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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 31, 1997
                         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: (602) 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. [____]

         The aggregate  market value of the Common Stock of the Registrant  held
by  non-affiliates  of the Registrant  (6,570,933  shares) on March 31, 1998 was
$14,373,916. 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,  1998:
13,447,777 shares of Common Stock, $.10 par value.

         Documents incorporated by reference:  None.

--------------------------------------------------------------------------------
<PAGE>
                                DENAMERICA CORP.

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS


                                     PART I

ITEM 1.  BUSINESS..............................................................1
ITEM 2.  PROPERTIES...........................................................22
ITEM 3.  LEGAL PROCEEDINGS....................................................22
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................22

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS...............................................23
ITEM 6.  SELECTED FINANCIAL DATA..............................................24
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS...............................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........32
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................32
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE...............................33

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................34
ITEM 11. EXECUTIVE COMPENSATION...............................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT........................................................43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................44

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....45

SIGNATURES....................................................................49


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
<PAGE>
                                     PART I
ITEM 1.           BUSINESS.

General

         The  Company  currently  operates  208  family-oriented,   full-service
restaurants in 25 states,  primarily in the southwestern,  midwestern,  western,
and southeastern United States. The Company owns and operates 104 Black-eyed Pea
restaurants,  primarily in Texas, Georgia, Arizona,  Oklahoma,  Florida, and the
Washington,  D.C.  area,  and  franchises to third parties the rights to operate
three  Black-eyed  Pea  restaurants  in two states.  The  Company  also owns and
operates 103 Denny's  restaurants,  which represents  approximately  6.4% 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  substantially  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  restaurants  and
acquisitions of franchised Black-eyed Pea restaurants from the franchisees.  The
Company also plans to sell or close certain of its  restaurants  as  appropriate
based on  performance  and other  considerations.  In addition,  the Company may
expand its operations  through the acquisition of one or more restaurant  chains
or multiple restaurant  locations.  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 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 (602) 483-7055.

Development of 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>
                                                                                                        As of
                                                                                                      March 31,
                                         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           0
  Developed.........................       15              6           5           0           4           0
  Sold or closed....................        0              0          (3)        (12)         (2)          0
                                          ---            ---         ---         ---         ---         ---
  Number open at end of period......       97            103         105          93         104         104
                                          ===            ===         ===         ===         ===         ===
Denny's restaurants:
  Number open beginning of period...       89            102         148         168         182         176
  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)        (17)        (73)
                                          ---            ---         ---         ---         ---         ---
  Number open at end of period......      102            148         168         182         176         103
                                          ===            ===         ===         ===         ===         ===
Non-branded restaurants:
  Number open beginning of period...       43             59          56          82          20           3
  Acquired..........................       24              1          36           0           0           0
  Converted.........................       (7)            (1)        (10)        (15)         (2)          0
  Sold or closed....................       (1)            (3)         (0)        (47)        (15)         (2)
                                          ---            ---         ---         ---         ---         ---
  Number open at end of period......       59             56          82          20           3           1
                                          ===            ===         ===         ===         ===         ===
</TABLE>
<PAGE>
         In March 1998, the Company completed the sale of 63 Denny's restaurants
and eight  non-branded  restaurants  located in 13 states to an existing Denny's
franchisee for gross proceeds of $28.7  million.  The Company  utilized the cash
proceeds  of  approximately   $25.2  million  from  this  transaction  to  repay
outstanding indebtedness and operating leases and to cancel outstanding warrants
to acquire  approximately  1,000,000  shares of the Company's  Common Stock. The
Company  has  included  a  charge  for  impaired  assets   associated  with  the
restaurants sold of approximately $14.1 million,  due primarily to the reduction
of intangibles of approximately  $29.0 million,  in its  consolidated  financial
statements for fiscal 1997. See Item 7, "Management's Discussion and Analysis of
Financial  Condition and Results of Operations" and the  consolidated  financial
statements and related notes thereto included elsewhere herein.

