaurant sales
during fiscal 1998.

         As  generally  required  under  the  terms  of  the  Denny's  Franchise
Agreements,  the Company  contributes 2% of its Denny's  restaurant  sales to an
advertising and marketing fund controlled by Denny's,  Inc.  Denny's,  Inc. uses
this fund primarily to develop  system-wide  advertising,  sale promotions,  and
marketing  materials and programs.  The Denny's  Franchise  Agreements  prohibit
franchisees,  including the Company,  from  conducting any local,  regional,  or
national  advertising  without the prior written  consent of Denny's,  Inc. From
time  to  time,  Denny's,  Inc.  may  establish  advertising   cooperatives  for
geographic areas not covered by existing advertising campaigns.

GOVERNMENT REGULATION

         The restaurant  business is subject to extensive  federal,  state,  and
local  government  regulation  relating  to the  development  and  operation  of
restaurants.  Each of the  Company's  restaurants  is subject to  licensing  and
regulation  by state and local  departments  and  bureaus  of  alcohol  control,
health,  sanitation,  and fire and to periodic review by the state and municipal
authorities  for areas in which the restaurants  are located.  In addition,  the
Company is subject to local land use, zoning,  building,  planning,  and traffic
ordinances and  regulations  in the selection and  acquisition of suitable sites
for constructing new restaurants. Delays in obtaining, or denials of, revocation
of, or temporary  suspension of,  necessary  licenses or approvals  could have a
material  adverse  impact  upon the  Company's  development  or  acquisition  of
restaurants or the Company's operations  generally.  The Company also is subject
to regulation  under the Fair Labor Standards Act, which governs such matters as
working conditions and minimum wages. An increase in the minimum wage rate, such
as the increases enacted during 1996 and 1997, changes in tip-credit provisions,
employee   benefit  costs  (including  costs  associated  with  mandated  health
insurance  coverage),  or other costs  associated with employees could adversely
affect the Company.  In addition,  the Company is subject to the Americans  with
Disabilities  Act of  1990  which,  among  other  things,  may  require  certain
installations  in new restaurants or renovations to its existing  restaurants to
meet federally mandated requirements.

         Sales of  alcoholic  beverages  comprised  less  than  2.0%  and  1.0%,
respectively,  of restaurant sales in its Black-eyed Pea and Denny's restaurants
during  fiscal  1998.  The sale of  alcoholic  beverages is subject to extensive
regulations.  The Company may be subject to "dram-shop" statues, which generally
provide  an  individual  injured by an  intoxicated  person the right to recover
damages from the  establishment  that wrongfully  served alcoholic  beverages to
that  person.  The  Company  carries  liquor  liability  coverage as part of its
existing  comprehensive  general  liability  insurance  and  has  never  been  a
defendant in a lawsuit involving "dram-shop" statutes.

         The Company has in the past  franchised  Black-eyed Pea  restaurants to
third  parties  and may in the future  resume its  franchising  efforts.  If the
Company  resumes  franchising  activities,  it would be subject to Federal Trade
Commission  regulations  and  state  laws  that  regulate  the offer and sale of
restaurant  franchises,  as well as state laws that regulate substantive aspects
of the  franchisor-franchisee  relationship.  Certain  of  such  laws  also  may
restrict the Company's  ability to terminate the  franchise  agreements  for its
franchised restaurants.

                                       12
<PAGE>
TRADEMARKS AND SERVICE MARKS

         The Company has registered or has applied for  registration of a number
of service marks,  including the names  "Black-eyed Pea," "Dixie House," and the
slogan "Home  Cookin'  Worth Going Out For," with the United  States  Patent and
Trademark  Office and in various  states in connection  with its  Black-eyed Pea
operations.  The Company regards these service marks as having significant value
and being an important factor in the marketing of its  restaurants.  The Company
licenses the right to use the "Denny's"  trademark  directly from Denny's,  Inc.
The Company believes that the continued right to use the "Denny's"  trademark is
important  to its  success.  The Company  also owns or licenses the right to use
certain other trademarks that it does not consider essential to its success.

COMPETITION

         The restaurant  industry is highly  competitive  with respect to price,
service,  and food type and quality.  In addition,  restaurants  compete for the
availability  of restaurant  personnel and managers.  The Company's  restaurants
compete  with a large  number  of  other  restaurants,  including  national  and
regional restaurant chains and franchised restaurant systems, many of which have
greater financial  resources,  more experience,  and longer operating  histories
than the Company, as well as with locally owned independent restaurants. Changes
in factors  such as consumer  tastes,  local,  regional,  or  national  economic
conditions,  demographic trends, traffic patterns, cost and availability of food
products or labor, inflation,  and purchasing power of consumers also could have
a material adverse effect on the Company's operations.

         The  Company's  restaurants  also compete  with  various  types of food
businesses,  as well as other businesses,  for restaurant locations. The Company
believes that site  selection is one of the most crucial  decisions  required in
connection with the  development of restaurants.  As a result of the presence of
competing restaurants in the Company's target markets, the Company devotes great
attention  to  obtaining  what it  believes  will be premium  locations  for new
restaurants,  although no assurances  can be given that it will be successful in
this regard.

         The Company's  Black-eyed  Pea  restaurants  compete in both the casual
mid-scale  dining  segment and the family  dining  segment.  Competitors  of the
Company's  Black-eyed Pea restaurants include Applebee's and Chili's. As part of
the  nation's  largest  family-oriented,   full-service  restaurant  chain,  the
Company's Denny's  restaurants compete primarily with regional restaurant chains
such as International  House of Pancakes,  Big Boy,  Shoney's,  Friendly's,  and
Perkins.

INSURANCE

         The Company maintains  general liability and property  insurance and an
umbrella  and  excess  liability  policy in amounts it  considers  adequate  and
customary for businesses of its kind. There can be no assurance,  however,  that
future claims will not exceed insurance coverage.

EMPLOYEES

         At March 31, 1999, the Company had approximately  10,000 employees,  of
whom  approximately  75  were  corporate   personnel,   approximately  450  were
restaurant  management personnel,  and the remainder were hourly personnel.  The
Company  is not a party to any  collective  bargaining  agreement.  The  Company
believes that its relationship with its employees is good.

         Each  of the  Company's  typical  Black-eyed  Pea  restaurants  employs
approximately 60 persons.  Each of the Company's typical Denny's restaurants has
approximately 35 employees,  including approximately 15 kitchen personnel and 20
service personnel.  Many of the Company's  employees work part-time.  Restaurant
personnel, other than regional, district and restaurant managers, are paid on an
hourly basis.  Hourly rates vary according to geographical  location,  generally
ranging from $5.15 to $8.00 an hour for kitchen personnel. The Company generally
pays service personnel the applicable minimum wage plus tips.

                                       13
<PAGE>
                             SPECIAL CONSIDERATIONS

         THE FOLLOWING FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN THIS
REPORT,  SHOULD BE  CAREFULLY  CONSIDERED  IN  EVALUATING  THE  COMPANY  AND ITS
BUSINESS.

THE COMPANY CANNOT PROVIDE ASSURANCE OF PROFITABILITY

         The  Company has not been  profitable  in the last two years and cannot
provide  assurance  that its  operations  will be profitable in the future.  The
Company's ability to generate operating profits will depend upon

         *  the  Company's  ability  to  refinance,  restructure,  or repay  its
            outstanding debt;

         *  general economic and demographic conditions;

         *  the Company's capital resources; and

         *  the nature and extent of any future developments and acquisitions.

See Item 7,  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations" and Note 1 to the Consolidated Financial Statements.

THE COMPANY HAS SIGNIFICANT INDEBTEDNESS

         The  development  of new  restaurants  and the  acquisition of existing
restaurants  requires funds for construction,  tenant  improvements,  furniture,
fixtures,  equipment,  training of employees,  permits,  any applicable  initial
franchise fees, and additional expenditures.  See Item 1, "Business - Black-eyed
Pea  Restaurants - Unit  Economics"  and "Business - Denny's  Restaurants - Unit
Economics."   The  Company  has  incurred   substantial   debt  to  develop  new
restaurants,   to  acquire  additional  restaurants,   and  to  convert  certain
restaurants to the Denny's concept. The Company may incur substantial additional
debt in the future in order to implement its business plan and growth  strategy.
As of  December  30,  1998,  the Company had  long-term  debt of $23.5  million,
subordinated   notes  of  $16.2  million,   obligations   under  capital  leases
aggregating $32.8 million, and a working capital deficit of $44.8 million.

         The Company  utilized the  proceeds  from sales of  restaurants  during
fiscal 1997 and fiscal 1998 to reduce its  outstanding  debt.  In April 1999 the
Company  obtained  financing  commitments  in amounts  that it believes  will be
sufficient for its ongoing  operations and  anticipated  restaurant  development
activities  during 1999.  See Item 7,  "Management's  Discussion and Analysis of
Financial   Condition   and  Results  of  Operations  -  Liquidity  and  Capital
Resources."  The Company may seek  additional  equity or debt  financing  in the
future,  however, to provide funds to develop or acquire additional restaurants.
The Company, however, cannot provide assurance that

         *  such   financing   will  be   available  or  will  be  available  on
            satisfactory terms;

         *  the Company will be able to develop or acquire new restaurants or to
            otherwise expand its restaurant operations; or

         *  the Company will be able to refinance,  restructure,  or satisfy its
            obligations as they become due.

See Item 1, "Special  Considerations  - The Company faces risks  associated with
the expansion of its operations" and "Special Considerations -The Company may be
unable to develop  restaurants." While debt financing enables the Company to add
more restaurants than it would otherwise be able to do, such financing increases
expenses and must be repaid by the Company regardless of the Company's operating
results.   Future  equity  financings  could  result  in  dilution  to  existing
shareholders.

THE COMPANY FACES RISKS ASSOCIATED WITH THE EXPANSION OF ITS OPERATIONS

         The Company  currently intends to pursue a strategy of growth primarily
through the  development  of new  Black-eyed  Pea and Denny's  restaurants.  The
Company also may acquire  additional Denny's or other restaurants in the future.
See Item 1, "Business - Strategy" and "Business - Expansion of Operations."  The
rate at which the Company will be able to increase the number of  restaurants it
operates  will  vary  depending  upon  whether  the  

                                       14
<PAGE>
Company acquires  existing  restaurants or develops new restaurants.  Unforeseen
expenses, difficulties, and delays frequently encountered in connection with the
rapid  expansion  of  operations  could hinder the Company  from  executing  its
business  strategy.  The  magnitude,  timing,  and  nature of future  restaurant
developments  and acquisitions  will depend upon various factors,  many of which
will be beyond the  Company's  control.  These  factors  include  the  Company's
ability to:

         *        locate suitable restaurant development sites in terms of

                  -        favorable population characteristics,
                  -        density and household income levels,
                  -        visibility, accessibility, and traffic volume,
                  -        proximity to demand  generators  (including  shopping
                           malls, lodging, and office complexes), and
                  -        potential competition;

         *        identify  and acquire  existing  restaurants  on  satisfactory
                  terms and conditions;

         *        obtain   financing  for  restaurant   acquisitions,   building
                  construction,  tenant improvements,  furniture,  fixtures, and
                  equipment;

         *        negotiate acceptable leases or terms of purchase;

         *        obtain  any  required  consents  from  Denny's,  Inc.,  or the
                  Company's lenders for such developments and acquisitions;

         *        secure liquor licenses and zoning, environmental,  health, and
                  similar regulatory approvals;

         *        recruit and train qualified management and other personnel;

         *        continue   development   and   implementation   of  management
                  information systems; and

         *        manage   successfully  the  rate  of  expansion  and  expanded
                  operations.

         The  opening  of new  restaurants  also may be  affected  by  increased
construction costs and delays resulting from governmental  regulatory approvals,
strikes or work stoppages,  adverse weather conditions, and various acts of God.
Newly  opened  restaurants  may operate at a loss for a period  following  their
initial opening. The length of this period will depend upon a number of factors,
including  the time of year the  restaurant  is opened,  sales  volume,  and the
Company's ability to control costs. The Company cannot provide assurance

         *        that it will be successful in developing  new  restaurants  or
                  acquiring   existing   restaurants  on  acceptable  terms  and
                  conditions;

         *        that any  additional  restaurants it develops or acquires will
                  be effectively and profitably  managed and integrated into its
                  operations; or

         *        that any restaurants that it develops or acquires will operate
                  profitably.

         The Company will  require  substantial  funds in order to  successfully
execute its business  strategy.  These funds  historically have been provided by
sale-leaseback  financing  arrangements.  The Company  currently  has  financing
commitments  available in amounts that it believes  will be  sufficient  for its
ongoing  operations and anticipated  restaurant  development  activities  during
1999. The Company cannot provide  assurance,  however,  that adequate  financing
will continue to be available on terms acceptable to the Company.

THE COMPANY RELIES ON DENNY'S, INC.

         The Company  currently  operates 100 Denny's  restaurants  as a Denny's
franchisee. As a result of the nature of franchising and the Company's franchise
agreements with Denny's,  Inc., the long-term success of the Company depends, to
a significant extent, on

         *  the  continued  vitality of the Denny's  restaurant  concept and the
            overall success of the Denny's System;

                                       15
<PAGE>
         *  the ability of Denny's,  Inc. to identify and react to new trends in
            the restaurant  industry,  including the development of popular menu
            items;

         *  the  ability of  Denny's,  Inc.  to develop  and pursue  appropriate
            marketing  strategies  in order to  maintain  and  enhance  the name
            recognition,   reputation,   and   market   perception   of  Denny's
            restaurants;

         *  the goodwill associated with the Denny's trademark;

         *  the quality,  consistency,  and  management  of the overall  Denny's
            System; and

         *  the successful  operation of Denny's  restaurants  owned by Denny's,
            Inc. and other Denny's franchisees.

         Advantica Restaurant Group, Inc., the parent of Denny's,  Inc., emerged
from  bankruptcy  protection in 1997. Any financial  reversals or illiquidity on
the part of Advantica could have a material adverse effect on Denny's,  Inc. The
Company has no control over the  management  or  operation  of Denny's,  Inc. or
other Denny's  franchisees.  A variety of factors affecting Denny's,  Inc. could
have a material adverse effect on the Company, including the following:

         *  any business reversals that may be encountered by Denny's, Inc.;

         *  a failure by Denny's, Inc. to promote the Denny's name or restaurant
            concept;

         *  the   inability   or  failure  of  Denny's,   Inc.  to  support  its
            franchisees, including the Company;

         *  the failure to operate  successfully  the Denny's  restaurants  that
            Denny's, Inc. itself owns; or

         *  negative  publicity  with  respect to  Denny's,  Inc. or the Denny's
            name.

DENNY'S FRANCHISE AGREEMENTS IMPOSE RESTRICTIONS AND OBLIGATIONS ON THE COMPANY

         The Denny's  Franchise  Agreements  impose a number of restrictions and
obligations on the Company. The Denny's Franchise Agreements require the Company
to pay an initial  franchise fee and royalties equal to 4% of weekly gross sales
and an advertising  contribution of 2% to 3% of weekly gross sales.  The Company
must pay or accrue such amounts regardless of the profitability of the Company's
Denny's  restaurants.  The Denny's Franchise Agreements also require the Company
to operate its Denny's  restaurants  in  accordance  with the  requirements  and
specifications   established   by   Denny's,   Inc.   These   requirements   and
specifications   relate  to  the  exterior  and  interior  design,   decor,  and
furnishings of Denny's  restaurants,  menu  selection,  the  preparation of food
products,  and  quality  of service  as well as  general  operating  procedures,
advertising,  maintenance of records, and protection of trademarks. In addition,
from  time to  time  Denny's,  Inc.  may  require  the  Company  to  modify  its
restaurants  to  conform  with  the  then-existing  Denny's  restaurant  format.
Denny's,  Inc.  has  retained the right to open on its own behalf or to grant to
other  franchisees the right to open other Denny's  restaurants in the immediate
vicinity of the Company's Denny's  restaurants.  See Item 1, "Business - Denny's
Restaurants - Denny's Franchise Agreements."

         An agreement between the Company and Denny's,  Inc. gives Denny's, Inc.
the right to terminate  substantially all of the Denny's Franchise Agreements in
the event that Banque  Paribas  takes  certain  actions  while the Company is in
default  under the terms of its credit  facility  with  Banque  Paribas  and the
Company's other senior lenders. If the Company fails to satisfy the requirements
described above or otherwise  defaults under the Denny's  Franchise  Agreements,
the Company  could be subject to  potential  damages for breach of contract  and
could lose its rights under those agreements.  At December 30, 1998, the Company
was  not in  compliance  with  certain  financial  covenants  under  its  credit
facility.  In April 1999, however, the Company obtained financing commitments in
amounts  that it believes  will be  sufficient  for its ongoing  operations  and
anticipated   restaurant   development  activities  during  1999.  See  Item  7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Liquidity and Capital  Resources." The  cancellation of the Denny's
Franchise  Agreements,  which include the right to what the Company believes are
favorable franchise  arrangements and the right to use the "Denny's"  trademarks
and trade styles, would have a material adverse effect on the Company.

                                       16
<PAGE>
         The Denny's  Franchise  Agreements  also provide that, in the event the
Company  assigns its rights under any of those  agreements,  Denny's,  Inc. will
have the option to purchase the interest being transferred.  An assignment under
the Denny's  Franchise  Agreements  will be deemed to have occurred if a person,
entity,  or group of persons (other than a group including any of Jack M. Lloyd,
William J. Howard,  and William G. Cox,  each of whom is an officer and director
of the Company; Jeffrey D. Miller, a former officer and director of the Company;
or BancBoston) acquires voting control of the Board of Directors of the Company.

THE COMPANY FACES CERTAIN RISKS AFFECTING THE RESTAURANT INDUSTRY

         The ownership and operation of restaurants may be affected by a variety
of factors  over which the  Company has no control.  These  factors  include the
following:

*  adverse   changes  in   national,        *  changing consumer tastes, habits,
   regional,  or local  economic  or           and spending priorities;
   market conditions;
                                            *  the  cost  and   availability  of
*  increased  costs of labor or food           insurance coverage;
   products;
                                            *  management problems;
*  fuel    shortages    and    price
   increases;                               *  uninsured losses;

*  competitive factors;                     *  limited   alternative   uses  for
                                               properties and equipment;
*  the number, density, and location
   of competitors;                          *  changes in government regulation;
                                               and
*  changing demographics;
                                            *  weather conditions.
*  changing traffic patterns;

Third  parties may file lawsuits  against the Company  based on  discrimination,
personal  injury,  claims for  injuries or damages  caused by serving  alcoholic
beverages  to an  intoxicated  person  or to a  minor,  or  other  claims.  As a
multi-unit  restaurant  operator,  the  Company  can be  adversely  affected  by
publicity  about  food  quality,  illness,  injury,  or other  health and safety
concerns  or  operating  issues  at  one  restaurant  or  a  limited  number  of
restaurants  operated under the same name,  whether or not the Company  actually
owns the  restaurants  in  question.  The  Company  cannot  predict any of these
factors with any degree of  certainty.  Any one or more of these  factors  could
have a material adverse effect on the Company.

THE COMPANY FACES RISKS ASSOCIATED WITH COMPETITION

         The  Company's  Black-eyed  Pea  restaurants  compete in the casual and
mid-scale  dining  segment  and the family  dining  segment  with  national  and
regional  restaurant  chains,  such as  Applebee's  and Chili's.  As part of the
nation's largest  family-oriented,  full-service restaurant chain, the Company's
Denny's  restaurants  compete  primarily  with national and regional  restaurant
chains, such as International House of Pancakes, Big Boy, Shoney's,  Friendly's,
and Perkins.

         The restaurant industry is intensely competitive with respect to price,
service,  location,  personnel,  and type and  quality  of  food.  In  addition,
restaurants  compete for  desirable  restaurant  sites and the  availability  of
restaurant  personnel  and  managers.  The  Company  has  many  well-established
competitors  that have  financial  and other  resources  that are  substantially
greater than those of the Company.  Certain  competitors  have been in existence
for a substantially longer period than the Company and may be better established
in markets where the Company's restaurants are or may be located. The restaurant
business often is affected by

         *  changes in consumer tastes;

         *  national, regional, or local economic conditions;

         *  demographic trends;

         *  traffic patterns; and

         *  the type, number and location of competing restaurants.

                                       17
<PAGE>
The Company's  success will depend,  in part, on the ability of the Company (and
Denny's,  Inc. in the case of the Company's Denny's restaurants) to identify and
respond  appropriately  to changing  conditions.  In  addition,  factors such as
inflation,  increased food,  labor,  and benefit costs,  and the availability of
experienced  management  and hourly  employees,  which may adversely  affect the
restaurant industry in general, would affect the Company's restaurants.

CERTAIN SHAREHOLDERS MAY CONTROL THE COMPANY OR HAVE CONFLICTS OF INTEREST

         The directors and officers of the Company  currently own  approximately
35.1% of the Company's  outstanding Common Stock. Jack M. Lloyd, the Chairman of
the Board, President, and Chief Executive Officer of the Company, and William J.
Howard,  Executive  Vice  President  and a director  of the  Company,  also hold
warrants to acquire an additional  439,834 shares of Common Stock at an exercise
price of $.01 per share. In addition,  BancBoston,  a former shareholder of DRC,
currently owns  approximately  15.8% of the Company's  outstanding Common Stock.
Accordingly,  such shareholders  collectively have the power to elect all of the
members of the Company's Board of Directors and thereby control the business and
policies of the Company.

         Messrs.  Lloyd and Howard currently hold an aggregate of $16,794,000 in
principal  amount of the  Company's  Series B Notes in addition to their  Common
Stock and warrants. As a result of such shareholders' ability, together with the
Company's other  directors and officers,  to direct the policies of the Company,
an  inherent  conflict  of  interest  may  arise in  connection  with  decisions
regarding  the timing of and the  allocation  of assets of the  Company  for the
purposes of  interest  payments  on, or  redemption  of, the Series B Notes.  In
addition,  the Series B Notes  contain  restrictive  covenants  relating  to the
operation of the Company and the  maintenance  of certain  financial  ratios and
tests.  A default  not waived by a majority of the holders of the Series B Notes
could have a material  adverse  effect on the  holders of the  Company's  Common
Stock.  Messrs.  Lloyd and Howard have deferred certain payments of interest due
on the  Series  B  Notes.  See  Item  13,  "Certain  Relationships  and  Related
Transactions."

THE COMPANY DEPENDS UPON KEY PERSONNEL

         The Company's success depends,  in large part, upon the services of its
senior management.  The Company currently has employment agreements with certain
members  of its  senior  management.  See Item  11,  "Executive  Compensation  -
Employment  Agreements."  The  loss  of the  services  of the  Company's  senior
management team could have a material adverse effect on the Company.

THE COMPANY MUST COMPLY WITH VARIOUS GOVERNMENT REGULATIONS

         Various federal,  state, and local laws affect the Company's  business.
The development and operation of restaurants  depend to a significant  extent on
the selection and  acquisition of suitable  sites,  which are subject to zoning,
land  use,  environmental,  traffic,  and other  regulations  of state and local
governmental agencies. City ordinances or other regulations,  or the application
of such  ordinances  or  regulations,  could  impair  the  Company's  ability to
construct or acquire restaurants in desired locations and could result in costly
delays. In addition, restaurant operations are subject to

         *  licensing and regulation by state and local departments  relating to
            health, sanitation, safety standards, and fire codes;

         *  federal  and state labor laws  (including  applicable  minimum  wage
            requirements, tip credit provisions, overtime regulations,  workers'
            compensation insurance rates,  unemployment and other taxes, working
            and safety conditions, and citizenship requirements);

         *  zoning restrictions; and

         *  state and local  licensing  of the sale of  alcoholic  beverages  in
            those  restaurants  operated  by  the  Company  at  which  alcoholic
            beverages are served.

                                       18
<PAGE>
The delay or failure to obtain or maintain any licenses or permits necessary for
operations could have a material adverse effect on the Company. In addition,  an
increase in the minimum  wage rate,  employee  benefit  costs  (including  costs
associated with mandated health insurance  coverage),  or other costs associated
with employees could adversely affect the Company.

         The Company also is subject to the Americans with  Disabilities  Act of
1990 which, among other things, may require the installation of certain fixtures
or accommodations in new restaurants or renovations to its existing  restaurants
to meet federally mandated  requirements.  In the event that the Company resumes
franchising  Black-eyed Pea restaurants or any other  restaurants in the future,
the Company will be subject to regulation by the Federal  Trade  Commission  and
will be required to comply with certain state laws  governing  the offer,  sale,
and termination of franchises and the refusal to renew franchises.

THE COMPANY FACES RISKS ASSOCIATED WITH "YEAR 2000" COMPLIANCE

         Many currently installed computer systems and software products may not
function  properly when processing  transactions that include dates on and after
January 1, 2000. The Company  engaged an outside  consulting firm to address its
internal Year 2000 issues and is converting or upgrading its internal accounting
system and restaurant-level  point-of-sale and accounting systems to ensure Year
2000   compliance.   The  Company  also  has  obtained   Year  2000   compliance
certifications from significant third parties, including suppliers,  credit card
transaction  processors,  and financial  institutions,  with which the Company's
systems  interface.  The Company  anticipates  that it will incur internal staff
costs as well as  consulting  and other  expenses of up to  $250,000  related to
making its computer systems Year 2000 compliant.  The Company will expense these
costs as  incurred.  Because  the  appropriate  course  of  action  may  include
replacing or  upgrading  certain  equipment  or software,  the Company may incur
costs in excess of that amount in resolving  its Year 2000  issues.  The Company
cannot provide  assurance that it will be able to make its computer  system Year
2000  compliant in a timely  manner.  In addition,  the Company  cannot  provide
assurance  that  computer  systems  operated  by third  parties  with  which the
Company's  systems  interface  will  continue  to  properly  interface  with the
Company's  systems and will  otherwise  be compliant on a timely basis with Year
2000  requirements.  Any failure of the Company's computer system or the systems
of third parties to timely  achieve Year 2000  compliance  could have a material
adverse effect on the Company's  business,  financial  condition,  and operating
results.  See  Item  7,  "Management's  Discussion  and  Analysis  of  Financial
Condition and Operating Results - Year 2000 Compliance."

THE COMPANY'S STOCK IS THINLY TRADED AND MAY EXPERIENCE PRICE VOLATILITY

         The market price of the Company's Common Stock could be subject to wide
fluctuations as a result of a variety of factors, including the following:

         *  quarterly  variations  in the  operating  results of the  Company or
            other restaurant companies;

         *  changes  in   analysts'   estimates  of  the   Company's   financial
            performance;

         *  changes in national and regional economic conditions,  the financial
            markets, or the restaurant industry;

         *  natural disasters; or

         *  other  developments   affecting  the  Company  or  other  restaurant
            companies.

The trading  volume of the Company's  Common Stock has been  limited,  which may
increase the  volatility  of the market price for such stock.  In addition,  the
stock market has  experienced  extreme  price and volume  fluctuation  in recent
years.  This  volatility  has had a  significant  effect on the market prices of
securities  issued by many companies for reasons not necessarily  related to the
operating performances of these companies.

THE EXISTENCE OF STOCK OPTIONS AND WARRANTS MAY ADVERSELY AFFECT THE TERMS OF
FUTURE FINANCINGS

         Employee  and  director  stock  options  to  acquire  an  aggregate  of
1,016,300  shares of Common  Stock  currently  are  outstanding.  An  additional
821,667 shares have been reserved for issuance upon exercise of options

                                       19
<PAGE>
that may be  granted  under  the  Company's  existing  stock  option  plans.  In
addition,  warrants to acquire  1,560,981  shares of Common Stock  currently are
outstanding. During the terms of such options and warrants, the holders of those
securities  will have the  opportunity  to profit from an increase in the market
price of the Company's  Common Stock. The existence of such options and warrants
may  adversely  affect  the terms on which the  Company  can  obtain  additional
financing  in the future,  and the holders of such  options and  warrants can be
expected to exercise  such options and  warrants at a time when the Company,  in
all likelihood, would be able to obtain additional capital by offering shares of
Common Stock on terms more  favorable to it than those  provided by the exercise
of such options and warrants.

SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF THE
COMPANY'S COMMON STOCK

         Sales of substantial  amounts of Common Stock in the public market,  or
even the potential for such sales,  could  adversely  affect  prevailing  market
prices for the Company's  Common Stock and could adversely  affect the Company's
ability  to  raise  capital.  As of  March  31,  1999,  there  were  outstanding
13,485,277  shares of the  Company's  Common Stock.  Of these shares,  6,204,560
shares are freely  transferable  without  restriction under the securities laws,
unless they are held by "affiliates" of the Company,  as that term is defined in
the  securities  laws or unless  transfer of certain  shares is  restricted as a
result of  contractual  obligations.  The remaining  7,280,717  shares of Common
Stock currently outstanding are "restricted securities," as that term is defined
in Rule 144 under the securities  laws, and may be sold only in compliance  with
Rule 144, pursuant to registration  under the securities laws, or pursuant to an
exemption  from  registration.  Affiliates  also are  subject  to certain of the
resale  limitations  of Rule 144.  Generally,  under Rule 144,  each  person who
beneficially owns restricted  securities with respect to which at least one year
has  elapsed  since  the later of the date the  shares  were  acquired  from the
Company or an affiliate of the Company may, every three months, sell in ordinary
brokerage  transactions  or to market  makers  an amount of shares  equal to the
greater of 1% of the  Company's  then-outstanding  Common  Stock or the  average
weekly  trading  volume for the four weeks  prior to the  proposed  sale of such
shares.

         An aggregate of  approximately  744,800 shares of Common Stock that are
currently  outstanding  or that are issuable upon  exercise of certain  warrants
have been registered for resale pursuant to an effective registration statement.
The 6,937,500 shares of Common Stock issued to the former shareholders of DRC in
connection with the Merger  generally are freely  tradeable under Rule 145 under
the Securities Act, unless held by an affiliate,  in which case such shares will
be subject to the volume  and manner of sale  restrictions  under Rule 144.  The
former  shareholders  of DRC have certain rights with respect to registration of
the shares of Common Stock issued in connection with the Merger or upon exercise
of the warrants issued in connection with the Merger.

THE COMPANY DOES NOT ANTICIPATE THAT IT WILL PAY DIVIDENDS

         The Company has never paid any  dividends  on its Common Stock and does
not anticipate that it will pay dividends in the foreseeable future. The Company
intends to apply any earnings to the expansion and  development of its business.
In  addition,  the terms of the  Company's  credit  facility  and the  indenture
governing  its Series B Notes limit the ability of the Company to pay  dividends
on its Common Stock.

CHANGE IN CONTROL PROVISIONS MAY ADVERSELY AFFECT EXISTING SHAREHOLDERS

         The  Company's  Restated  Articles  of  Incorporation  and  Amended and
Restated Bylaws and certain provisions of the Georgia Business  Corporation Code
contain provisions that may have the effect of making more difficult or delaying
attempts by others to obtain  control of the Company,  even when these  attempts
may be in the best interests of shareholders.

ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS IN THIS REPORT

         Certain statements and information  contained in this Report concerning
future, proposed, and anticipated activities of the Company, certain trends with
respect to the Company's operating results,  capital resources, and liquidity or
with  respect  to the  restaurant  industry  in  general,  and other  statements
contained in this Report  regarding  matters that are not  historical  facts are
forward-looking  statements, as such term is defined under 

                                       20
<PAGE>
applicable securities laws.  Forward-looking  statements,  by their very nature,
include risks and uncertainties. Accordingly, actual results may differ, perhaps
materially,   from  those  expressed  in  or  implied  by  such  forward-looking
statements. Factors that could cause actual results to differ materially include
those discussed elsewhere under this Item 1, "Special Considerations."

ITEM 2. PROPERTIES.

         The Company leases for a term expiring in September 2001  approximately
20,000  square  feet of  office  space in  Scottsdale,  Arizona,  for use as its
principal   corporate  offices.   The  Company  currently  believes  that  these
facilities are adequate for its reasonably  anticipated  needs. The Company also
leases for a term  expiring in 1999  approximately  3,000  square feet of office
space in Dallas,  Texas, that it utilizes for regional operations and facilities
maintenance operations.

         The   Company's   restaurants   generally  are  located  in  one-story,
freestanding  buildings  with a capacity  of between 90 and 210  customers.  The
Company leases substantially all the land and buildings for its restaurants. The
initial lease terms range from 10 to 20 years and include renewal options for up
to 30 years. All of the Company's current leases have remaining initial terms or
renewal  options  that  extend  for more than five  years  from the date of this
Report.  The leases  generally  provide for a minimum annual rent and additional
rental  payments if  restaurant  sales  volume  exceeds  specified  amounts.  In
addition,  the leases  generally  require the Company to pay real estate  taxes,
insurance  premiums,  maintenance  costs,  and certain  other of the  landlords'
operating costs.  Contingent rentals have represented less than 5% of total rent
expense  for each of fiscal  1996,  1997,  and 1998.  Annual  base rent for each
location ranges up to approximately $180,000 a year.

ITEM 3. LEGAL PROCEEDINGS.

         There are no legal  proceedings  to which the  Company is a party or to
which any of its properties are subject other than routine  litigation  incident
to the  Company's  business  which is covered by insurance or an  indemnity,  or
which  is not  expected  to have a  material  adverse  effect  on the  Company's
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         Not applicable.

                                       21
<PAGE>
                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The  Company's  Common  Stock  has been  traded on the  American  Stock
Exchange (the "AMEX") under the symbol "DEN" since the Company's  initial public
offering on October 18, 1994.  The  following  table sets forth the high and low
sales prices per share of the Company's Common Stock as reported on the AMEX for
the calendar periods indicated.

                                                         COMMON STOCK
                                                      -----------------
                                                       HIGH        LOW
                                                      -----       -----
           1997
           ----
           First Quarter..........................    $3.63       $3.00
           Second Quarter ........................     3.25        2.19
           Third Quarter..........................     2.69        1.63
           Fourth Quarter.........................     3.25        1.81

           1998
           ----
           First Quarter..........................    $2.75       $1.81
           Second Quarter ........................     3.38        2.13
           Third Quarter..........................     3.50        1.75
           Fourth Quarter.........................     2.38        0.88

           1999
           ----
           First Quarter..........................    $1.31       $0.88

         The  Company  has never  declared  or paid any  dividends.  The Company
intends to retain earnings,  if any, to fund the growth of its business and does
not anticipate paying any cash dividends in the foreseeable future. In addition,
the payment of dividends on the Company's  Common Stock is prohibited  under the
Company's  existing  credit  facility with Banque Paribas and other  outstanding
debt obligations.

         As  of  March  31,   1999,   there  were  107  holders  of  record  and
approximately  1,200  beneficial  owners of the Company's Common Stock. On March
31, 1999, the closing sales price of the Company's  Common Stock on the AMEX was
$1.00 per share.

                                       22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.

         The following selected  historical  consolidated  financial data of the
Company for each of the fiscal years in the three-year period ended December 31,
1998  have  been  derived  from  and  should  be read in  conjunction  with  the
consolidated  financial  statements and related notes thereto included elsewhere
herein. The selected historical summary consolidated  financial data for the two
fiscal  years ended  December  30, 1995 are derived  from  historical  financial
statements that are not included  elsewhere  herein.  See Item 7,  "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Basis
of Presentation" and Note 1 to the consolidated financial statements.
<TABLE>
<CAPTION>
                                                                   AS OF AND FOR FISCAL YEAR(1)
                                                    ----------------------------------------------------------
                                                      1994        1995        1996         1997         1998
                                                      ----        ----        ----         ----         ----
                                                                      (DOLLARS IN THOUSANDS)
<S>                                               <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA(2):
Restaurant sales .................................  $47,323     $74,683     $241,480     $300,579     $255,956
Charge for impaired assets .......................       --         523           --       14,100           --
Restaurant operating income ......................    4,539       6,643       22,137        9,101       18,116
Administrative expenses ..........................    2,619       3,380       10,303       13,684       12,423
Operating income (loss) ..........................    1,320       3,263       11,834       (4,583)       5,693
Interest expense, net ............................   (1,301)     (2,467)      (9,605)     (13,655)     (12,635)
Net income (loss) ................................     (341)        200        1,118      (20,977)      (4,657)

OTHER DATA:
EBITDA(3) ........................................  $ 2,821     $ 6,722     $ 18,834     $ 18,884     $ 13,283
Cash interest expense ............................    1,140       2,397        8,904       10,033        8,221
Cash provided by (used in) operating activities...    2,410       7,486        9,664       (1,458)      (1,357)
Cash (used in) provided by investing activities...   (9,667)     (8,736)      (9,393)      (6,316)      22,622
Cash provided by (used in) financing activities...    7,092       2,273        1,157        6,432      (20,202)
Capital expenditures .............................    6,355       7,003        9,879        8,147        2,891
Depreciation and amortization ....................    1,501       2,936        7,000        9,367        7,590
Ratio of earnings to fixed charges(4) ............       --        1.10         1.14           --           --
Number of restaurants, end of period .............       70         102          307          283          201

BALANCE SHEET DATA:
Working capital (deficit) ........................  $(6,107)    $(9,406)    $(33,029)    $(36,417)    $(44,838)
Total assets .....................................   35,028      53,785      179,189      170,264      134,507
Long-term debt, less current portion .............    7,552      10,371       69,903       39,022       39,666
Obligations under capital leases,
  less current obligations .......................    7,151      19,881       24,229       39,396       32,828
Redeemable convertible preferred stock ...........    7,397       7,501           --           --           --
Shareholders' equity (deficit) ...................      957         564       22,128        1,248       (3,334)
</TABLE>
----------
(1)  The  Company's  fiscal  years 1994 through 1998 ended on December 28, 1994,
     December 27,  1995,  January 1, 1997,  December 31, 1997,  and December 30,
     1998, respectively.
(2)  From  fiscal  1994   through   1998,   the  Company   consummated   various
     acquisitions,   opened  new   restaurants,   and  closed  or  sold  certain
     restaurants.  Revenue  increases  in each year from 1994 through 1997 arose
     primarily  from  restaurant  acquisitions  and  openings in each year.  The
     Company sold or closed an aggregate of 82  restaurants  during fiscal 1998,
     which  contributed to the overall revenue  decrease in that year from prior
     years.
(3)  EBITDA represents income (loss) before minority interest in joint ventures,
     interest,  income taxes,  depreciation and amortization plus the charge for
     impaired  assets.  EBITDA is not  intended  to  represent  cash  flows from
     operations  as defined by  generally  accepted  accounting  principles  and
     should not be  considered  as an  alternative  to net  income  (loss) as an
     indication of the  Company's  operating  performance  or to cash flows from
     operations  as a measure of  liquidity.  EBITDA is  included in this Report
     because  it is a basis  upon  which  the  Company  assesses  its  financial
     performance.
(4)  Earnings  consist of pre-tax  income after  minority  interests  plus fixed
     charges,  excluding  capitalized  interest.  The  Company's  fixed  charges
     consist of (a) interest, whether expensed or capitalized;  (b) amortization
     of debt  expense,  including  any discount or premium  whether  expensed or
     capitalized;  and (c) a portion of rental expense representing the interest
     factor.  Earnings  were  inadequate  to cover fixed  charges in fiscal 1994
     $(550,000), fiscal 1997 ($17,719,000), and fiscal 1998 ($6,942,000).

                                       23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

GENERAL

         The  Company's   fiscal  1996  and  1997  results  of  operations  were
materially  impacted by the Merger and the BEP Acquisition.  During these years,
revenue and related expenses increased  significantly over prior years primarily
as a result  of these  acquisitions.  In  particular,  the  Company's  operating
results for fiscal 1997 reflect 52 "restaurant  operating weeks" associated with
91  Black-eyed  Pea  restaurants  acquired  in the BEP  Acquisition,  which  was
completed  in  July  1996,  as  compared  with  27  restaurant  operating  weeks
associated with those  restaurants  during fiscal 1996.  During 1998 the Company
(i) sold or closed a total of 74 Denny's restaurants;  (ii) sold or closed three
non-branded  restaurants;   (iii)  purchased  the  leasehold  interests  in  two
Black-eyed Pea restaurants from franchisees; and (iv) closed five Black-eyed Pea
restaurants. These transactions follow the Company's strategy of focusing on the
Black-eyed Pea concept as well as those Denny's restaurants that achieve certain
operational and geographic  efficiencies.  As a result of the  acquisitions  and
dispositions of restaurants during past fiscal periods, operating results during
a  particular  year are not  comparable  to those of  other  fiscal  years.  The
following  discussion  and  analysis  should  be read in  conjunction  with  the
information  set  forth  under  Item  6,  "Selected   Financial  Data"  and  the
consolidated financial statements and notes thereto included elsewhere herein.