         The following table sets forth certain  information with respect to the
Company's  restaurants  as of  March  31,  1998 and  current  plans  for  future
restaurant activity.
<TABLE>
<CAPTION>
                                                                                           Planned       
                                    Current Restaurants                                 Development      
                          ------------------------------------------------------    ---------------------
                                  Company-Owned Restaurants           
                          ---------------------------------------     Franchised    Black-eyed Peas to be
                          Black-eyed                                  Black-eyed      Developed Through  
                              Pea            Denny's        Other        Pea             12/31/98
                              ---            -------        -----        ---             --------
<S>                          <C>              <C>             <C>         <C>               <C>
Arizona..............          7               14                                           2
Arkansas.............          1                2
Colorado.............                           8
Florida..............          3               19             1
Georgia..............          9
Idaho................                           5
Iowa.................                           5
Kansas...............          2                1
Louisiana............                           1
Maryland.............          4
Minnesota............                           1
Missouri.............          1                1
Nebraska.............                           4
Nevada...............                           1
New Mexico...........          2
North Carolina.......          1
Oklahoma.............          5                7                                           1
Oregon...............                           1
South Carolina.......          1
South Dakota.........                           1
Tennessee............          2
Texas................         61               23                         1                 5
Utah.................                           8
Virginia.............          5                                          2
Wisconsin............                           1
                            -----             -----        -----       -----             -----
    Totals...........        104               103            1           3                 8
                            =====             =====        =====       =====             =====
</TABLE>
                                       2
<PAGE>
Strategy

       The  Company's  business  strategy  is to  (i)  enhance  its  operational
efficiencies;  (ii) sell or close  certain  underperforming  restaurants;  (iii)
enhance and refine the  Black-eyed  Pea  restaurant  concept;  (iv)  continue to
develop new restaurants; and (v) acquire additional restaurants.

Enhancement of Operating Efficiencies

       The  Company  plans to take  steps  necessary  to enhance  its  operating
efficiencies.  In October 1997, the Company divided its administrative functions
between its  Black-eyed  Pea and Denny's  restaurants in order to reduce general
and  administrative  costs.  The Company  anticipates  that  personnel and other
reductions  associated  with  these  changes  will  result in annual  savings of
approximately  $3.0  million.  The Company also 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 the core
market  areas for its  Black-eyed  Pea  restaurants.  See Item 7,  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
General."

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  underperforming  restaurants.
Subsequent to the Merger and the BEP Acquisition, the Company has sold or closed
a total of six  Black-eyed  Pea  restaurants,  96  Denny's  restaurants,  and 64
non-branded  restaurants,  including the 71 restaurants  sold in March 1998. The
Company  determined that these restaurants had  below-average  operating results
and could not be  operated  profitably  because  of their  location,  renovation
costs,  competitive  factors,  or  inability  to convert the brand.  The Company
intends  to apply  the  proceeds  from the  sale of  additional  underperforming
restaurants  to  reduce  its  outstanding  indebtedness  to  a  level  that  its
then-current  operations will support  profitably.  The Company believes that it
will then be positioned to resume growth through development and acquisitions of
additional restaurants.

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, to increase the appeal of the Black-eyed Pea concept to current
customers,  to attract new customers,  and to encourage its customers to dine at
Black-eyed Pea restaurants  with greater  frequency and regularity.  The Company
began  implementing  a number  of  changes  to its  "prototype"  Black-eyed  Pea
restaurant  during 1997. These changes are designed to improve unit economics by
reducing  the costs  required  to  develop  and equip each new  restaurant.  The
changes include (i)  de-emphasizing  bar sales, which currently account for only
2.1% of sales at  Black-eyed  Pea  restaurants,  in order to eliminate the costs
associated with  installing,  equipping,  and stocking a full bar; (ii) 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 (iii) increasing emphasis on
take-out  sales,  which grew to  approximately  11% of per-store sales in fiscal
1997 from approximately 9% in fiscal 1996. The Company significantly reduced the
number of its franchised  Black-eyed Pea restaurants during 1997 and may acquire
additional franchised restaurants during fiscal 1998. The Company may resume its
franchising activities after implementing the enhancements to and refinements of
the  Black-eyed  Pea  concept   throughout  the  Company-owned   Black-eyed  Pea
restaurants.
                                       3
<PAGE>
       As part of its program to enhance and refine the  Black-eyed Pea concept,
in February  1998 the Company  began  testing and  marketing  breakfast at three
Black-eyed  Pea  restaurants  in one market area.  The success of this test will
depend upon various factors, including the addition of incremental sales without
reducing  guest counts  during  other parts of the day and the costs  associated
with equipment modifications required to accommodate breakfast preparation.

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  Company  currently  intends  to  concentrate  its  efforts  on
developing  additional  Black-eyed  Pea  restaurants  because of the better unit
economics  provided by those  restaurants and  anticipates  that it will develop
approximately  six to eight new Black-eyed  Pea  restaurants by the end of 1998.
The Company  developed four new Black-eyed Pea  restaurants  and one new Denny's
restaurant  during fiscal 1997.  During the three-year period ended December 31,
1997,  the Company  developed four new  Black-eyed  Pea  restaurants  and 14 new
Denny's restaurants.  See Item 1, "Special Considerations - Inability to Develop
Restaurants."