         The Company  currently  operates 101 Black-eyed  Pea  restaurants in 13
states, including 73 Black-eyed Pea restaurants in Texas, Oklahoma, and Arizona.
The average unit sales for all Company-owned Black-eyed Pea restaurants was $1.4
million in each of fiscal 1997 and 1998 as compared  with  average unit sales at
restaurants  in Texas and Oklahoma of $1.6 million during each of those periods.
Through December 30, 1998, comparable same-store sales decreased 1.0% for all of
the Company's  Black-eyed Pea  restaurants,  while  comparable  same-store sales
decreased by 0.3% for  Black-eyed  Pea  restaurants  in Texas and Oklahoma.  The
guest check average at the Company's Black-eyed Pea restaurants is approximately
$7.95, and alcohol and carry-out sales account for approximately  2.0% and 11.4%
of sales, respectively.

         As of December 30, 1998, the Company  operated 100 Denny's  restaurants
in 19 states.  The Company's  Denny's  restaurants that were open for a 12-month
period had average  restaurant  sales of  $1,030,000  in fiscal 1998 as compared
with $917,000 in fiscal 1997.  Excluding the results of the restaurants  sold in
March 1998,  average  restaurant  sales in fiscal 1997 would have been $997,000.
Comparable  store  sales  increased  approximately  3.0% in fiscal  1998 and the
average  guest  check  was  approximately  $5.45.  Food  and  labor  costs  as a
percentage of revenue  decreased in 1998 due to the withdrawal from  promotional
value pricing and an increase in comparable store sales.

                                       24
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS

         The following table presents, for the periods indicated,  certain items
in the historical consolidated statements of operations as a percentage of total
restaurant sales.

                                                            FISCAL YEAR
                                                    --------------------------
                                                     1996      1997      1998
                                                     ----      ----      ----
Restaurant sales:
   Denny's restaurants ..........................    62.7%     54.9%     45.2%
   Black-eyed Pea restaurants ...................    28.6      42.9      54.6
   Other restaurants ............................     8.7       2.2       0.2
                                                    -----     -----     -----
     Total restaurant sales .....................   100.0%    100.0%    100.0%
                                                    -----     -----     -----
Restaurant operating expenses:
   Food and beverage costs ......................    27.3      27.4      27.4
   Payroll and payroll related costs ............    34.3      34.4      34.4
   Depreciation and amortization ................     2.9       3.1       3.0
   Other operating expenses .....................    26.3      27.4      28.1
   Charge for impaired assets ...................      --       4.7        --
                                                    -----     -----     -----
     Total restaurant operating expenses ........    90.8      97.0      92.9
                                                    -----     -----     -----
Restaurant operating income .....................     9.2       3.0       7.1
Administrative expenses .........................     4.3       4.6       4.9
                                                    -----     -----     -----
Operating income (loss) .........................     4.9      (1.5)      2.2
Interest expense, net ...........................    (4.0)     (4.6)     (4.9)
Minority interest in joint ventures .............     0.1       0.2        --
                                                    -----     -----     -----
Income before income taxes and
 extraordinary item .............................     1.0      (5.9)     (2.7)
Income tax provision (benefit) ..................     0.4       1.1      (0.4)
                                                    -----     -----     -----
Income (loss) before extraordinary item .........     0.6      (7.0)     (2.3)
Extraordinary (loss) gain .......................    (0.2)       --       0.5
                                                    -----     -----     -----
Net income (loss) ...............................     0.4%     (7.0)%    (1.8)%
                                                    =====     =====     =====
FISCAL 1998 COMPARED WITH FISCAL 1997

         RESTAURANT SALES.  Restaurant sales decreased $44.6 million,  or 14.8%,
to $256.0  million in fiscal 1998 as compared  with  restaurant  sales of $300.6
million in fiscal 1997. This decrease was primarily  attributable to the sale of
Denny's  restaurants in March 1998 and an approximately $1.1 million decrease in
Black-eyed  Pea franchise  revenue.  In 1998,  the  Black-eyed  Pea  restaurants
accounted  for 54.6% of total sales as compared  with 42.9% in fiscal 1997.  The
Company expects this percentage to continue to increase.

         FOOD  AND  BEVERAGE  COSTS.  Food  and  beverage  costs  were  27.4% of
restaurant  sales in each of fiscal 1998 and 1997.  Food costs at the  Company's
Denny's  restaurants  decreased from 26.6% of restaurant sales in fiscal 1997 to
26.0% in fiscal 1998,  primarily due to the sale of lower volume restaurants and
same store  sales  increases.  Food costs  attributable  to the  Black-eyed  Pea
restaurants  decreased from 28.8% of restaurant sales in fiscal 1997 to 28.6% in
fiscal 1998,  as a result of lower  commodity  prices and  improved  operational
controls.

         PAYROLL AND PAYROLL  RELATED COSTS.  Payroll and payroll  related costs
were 34.4% of restaurant  sales in each of fiscal 1998 and fiscal 1997.  Payroll
and payroll related costs at the Company's  Denny's  restaurants  decreased from
35.3% of restaurant  sales in fiscal 1997 to 34.5% in fiscal 1998. This decrease
is  attributable  to the sale of lower volume  restaurants  and same store sales
increases.  Payroll and payroll related costs attributable to the Black-eyed Pea
restaurants  increased from 32.9% of restaurant sales in fiscal 1997 to 33.8% in
fiscal 1998 due principally to increased fringe benefits.

         DEPRECIATION  AND   AMORTIZATION.   Depreciation  and  amortization  of
restaurant  equipment  and  leasehold   improvements,   intangible  assets,  and
pre-opening  costs totaled $7.6 million,  or 3.0% of restaurant sales, in fiscal
1998 as compared with $9.4 million, or 3.1% of restaurant sales, in fiscal 1997.
The $1.8  million  decrease  was  attributable  to the reduced  amortization  of
goodwill  associated  with the sale of  restaurants  in March  1998 and  reduced
amortization of pre-opening  costs related to restaurants  opened in 1997. These
decreases were partially  offset by increased  depreciation  associated with the
acquisition of certain Black-eyed Pea restaurants in September 1997.

         OTHER  OPERATING  EXPENSES.  Other  operating  expenses  were  28.1% of
restaurant  sales in fiscal 1998 as compared with 27.4% of  restaurant  sales in
fiscal  1997.  This  increase was  attributable  to (a) an increase in occupancy
costs  as a  percentage  of  restaurant  sales  associated  with  the  Company's
remaining Denny's restaurants subsequent

                                       25
<PAGE>
to the  sale of  restaurants  in  March  1998,  and  (b) an  increase  in  costs
associated with Denny's  promotional items,  offset by (c) a decrease in utility
costs.

         RESTAURANT OPERATING INCOME. Restaurant operating income increased $9.0
million to $18.1  million in fiscal 1998 as compared with $9.1 million in fiscal
1997. This increase was principally the result of the charge for impaired assets
of $14.1 million in fiscal 1997, offset by the factors described above.

         ADMINISTRATIVE EXPENSES. Administrative expenses decreased $1.3 million
to $12.4  million in fiscal 1998 as compared  with $13.7 million in fiscal 1997.
This  decrease  is  attributable  to a  reduction  in the  administrative  costs
associated  with the  restaurants  sold in March 1998 and various cost reduction
initiatives  implemented  in  1997,  offset  by the  costs  associated  with the
proposed merger and a reduction in overall restaurant sales.

         INTEREST  EXPENSE.  Interest  expense  decreased  $1.1 million to $12.6
million  in fiscal  1998 from  $13.7  million  in fiscal  1997.  Expressed  as a
percentage of restaurant  sales,  interest expense increased from 4.6% in fiscal
1997 to 4.9% in fiscal 1998.  This increase is the result of reduced  restaurant
sales in fiscal 1998. 

         INCOME  TAXES.  The income tax benefit was $0.9 million for fiscal 1998
as compared  with an income tax  provision of $3.3 million in fiscal 1997.  This
change was the result of a non-deductible expense associated with the charge for
impaired assets in fiscal 1997 as compared with the tax benefit  associated with
the net loss in fiscal 1998.

         EXTRAORDINARY  ITEMS.  The  extraordinary  item in fiscal 1998 resulted
from the discount  associated with the repayment of the BEP Purchase Note, which
was realized in March 1998.

FISCAL 1997 COMPARED WITH FISCAL 1996

         RESTAURANT SALES. Restaurant sales increased 24.5% to $300.6 million in
fiscal 1997 as compared with restaurant  sales of $241.5 million in fiscal 1996.
This  increase was  primarily  attributable  to 52  restaurant  operating  weeks
associated with 91 Black-eyed Pea restaurants acquired in the BEP Acquisition in
1996,  as compared  with 27  restaurant  operating  weeks for those  restaurants
during fiscal 1996.

         FOOD AND BEVERAGE COSTS.  Food and beverage costs increased to 27.4% of
restaurant  sales in fiscal 1997 as compared with 27.3% of  restaurant  sales in
fiscal 1996. This increase was  attributable to the higher food costs associated
with the  Black-eyed  Pea  restaurants,  partially  offset by a decrease in food
costs at the Company's Denny's restaurants.  Food costs at the Company's Denny's
restaurants  decreased from 27.6% of restaurant sales in fiscal 1996 to 26.6% in
fiscal 1997,  primarily due to the withdrawal from promotional  value pricing in
October 1996.

         PAYROLL AND PAYROLL  RELATED COSTS.  Payroll and payroll  related costs
were  34.4% of  restaurant  sales  in  fiscal  1997 as  compared  with  34.3% of
restaurant  sales in fiscal 1996.  This increase was  attributable  to increased
management  labor  costs,  primarily  related to certain  health  care  benefits
implemented  by the  Company  during  1997 as part of its  continuing  effort to
increase management  retention and to remain competitive with other companies in
the restaurant  industry.  In addition,  restaurant  labor costs  increased as a
percentage  of sales in fiscal 1997 as a result of the  effects of minimum  wage
increases.

         DEPRECIATION  AND   AMORTIZATION.   Depreciation  and  amortization  of
restaurant  equipment  and  leasehold   improvements,   intangible  assets,  and
pre-opening  costs totaled $9.4 million,  or 3.1% of restaurant sales, in fiscal
1997 as compared with $7.0 million, or 2.9% of restaurant sales, in fiscal 1996.
The increase of approximately  $2.4 million was attributable to the amortization
of the capital leases associated with new restaurants and the

                                       26
<PAGE>
amortization of intangible assets associated with the fiscal 1996  acquisitions.
In addition,  the  amortization of pre-opening  costs increased from $894,000 in
fiscal 1996 to $1.4 million in fiscal 1997.

         OTHER  OPERATING  EXPENSES.  Other  operating  expenses  were  27.4% of
restaurant  sales in fiscal 1997 as compared with 26.3% of  restaurant  sales in
fiscal 1996.  The increase was  attributable  to higher  operating  costs at the
Company's  Black-eyed  Pea  restaurants  and the increased  number of restaurant
operating  weeks in 1997 versus 1996.  In  particular,  the  Company's  costs of
leased equipment  increased from 0.5% of restaurant sales in fiscal 1996 to 1.9%
in fiscal 1997 and advertising  costs increased from 1.1% of restaurant sales in
fiscal 1996 to 2.4% in fiscal 1997 as a result of increases  associated with the
Company's Black-eyed Pea restaurants.

         RESTAURANT OPERATING INCOME. Restaurant operating income decreased from
$22.1  million in fiscal 1996 to $9.1  million in fiscal  1997,  primarily  as a
result of the $14.1  million  charge  for  impaired  assets  relating  to assets
associated  with the sale of 71  restaurants in March 1998 and the other factors
described above.

         ADMINISTRATIVE  EXPENSES.  Administrative expenses increased to 4.6% of
restaurant  sales in fiscal 1997 as compared  with 4.3% of  restaurant  sales in
fiscal 1996.  This increase was  primarily the result of greater  administrative
support  required as the  franchisor of the Black-eyed Pea concept as opposed to
operating solely as a franchisee of Denny's restaurants.

         INTEREST EXPENSE.  Interest expense increased to $13.7 million, or 4.6%
of restaurant  sales,  in fiscal 1997 as compared with $9.6 million,  or 4.0% of
restaurant  sales,  in  fiscal  1996.  This  increase  was  attributable  to the
increased level of long-term debt associated with the restaurant acquisitions in
1996 and the increase in capitalized lease obligations.

         INCOME  TAXES.  The provision for income tax was $3.3 million in fiscal
1997 as compared  with the  provision for income tax of $870,000 in fiscal 1996.
The  increased  provision  for income tax in fiscal 1997  resulted  from certain
permanent  differences  associated  with  goodwill and other  intangible  assets
created in connection with the Merger.

LIQUIDITY AND CAPITAL RESOURCES

         In order to provide the Company with the  flexibility  to (a) refinance
certain  debt  obligations  to  better  match  operating  cash  flows  with debt
amortization,  (b) improve  its  portfolio  of  operating  restaurants,  and (c)
position  itself for  growth,  the  Company  has pursued a strategy to repay its
senior debt obligations.  During 1998, the Company reduced its total liabilities
from $169.0 million to $137.8 million.  Included in this $31.2 million reduction
was a decrease in long-term debt  obligations,  including  current  portion,  of
$27.8 million.  This decrease in indebtedness was primarily  attributable to the
Company's reduction of its obligations under the terms of a credit facility with
Banque Paribas, as agent for several banks (the "Credit  Facility"),  as well as
the early  repayment of an outstanding  promissory  note issued to the seller of
BEP. As described below, in April 1999 the Company executed  commitment  letters
for new financing that will allow the Company to repay its remaining  obligation
under  the  Credit   Facility.   The  following   paragraphs   describe  certain
transactions the Company  completed in fiscal 1998 in its effort to decrease its
long-term debt obligations.

         In March  1998,  the  Company  sold 63  Denny's  restaurants  and eight
non-branded  restaurants  to an unrelated  party for $28.7  million,  consisting
initially of cash of $25.2 million and notes totaling $3.5 million.  The Company
collected $1.7 million on those notes during 1998. The Company utilized the cash
proceeds  from  this  transaction   primarily  to  (1)  permanently  reduce  its
outstanding  borrowings under the Credit Facility;  and (2) repay an outstanding
promissory note issued to the seller of BEP at a $2.3 million  discount from its
outstanding  principal amount of approximately  $15.3 million.  The Company also
canceled  outstanding  warrants to acquire  approximately  1.0 million shares of
Common Stock when it repaid the note.

         In a separate  transaction  completed  in March 1998,  the Company also
sold five Denny's  restaurants located in Wyoming to an unrelated party for cash
of  $700,000  plus a note in the  principal  amount  of  $400,000.  The  Company
collected  $200,000 on this note in  September  1998.  The Company  utilized the
proceeds from this transaction to permanently reduce its outstanding  borrowings
under the Credit Facility.

                                       27
<PAGE>

         In  April  1999,   the  Company   executed   commitment   letters  (the
"Commitments")  that provide for borrowings  totaling  $20.1 million.  Under the
terms of the  Commitments,  the Company  will enter into (a) $3.0 million of new
equipment  financing,  and (b) a loan  not to  exceed  $17.1  million.  The $3.0
million  new  equipment   financing  will  be  made  in  conjunction   with  the
modification   and   consolidation   of  existing   equipment   loans   totaling
approximately $15.4 million to create a total term loan of $18.4 million,  which
will amortize monthly over a seven-year period.

         To  facilitate   the  $17.1  million   loan,   the  Company   formed  a
special-purpose subsidiary and will contribute to that subsidiary the assets and
liabilities  associated with  approximately  34 Denny's  restaurants.  The newly
formed  subsidiary will be the borrower under the loan,  which will be evidenced
by 34 individual promissory notes secured by the leasehold properties. The terms
of the notes will vary based upon the term of the leaseholds,  which approximate
15 years. The notes will amortize monthly at a fixed rate.

         The Company will use the proceeds from the new loans (1) to permanently
retire  the  Credit  Facility;  (2) to  purchase  certain  restaurant  equipment
currently  encumbered by equipment leases; (3) to pay various fees and expenses;
and (4) to provide working  capital.  The Company believes that it will complete
the financing transactions contemplated by the Commitments in the second quarter
of 1999 and that the funds provided by these  financings  will be sufficient for
its ongoing operations and anticipated  restaurant development activities during
1999.

         At December 30, 1998,  the Company was not in  compliance  with certain
financial  covenants  and payment  terms in various  debt and other  agreements,
including  the  Credit  Facility  and  Series  B Notes.  See  Item 13,  "Certain
Relationships and Related Transactions." The Company believes that the financing
transaction  provided  for  in the  Commitments  will  enable  it to  repay  the
remaining  obligations  under  its  Credit  Facility  and to cure  the  covenant
defaults under its other agreements.  In addition, the Company intends to pursue
various  alternatives  to  refinance  other assets  during 1999.  If the Company
cannot  complete the  financing  contemplated  under the  Commitments,  it would
continue  to be in default  under the Credit  Facility  until  other  acceptable
refinancing or restructuring  alternatives become available.  The Company cannot
provide assurance,  however,  that additional financing will be available to the
Company or available on satisfactory terms.

         The sale of  restaurants  described  above  significantly  impacted the
Company's  liquidity  during 1998  because (a) the Company  repaid the  negative
working capital  attributable  to the  restaurants  that it sold from cash flows
generated by its remaining restaurants;  and (b) the Company did not immediately
realize the  beneficial  effects of reduced  administrative  costs.  The Company
believes,  however,  that  the  sale of these  underperforming  restaurants  has
improved its overall asset base and positioned it for improved operating results
in fiscal 1999. In  particular,  the  Company's  remaining  Denny's  restaurants
posted  improved  same-store  sales during the fourth quarter of fiscal 1998 and
the first quarter of fiscal 1999. In addition, the Company's Denny's restaurants
and  Black-eyed  Pea  restaurants  recorded  improved cash flows during the same
periods.

         The Company, and the restaurant industry generally, operate principally
on a cash basis with a relatively small amount of receivables.  Therefore,  like
many other  companies in the restaurant  industry,  the Company  operates with a
working capital deficit. The Company's working capital deficit was $36.4 million
at December 31, 1997 and $44.8 million at December 30, 1998. The Company expects
that it will operate with a working capital deficit in the future.

         The Company historically has satisfied its capital requirements through
credit facilities and sale-leaseback  financings. The Company currently requires
capital  principally  for the  development of new  restaurants  and  maintenance
expenditures on existing  restaurants.  Expenditures  for property and equipment
totaled  approximately $9.9 million,  $8.1 million,  and $2.9 million for fiscal
1996, fiscal 1997, and fiscal 1998, respectively. The Company intends to develop
a total of eight new Black-eyed Pea restaurants during 1999, including three new
Black-eyed  Pea  restaurants  opened  to  date.  The  Company  believes  that it
currently  has  commitments  that it  believes  will  be  adequate  to meet  its
financing  needs during 1999.  The following  paragraphs  describe the Company's
cash flow activities during fiscal 1998.

                                       28
<PAGE>
         Net cash used in operating  activities  decreased  from $1.5 million in
fiscal  1997  to $1.4  million  in  fiscal  1998.  Net  cash  used in  operating
activities  included a reduction of accounts payable and  accrued liabilities of
$7.0 million and $3.4 million in fiscal 1997 and fiscal 1998, respectively. This
reduction  was  primarily  attributable  to the  payment of certain  liabilities
associated with restaurants sold or closed.

         Net cash from investing  activities increased from $6.3 million used in
fiscal  1997 to $22.5  million  provided in fiscal  1998.  In fiscal  1997,  the
Company  opened  four  new  Black-eyed  Pea   restaurants  and  purchased  seven
franchised  Black-eyed Pea restaurants.  The cash used in these transactions was
offset by the  proceeds  from the sale of assets.  In fiscal  1998,  the Company
purchased the two remaining franchised  Black-eyed Pea restaurants and began the
construction  of several new  Black-eyed  Pea  restaurants to be opened in 1999.
These  expenditures  were  offset  by the  proceeds  from the  restaurant  sales
described above.

         Net cash from financing  activities  changed from $6.4 million provided
by  financing  activities  in fiscal  1997 to $20.2  million  used in  financing
activities  in fiscal  1998.  In fiscal  1997,  the Company  refinanced  certain
indebtedness  and used  the  proceeds  to repay  obligations  under  its  Credit
Facility and to acquire the  franchised  Black-eyed  Pea  restaurants  described
above.  In fiscal  1998,  the Company  sold  restaurants  and used the  proceeds
primarily to reduce its long-term debt obligations.