Restaurant Acquisitions

       The Company plans to acquire  restaurants when it believes it can improve
their performance  through better management and greater operating  efficiencies
or through  conversion to the  Black-eyed  Pea or Denny's  concept.  The Company
believes it can take advantage of its organizational and management expertise to
bring  improved  quality  and  operating  efficiencies  to  the  restaurants  it
acquires.  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,  the Company  acquired  nine  Black-eyed  Pea
restaurants  in  Arizona  and  Florida  from  the  franchisees  operating  these
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

       The Company  currently  operates 104  Black-eyed  Pea  restaurants  in 12
states.  The Company also  currently  franchises  to third parties the rights to
operate three Black-eyed Pea restaurants in two states.

Concept

       Black-eyed Pea restaurants are full-service, casual dining establishments
featuring wholesome home-style meals,  including  traditional  favorites such as
pot roast,  chicken fried steak,  roast turkey,  vegetable  dishes,  and freshly
baked breads and desserts.  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. On average,  sales before
4:30 p.m. account for  approximately  48% of total sales per restaurant.  During
fiscal 1997, the Company introduced expanded store hours and a breakfast menu at
one Black-eyed Pea  restaurant.  In February 1998, the Company began testing and
marketing breakfast at three Black-eyed Pea restaurants in another market area.

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 
                                       4
<PAGE>
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 31, 1997,  the
average  check per customer at the  Company's  Black-eyed  Pea  restaurants  was
$7.90. In fiscal 1997,  liquor sales accounted for  approximately  2.1% 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

       The  distinctive,   turn-of-the-century  "General  Store"  appearance  of
Black-eyed Pea restaurants is designed to create a casual and comfortable dining
atmosphere,  which appeals to their broad  customer  base,  including  families.
Restaurant interiors are usually decorated with  turn-of-the-century  artifacts,
which line the walls and shelves. 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 $350,000 to $400,000,  exclusive of annual
operating  costs and assuming that the land and  buildings are obtained  under a
lease  arrangement.  These costs include  approximately (i) $300,000 to $350,000
for furniture,  fixtures,  and equipment;  (ii) $50,000 for  pre-opening  costs,
including hiring and training costs, employee wages, and advertising;  and (iii)
$30,000 for the initial  franchise fee in the case of  franchisees.  The Company
currently plans to lease  substantially all of its new Black-eyed Pea restaurant
sites in order to minimize the costs of developing new restaurants.  See Item 1,
"Business - Financing and Leasing" and Item 2, "Properties."

Site Selection

       The Company believes that proper site selection is critical to maximizing
the success of a particular  Black-eyed Pea restaurant  and,  therefore,  senior
management  devotes  significant  time and resources in selecting and evaluating
each  prospective  site. A variety of factors are analyzed 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.  In most instances,  the Company prefers the stand-alone
Black-eyed  Pea prototype  because it enhances the  restaurant's  visibility and
customer access.
                                       5
<PAGE>
Franchises

       The Company significantly reduced the number of its franchised Black-eyed
Pea restaurants  during 1997 and may acquire additional  franchised  restaurants
during  fiscal 1998.  The Company  currently  intends to resume its  franchising
activities  after  implementing  various  enhancements to and refinements of the
Black-eyed Pea concept throughout the Company-owned  Black-eyed Pea restaurants.
See Item 1,  "Business - Strategy." As of December 31, 1997, the Company had two
Black-eyed  Pea  franchisees  operating  three  restaurants  in two states.  The
Company  has  typically  offered  development   agreements  to  franchisees  for
construction of one or more  restaurants  over a defined period of time within a
specific  geographic  area. Under the current form of development  agreement,  a
franchisee  is  required  to  pay,  at the  time  the  agreement  is  signed,  a
nonrefundable  fee of $5,000  per  restaurant  committed  to be  developed.  The
Company's  current  development  agreement  also requires  franchisees  to pay a
franchise fee of $30,000 per restaurant upon signing a franchise agreement for a
specific  location before  construction  begins.  The Company's  current form of
franchise  agreement has a 15 year initial term with certain  renewal rights and
provisions for payment to the Company of royalties  equal to 3.5% of gross sales
and advertising fees and required marketing expenditures of up to 2.75% of gross
sales.  The Company  requires  each  franchisee  to have an  approved  full-time
principal  operator who is responsible  for the supervision and operation of the
franchise.