SEASONALITY

         The Company's  operating results fluctuate from quarter to quarter as a
result of the seasonal nature of the restaurant industry and other factors.  The
Company's  restaurant sales are generally greater in the second and third fiscal
quarters (April through  September) than in the first and fourth fiscal quarters
(October  through  March).  Occupancy and other  operating  costs,  which remain
relatively  constant,  have a  disproportionately  negative  effect on operating
results  during  quarters with lower  restaurant  sales.  The Company's  working
capital  requirements  also  fluctuate  seasonally,   with  its  greatest  needs
occurring during its first and fourth quarters.

INFLATION

         The Company does not believe that  inflation has had a material  effect
on operating results in past years.  Although  increases in labor, food or other
operating costs could  adversely  affect the Company's  operations,  the Company
generally has been able to modify its operating procedures or to increase prices
to offset increases in its operating costs.

YEAR 2000 COMPLIANCE

         Many currently installed computer systems and software products may not
function  properly when processing dates that begin on or after January 1, 2000.
The Company  currently is upgrading its internal computer network to improve its
management information systems in general, as well as to ensure that its systems
will not  malfunction  as a result  of  "Year  2000"  issues.  The  Company  has
identified  four primary  systems  that could be adversely  impacted by the Year
2000 issue.  These  systems are (1)  point-of-sale  and  restaurant  back-office
accounting systems in each of its Black-eyed Pea restaurants;  (2) point-of-sale
and  restaurant   back-office   accounting   systems  in  each  of  its  Denny's
restaurants; (3) the Company's internal accounting systems and software; and (4)
third-party  systems,  including  computer  systems used by the  Company's  food
suppliers,   financial  institutions,   credit  card  processors,   and  utility
companies.

         The  Company is in the  process of  converting  the  point-of-sale  and
back-office  accounting  systems at its Black-eyed Pea and Denny's  restaurants.
The Company currently anticipates that this conversion, which includes upgrading
existing  software,  will be completed by September 30, 1999. The vendor for the
Company's internal corporate  accounting systems has advised the Company that it
will be able to modify those systems to be Year 2000 compliant  during 1999. The
vendor  currently is modifying the line code for those  software  products.  The
Company  previously  engaged a third-party  consultant to evaluate those systems
and has retained another third-party  consultant to assess and test the vendor's
modifications to the systems by June 30, 1999. The Company currently anticipates
that its costs to bring its computer  systems into Year 2000 compliance will not
exceed $250,000.

                                       29
<PAGE>
         The Company has obtained Year 2000 compliance  certifications  from all
significant   third-parties  that  the  Company  depends  upon,  including  food
suppliers,  financial institutions,  and credit card transaction processors. All
significant  third-parties  have advised the Company  that their  systems are or
will be Year 2000 compliant during 1999.

         The Company intends to continue to identify technology systems that may
be subject to Year 2000 risks and to monitor and test those  systems  throughout
1999. The Company  currently does not  anticipate any material  adverse  effects
related to Year 2000 issues.  As of the filing date of this Report,  the Company
has not  developed a  contingency  plan to address Year 2000  issues.  Following
completion of the  third-party  assessment and testing of  modifications  to its
internal  accounting  systems,  the Company  will develop  contingency  plans to
address those potential adverse  consequences,  if any,  identified as remaining
with respect to Year 2000 issues.

NEW ACCOUNTING STANDARDS

         In April 1998,  the  Accounting  Standards  Executive  Committee of the
American  Institute of Certified Public Accountants issued Statement of Position
No. 98-5 ("SOP  98-5"),  "Reporting  on the Costs of Start-up  Activities."  The
Company  early  adopted SOP 98-5 in fiscal 1998 and now expenses as incurred all
pre-opening  costs.  The effect of this change did not have a material impact on
the Company's financial statements.

         In June 1998,  the FASB issued SFAS No. 133,  ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING Activities.  This standard is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards  for  derivative  instruments,   including  those  imbedded  in  other
contracts,  and for  hedging  activities.  It  requires  all  derivatives  to be
recognized  as either  assets  or  liabilities  in the  statement  of  financial
position  and  measured at fair value.  The Company has not yet  determined  the
effect the adoption of SFAS No. 133 will have on its financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Reference is made to the financial statements,  the report thereon, and
the  notes  thereto  commencing  at page  F-1 of this  Report,  which  financial
statements, report, and notes are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

         Not applicable.

                                       30
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The following table sets forth certain information with respect to each
of the Company's directors and executive officers.

        NAME              AGE                   POSITION
        ----              ---                   --------
Jack M. Lloyd...........  49   Chairman of the Board, President, and Chief
                                 Executive Officer
William J. Howard.......  54   Executive Vice President, Secretary, and Director
William G. Cox..........  50   Chief Operating Officer and Director
Robert J. Gentz.........  49   Executive Vice President
Todd S. Brown...........  42   Senior Vice President, Chief Financial Officer,
                                 Treasurer, and Director
Fred W. Martin..........  68   Director
Robert H. Manschot......  55   Director

         JACK M. LLOYD has served as Chairman of the Board of the Company  since
July 9, 1996 and as President,  Chief Executive  Officer,  and a director of the
Company  since March 29,  1996.  Mr.  Lloyd  served as Chairman of the Board and
Chief  Executive  Officer  of DRC from  1987  until  March  1996 and  served  as
President of DRC from 1987 until  November 1994. Mr. Lloyd engaged in commercial
and residential real estate development and property  management as President of
First Federated Investment Corporation during the early and mid-1980s. Mr. Lloyd
also currently serves as a director of Action  Performance  Companies,  Inc. and
Star Buffet, Inc., which are publicly held companies.

         WILLIAM J. HOWARD has served as Executive Vice President of the Company
since July 9, 1996 and as  Secretary  and a director of the Company  since March
29, 1996.  Mr. Howard  served as a Vice  President of the Company from March 29,
1996 until July 9, 1996.  Mr.  Howard  served as President of DRC from  November
1994 until March 1996 and as a director  of DRC from 1990 until March 1996.  Mr.
Howard  served as Vice  President  of DRC from 1990 until  November  1994 and as
Chief  Financial  Officer of DRC from 1990 until August  1994.  Prior to joining
DRC, Mr.  Howard held numerous  senior  management  positions  with Citicorp and
Citibank,  including  Senior  Vice  President  and Senior  Credit  Officer  with
Citicorp Mortgage, Inc.

         WILLIAM G. COX has served as Chief Operating  Officer and a director of
the Company since March 29, 1996.  Mr. Cox served as Vice President - Operations
for Denny's,  Inc. from June 1993 until November 1995, with  responsibility  for
approximately  590  company-owned  and franchised  Denny's  restaurants  located
throughout  the United  States.  Mr. Cox served as a Senior  Vice  President  of
Flagstar and as Chief  Operating  Officer of  Flagstar's  "Quincy's"  restaurant
chain from May 1992 to June 1993.  Mr. Cox served as Vice  President  of Eastern
Operations  of  Denny's,  Inc.  from  March  1991 to May 1992 and as a  Regional
Manager and Division  Leader for Denny's,  Inc. from 1981 to March 1991. Mr. Cox
joined Denny's, Inc. as a Manager-in-Training in September 1977 and had advanced
to the position of Regional Manager by 1981.

         ROBERT J. GENTZ has served as Executive  Vice  President of the Company
since January 1997. Prior to joining the Company,  Mr. Gentz spent nine years as
Executive Vice President for CNL Group,  Inc., a diversified  investment company
that specializes in providing  financing to the restaurant  industry.  Mr. Gentz
also served as Director of Development for Wendy's International, Inc. from 1982
through  1987,  where  he  was  responsible  for  company-owned  and  franchised
restaurants in various regions.

                                       31
<PAGE>
         TODD S. BROWN has served as Senior Vice  President of the Company since
December 1997 and as Chief Financial Officer,  Treasurer,  and a director of the
Company  since March 29,  1996.  Mr.  Brown  served as a Vice  President  of the
Company from March 1996 to December  1997.  Mr. Brown served as Vice  President,
Chief Financial  Officer,  and a director of DRC from September 1994 until March
1996.  Mr.  Brown was  employed by Deloitte & Touche LLP from 1980 to  September
1994,  most  recently  as a Senior  Manager.  Mr.  Brown is a  Certified  Public
Accountant in the state of Arizona.

         FRED W. MARTIN has served as a director of the Company  since March 29,
1996.  Mr.  Martin  served as a director of DRC from  November  1994 until March
1996. Mr. Martin served as Western  Regional  Director of Franchise  Development
with  Denny's,  Inc.  from  1985 to 1994,  during  which  time he  approved  and
developed 400 franchise and company locations for Denny's,  Inc.  throughout the
western United States.  Mr. Martin served as Western Real Estate  Representative
with Denny's, Inc. from 1979 until 1985.

         ROBERT H.  MANSCHOT  has  served as a  director  of the  Company  since
January  1999.  Mr.  Manschot  currently  serves as the  Managing  Director  and
Chairman of Manschot  Investment Group L.L.C., an investment fund that is in the
business  of  identifying  and  investing  in  companies  that have  significant
potential for growth.  Mr. Manschot also serves as Chairman of Seceurop Security
Services in the United Kingdom and engages in business  consulting  services and
venture capital activities as Chairman of RHEM International  Enterprises,  Inc.
Mr.  Manschot  served as President and Chief  Executive  Officer of  Rural/Metro
Corporation  ("Rural/Metro"),  a publicly  held  provider of ambulance  and fire
protection  services,  from October 1988 until March 1995. Mr.  Manschot  joined
Rural/Metro  in  October  1987 as  Executive  Vice  President,  Chief  Operating
Officer,  and a member of its Board of Directors.  Mr. Manschot was with the Hay
Group, an international  consulting firm, from 1978 until October 1987,  serving
as Vice  President and a partner from 1984,  where he led  strategic  consulting
practices in Europe,  Asia, and the western United States.  Prior to joining the
Hay Group, Mr. Manschot spent 10 years with several leading  international hotel
chains in senior operating positions in Europe, the Middle East, Africa, and the
United States.  Mr.  Manschot  currently  serves as a director of Samoth Capital
Corporation and Action  Performance  Companies,  Inc., which are publicly traded
companies,  and as a  director  of Silicon  Entertainment,  Inc.,  Thomas  Pride
Development,  Inc., First Wave, Inc., Motorsports  Promotions,  Inc., and Sports
Southwest, Inc., all of which are privately held companies.

         All  directors  of the Company  hold office  until the  Company's  next
annual  meeting of  shareholders  or the  election  and  qualification  of their
successors.  The former shareholders of DRC collectively own a sufficient number
of shares of the Company's Common Stock to elect all of the members of the Board
of Directors. There is no agreement or understanding between the Company and any
of the persons who  constitute  the  Company's  Board of  Directors  as to their
serving on the Company's Board of Directors in the future.

         The  Company's  Board of  Directors  maintains  an Audit  Committee,  a
Compensation  Committee,  a  1992  Stock  Option  Plan  Committee,  and  a  1995
Directors' Stock Option Plan Committee. During fiscal 1998, John M. Holliman and
C. Alan  MacDonald,  former  directors  of the  Company,  constituted  the Audit
Committee;  Messrs.  Holliman,  MacDonald,  and Fred W. Martin  constituted  the
Compensation  Committee and 1992 Stock Option Plan Committee;  and Messrs. Lloyd
and Howard constituted the 1995 Directors' Stock Option Plan Committee.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the  Securities  Exchange Act of 1934, as amended (the
"Exchange  Act")  requires the  Company's  directors,  executive  officers,  and
persons  who own more than 10 percent  of a  registered  class of the  Company's
equity securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC").  Directors,  executive officers,
and greater  than 10 percent  shareholders  are required by SEC  regulations  to
furnish the Company  with  copies of all  Section  16(a) forms they file.  Based
solely  upon the  Company's  review of the copies of such forms  received  by it
during the fiscal year ended December 30, 1998, and written representations that
no other reports were  required,  the Company  believes that each person who, at
any time during such fiscal year, was a director,  officer,  or beneficial owner
of more than 10 percent of the Company's  Common Stock complied with all Section
16(a) filing requirements during such fiscal year.

                                       32
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.

         The following table sets forth information  concerning the compensation
of the Company's Chief Executive  Officer and each of the four other most highly
compensated  executive  officers whose cash salary and bonuses exceeded $100,000
during the fiscal year ended December 30, 1998 (the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                         LONG-TERM
                                                                        COMPENSATION
                                                                        ------------
                                                 ANNUAL COMPENSATION       AWARDS
                                               ----------------------   ------------
                                                                         SECURITIES
                                      FISCAL                             UNDERLYING       ALL OTHER
NAME AND PRINCIPAL POSITION            YEAR    SALARY$(1)    BONUS($)    OPTIONS(#)    COMPENSATION($)
---------------------------            ----    ----------    --------   ------------   ---------------
<S>                                    <C>     <C>           <C>           <C>            <C>
Jack M. Lloyd, Chairman of the         1998    $520,000           --            --             --
   Board, President, and Chief         1997     520,000           --            --             --
   Executive Officer(2)                1996     375,200           --            --             --


William J. Howard, Executive           1998    $260,000           --            --             --
   Vice President and Secretary (2)    1997     260,000           --            --             --
                                       1996     187,600           --            --             --

William G. Cox, Chief Operating        1998    $220,000      $50,000            --             --
   Officer                             1997     220,000           --            --             --
                                       1996     221,795(3)        --       300,000        $15,921

Robert J. Gentz, Executive Vice        1998    $175,000      $50,000            --             --
   President                           1997     166,027(4)        --       100,000             --

Todd S. Brown, Senior Vice             1998    $160,000      $50,000            --             --
   President, Chief Financial          1997     127,372           --            --             --
   Officer, and Treasurer(2)           1996     115,700       75,000       124,800             --
</TABLE>
----------
(1)  Each of the Named Executive  Officers  received  certain  perquisites,  the
     value of which did not exceed 10% of their salary during fiscal 1998.
(2)  Each of Messrs.  Lloyd,  Howard, and Brown became executive officers of the
     Company upon  consummation  of the Merger on March 29, 1996.  Amounts shown
     for fiscal 1996  include  payments  to each such person for  services as an
     executive officer of DRC prior to the Merger.
(3)  Represents amounts accrued or paid beginning on March 29, 1996, the date of
     Mr. Cox's employment with the Company.
(4)  Represents  amounts  accrued or paid beginning on January 6, 1997, the date
     of Mr. Gentz' employment with the Company.

OPTION GRANTS

         The  Company  did not grant any stock  options  to the Named  Executive
Officers during the fiscal year ended December 30, 1998.

                                       33
<PAGE>
OPTION HOLDINGS

         The following  table sets forth  information  concerning the number and
value of all options held at December 30, 1998, by the Named Executive Officers.
None of the Named Executive Officers exercised any options during fiscal 1998.

                             YEAR-END OPTION VALUES

                          NUMBER OF SECURITIES         VALUE OF UNEXERCISED
                         UNDERLYING UNEXERCISED        IN-THE-MONEY OPTIONS
                       OPTIONS AT FISCAL YEAR-END    AT FISCAL YEAR-END ($)(1)
                       --------------------------    -------------------------
      NAME             EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
      ----             -----------   -------------   -----------   -------------
Jack M. Lloyd........      --           --              N/A            N/A
William J. Howard....      --           --              N/A            N/A
William G. Cox.......    180,000      120,000           $0             $0
Robert J. Gentz......     50,000       50,000           $0             $0
Todd S. Brown........     74,880       49,920           $0             $0

----------
(1)  The  exercise  prices of all options held by the Named  Executive  Officers
     were greater than the closing price of the Company's  Common Stock of $1.13
     per share on December 30, 1998.

401(K) PLAN

         In April 1998, the Company established a defined contribution plan (the
"401(k)  Plan") that  qualifies as a cash or deferred  profit sharing plan under
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the
"Internal  Revenue Code").  Under the 401(k) Plan,  participating  employees may
defer  from 1% to 15% of their  pre-tax  compensation,  subject  to the  maximum
dollar amount allowed under the Internal  Revenue Code. In addition,  the 401(k)
Plan  provides  that  the  Company  may  make  discretionary   contributions  to
participating  employees in such amounts as may be  determined  by the Company's
Board of  Directors.  Highly  compensated  employees of the  Company,  including
executive officers, are not eligible to participate in the 401(k) Plan.

EMPLOYMENT AGREEMENTS

GENERAL

         The Company currently is a party to employment  agreements with each of
William  G.  Cox,  Robert  J.  Gentz,  and Todd S.  Brown.  In  addition  to the
provisions  of the  individual  employment  agreements as described  below,  the
employment  agreements generally require the Company to provide each person with
certain medical and life insurance  benefits;  to reimburse them for all travel,
entertainment,  and other ordinary and necessary expenses incurred in connection
with the Company's  business and their duties under their respective  employment
agreements;  and to provide such other fringe  benefits  that the Company  makes
generally available to all of its employees on a  non-discriminatory  basis. The
employment agreements with Messrs. and Cox, Gentz, and Brown require the Company
to provide each such officer with an automobile  for use in connection  with the
Company's  business.  In addition,  in the event of a "change of control" of the
Company,  as defined in employment  agreements,  the Company will be required to
pay each of Messrs.  Cox, Gentz,  and Brown a lump sum equal to their respective
fixed  salaries  for the greater of one year or the balance of the  then-current
term of employment  under the applicable  agreement,  and all of Messrs.  Cox's,
Gentz's,  and Brown's unvested stock options,  if any, will immediately vest and
become exercisable in full. The agreements also contain provisions that prohibit
the respective officer from (i) competing with the business of the Company, (ii)
taking  certain  actions  intended to solicit other  persons to terminate  their
business  relationship  with the Company or to terminate  his or her  employment
relationship with the Company,  and (iii) making  unauthorized use or disclosure
of the Company's trade names, fictitious names, or confidential information.

                                       34
<PAGE>
WILLIAM G. COX

         In December 1995, the Company entered into an employment agreement with
William  G.  Cox,  which  became  effective  upon  consummation  of the  Merger.
Effective  January  1,  1998,  Mr.  Cox and the  Company  amended  the  original
employment agreement. Pursuant to his agreement with the Company, Mr. Cox serves
as the Chief  Operating  Officer of the Company at a base salary of $220,000 per
year.  The  agreement  also provides that Mr. Cox will be eligible to receive an
annual  bonus of up to 50% of his annual  base  salary  pursuant to a bonus pool
plan  to be  established  by and  administered  in the  sole  discretion  of the
Company.  Pursuant to the agreement,  the Company  granted to Mr. Cox options to
purchase 300,000 shares of the Company's  Common Stock. Mr. Cox's agreement,  as
amended,  continues  until December 31, 2000 and will renew  automatically  from
year to year thereafter,  unless and until either party terminates by giving the
other  party  written  notice  not  less  than 60 days  prior  to the end of the
then-current  term. The Company may terminate the agreement  only for cause,  as
defined in the agreement.

ROBERT J. GENTZ

         In January 1997, the Company entered into an employment  agreement with
Robert J. Gentz  pursuant to which Mr. Gentz serves as Executive  Vice President
of the Company.  The employment agreement provides for a base salary of $175,000
per year. In addition, the agreement provides that Mr. Gentz will be eligible to
receive an annual  bonus of up to $50,000  per year based upon  standards  to be
agreed upon between the Company and Mr. Gentz.  Pursuant to the  agreement,  the
Company reimbursed Mr. Gentz for certain relocation  expenses and granted to Mr.
Gentz  options to purchase  100,000  shares of the Company's  Common Stock.  Mr.
Gentz' agreement provides for an initial employment term of three years, subject
to extension for additional  one-year periods under mutually agreeable terms and
conditions.

TODD S. BROWN

         In December 1997, the Company entered into an employment agreement with
Todd S. Brown  pursuant  to which Mr.  Brown  serves as Senior  Vice  President,
Treasurer,  and Chief Financial Officer of the Company. The employment agreement
provides for a base salary of $160,000, $175,000, and $190,000 in calendar 1998,
1999, and 2000, respectively. In addition, the agreement provides that Mr. Brown
will be eligible to receive an annual bonus in an amount to be determined by the
Company's Board of Directors,  in its sole  discretion.  Mr. Brown's  employment
agreement  continues until December 31, 2000 and will renew  automatically  from
year to year thereafter,  unless and until either party terminates by giving the
other  party  written  notice  not  less  than 60 days  prior  to the end of the
then-current  term.  In the  event  that  the  Company  terminates  Mr.  Brown's
employment without cause, Mr. Brown will continue to receive his base salary for
a period of 12 months following the date of such termination.