Denny's Restaurants

       The Company  currently  operates  103 Denny's  restaurants,  representing
approximately  6.4% of the  Denny's  system and making the  Company  the world's
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  1,600
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 - Reliance 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  include
Denny's popular  "Original Grand Slam Breakfast"  combinations,  consisting of a
variety of eggs, breakfast meats, pancakes,  biscuits, muffins, and other items,
as  well as  traditional  breakfast  items,  such as  eggs,  omelets,  pancakes,
waffles, cereals, and muffins. Lunch and dinner entrees include prime rib, roast
beef, fried shrimp, fish, roast turkey, grilled or fried chicken,  sirloin tips,
and liver.  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;  and 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.  In December 1997, the average check per customer
at the Company's Denny's restaurants was $5.30.
                                       6
<PAGE>
Restaurant Layout

       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 an average  seating  capacity of
180 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 and 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 estimates that its total cost
of converting an acquired  restaurant to the Denny's  concept  currently  ranges
from approximately $160,000 to $480,000, exclusive of annual operating costs and
assuming  that the land and  building are  obtained  under a lease  arrangement.
These costs include  approximately  (a) $110,000 to $430,000 for  remodeling and
improvements;  (b)  $30,000  for  pre-opening  costs,  including  hiring  costs,
employee wages, and advertising;  and (c) $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 
                                       7
<PAGE>
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.

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% of weekly
gross sales in markets where Denny's,  Inc. conducts  significant  institutional
advertising.  In  markets  where  Denny's,  Inc.  does not  conduct  significant
institutional advertising,  the Denny's Franchise Agreements require the Company
to pay Denny's,  Inc. 0.5% of weekly gross sales and to spend an additional 1.5%
of weekly  gross  sales on local  advertising.  Initial  franchise  fees for the
Denny's restaurants  operated by the Company have ranged from $0 to $35,000. The
Company  negotiates  the  initial  franchise  fees,  which  vary based upon such
factors as  involvement  of  Denny's,  Inc.  personnel  in the  training  of the
Company's  employees and the number of Denny's  restaurants  being  developed or
acquired.  Shorter  development  periods will result in lower initial  franchise
fees. 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  services 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 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 of a "change of control" of the Company,  the Denny's Franchise Agreements
give Denny's, Inc. the option to purchase within one year after the date of such
change of  control  all of the  Denny's  restaurants  owned or  operated  by the
Company for their fair market  value.  As long as the Company is a publicly held
corporation,  a change of control  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.
                                       8
<PAGE>
Non-branded Restaurants

       The Company currently operates one non-branded restaurant.  During fiscal
1997, the Company sold 12  non-branded  restaurants,  converted two  non-branded
restaurants  to  the  Denny's  concept,   and  closed  three  other  non-branded
restaurants.

Expansion of Operations

       The Company's current growth plan is to develop or acquire restaurants in
its core market areas,  primarily in Texas,  Oklahoma,  and Arizona. See Item 7,
"Management  Discussion  and  Analysis  of  Financial  Condition  and Results of
Operations  -  General."  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.  Historically,  the  Company  generally  has been able to
increase sales volume at acquired or converted  restaurants  through  remodeling
and improved service.  The Company intends to continue developing new Black-eyed
Pea  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.  The Company also may acquire or develop  restaurants  operating  under
different concepts, but currently has no plans to do so.

Restaurant Development

       Since 1986, the Company has developed and opened more Denny's restaurants
than either  Denny's,  Inc. or any other  franchisee.  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  currently  plans to  accelerate  the
development of additional Black-eyed Pea restaurants. 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  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 
                                       9
<PAGE>
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 those mandated by Denny's,  Inc. in the case of
its Denny's restaurants.

       Responsibility  for managing the operations of Black-eyed Pea restaurants
is  currently  the  responsibility  of one vice  president  of  operations.  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 three regional vice presidents for Denny's  restaurants are
responsible for the  maintenance of the  operational  standards of the Company's
Denny's  restaurants  as  specified  by  Denny's,  Inc.  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.

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.
                                       10
<PAGE>
       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.  By training its own management  personnel and opening its own
restaurants,   the  Company  reduces  its  initial  franchise  fee  per  Denny's
restaurant from $35,000 to $20,000.

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 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  restaurant  maintains "par stock"  inventory  levels and the
restaurant manager takes monthly physical inventories of all food, beverage, and
supply items. 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 1, "Special  Considerations  - Year 2000
Compliance."