STOCK OPTION PLANS

1996 STOCK OPTION PLAN

         On December  10, 1996,  the  Company's  Board of Directors  adopted the
Company's 1996 Stock Option Plan (the "1996 Plan").  The Company's  shareholders
approved  the 1996  Plan on June 26,  1997.  A total of  500,000  shares  of the
Company's  Common Stock has been reserved for issuance  under the 1996 Plan. The
1996 Plan is intended to promote the interests of the Company by encouraging key
persons  associated with the Company to acquire,  or otherwise  increase,  their
proprietary  interest in the Company and an increased  personal  interest in its
continued success and progress.  The 1996 Plan provides for the grant of options
to acquire Common Stock of the Company  ("Options"),  the direct grant of Common
Stock ("Stock Awards"), the grant of stock appreciation rights ("SARs"), and the
grant of other cash awards ("Cash Awards") (Stock Awards,  SARs, and Cash Awards
are  collectively  referred  to  herein  as  "Awards").  If  any  Option  or SAR
terminates or expires  without having been  exercised in full,  stock not issued
under such Option or SAR will again be  available  for the  purposes of the 1996
Plan. The 1996 Plan is intended to comply with Rule 16b-3 as  promulgated  under
the Exchange  Act with respect to persons  subject to Section 16 of the Exchange
Act. As of March 31, 1998, the

                                       35
<PAGE>
Company  has not granted  any  Options  under the 1996 Plan.  The 1996 Plan will
remain in effect until December 9, 2006.

         Options  and Awards may be  granted  pursuant  to the 1996 Plan only to
persons  ("Eligible  Persons")  who at the  time of  grant  are  either  (i) key
personnel (including officers and directors) of the Company, or (ii) consultants
or independent contractors who provide valuable services to the Company. Options
granted   pursuant  to  the  1996  Plan  may  be  incentive   stock  options  or
non-qualified  stock  options.  Options that are incentive  stock options may be
granted  only to key  personnel  of the  Company who are also  employees  of the
Company.  To the extent that granted  Options are incentive  stock options,  the
terms and conditions of those Options must be consistent with the  qualification
requirements  set forth in the  Internal  Revenue  Code.  The maximum  number of
shares of stock with  respect  to which  Options or Awards may be granted to any
employee  during  the term of the 1996  Plan may not  exceed 50  percent  of the
shares of Common Stock covered by the 1996 Plan.

         The  exercise  price of any Option  intended to be an  incentive  stock
option may not be less than 100 percent of the fair  market  value of the Common
Stock at the time of the grant (110 percent if the Option is granted to a person
who at the time the Option is granted owns stock possessing more than 10 percent
of the total  combined  voting  power of all  classes of stock of the  Company).
Options  may be  granted  for terms of up to 10 years  and will vest and  become
exercisable in whole or in one or more  installments as may be determined at the
time the Options are granted.  To exercise an Option,  the optionholder  will be
required to deliver to the Company full  payment of the  exercise  price for the
shares as to which the  Option is being  exercised.  Generally,  Options  can be
exercised by delivery of cash, check, or shares of Common Stock of the Company.

         SARs will  entitle  the  recipient  to  receive a payment  equal to the
appreciation  in market value of a stated  number of shares of Common Stock from
the price on the date the SAR was  granted  or became  effective  to the  market
value of the Common  Stock on the date the SARs are  exercised  or  surrendered.
Stock  Awards will  entitle the  recipient  to receive  shares of the  Company's
Common Stock directly.  Cash Awards will entitle the recipient to receive direct
payments of cash depending on the market value or the appreciation of the Common
Stock or other securities of the Company.  The plan administrators may determine
such other terms,  conditions,  or  limitations,  if any, on any Awards  granted
pursuant to the 1996 Plan.

AMENDED AND RESTATED 1992 STOCK OPTION PLAN

         A total of  1,000,000  shares of the  Company's  Common Stock have been
reserved for issuance under the Company's Amended and Restated 1992 Stock Option
Plan (the "1992  Plan").  The 1992 Plan limits the  persons  eligible to receive
options to directors, consultants, and key employees, including officers, of the
Company or a subsidiary  of the Company and "key  persons" who are not employees
but have provided valuable  services,  have incurred financial risk on behalf of
the Company,  or have extended  credit to the Company or its  subsidiaries.  The
1992 Plan  provides  that options  granted to employees  may be incentive  stock
options or  non-qualified  options  pursuant to the Internal  Revenue Code.  Key
persons  who are not  employees  are  eligible  to  receive  only  non-qualified
options.  The 1992 Plan is  intended  to comply  with Rule 16b-3 as  promulgated
under the  Exchange  Act with  respect to  persons  subject to Section 16 of the
Exchange Act. As of March 31, 1998, there were outstanding  options to acquire a
total of  728,000  shares of Common  Stock  under the 1992  Plan.  The 1992 Plan
terminates on April 1, 2002.

         Incentive  stock  options may not have an exercise  price less than the
fair market  value of the Common Stock on the grant date,  except  that,  in the
case of an incentive  stock option granted to any participant who owns more than
10% of the Company's  outstanding  voting shares,  the exercise price must be at
least 110% of the fair market value of the Common Stock on the date of grant and
the term of the option may be no longer  than five years.  Options  that are not
incentive  stock options may not have an exercise price less than the greater of
the minimum price  required by applicable  state law, by the Company's  Restated
Articles  of  Incorporation,  or the par  value  of the  Common  Stock.  Options
generally  may be exercised by delivery of any  combination  of cash,  shares of
Common Stock,  or by delivering to the Company a promissory note upon such terms
and conditions as the Board of Directors may determine.

                                       36
<PAGE>
1995 DIRECTORS STOCK OPTION PLAN

         A total of  300,000  shares of Common  Stock  have  been  reserved  for
issuance under the Company's 1995 Directors Stock Option Plan (the "1995 Plan").
The purpose of the 1995 Plan is to promote the  interests of the Company and its
shareholders by  strengthening  the Company's  ability to attract and retain the
services  of  experienced  and  knowledgeable   non-employee  directors  and  by
encouraging such directors to acquire an increased  proprietary  interest in the
Company. As of March 31, 1998, there were outstanding options to acquire a total
of 70,000 shares of Common Stock under the 1995 Plan.  The 1995 Plan  terminates
on January 16, 2005.

         Options to purchase  10,000  shares of Common  Stock are  automatically
granted to each  non-employee  director of the Company on the date of his or her
initial  election to the Board of Directors or  re-election at an annual meeting
of the Company's  shareholders.  Directors who are first elected or appointed to
the  Board  of  Directors  on a date  other  than an  annual  meeting  date  are
automatically  granted  options to purchase the number of shares of Common Stock
equal to the product of 10,000 multiplied by a fraction,  the numerator of which
is the number of days during the period  beginning on such grant date and ending
on the date of the next annual meeting,  and the denominator of which is 365. If
no meeting is  scheduled  at a time a director is first  elected or appointed to
the Board of Directors,  the date of the next annual meeting is deemed to be the
120th day of the fiscal year next following the interim grant date. The exercise
price of each option is the fair market value of the  Company's  Common Stock on
the business day  preceding  the date of grant,  and the term of each option may
not  exceed  ten  years.  One-half  of  the  options  granted  vest  and  become
exercisable after the first year of continuous  service as a director  following
the automatic  grant date, and the remainder vest and become  exercisable  after
two years of continuous service on the Board of Directors.

DIRECTOR COMPENSATION

         Employees  of the  Company do not receive  compensation  for serving as
members of the Company's Board of Directors.  Non-employee  members of the Board
of  Directors  receive  cash  compensation  in the amount of $10,000  per annum.
Non-employee  directors receive automatic grants of stock options under the 1995
Directors Stock Option Plan. See Item 11, "Executive Compensation - Stock Option
Plans."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         C. Alan MacDonald,  Fred W. Martin, and John M. Holliman, III served as
members of the  Compensation  Committee of the Board of Directors  during fiscal
1998. None of such individuals had any contractual or other  relationships  with
the Company during fiscal 1998 except as directors.

INDEMNIFICATION AND LIMITATION OF PERSONAL LIABILITY OF DIRECTORS

         The  Company's  Amended  and  Restated  Bylaws  require  the Company to
indemnify  its directors and officers  against  liabilities  that they may incur
while serving in such capacities, to the full extent permitted and in the manner
required by the Georgia  Business  Corporation  Code (the  "GBCC").  Pursuant to
these provisions,  the Company will indemnify its directors and officers against
any losses  incurred in  connection  with any  threatened,  pending or completed
action,  suit  or  proceeding,   whether  civil,  criminal,   administrative  or
investigative,  by  reason of the fact  that he or she is or was a  director  or
officer of the Company or served with another  corporation,  partnership,  joint
venture,  trust or other enterprise at the request of the Company.  In addition,
the Company will provide  advances for expenses  incurred in defending  any such
action,  suit or proceeding  upon receipt of an  undertaking  by or on behalf of
such director or officer to repay such  advances if it is ultimately  determined
that he or she is not entitled to  indemnification  by the Company.  The Company
has entered into  indemnification  agreements  with certain of its directors and
executive  officers  pursuant  to the  foregoing  provisions  of its Amended and
Restated Bylaws.

         As  permitted  by  the  GBCC,  the  Company's   Restated   Articles  of
Incorporation  contain  provisions  that  eliminate  the  personal  liability of
directors for monetary  damages to the Company or its shareholders for breach of
their  fiduciary  duties  as  directors.  In  accordance  with the  GBCC,  these
provisions do not limit the liability of a director for (i) any appropriation of
a business opportunity of the Company in violation of the director's duty, (ii)

                                       37
<PAGE>
acts or omissions that involve intentional  misconduct or a knowing violation of
law,  (iii)  any  dividend  payment,  stock  repurchase,   stock  redemption  or
distribution  in liquidation  that is prohibited  under Georgia law, or (iv) any
merger from which the  director  derived an  improper  personal  benefit.  These
provisions  do  not  limit  or  eliminate  the  rights  of  the  Company  or any
shareholder to seek an injunction or any other non-monetary  relief in the event
of a breach of a director's fiduciary duty. In addition,  these provisions apply
only to claims  against a director  arising out of his or her role as a director
and do not relieve a director from  liability for  violations of statutory  law,
such as certain  liabilities  imposed on a director under the federal securities
laws.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth certain information regarding the shares
of the  Company's  Common Stock  beneficially  owned as of March 31, 1999 by (i)
each of the Company's directors and executive  officers;  (ii) all directors and
executive officers of the Company as a group; and (iii) each person known by the
Company to be the beneficial owner of 5% or more of the Company's Common Stock.

                                                    NUMBER         PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL HOLDER(1)         OF SHARES(2)     OWNERSHIP(2)
----------------------------------------         ------------     ------------

DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
Jack M. Lloyd                                    3,469,727(3)          25.2%
William J. Howard                                1,700,363(4)          12.5%
William G. Cox                                     241,000(5)           1.8%
Robert J. Gentz                                     75,000(6)           *
Todd S. Brown                                      102,640(7)           *
Fred W. Martin                                      31,000(8)           *
Robert H. Manschot                                  10,000(9)           *
All directors and executive officers
 as a group (seven persons)                      5,629,730             39.2%

NON-MANAGEMENT 5% SHAREHOLDER
-----------------------------
BancBoston Ventures, Inc.(10)                    2,124,352             15.8%

----------
*    Less than 1.0% of the outstanding shares of Common Stock.

(1)  Except as  otherwise  indicated,  each  person  named in the table has sole
     voting and investment  power with respect to all Common Stock  beneficially
     owned by him,  subject to  applicable  community  property  law.  Except as
     otherwise  indicated,  each of such  persons  may be  reached  through  the
     Company at 7373 N. Scottsdale Road, Suite D-120, Scottsdale, Arizona 85253.
(2)  The  numbers  and  percentages  shown  include  the shares of Common  Stock
     actually  owned as of March 31,  1999 and the shares of Common  Stock which
     the person or group had the right to  acquire  within 60 days of such date.
     In  calculating  the  percentage of  ownership,  all shares of Common Stock
     which the  identified  person or group had the right to  acquire  within 60
     days of March 31, 1999 upon the  exercise of options or warrants are deemed
     to be outstanding for the purpose of computing the percentage of the shares
     of Common  Stock  owned by such  person or group,  but are not deemed to be
     outstanding  for the purpose of computing  the  percentage of the shares of
     Common Stock owned by any other person.
(3)  Represents  3,176,504  shares of Common Stock and 293,223  shares  issuable
     upon exercise of Series B Warrants.
(4)  Represents  1,553,752  shares of Common Stock and 146,611  shares  issuable
     upon exercise of Series B Warrants.
(5)  Represents  1,000 shares of Common Stock and 240,000 shares of Common Stock
     issuable upon the exercise of vested options.
(6)  Represents  75,000 shares of Common Stock  issuable upon exercise of vested
     options.
(7)  Represents 2,800 shares of Common Stock and 99,840 shares issuable upon the
     exercise of vested options.

                                       38
<PAGE>
(8)  Represents  6,000 shares of Common Stock held by Mr.  Martin and his spouse
     and 25,000 shares issuable upon the exercise of vested options.
(9)  Represents  10,000  shares of Common  Stock  issuable  upon the exercise of
     vested options.
(10) The address of BancBoston Ventures,  Inc. is c/o BancBoston Capital,  Inc.,
     100 Federal Street, Boston, Massachusetts 02110.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In  connection  with the financing of the BEP  Acquisition,  LH Leasing
Company,  Inc. ("LH Leasing"),  a corporation owned by Jack M. Lloyd and William
J. Howard,  purchased  from the Company for cash in the amount of $14.25 million
the equipment  located at 62 Black-eyed Pea restaurants  leased by BEP, a wholly
owned  subsidiary of the Company,  or Texas BEP, L.P.  ("Texas  BEP"), a limited
partnership  in which BEP is the  general  partner  and in which a wholly  owned
subsidiary  of BEP is the  limited  partner.  Concurrently  with the sale of the
equipment to LH Leasing,  LH Leasing leased the equipment to the Company and the
Company  subleased the equipment to BEP or Texas BEP. The equipment  lease has a
term of five years and grants the Company an option to purchase the equipment at
its fair  market  value  upon the  expiration  of the  lease.  The  terms of the
subleases  between the Company and each of BEP and Texas BEP are consistent with
the terms set forth in the  equipment  lease between the Company and LH Leasing.
Messrs. Lloyd and Howard formed LH Leasing as an accommodation to the Company to
enable it to satisfy the requirements of the Company's  senior lenders.  Messrs.
Lloyd  and  Howard  received  no  material  compensation  for  the  transactions
involving the Company and LH Leasing.

         In order to finance its sale and lease transaction with the Company, LH
Leasing borrowed cash in the amount of $14.25 million from FFCA.  Messrs.  Lloyd
and Howard  jointly and  severally  guaranteed  the  repayment  of the loan.  In
addition,  Messrs. Lloyd and Howard pledged their stock in LH Leasing to FFCA as
additional collateral for the loan.

         In  addition  to the loan from FFCA to LH Leasing as  described  above,
Jack M. Lloyd and William J. Howard each have personally  guaranteed  certain of
the  Company's  indebtedness  and other  obligations  under leases and franchise
agreements.

         Jack M. Lloyd and William J. Howard hold  $11,196,000 and $5,598,000 in
principal  amount of the Company's Series B Notes,  respectively.  Mr. Lloyd and
Mr.  Howard  have  deferred  interest  due on the  Series  B Notes as of each of
September 30, 1997,  March 31, 1998,  September 30, 1998, and March 31, 1999. As
of December 30, 1998, the Company was in technical  default of certain financial
covenants  in the Series B Notes,  owed Mr.  Lloyd  deferred  interest  totaling
approximately  $2,546,000,  and  owed  Mr.  Howard  deferred  interest  totaling
approximately  $1,274,000.  Although  the Company  believes  that the  financing
transaction provided for in the Commitments will enable it to cure the financial
covenant defaults under the Series B Notes.

         During fiscal 1998, the Company made various advances to Jack M. Lloyd.
Such advances totaled approximately $800,000 as of December 30, 1998.

                                       39
<PAGE>
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES:

     (1) Financial Statements are listed in the Index to Consolidated  Financial
     Statements on page F-1 of this Report.

     (2) No Financial  Statement  Schedules  are  included  because they are not
     applicable or are not required or the information  required to be set forth
     therein is  included  in the  consolidated  financial  statements  or notes
     thereto.

(b)  REPORTS ON FORM 8-K.

     Not applicable.

(c)  EXHIBITS - INDEX OF EXHIBITS

EXHIBIT NO                        DESCRIPTION OF EXHIBIT
----------                        ----------------------
    3.1        Articles  of  Restatement  of the  Articles of  Incorporation  of
               American  Family  Restaurants,  Inc.  and  Articles of  Amendment
               thereto.(1)
    3.1A       Articles  of  Amendment  to  the  Articles  of  Incorporation  of
               DenAmerica Corp., as filed on July 2, 1997.(2)
    3.2        Amended  and  Restated  Bylaws of  American  Family  Restaurants,
               Inc.(3)
    3.3        Certificate of Merger of Denwest  Restaurant  Corp. into American
               Family Restaurants, Inc.(4)
    4.2        Form of Indenture between  DenAmerica Corp. and State Street Bank
               and Trust  Company,  as  trustee,  relating to the Series B Notes
               (including the Form of Series B Note).(4)
    4.4        Form of Series B Common Stock Purchase Warrant.(5)
    4.5        Common Stock  Purchase  Warrant  dated March 29, 1996,  issued to
               Banque Paribas.(4)
    4.6        Supplemental  Indenture (Series B Notes) between DenAmerica Corp.
               and State Street Bank and Trust Company, as trustee(6)
    4.8        Common  Stock  Purchase  Warrant  dated July 3,  1996,  issued to
               Banque Paribas(6)
    10.1       American Family Restaurants, Inc. 1992 Stock Option Plan.(1)
    10.1A      American Family Restaurants, Inc. Amended and Restated 1992 Stock
               Option Plan.(1)
    10.2       American Family Restaurants, Inc. Directors Stock Option Plan.(1)
    10.32      Warrant No. W-0527933 issued by Great American Restaurants,  Inc.
               to Merl Trust for 33,333.33 shares of Common Stock, dated June 2,
               1993.   (Three   additional   warrants   were   issued   and  are
               substantially identical in all material respects except as to the
               warrantholder and the number of shares.)(1)
    10.32A     Schedule of warrants substantially identical to Exhibit 10.32.(1)
    10.33      Registration Rights Agreement between Great American Restaurants,
               Inc. and Merl Trust,  dated June 2, 1993 covering warrants issued
               in connection with 9% subordinated  notes.  (Registration  Rights
               Agreements  entered into by other  holders of warrants  issued in
               connection  with  the 9%  subordinated  notes  are  substantially
               identical in all material  respects  except as to the name of the
               holder.)(1)
    10.33A     Schedule  of   registration   rights   agreements   substantially
               identical to Exhibit 10.33.(1)
    10.60      Form of Franchise  Agreement between American Family Restaurants,
               Inc. and Denny's, Inc. (American Family Restaurants,  Inc. has 78
               franchise  agreements  which are  substantially  identical in all
               material  respects  except as to location of restaurants and date
               of agreement.)(1)
    10.60A     Letter Agreement  between American Family  Restaurants,  Inc. and
               Denny's,  Inc.,  dated  September 13, 1994,  regarding  change of
               control provisions.(1)

                                       40
<PAGE>

    10.60B     Letter Agreement  between American Family  Restaurants,  Inc. and
               Denny's,  Inc., dated September 13, 1994,  regarding  non-compete
               provisions.(1)
    10.60A     Schedule  of  franchise  agreements  substantially  identical  to
               Exhibit 10.60.(1)
    10.65      Form of Warrant  Agreement  between American Family  Restaurants,
               Inc.  and  Fahnestock  & Co. Inc.  for  290,000  shares of Common
               Stock.(1)
    10.73      Employment  Agreement  dated  December 8, 1995  between  American
               Family Restaurants, Inc. and William G. Cox.(5)
    10.73A     Amendment   Agreement  dated  as  of  January  1,  1998,  between
               DenAmerica  Corp.  and William G. Cox,  amending  the  Employment
               Agreement  dated  December  8,  1995,   between  American  Family
               Restaurants, Inc. and William G. Cox.(7)
    10.78      Amendment  to  American  Family  Restaurants,  Inc.  Amended  and
               Restated 1992 Stock Option Plan.(5)
    10.79      Letter  Agreement,  dated December 20, 1995, from American Family
               Restaurants,   Inc.  to  Denny's,  Inc.  and  Denwest  Restaurant
               Corp.(5)
    10.80      Form of Registration  Rights Agreement to be entered into between
               American  Family  Restaurants,  Inc.  and certain of the existing
               shareholders of Denwest Restaurant Corp.(5)
    10.82      Executive Employment  Agreement,  dated November 9, 1994, between
               Jack M. Lloyd and Denwest Restaurant Corp.(5)
    10.83      Executive Employment  Agreement,  dated November 9, 1994, between
               William J. Howard and Denwest Restaurant Corp.(5)
    10.90      Intercreditor  Agreement among DenAmerica Corp.,  certain holders
               of DenAmerica's  Series B Notes,  and State Street Bank and Trust
               Company.(4)
    10.92      Credit  Agreement dated as of February 29, 1996, among DenAmerica
               Corp.,  the Banks named  therein,  and Banque  Paribas,  as Agent
               (including  the Form of Term Note,  Form of Revolving  Note,  and
               Form of Delayed Draw Term Note).(4)
    10.92A     Amended and Restated  Credit  Agreement dated as of July 3, 1996,
               among  DenAmerica  Corp.,  the Banks  named  therein,  and Banque
               Paribas, as Agent.(6)
    10.92B     Amendment  and Limited  Consent and Waiver  dated as of September
               30, 1997 among  DenAmerica  Corp.,  the Banks (as  defined),  and
               Banque Paribas, as agent.(2)
    10.92C     Amendment  and Limited  Consent and Waiver  dated as of March 25,
               1998 among DenAmerica  Corp., the Banks (as defined),  and Banque
               Paribas, as agent.(7)
    10.93      Security  Agreement  dated  as  of  February  29,  1996,  between
               DenAmerica Corp. and Banque Paribas, as Agent.(4)
    10.94      Form of Senior  Intercreditor  Agreement among Banque Paribas, as
               Agent,  the holders of Series A Notes,  and State Street Bank and
               Trust Company.(4)
    10.95      Stock Option Agreement dated March 29, 1996,  between  DenAmerica
               Corp. and William G. Cox.(4)
    10.98      Intercreditor  Agreement among DenAmerica Corp.,  certain holders
               of DenAmerica's  Series B Notes,  and State Street Bank and Trust
               Company.(6)
    10.99      Sale  and  Lease  Agreement  dated  July  3,  1996,   among  FFCA
               Acquisition  Corporation,  Black-eyed Pea U.S.A., Inc., and Texas
               BEP, L.P.(6)
    10.100     Form of Lease dated July 3, 1996,  between FFCA Acquisition Corp.
               and DenAmerica Corp.(6)
    10.101     Form of Sublease dated July 3, 1996, between DenAmerica Corp. and
               Black-eyed Pea U.S.A., Inc.(6)
    10.102     Form of Sublease dated July 3, 1996, between DenAmerica Corp. and
               Texas BEP, L.P.(6)
    10.103     Equipment Purchase Agreement and Bill of Sale dated July 3, 1996,
               between LH Leasing  Company,  Inc.  and  Black-eyed  Pea  U.S.A.,
               Inc.(6)
    10.104     Equipment Purchase Agreement and Bill of Sale dated July 3, 1996,
               between LH Leasing Company, Inc. and Texas BEP, L.P.(6)
    10.105     Equipment Lease dated July 3, 1996,  between LH Leasing  Company,
               Inc. and DenAmerica Corp.(6)
    10.106     Equipment  Sublease dated July 3, 1996,  between DenAmerica Corp.
               and Black-eyed Pea, U.S.A., Inc.(6)
    10.107     Equipment  Sublease dated July 3, 1996,  between DenAmerica Corp.
               and Texas BEP, L.P.(6)

                                       41
<PAGE>
    10.109     Stock Option Agreement dated April 29, 1996,  between  DenAmerica
               Corp. and Todd S. Brown.(8)
    10.110     DenAmerica Corp. 1996 Stock Option Plan.(9)
    10.111     Loan and Security Agreement dated as of September 30, 1997 by and
               among DenAmerica Corp., CNL Growth Corp., Midsouth Foods I, Ltd.,
               and Midsouth Foods II, Ltd.(2)
    10.112     5-Year 5% Convertible  Redeemable  Debenture  dated September 30,
               1997 in the principal amount of $4,400,000.(2)
    10.113     Subordinated  Promissory  Note dated  September  30,  1997 in the
               principal amount of $7,700,000.(2)
    10.114     Registration  Rights  Agreement  dated as of  September  30, 1997
               between DenAmerica Corp., and CNL Growth Corp.(2)
    10.115     Agreement dated as of September 30, 1997 by and among  DenAmerica
               Corp., Beck Holdings, Inc. and Unigate Holdings, NV.(2)
    10.116     Asset Purchase Agreement dated January 27, 1998, among DenAmerica
               Corp., Olajuwon Holdings, Inc., and Akinola Olajuwon.(10)
    10.117     First Amendment to Asset Purchase  Agreement dated March 16, 1998
               between DenAmerica Corp.,  Olajuwon  Holdings,  Inc., and Akinola
               Olajuwon.(10)
    10.118     Promissory  Note dated March 25, 1998,  from  Olajuwon  Holdings,
               Inc.   to   DenAmerica   Corp.   in  the   principal   amount  of
               $1,800,000.(10)
    10.119     Negative Working Capital Note dated March 25, 1998, from Olajuwon
               Holdings,  Inc. to DenAmerica  Corp.  in the principal  amount of
               $1,700,000.(10)
    10.120     Executive  Employment  Agreement  dated as of December  27, 1997,
               between DenAmerica Corp. and Todd S. Brown.(8)
    10.121     Commitment  Letter dated April 13, 1999,  from CNL Fund Advisors,
               Inc. to DenAmerica  Corp.  regarding  $3,000,000 of new equipment
               financing and  modification  and  consolidation  with $15,400,000
               existing equipment financing.
    10.122     Commitment  Letter  dated  April  13,  1999  from  CNL  Financial
               Services,  Inc. to DenAmerica  Corp.  regarding total  cumulative
               loan not to exceed $17,000,000.
    12.1       DenAmerica Corp. Ratio of Income to Fixed Charges.
    21.2       List of Subsidiaries of DenAmerica Corp.
    23.1       Consent of Deloitte & Touche LLP.
    25.2       Form T-1  statement of  eligibility  and  qualification  of State
               Street Bank and Trust Company relating to the Series B Notes.(5)
    27.1       Financial Data Schedule.

----------
(1)   Incorporated by reference to the Exhibits to the Registrant's Registration
      Statement on Form S-1,  File No.  33-80550,  and  Amendments  1-3 thereto,
      filed on June 22, 1994,  September 16, 1994, October 13, 1994, and October
      17, 1994, respectively.
(2)   Incorporated  by reference to the Exhibits to the  Registrant's  Quarterly
      Report on Form 10-Q for the  quarter  ended  October 1, 1997,  as filed on
      November 17, 1997.
(3)   Incorporated  by reference to the Exhibits to the  Registrant's  Quarterly
      Report on Form 10-Q for the quarter  ended March 27, 1996, as filed on May
      16, 1996.
(4)   Incorporated  by  reference to the  Exhibits to the  Registrant's  Current
      Report on Form 8-K as filed on April 15, 1996, as amended by Form 8-K/A as
      filed on June 12, 1996.
(5)   Incorporated by reference to the Exhibits to the Registrant's Registration
      Statement on Form S-4, No.  333-00216,  and  Amendment  No. 1 thereto,  as
      filed on January 10, 1996 and February 1, 1996, respectively.
(6)   Incorporated  by  reference to the  Exhibits to the  Registrant's  Current
      Report on Form 8-K as filed on July 18, 1996,  as amended by Form 8-K/A as
      filed on September 16, 1996,  Form 8-K/A as filed on November 1, 1996, and
      Form 8-K/A as filed on November 6, 1996.
(7)   Incorporated  by reference to the Exhibits to the  Registrant's  Quarterly
      Report on Form 10-Q for the quarter  ended April 1, 1998,  as filed on May
      15, 1998.
(8)   Incorporated by reference to the Exhibits to the Registrant's Registration
      Statement on Form S-8, No. 333-09731 as filed on August 7, 1996.
(9)   Incorporated  by  reference  to the  Exhibits to the  Registrant's  Annual
      Report on Form 10-K for the year ended  January 1, 1997, as filed on March
      31, 1997.
(10)  Incorporated  by  reference to the  Exhibits to the  Registrant's  Current
      Report on Form 8-K as filed on April 9, 1998.

                                       42
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned,  thereunto duly  authorized,  on this 13th day of
April, 1999.

                                       DenAmerica Corp.


                                       By: /s/ Jack M. Lloyd
                                          --------------------------------------
                                          Jack M. Lloyd
                                          Chairman  of the  Board,  President,
                                          and Chief  Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant in the capacities and on the dates indicated.

      SIGNATURE                          TITLE                         DATE
      ---------                          -----                         ----

/s/ Jack M. Lloyd            Chairman of the Board, President,    April 13, 1999
-------------------------    and Chief Executive Officer
Jack M. Lloyd                (Principal Executive Officer)


/s/ William J. Howard        Executive Vice President,            April 13, 1999
-------------------------    Secretary, and Director
William J. Howard


/s/ William G. Cox           Chief Operating Officer and          April 13, 1999
-------------------------    Director
William G. Cox


/s/ Todd S. Brown            Senior Vice President, Chief         April 13, 1999
-------------------------    Financial Officer, Treasurer, and
Todd S. Brown                Director (Principal Financial and
                             Accounting Officer)


/s/ Fred W. Martin           Director                             April 13, 1999
-------------------------
Fred W. Martin


/s/ Robert H. Manschot       Director                             April 13, 1999
-------------------------
Robert H. Manschot

                                       43
<PAGE>
                                DENAMERICA CORP.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

Independent Auditors' Report...............................................  F-2

Consolidated Balance Sheets as of December 31, 1997 and
     December 31, 1998.....................................................  F-3

Consolidated Statements of Operations for each of three years
     in the period ended December 31, 1998.................................  F-4

Consolidated Statements of Changes in Shareholders' Equity (Deficit) for 
     each of the three years in the period ended December 31, 1998.........  F-5

Consolidated Statements of Cash Flows for each of the three
     years in the period ended December 31, 1998...........................  F-6

Notes to Consolidated Financial Statements.................................  F-8

                                      F-1
<PAGE>
DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' REPORT


Board of Directors and Shareholders
DenAmerica Corp.
Phoenix, Arizona

We have  audited  the  consolidated  balance  sheets  of  DenAmerica  Corp.  and
subsidiaries  (the  "Company") as of December 31, 1997 and 1998, and the related
consolidated statements of operations,  shareholders' equity (deficit), and cash
flows for each of the three fiscal years in the period ended  December 31, 1998.
These consolidated  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,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial position of DenAmerica Corp. and subsidiaries
at December  31, 1997 and 1998,  and the results of their  operations  and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated  financial  statements,  the uncertainty  relating to the Company's
completion  of its  refinancing  raises  substantial  doubt about its ability to
continue as a going concern.  Management's  plan  concerning this matter is also
described in Note 1. The  consolidated  financial  statements do not include any
adjustments that might result from the outcome of this uncertainty.


/s/ Deloitte & Touche LLP

April 14, 1999

                                      F-2
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
--------------------------------------------------------------------------------

                                                               DECEMBER 31,
ASSETS                                                     1997         1998
                                                         ---------    ---------
CURRENT ASSETS:
  Cash and cash equivalents                              $   1,267    $   2,330
  Receivables                                                3,192        2,636
  Inventories                                                3,244        2,917
  Other current assets                                       5,564        5,533
  Assets held for sale                                      28,700
                                                         ---------    ---------
          Total current assets                              41,967       13,416

PROPERTY AND EQUIPMENT - Net                                60,060       55,648
INTANGIBLE ASSETS - Net                                     52,101       50,580
DEFERRED INCOME TAXES                                        5,312        5,578
OTHER ASSETS                                                10,824        9,285
                                                         ---------    ---------
TOTAL                                                    $ 170,264    $ 134,507
                                                         =========    =========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Accounts payable                                       $  16,511    $  18,026
  Accrued compensation                                       6,354        5,402
  Accrued taxes                                              4,522        5,089
  Other current liabilities                                  8,363        8,946
  Current debt obligations                                  42,634       20,791
                                                         ---------    ---------
          Total current liabilities                         78,384       58,254
LONG-TERM DEBT OBLIGATIONS - Less current portion           78,418       72,494
OTHER LONG-TERM LIABILITIES                                 12,214        7,093
                                                         ---------    ---------
          Total liabilities                                169,016      137,841
                                                         ---------    ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
  Preferred stock, $.01 par value; authorized,
    5,000,000 shares; issued and outstanding, none
  Common stock, $.10 par value; authorized,
    40,000,000 shares; issued and outstanding,
    13,447,777 and 13,485,277 shares, respectively           1,344        1,349
  Additional paid-in capital                                35,799       35,869
  Accumulated deficit                                      (35,895)     (40,552)
                                                         ---------    ---------
          Total shareholders' equity (deficit)               1,248       (3,334)
                                                         ---------    ---------
TOTAL                                                    $ 170,264    $ 134,507
                                                         =========    =========

See notes to consolidated financial statements.

                                       F-3
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except for Per Share Data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                 1996            1997            1998
                                             ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
RESTAURANT SALES                             $    241,480    $    300,579    $    255,956
                                             ------------    ------------    ------------
RESTAURANT OPERATING EXPENSES:
  Food and beverage costs                          65,966          82,255          70,046
  Payroll and payroll related costs                82,794         103,451          88,118
  Other operating expenses                         63,583          82,305          72,086
  Depreciation and amortization                     7,000           9,367           7,590
  Charge for impaired assets                                       14,100
                                             ------------    ------------    ------------
          Total operating expenses                219,343         291,478         237,840
                                             ------------    ------------    ------------
RESTAURANT OPERATING INCOME                        22,137           9,101          18,116
ADMINISTRATIVE EXPENSES                            10,303          13,684          12,423
                                             ------------    ------------    ------------
OPERATING INCOME (LOSS)                            11,834          (4,583)          5,693
INTEREST EXPENSE - Net                              9,605          13,655          12,635
MINORITY INTEREST IN JOINT VENTURES                  (256)           (519)
                                             ------------    ------------    ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEM                                2,485         (17,719)         (6,942)
INCOME TAX PROVISION (BENEFIT)                        870           3,258            (914)
                                             ------------    ------------    ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM             1,615         (20,977)         (6,028)
EXTRAORDINARY LOSS (GAIN) - Net of tax
  of $331 and $(914)                                  497                          (1,371)
                                             ------------    ------------    ------------
NET INCOME (LOSS)                                   1,118         (20,977)         (4,657)
PREFERRED STOCK DIVIDEND AND ACCRETION               (149)
                                             ------------    ------------    ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
  SHAREHOLDERS                               $        969    $    (20,977)   $     (4,657)
                                             ============    ============    ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
  Before extraordinary item                  $        .14    $      (1.56)   $       (.45)
                                             ============    ============    ============
  Applicable to common shareholders          $        .08    $      (1.56)   $       (.35)
                                             ============    ============    ============
BASIC AND DILUTED WEIGHTED AVERAGE
  SHARES OUTSTANDING:
    Basic                                      11,698,000      13,437,000      13,485,000
                                             ============    ============    ============
    Diluted                                    11,844,000      13,437,000      13,485,000
                                             ============    ============    ============
</TABLE>
See notes to consolidated financial statements.

                                       F-4
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands)
--------------------------------------------------------------------------------

                                              Additional
                                    Common      Paid-in  Accumulated
                                    Stock       Capital     Deficit     Total
                                   --------    --------    --------    --------
BALANCE, JANUARY 1, 1996           $      7    $  3,156    $ (2,599)   $    564

  Preferred stock accretion                         (26)                    (26)

  Preferred stock dividends                                    (123)       (123)

  Merger related activity             1,301      30,395     (13,314)     18,382

  Value of warrants issued in
    connection with financing                     1,109                   1,109

  Issuance of common stock in
    connection with Series A
    Subordinated Notes repayment         25         975                   1,000

  Stock options exercised                 7          97                     104

  Net income                                                  1,118       1,118
                                   --------    --------    --------    --------

BALANCE, DECEMBER 31, 1996            1,340      35,706     (14,918)     22,128

  Stock options exercised                 4          93                      97

  Net loss                                                  (20,977)    (20,977)
                                   --------    --------    --------    --------

BALANCE, DECEMBER 31, 1997            1,344      35,799     (35,895)      1,248

  Stock options exercised                 5          70                      75

  Net loss                                                   (4,657)     (4,657)
                                   --------    --------    --------    --------

BALANCE, DECEMBER 31, 1998         $  1,349    $ 35,869    $(40,552)   $ (3,334)
                                   ========    ========    ========    ========

See notes to consolidated financial statements.

                                       F-5
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                       1996        1997        1998
                                                     --------    --------    --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                  <C>         <C>         <C>
  Net income (loss)                                  $  1,118    $(20,977)   $ (4,657)
  Adjustments to reconcile net income (loss) to
    net cash provided by (used in) operating
    activities:
      Extraordinary item                                  497                  (1,371)
      Depreciation and amortization                     7,000       9,367       7,590
      Amortization of deferred financing costs            350         763         983
      Charge for impaired assets                                   14,100
      Deferred income taxes                               870       3,221        (927)
      Deferred rent                                       249         645         279
      Other - net                                        (256)     (1,368)       (505)
      Changes in operating assets and liabilities:
        Receivables                                    (2,129)        910         113
        Inventories                                      (425)       (439)        184
        Other current assets                             (647)       (727)        309
        Accounts payable and accrued liabilities        3,037      (6,953)     (3,355)
                                                     --------    --------    --------
          Net cash provided by (used in) operating
            activities                                  9,664      (1,458)     (1,357)
                                                     --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                   (9,879)     (8,147)     (2,891)
  Purchase of intangibles                              (1,705)     (2,302)       (479)
  Net cash paid to acquire fair value of assets          (231)
  Proceeds from sale of assets                          2,422       4,133      25,992
                                                     --------    --------    --------
          Net cash (used in) provided by investing
            activities                                 (9,393)     (6,316)     22,622
                                                     --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Note receivable collections                                                   2,258
  Principal reductions of long-term debt              (11,655)    (25,018)    (28,908)
  Proceeds from borrowings                             13,361      31,353       6,373
  Other                                                  (549)         97          75
                                                     --------    --------    --------
          Net cash provided by (used in) financing
            activities                                  1,157       6,432     (20,202)
                                                     --------    --------    --------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                      1,428      (1,342)      1,063
CASH AND CASH EQUIVALENTS, BEGINNING  OF YEAR           1,181       2,609       1,267
                                                     --------    --------    --------
CASH AND CASH EQUIVALENTS, END OF YEAR               $  2,609    $  1,267    $  2,330
                                                     ========    ========    ========
</TABLE>

                                                                     (Continued)

                                       F-6
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                       1996        1997        1998
                                                     --------    --------    --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
<S>                                                  <C>         <C>         <C>
    Cash paid for:
      Interest                                       $  8,904    $ 10,033    $  8,221
                                                     ========    ========    ========
      Income taxes                                   $     36    $     37    $     96
                                                     ========    ========    ========
SUPPLEMENTAL SCHEDULE OF NONCASH
  INVESTING AND FINANCING ACTIVITIES:
    Acquisitions:
      Fair value of assets acquired                  $ 35,140
                                                     ========
      Working capital deficit acquired               $(28,750)
                                                     ========
      Intangible assets (goodwill)                   $ 69,799
                                                     ========
      Liabilities assumed                            $ (2,785)
                                                     ========
      Notes issued                                   $(64,222)
                                                     ========
      Common stock issued

    Capital expenditures financed through increase
      in obligations under capital leases            $  2,927    $  2,409
                                                     ========    ========
    Issuance of common stock in connection with
      Series A subordinated notes repayment          $  1,000
                                                     ========
    Purchase of BEP and Franchisees financed
      through sale/leaseback transactions            $ 50,000    $  5,440
                                                     ========    ========
</TABLE>
                                                                     (Concluded)
See notes to consolidated financial statements.

                                       F-7
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE FISCAL YEARS IN THE PERIOD ENDED  DECEMBER 31, 1998
(IN  THOUSANDS  EXCEPT FOR SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------

1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION - On March 29, 1996, Denwest Restaurant Corp. ("DRC")
     merged with and into American Family Restaurants ("AFR") with AFR being the
     surviving corporation (the "Merger").  Upon consummation of the Merger, AFR
     changed its name to  DenAmerica  Corp.  (the  "Company").  The Company is a
     multi-concept  restaurant company, which operates restaurants in 25 states.
     At December 31, 1998, the Company operated 100 Denny's  restaurants and 101
     Black-eyed Pea  restaurants.  The Company owns its Black-eyed Pea brand and
     operates the Denny's  restaurants  under the terms of franchise  agreements
     whereby  it is  obligated  to remit  advertising  and  royalty  fees to the
     franchisor.

     Over the past two years the Company has experienced net losses  aggregating
     approximately  $25,600, which includes an asset impairment loss of $14,100.
     As a result, at December 31, 1998, the Company had a shareholders'  deficit
     of approximately $3,300.

     The  Company  has  pursued a  strategy  to repay  its  senior  lender  debt
     obligations  in order to provide the Company  with the  flexibility  to (i)
     refinance  certain debt  obligations  to better match  operating cash flows
     with  debt   amortization,   (ii)   improve  its   portfolio  of  operating
     restaurants,  and (iii)  position  it to grow.  During  1998,  the  Company
     reduced its total debt  obligations  by $27,767  primarily from the sale of
     restaurants.   The  Company  believes  that  the  sale  of  underperforming
     restaurants has improved its overall asset base. In addition, the Company's
     Denny's  restaurants  have  experienced same store sales increases of 5% in
     the  fourth  quarter  of 1998,  a trend  which has  continued  in the first
     quarter of 1999.  Higher sales volumes allow the Company to better leverage
     its fixed cost  structure  and have  positioned  the Company  for  improved
     operating results in the future.

     At  December  31,  1998,  the Company was not in  compliance  with  certain
     financial debt covenants under its senior credit facility.  These financial
     covenants  were  established  in July  1996 and have not been  modified  to
     reflect  the  reduction  in   outstanding   obligations   or  the  sale  of
     restaurants.  As discussed in Note 15, in April 1999, the Company  received
     commitments from lenders to provide new borrowings of $20,100.  The Company
     believes that the financing  transaction  outlined in the commitments  will
     enable it to repay  the  remaining  obligations  under  its  senior  credit
     facility  and to cure its  defaults.  If the Company  cannot  complete  the
     financing  contemplated under the commitments,  it would continued to be in
     default with the senior credit facility until other acceptable  refinancing
     or  restructuring  alternatives  are available.  There can be no assurance,
     however,  that  additional  financing  will be  available to the Company or
     available on satisfactory  terms.  

     The consolidated  financial  statements  include the accounts of DenAmerica
     Corp. and its  wholly-owned  subsidiaries.  All  intercompany  balances and
     transactions are eliminated in these consolidated financial statements.

     SIGNIFICANT  ACCOUNTING  POLICIES  - A summary of  significant  accounting
     policies is as follows:

     a.   FISCAL YEARS - The  Company's  fiscal year is the 52 or 53 week period
          ending  the   Wednesday   closest  to  December  31.  For  clarity  of
          presentation,  the Company's 1996,  1997 and 1998 fiscal years,  which
          represent the 53 week period ended January 1, 1997, the 52 week period
          ended  December  31, 1997 and the 52 week period  ended  December  30,
          1998,  have been  described in the  financial  statements as the years
          ended December 31, 1996, 1997 and 1998.

     b.   CASH AND CASH EQUIVALENTS consist of cash held in bank demand deposits
          and highly liquid  investments  purchased  with initial  maturities of
          three months or less.

     c.   INVENTORIES consist primarily of food and beverages in restaurants and
          are carried at the lower of cost or market. Cost is determined under a
          method which approximates the last-in, first-out ("LIFO") method.

     d.   ASSETS  HELD  FOR  SALE in 1997  are  stated  at the  lower of cost or
          estimated  net  realizable  value and  include  certain  property  and
          equipment,  franchise  costs  and  goodwill  associated  with  certain
          restaurants that were sold in March 1998.

     e.   PROPERTY AND EQUIPMENT are recorded at cost.  Depreciation is computed
          under the straight-line  depreciation method over the estimated useful
          lives  of  the  assets.   Leased  properties  consist  of  capitalized
          buildings and equipment and leasehold  improvements.  Amortization  is
          recorded  principally on the  straight-line  method over the lesser of
          the estimated useful lives or the lives of the leases.

     f.   FRANCHISE  RIGHTS  - The  Denny's  franchise  agreements  require  the
          Company  to pay a  franchise  fee for each unit  opened.  The fees are
          capitalized and amortized using the  straight-line  method over the 20
          year  terms  of  the  franchise  agreements.  Upon  expiration  of the
          franchise  agreements,  the franchisor may grant the Company the right
          to extend the term of the franchise  agreement.  Also, at termination,
          the  franchisor  has  the  right,  at  its  option,  to  purchase  the
          restaurant  equipment at the lesser of the Company's cost (as defined)
          or fair value.

                                      F-8
<PAGE>
     g.   FRANCHISE  REVENUE - During 1998,  the Company  acquired all remaining
          Black-eyed Pea franchised  restaurants.  Royalty  revenues,  which are
          included in restaurant  revenues,  were  approximately  $1,142 and $45
          during fiscal years 1997 and 1998, respectively.

     h.   PREOPENING COSTS,  GOODWILL AND INTANGIBLE ASSETS - In April 1998, the
          Accounting  Standards Executive Committee of the American Institute of
          Certified Public  Accountants issued Statement of Position ("SOP") No.
          98-5,  REPORTING  ON THE COSTS OF  START-UP  ACTIVITIES.  The  Company
          early-adopted  SOP 98-5 at the  beginning  of fiscal year 1998 and now
          expenses all preopening  costs as incurred.  This change in accounting
          principal did not have a material  effect on the  Company's  financial
          statements. Deferred costs and intangible assets are recorded at cost.
          Goodwill  represents  the excess of the cost of  restaurants  acquired
          over the  fair  value of the net  assets  at the date of  acquisition.
          Goodwill is amortized using the  straight-line  method ranging from 12
          to 40 years. The Company evaluates the possible impairment of goodwill
          and intangible  assets based on estimates of future  undiscounted cash
          flows allocated on an individual restaurant basis.

     i.   DEFERRED  FINANCING  COSTS  are  included  in  other  assets  and  are
          amortized  using the effective  interest  method over the terms of the
          related loans. Deferred financing costs, net of amortization,  totaled
          $4,456 and $3,670 at December 31, 1997 and 1998, respectively.

     j.   DEFERRED RENT represents the accrual  resulting from recording  rental
          expense on a  straight-line  basis.  As of December 31, 1997 and 1998,
          deferred rent totaled $2,511 and $2,487, respectively, and is included
          in other liabilities in the accompanying consolidated balance sheets.

     k.   EARNINGS PER SHARE - Basic earnings per share is calculated  utilizing
          only weighted  average common shares  outstanding and diluted earnings
          per  share  gives  effect  to all  dilutive  potential  common  shares
          outstanding during the reporting periods.

          Earnings  per  share for the year  ended  December  31,  1996 has been
          computed  based  upon  the  weighted  average  of  the  shares  of the
          Company's  common stock received in connection  with the Merger by the
          former  shareholders of DRC after deducting  preferred stock dividends
          and  accretion  on  preferred  stock of DRC  outstanding  prior to the
          Merger,  plus the total  outstanding  shares of the  Company's  common
          stock held by other shareholders.

     l.   STOCK-BASED  COMPENSATION - The Company applies Accounting  Principles
          Board Opinion No. 25 and related interpretations in accounting for its
          stock  option  plans.  Accordingly,  no  compensation  cost  has  been
          recognized  for  its  stock  option  plans.   Pro  forma   information
          reflecting the fair value method is presented in Note 11.

     m.   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  and  liabilities  at the  date  of the  financial
          statements  and the reported  amounts of revenues and expenses  during
          the  reporting   period.   Actual  results  could  differ  from  those
          estimates.

     n.   FAIR VALUE - The fair value of notes receivable,  payables and accrued
          liabilities  approximates  carrying value due to the short-term nature
          of the  instruments.  The fair value of debt obligations is determined
          based on current borrowings and repayment transactions. The fair value
          of the warrants were determined using the Black-Scholes option pricing
          model.

                                      F-9
<PAGE>
     o.   NEW ACCOUNTING  STANDARDS - During 1998, the Company adopted Financial
          Accounting  Standards Board ("FASB") Statement of Financial Accounting
          Standards  ("SFAS") No. 130, REPORTING  COMPREHENSIVE  INCOME, and No.
          131,   DISCLOSURES   ABOUT  SEGMENTS  OF  AN  ENTERPRISE  AND  RELATED
          INFORMATION.  SFAS No. 130  changes  the  reporting  of certain  items
          currently reported in the shareholders'  equity section of the balance
          sheet and requires  that  comprehensive  income and its  components be
          prominently displayed in the financial statements. There were no items
          which  qualified for treatment as components of  comprehensive  income
          for the periods  presented.  SFAS No. 131 requires public companies to
          report certain information about operating segments in their financial
          statements,  and establishes  related  disclosures  about products and
          services, geographic areas and major customers.

          In June 1998, the FASB issued SFAS No. 133,  ACCOUNTING FOR DERIVATIVE
          INSTRUMENTS  AND HEDGING  ACTIVITIES.  This  standard is effective for
          fiscal years  beginning  after June 15, 1999. SFAS No. 133 establishes
          accounting  and  reporting   standards  for   derivative   instruments
          including   those   imbedded  in  other   contracts  and  for  hedging
          activities.  It requires all  derivatives  to be  recognized as either
          assets or  liabilities  in the  statement  of  financial  position and
          measured at fair value.  The Company has not yet determined the effect
          the adoption of SFAS No. 133 will have on its financial statements.

     p.   RECLASSIFICATIONS  - Certain  reclassifications  have been made to the
          1996  and  1997   financial   statements   to   conform  to  the  1998
          presentation.

2.   ACQUISITIONS AND DIVESTITURES

     During 1996,  the Company  expanded the number of  restaurants  it operates
     through  certain  mergers and  acquisitions,  including the merger with AFR
     described in Note 1 and the acquisition of Black-eyed Pea U.S.A., Inc. (the
     "BEP Acquisition")  pursuant to a stock purchase  agreement.  Additionally,
     during  1996,  the Company  sold the assets  related to 23  restaurants  in
     exchange for a promissory  note from the buyer in the  principal  amount of
     $4,600.  The promissory note, which is included in other assets, is secured
     by the assets sold and requires monthly payments through June 2003.

     During  1997,  the  Company  implemented  a  strategy  of  focusing  on the
     Black-eyed  Pea concept as well as those Denny's  restaurants  that achieve
     certain  operational and geographic  efficiencies by completing a series of
     transactions  including:  (i)  converting 10 nonbranded  restaurants to the
     Denny's  concept and selling 11  nonbranded  restaurants,  (ii)  selling or
     closing 17 Denny's restaurants, (iii) entering into an agreement to sell 63
     Denny's and eight nonbranded  restaurants,  of which six were closed,  to a
     Denny's  franchisee,  (iv)  developing  four new Black-eyed Pea and one new
     Denny's  restaurants,  (v)  purchasing  the  leasehold  interests  in  nine
     Black-eyed  Pea   restaurants   from   franchisees   (the  "BEP  Franchisee
     Acquisition") and selling the related leasehold interests.  The sale of the
     restaurants  in 1997  resulted in a gain of  approximately  $850,  which is
     included as a reduction of other operating  expenses.  The Company included
     in  its  1997  financial   statements  a  charge  for  impaired  assets  of
     approximately  $14,100  associated  with  the  sale  of the 71  restaurants
     described under (iii) above, which the Company completed in March 1998.

     In  connection  with the  closing of the BEP  Franchisee  Acquisition,  the
     Company and one of the franchisees  settled  threatened  litigation and CNL
     Group,  Inc.  ("CNL") acquired certain assets directly from the franchisees
     and entered into capital  leases with the Company.  The value of the leases
     exceeded  the   purchase   price,   resulting  in  the  Company   receiving
     approximately  $2,700 in cash that has been  recorded  as a  deferred  gain
     which is being amortized over the life of the leases.

     During 1997,  the Company also entered into a series of  transactions  with
     CNL,  including the purchase of CNL's 50% interest in three joint ventures,
     which  operated  a  total  of 16  Denny's  restaurants,  and the  land  and
     buildings for nine of the restaurants that were previously leased from CNL.
     The Company subsequently entered into 15-year  sale-leaseback  arrangements
     with CNL for nine Denny's restaurants

                                      F-10
<PAGE>
     and received $8,000. In addition,  the Company sold eight buildings located
     on ground  leases to CNL for  proceeds of $4,600 and entered  into  capital
     leases for these  locations.  The Company also entered into equipment notes
     payable  with  CNL  totaling  approximately  $12,500.  No gain or loss  was
     recognized  on these  transactions  and the Company  utilized the proceeds,
     which totaled  approximately  $25,000,  to repay senior debt obligations of
     the Company.

     In  March  1998,  the  Company  completed  the sale of 71  restaurants,  as
     described  above,  for gross  proceeds  of  $28,700.  Net cash  proceeds of
     $25,200 were used to (i) repay  indebtedness  of the  Company,  including a
     note  at a  $2,400  discount  from  its  outstanding  principal  amount  of
     approximately   $15,285,   (ii)  cancel  outstanding  warrants  to  acquire
     approximately 1,000,000 shares of the Company's common stock at an exercise
     price of $1.90 per share,  which were issued in connection  with the repaid
     note, (iii) permanently reduce the Company's  outstanding  borrowings under
     the term loan  portion of its  credit  facility  to $1,500,  and (iv) repay
     certain equipment operating leases associated with restaurants sold.

     In a separate  transaction  completed in March 1998,  the Company sold five
     Denny's restaurants for cash of $700 plus a note in the principal amount of
     $400.  The  Company  used  the  cash  proceeds  from  this  transaction  to
     permanently  reduce its outstanding  borrowings under the term loan portion
     of its credit facility.

3.   PROPERTY AND EQUIPMENT

     Property and equipment  including assets under capitalized leases as of the
     fiscal years ended consist of the following:

                                                 ESTIMATED
                                               USEFUL LIVES     1997      1998
                                               ------------    -------   -------

     Buildings                                 5 - 20 years    $35,585   $34,641
     Restaurant equipment                      3 - 11 years     22,310    22,353
     Leasehold improvements                    Life of lease    11,942    12,538
     Other                                     3 - 7 years       2,451     3,346
                                                               -------   -------
     Total                                                      72,288    72,878
     Less accumulated depreciation
       and amortization                                         12,228    17,230
                                                               -------   -------
     Equipment and leasehold
       improvement - net                                       $60,060   $55,648
                                                               =======   =======

     Assets  recorded  under capital leases as of the fiscal years ended consist
     of the following:

                                                            1997          1998
                                                           -------       -------
     Buildings                                             $33,600       $32,878
     Other                                                   7,138         6,440
                                                           -------       -------
     Total                                                  40,738        39,318
     Less accumulated amortization                           5,147         7,325
                                                           -------       -------
     Total                                                 $35,591       $31,993
                                                           =======       =======

     Depreciation and amortization expense was $4,594, $5,324 and $5,598 for the
     fiscal years ended 1996, 1997 and 1998, respectively.

4.   INTANGIBLE ASSETS

     Intangible assets as of the fiscal years ended consist of the following:

                                      F-11
<PAGE>
                                                            1997          1998
                                                           -------       -------
     Goodwill                                              $52,650       $52,879
     Franchise rights                                        3,217         2,989
     Favorable lease arrangements                            1,130           883
                                                           -------       -------
     Total                                                  56,997        56,751
     Less accumulated amortization                           4,896         6,171
                                                           -------       -------
     Intangible assets -- net                              $52,101       $50,580
                                                           =======       =======

     Amortization  expense  was $2,406,  $4,043 and $1,992 for the fiscal  years
     ended 1996, 1997 and 1998, respectively.

5.   OTHER CURRENT LIABILITIES

     Other  current  liabilities  as of the fiscal  years  ended  consist of the
     following:

                                                            1997           1998
                                                           ------         ------
     Accrued insurance                                     $2,022         $1,125
     Estimated closed restaurant obligations                1,000          1,570
     Interest                                               2,544          4,432
     Other                                                  2,797          1,819
                                                           ------         ------
     Total accrued liabilities                             $8,363         $8,946
                                                           ======         ======

     The  majority of the accrued  interest  relates to the deferral of interest
     payments on the Company's  Series B Subordinated  Notes,  which are held by
     related parties (see Notes 7 and 13) .

6.   RESERVES FOR STORE CLOSINGS

     In 1997 and 1998, other long-term  liabilities  includes long-term reserves
     of $3,491 and $1,737,  respectively,  for estimated  obligations for closed
     restaurants.  Other  long-term  liabilities  includes  $1,473 for estimated
     obligations for insurance in 1997.

     The following is a summary of store closing  reserves  including  additions
     recorded in connection with mergers and acquisitions:

                                                 1996         1997         1998
                                                ------       ------       ------
     Beginning Balance                          $  871       $6,971       $4,491
     Additions                                   7,150                     1,208
     Less charges                                1,050        2,480        2,392
                                                ------       ------       ------
     Ending Balance                             $6,971       $4,491       $3,307
                                                ======       ======       ======

                                      F-12
<PAGE>
7.   DEBT OBLIGATIONS

     Debt obligations as of the fiscal years ended consist of the following:

                                                                1997      1998
                                                               -------   -------
     LONG-TERM DEBT OBLIGATIONS:
       CNL obligations                                         $22,673   $22,873
       Series B subordinated notes (face value $18,250)         15,690    16,176
       Other notes payable                                         659       617
       Capital lease obligations (Note 8)                       39,396    32,828
                                                               -------   -------
       Total long-term obligations                             $78,418   $72,494
                                                               =======   =======

     CURRENT PORTION OF LONG-TERM DEBT OBLIGATIONS:
       Obligations under credit facility                       $22,777   $14,772
       CNL obligations                                           1,885     4,205
       BEP purchase note (repaid in 1998)                       15,285
       Other notes payable                                         206        85
       Capital lease obligations (Note 8)                        2,481     1,729
                                                               -------   -------
       Total current obligations                               $42,634   $20,791
                                                               =======   =======

     A summary of the Company's debt obligations is as follows:

     (a)  CREDIT FACILITY

          The Company has entered into a credit facility with Banque Paribas, as
          agent, and the Company's other senior lenders (the "Credit Facility").
          The Credit Facility  currently  consists of a $15,000 revolving credit
          loan. These loans bear interest at 150 basis points over prime,  which
          was 7.75% at December 31, 1998.  As of December 31, 1998,  the Company
          had $14,772 of outstanding borrowings under the revolving credit loan,
          which  matures  in  December  2001.  In  connection  with  the  Credit
          Facility,  the  Company  issued to the  lender  six-year  warrants  to
          acquire an aggregate of 738,028 shares of the Company's  common stock.
          The  exercise  prices  for the  shares  range  from $4.30 to $6.45 per
          share. At the date of issuance, the warrants were valued at $1,109. At
          December 31, 1998, the fair value of the warrants is $998.

          The Company was not in compliance  with certain of its debt  covenants
          under the Credit Facility at December 31, 1998, and has classified the
          entire balance of the revolving credit loan as current (See Note 15).

     (b)  CNL OBLIGATIONS

          In October 1997 and November 1998,  the Company  entered into a series
          of transactions with CNL. As a result, the Company is obligated to CNL
          under  certain  promissory  notes  totaling  $23,216.  The notes  bear
          interest at rates from 9% to 10% payable monthly and quarterly, mature
          in November  2004 and  September  2007,  and are  collateralized  with
          certain  equipment  assets  located  in  54  Denny's  restaurants.  At
          December 31, 1998, the fair value of the promissory notes  approximate
          carrying  value as the  interest  rate  approximates  borrowing  rates
          currently  available to the Company.  The Company is also obligated to
          CNL under a $4,400 face value convertible redeemable debenture bearing
          interest at 5%,  recorded net of a $538 discount at December 31, 1998,
          with interest only payable  quarterly and maturing in September  2002.
          The fair value of the convertible redeemable debenture is $4,400.

                                      F-13
<PAGE>
     (c)  SERIES B SUBORDINATED NOTES

          The Series B  subordinated  notes  ("Series B Notes") bear interest at
          13% and mature in March 2003. In  connection  with the issuance of the
          Series B Notes, the Company issued  springing  warrants to purchase an
          aggregate  of  478,000  shares  of the  Company's  common  stock at an
          exercise price of $0.01 per share. The warrants become  exercisable if
          the  Company  does not repay the Series B Notes in full prior to March
          29,  1999.  Certain  holders of the  Series B Notes have not  received
          interest  payments  since March 31,  1997.  As of December  31,  1998,
          accrued and unpaid  interest due to these holders totals  $3,821.  The
          Company has not received waivers from these holders for  noncompliance
          of  certain of the debt  covenants  under the Series B Notes (see Note
          15).  The fair value of the  Series B Notes at  December  31,  1998 is
          $18,250.

          The aggregate annual  maturities of long-term debt,  excluding capital
          lease  obligations,  for the years subsequent to December 31, 1998 are
          as follows:

          1999                                                         $19,062
          2000                                                           2,258
          2001                                                           2,488
          2002                                                           2,741
          2003                                                          19,193
          Thereafter                                                    12,986
                                                                       -------
          Total                                                        $58,728
                                                                       =======
8.   LEASES

     The Company's operations utilize leased property, facilities and equipment.
     At December 31, 1998,  substantially  all of the Company's  restaurants are
     operated under lease  arrangements which provide for a fixed base rent and,
     in some  instances,  contingent  rentals  based  on a  percentage  of gross
     revenues. Initial terms of the leases generally are not less than 15 years,
     exclusive of options to renew.  The leases have  expiration  dates  through
     2018 and contain various renewal and purchase options. Future minimum lease
     payments do not  include  amounts  payable by the  Company for  maintenance
     costs,  real  estate  taxes  or  contingent  rentals  payable  based  on  a
     percentage of sales in excess of stipulated  amounts of the leases.  Future
     minimum lease payments under noncancelable operating leases and the present
     value of future minimum  capital lease payments,  including  certain leases
     relating  to  restaurants  sold as of  December  31,  1998  consist  of the
     following:

                                                              OPERATING LEASES
                                                             -------------------
                                                             MINIMUM    MINIMUM
                                                 CAPITAL      LEASE     SUBLEASE
                                                 LEASES      PAYMENTS   PAYMENTS
                                                --------     --------   --------
     1999                                       $  5,326     $ 26,700    $ 5,483
     2000                                          5,058       25,935      5,320
     2001                                          4,916       23,381      5,185
     2002                                          4,924       20,025      4,931
     2003                                          4,745       18,692      4,661
     Subsequent years                             41,561      178,469     59,571
                                                --------     --------    -------
     Total                                        66,530     $293,202    $85,151
                                                             ========    =======
     Less imputed interest - interest rates
       ranging from 10% to 15%                   (31,973)
                                                --------
     Present value of minimum capital lease
       obligation                                 34,557
     Less current portion of capital lease
       obligation                                  1,729
                                                --------
     Long-term portion of capital lease
       obligation                               $ 32,828
                                                ========
                                      F-14
<PAGE>
     Obligations  under operating  leases related to restaurants  sold which are
     being paid directly by the purchaser but for which the Company continues to
     be contingently  liable are included in minimum sublease payments (see Note
     2).

     Included in minimum  operating lease payments are payments  attributable to
     equipment  leases  which  typically  extend  for a period  of five to seven
     years.  Annual  payments  attributable  to these leases are: $4,397 (1999);
     $4,314  (2000);  $2,069  (2001) and none  thereafter.  These  payments  are
     included  in  other  operating  expenses  in  the  accompanying   financial
     statements.

     The following is a summary of rental expense,  excluding  sublease amounts,
     under all operating leases for the fiscal years ended:

                                                 1996         1997         1998
                                               -------      -------      -------
     Minimum rentals                           $17,852      $19,060      $16,432
     Contingent rentals                            823          510          513
                                               -------      -------      -------
     Total rent expense                        $18,675      $19,570      $16,945
                                               =======      =======      =======

9.   INCOME TAXES

     The Income tax provision (benefit) as of the fiscal years ended consists of
     the following:

                                                        1996     1997      1998
                                                        ----     ----      ----
     Current:
       Federal                                                    $ 37    $  13
     Deferred:
       Federal                                          $680     2,727     (621)
       State                                             190       494     (306)
                                                        ----    ------    -----
     Total deferred                                      870     3,221     (927)
                                                        ----    ------    -----
     Total income tax provision (benefit)               $870    $3,258    $(914)
                                                        ====    ======    =====

     A  reconciliation  of the  provision  (benefit)  for  income  taxes and the
     amounts that would be computed  using  federal  statutory tax rates for the
     fiscal years ended are as follows:

                                                     1996      1997       1998
                                                   -------   --------   -------
     Computed expected tax expense (benefit)       $   869   $ (6,205)  $(2,430)
     State income taxes - net of federal benefit       124       (886)     (347)
     Nondeductible expenses (primarily goodwill)       267     11,191       323
     FICA tip credits and other                       (390)      (842)     (595)
     Change in valuation allowance                                        2,135
                                                   -------   --------   -------
     Total                                         $   870   $  3,258   $  (914)
                                                   =======   ========   =======

     Deferred income tax assets for the fiscal years ended are as follows:

                                      F-15
<PAGE>
                                                               1997       1998
                                                             -------    -------
     Current deferred income tax assets:
       Accrued self insurance and contingent losses          $   827    $   478
       Other accrued expenses                                    264        360
                                                             -------    -------
     Total current deferred income tax assets included in
       other current assets                                  $ 1,091    $   838
                                                             =======    =======
     Noncurrent deferred income tax assets (liabilities):
       Store closing                                         $ 1,991    $   695
       Intangibles                                            (4,214)    (4,546)
       Net operating loss carryforward                         9,716      9,296
       Valuation allowance                                    (2,789)    (4,924)
       Various tax credit carryforward                         2,073      2,891
       Depreciation, capitalized leases and deferred gain      1,584      1,173
       Impairment of assets                                   (4,588)          
       Other                                                   1,539        993
                                                             -------    -------
     Net noncurrent deferred income tax assets               $ 5,312    $ 5,578
                                                             =======    =======

     As of December  31,  1998,  the Company  has  approximately  $23,454 of net
     operating loss  carryforwards that expire beginning in 2004 and alternative
     minimum tax credit carryforwards of approximately $2,891. The Company has a
     valuation  allowance  of $4,924  relating  to certain  net  operating  loss
     carryforwards.

10.  COMMITMENTS AND CONTINGENCIES

     In November 1996, the Company  entered into a self-insured  program whereby
     the Company is obligated for the first $100 of individual  health insurance
     claims.  The Company is involved in various legal  matters that  management
     considers to be in the normal course of business.  In management's opinion,
     all  matters  will be  settled  without  material  effect on the  Company's
     financial position or results of operations.

11.  STOCK OPTIONS

     The Company has three stock  option  plans,  the 1992,  1995 and 1996 plans
     under which 1,000,000,  300,000, and 500,000,  respectively,  shares of the
     Company's  common stock have been  reserved for issuance.  Options  granted
     under these plans expire up to ten years after the date of grant.

     A summary of changes in stock options is as follows:
                                                                        WEIGHTED
                                                                        AVERAGE
                                                           OPTION        OPTION
                                                           SHARES        PRICE
                                                         ---------      --------
     Outstanding at March 29, 1996                         506,500        $4.07
       Granted                                             774,800         4.15
       Exercised                                           (70,000)        2.00
                                                         ---------        -----
     Outstanding at December 31, 1996                    1,211,300         4.13
       Granted                                             100,000         3.44
       Exercised                                           (48,500)        2.00
                                                         ---------        -----
     Outstanding at December 31, 1997                    1,262,800         4.21
       Granted                                              30,000         3.06
       Exercised                                           (37,500)        2.00
       Canceled                                           (239,000)        4.26
                                                         ---------        -----
     Outstanding at December 31, 1998                    1,016,300         4.06
                                                         =========        =====

                                      F-16
<PAGE>
     The following table summarizes  information about stock options outstanding
     at December 31, 1998:

     Range of exercise prices                      $2.00 - $4.00   $4.75 - $6.00
     Shares outstanding in range                         788,800         227,500
     Weighted-average exercise price                      $ 3.73          $ 5.21
     Weighted-average remaining contractual life            7.19            6.35
     Shares currently exercisable                        516,880         167,500
     Weighted-average exercise price of shares
       currently exercisable                              $ 3.69          $ 5.31

     Had compensation  cost for the Company's stock option plans been determined
     based on the fair  value at the  grant  dates  for  awards  under the plans
     consistent with the method of SFAS No. 123, the Company's net income (loss)
     applicable  to common  shareholders  and net income  (loss)  applicable  to
     common  shareholders  per share for the years ended December 31, 1996, 1997
     and 1998 would have been adjusted to the pro forma amounts indicated below:

                                                   1996       1997       1998
                                                 --------   --------   --------
     Net income (loss) applicable to common
       shareholders - as reported               $   969   $(20,977)   $  (4,657)
                                                =======   ========    =========
     Net income (loss) applicable to common
       shareholders - pro forma                 $   707   $(21,239)   $  (4,974)
                                                =======   ========    =========
     Basic and diluted income (loss) per
       share - as reported                      $  0.08   $  (1.56)   $   (0.35)
                                                =======   ========    =========
     Basic and diluted income (loss) per
       share - pro forma                        $  0.06   $  (1.58)   $   (0.37)
                                                =======   ========    =========

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option pricing model with the following  assumptions used
     for grants:  no  dividend  yield;  expected  volatility  of 67%;  risk free
     interest rate of 5%; and expected lives of two to five years.

12.  EARNINGS PER SHARE

     Earnings per share is calculated as follows:

                                                   1996       1997       1998
                                                 --------   --------   --------
     Income (loss) before extraordinary item     $  1,615   $(20,977)  $ (6,028)
     Less:  Extraordinary gain (loss)                (497)                1,371
     Preferred stock dividend and accretion          (149)
                                                 --------   --------   --------
     Net income (loss) applicable to common
       shareholders                              $    969   $(20,977)  $ (4,657)
                                                 ========   ========   ========

     Shares - basic income (loss) per share        11,698     13,437     13,485
     Dilutive effect of common stock
       equivalents                                    146
                                                 --------   --------   --------
     Shares - diluted income (loss) per share      11,844     13,437     13,485
                                                 ========   ========   ========
     Basic and diluted income (loss) per share:
       Before extraordinary item                 $    .14   $  (1.56)  $   (.45)
                                                 ========   ========   ========
       Applicable to common shareholders         $    .08   $  (1.56)  $   (.35)
                                                 ========   ========   ========

                                      F-17
<PAGE>
13.  RELATED PARTY TRANSACTIONS

     During  fiscal years ended  December 31, 1996,  1997 and 1998,  the Company
     entered into a number of transactions with officers and/or  shareholders of
     the  Company  or  affiliated  companies.  Advances  due from  officers  are
     included in  receivables  in the  accompanying  financial  statements.  The
     following  summarizes  the  related  party  transactions  as of and for the
     fiscal years then ended:

                                                         1996     1997     1998
                                                        ------   ------   ------
     Advances due from officers and shareholders        $  435   $  378   $  802
                                                        ======   ======   ======
     Note receivable from shareholders                  $2,600   $2,600   $2,600
                                                        ======   ======   ======
     LH Leasing (described below)                       $1,902   $3,804   $3,804
                                                        ======   ======   ======
     Lease expense paid to shareholders                 $  100   $   35   $   --
                                                        ======   ======   ======

     In  connection  with  the  financing  of the BEP  Acquisition,  LH  Leasing
     Company,  Inc. ("LH  Leasing"),  a  corporation  owned by Jack M. Lloyd and
     William J.  Howard,  purchased  from the  Company for cash in the amount of
     $14,250 the equipment  located at 62 Black-eyed Pea  restaurants  leased by
     BEP, a wholly-owned  subsidiary of the Company,  or Texas BEP, L.P. ("Texas
     BEP"),  a limited  partnership  in which BEP is the general  partner and in
     which a wholly-owned subsidiary of BEP is the limited partner. Concurrently
     with the  sale of the  equipment  to LH  Leasing,  LH  Leasing  leased  the
     equipment to the Company and the Company  subleased the equipment to BEP or
     Texas  BEP.  The  equipment  lease has a term of five  years and grants the
     Company an option to purchase  the  equipment at its fair market value upon
     the expiration of the lease. The terms of the subleases between the Company
     and each of BEP and  Texas BEP are  consistent  with the terms set forth in
     the equipment lease between the Company and LH Leasing.  Messrs.  Lloyd and
     Howard formed LH Leasing as an accommodation to the Company to enable it to
     satisfy the requirements of the Company's senior lenders. Messrs. Lloyd and
     Howard received no material compensation for the transactions involving the
     Company and LH Leasing.

     A note  receivable  from  shareholder,  which is included in other  current
     assets at December 31, 1998,  bears  interest at 6%. The note is secured by
     Series B Notes with a face amount of approximately $1,500 and approximately
     403,000 shares of the Company's  common stock. The Company has entered into
     an  agreement   with  the  holder  of  the  note  whereby  the   securities
     collateralizing the note will be used to redeem the receivable. The Company
     expects this transaction to close in 1999.

     Related  parties of the  Company are the holders of $18,250 of the Series B
     Notes (discussed in Note 7).

14.  EMPLOYEE BENEFIT PLANS

     In 1998,  the Company  adopted a defined  contribution  plan under  Section
     401(k) of the Internal  Revenue Code covering all eligible  employees  (the
     "401(k)  Plan").  Eligible  participants  may contribute up to 15% of their
     total  compensation.  The Company  provides  matching  contributions to the
     401(k) Plan in amounts  determined by the Board of Directors.  Participants
     will be  immediately  vested  in their  personal  contributions  and over a
     five-year  graded  schedule for amounts  contributed  by the  Company.  The
     Company did not make any matching contributions to the 401(k) Plan in 1998.

15.  SUBSEQUENT EVENTS

     In April 1999, the Company executed  commitment  letters with a lender (the
     "Commitments") that provide for new borrowings totaling $20,100.  Under the
     terms of the  Commitments,  the  Company  will enter into (i) $3,000 of new
     equipment financing,  and (ii) a cumulative loan not to exceed $17,100. The
     $3,000  new  equipment  financing  will  modify  and  consolidate  existing
     equipment notes payable totaling approximately $15,400, which will create a
     total term loan of $18,400. The new $18,400 term loan will amortize monthly
     over a seven year period and will bear  interest  at a fixed rate.  The new
     term

                                      F-18
<PAGE>
     loan will be secured by a first security  interest in restaurant  equipment
     in certain of the Company's Denny's and Black-eyed Pea restaurants.

     To  facilitate   the  $17,100   cumulative   loan,  the  Company  formed  a
     special-purpose  subsidiary  and will  contribute  to that  subsidiary  the
     assets  and   liabilities   associated   with   approximately   34  Denny's
     restaurants. The cumulative loan will be evidenced by individual promissory
     notes secured by the leasehold properties. The terms of the notes will vary
     based upon the term of the leaseholds which approximate 15 years. The notes
     will amortize monthly at a fixed rate of interest.

     The Company  will use the  proceeds  from the new loans to (i)  permanently
     retire the Company's  revolving loans under its existing  Credit  Facility;
     (ii)  purchase  certain  restaurant   equipment  currently   encumbered  by
     equipment  leases;  (iii) pay various fees and  expenses;  and (iv) provide
     working capital to the Company.  The Company believes that it will complete
     the financing  transactions  contemplated  by the Commitments in the second
     quarter of 1999 and that the funds  provided  by these  financings  will be
     sufficient   for  its  ongoing   operations  and   anticipated   restaurant
     development activities during 1999.

     At December 31, 1998,  the Company was not in compliance  with several debt
     agreements,  including its Credit  Facility.  The Company believes that the
     financing  transaction outlined in the Commitments will provide the Company
     with sufficient  liquidity to enable it to repay the remaining  obligations
     under  its  Credit  Facility  and to cure  its  defaults  under  its  other
     agreements. In addition, the Company intends to pursue various alternatives
     to refinance  other assets during 1999. If the Company cannot  complete the
     financing  contemplated  under the Commitments,  it would continue to be in
     default and other acceptable refinancing or restructuring  alternatives may
     not be available to the Company.

16.  BUSINESS SEGMENTS

     The  Company  adopted  SFAS  No.  131,  DISCLOSURES  ABOUT  SEGMENTS  OF AN
     ENTERPRISE AND RELATED  INFORMATION  effective January 1, 1998. The Company
     operates  family-oriented,  full-service  restaurants  primarily  under two
     separate  concepts,  Denny's and the  Black-eyed  Pea. The Company owns the
     Black-eyed Pea brand and operates the Denny's  restaurants  under the terms
     of franchise  agreements.  The two concepts have separate  management teams
     and reporting infrastructures. The accounting policies for each concept are
     the same as those  described  in Note 1.  During each  fiscal  period,  the
     Company also operated

                                      F-19
<PAGE>
     several  non-branded  restaurants.  As of  December  31,  1998,  all of the
     non-branded  restaurants  have been closed or  converted  to the Denny's or
     Black-eyed Pea concept. The concept distribution of the Company's revenues,
     restaurant operating income, depreciation and amortization and identifiable
     assets for the three-year period ended December 31 is as follows:

                                               1996         1997         1998
                                            ---------    ---------    ---------
     REVENUES:
       Denny's                              $ 149,476    $ 165,167    $ 115,787
       Black-eyed Pea                          71,613      130,304      139,699
       Non-branded                             20,391        5,108          470
                                            ---------    ---------    ---------
     Total revenues                         $ 241,480    $ 300,579    $ 255,956
                                            =========    =========    =========

     RESTAURANT OPERATING INCOME:
       Denny's                                 11,347       (4,886)       7,583
       Black-eyed Pea                          11,150       14,444       10,684
       Non-branded                               (360)        (457)        (151)
                                            ---------    ---------    ---------
     Total restaurant operating income         22,137        9,101       18,116
       Administrative expenses                 10,303       13,684       12,423
                                            ---------    ---------    ---------
     Total operating income (loss)          $  11,834    $  (4,583)   $   5,693
                                            =========    =========    =========

     DEPRECIATION AND AMORTIZATION:
       Denny's                                  6,103        8,321        4,808
       Black-eyed Pea                             584        1,009        2,780
       Non-branded                                313           37            2
                                            ---------    ---------    ---------
     Total depreciation and amortization    $   7,000    $   9,367    $   7,590
                                            =========    =========    =========

     IDENTIFIABLE ASSETS:
       Denny's                                122,916      124,736       93,723
       Black-eyed Pea                          39,505       41,670       40,784
       Non-branded                             16,768        3,858
                                            ---------    ---------    ---------
     Total identifiable assets              $ 179,189    $ 170,264    $ 134,507
                                            =========    =========    =========

     Administrative   expenses,  which  are  not  allocated  to  the  individual
     concepts,  are shown as a  reconciling  item to calculate  total  operating
     income (loss) for the periods presented.

                                      F-20
<PAGE>
17.  QUARTERLY DATA (UNAUDITED)

     The following table presents selected unaudited quarterly operating results
     for the two-year period ended December 31, 1998. The Company  believes that
     all necessary  adjustments have been included in the amounts shown below to
     present fairly the related quarterly results.

                                                        1997
                                     -------------------------------------------
                                      1ST QTR.   2ND QTR.   3RD QTR.   4TH QTR.
                                     (13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS)
                                     ---------- ---------- ---------- ----------
     Restaurant sales                 $ 76,114   $ 76,185   $ 75,494   $ 72,786
     Operating income (loss)             2,113      2,527      4,083    (13,306)
     Net (loss) income applicable
       to common shareholders             (589)      (350)       531    (20,569)
     Basic and diluted (loss) income
       per share applicable to common
       shareholders                   $  (0.04)  $  (0.03)  $   0.04   $  (1.53)

                                                        1998
                                     -------------------------------------------
                                      1ST QTR.   2ND QTR.   3RD QTR.   4TH QTR.
                                     (13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS)
                                     ---------- ---------- ---------- ----------
     Restaurant sales                 $ 72,880   $ 62,066   $ 62,231   $ 58,779
     Operating income (loss)             3,378      1,574        904       (163)
     Net income (loss) applicable
       to common shareholders            1,340     (1,061)    (1,183)    (3,753)
     Basic and diluted income (loss)
       per share applicable to common
       shareholders                        .10       (.08)      (.09)      (.28)

                                   * * * * * *

                                      F-21