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 or joint ventures 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 preopening 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 
                                       11
<PAGE>
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 Company  currently has financing  commitments  available  from
various  lenders  in  amounts  that  it  believes  will  be  sufficient  for its
anticipated  restaurant  development and acquisition activities during 1998. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital  Resources."  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.

       Through  September 30, 1997, the Company and CNL Group,  Inc. and certain
of its affiliates ("CNL") were parties to three joint venture agreements for the
purpose  of  acquiring,   developing,  owning,  and  operating  a  total  of  16
restaurants.  The Company  and CNL each had a 50%  interest in each of the joint
ventures.   The  Company  was  responsible  for  day-to-day  operations  of  the
restaurants  owned by each joint venture,  and CNL paid the Company a management
fee of  approximately  3.5% of sales  for its  services.  Under the terms of the
joint ventures,  CNL contributed  100% of the initial capital required for land,
building,  and site development  costs, and a subsidiary of CNL contributed 100%
of the capital required to equip the restaurants,  acquire the franchises, train
the staff,  stock the inventory,  and open the restaurants.  On October 1, 1997,
the Company and CNL entered into a series of  transactions  in which the Company
(i) purchased CNL's 50% interest in each of the joint  ventures;  (ii) purchased
from CNL the land and  buildings for nine of the 16  restaurants;  (iii) entered
into  sale/leaseback  transactions  with CNL  with  respect  to eight  buildings
located on ground  leases;  and (iv) entered into  equipment  notes payable with
CNL. See Item 7,  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations - Liquidity and Capital Resources."

       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.  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.

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  offers its
Black-eyed  Pea  franchisees  the option to  participate  in its  purchasing and
distribution program.  Franchisees may purchase products and supplies from other
sources as long as the products meet Company specifications.

       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 
                                       12
<PAGE>
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 does not have a
supply agreement or other contractual  arrangement with its primary supplier and
effects purchases through purchase orders.  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  4.2% of Black-eyed Pea restaurant sales
during fiscal 1997.

       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.  In the event
that the Company  participates in such a cooperative,  any contribution  that it
makes to a cooperative  is in addition to the 2% of gross sales that the Company
is required to contribute to Denny's, Inc. Cooperatives have been established in
several of the Company's markets.

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  2.1%  and  1.0%,
respectively,  of restaurant sales in its Black-eyed Pea and Denny's restaurants
during  fiscal  1997.  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 
                                       13
<PAGE>
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" statues.

       The Company is subject to Federal Trade  Commission  ("FTC")  regulations
and state laws,  which  regulate the offer and sale of Black-eyed Pea restaurant
franchises.   The  Company  also  is  subject  to  state  laws,  which  regulate
substantive aspects of the franchisor-franchisee  relationship. The FTC requires
the Company to furnish to  prospective  Black-eyed  Pea  franchisees a franchise
offering circular containing prescribed information. A number of states in which
the Company offers Black-eyed Pea franchises also regulate the offer and sale of
franchises  and  require  registration  of the  franchise  offering  with  state
authorities.  State laws that  regulate the  franchisor-franchisee  relationship
presently  exist  in a  substantial  number  of  states,  and  bills  have  been
introduced in Congress and in a number of state  legislatures  from time to time
(some of which  are now  pending)  that  would  provide  for  federal  and state
regulation  of  the  franchisor-franchisee  relationship  in  certain  respects.
Certain  of such laws may  restrict  the  Company's  ability  to  terminate  the
franchise  agreements for its franchised  Black-eyed Pea  restaurants,  although
these provisions have not had a significant  effect on the Company's  operations
to date.

Trademarks

       The Company has registered 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 important 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. 
                                       14
<PAGE>
Employees

       At March 31, 1998, the Company had  approximately  13,000  employees,  of
whom  approximately  75  were  corporate   personnel,   approximately  900  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 50 employees,  including approximately 20 kitchen personnel and 30
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 $5.00 to $6.00 an hour for kitchen personnel. The Company generally
pays service personnel the applicable minimum wage plus tips.


                             SPECIAL CONSIDERATIONS

       The following factors,  in addition to those discussed  elsewhere in this
Report,  should be  considered  carefully  in  evaluating  the  Company  and its
business.

No Assurance of Profitability

       The Company's ability to generate  operating profits will depend upon the
nature and extent of any future  developments  and  acquisitions;  the Company's
capital  resources;   general  economic  and  demographic  conditions;  and  the
Company's   ability  to  refinance,   restructure,   or  repay  its  outstanding
indebtedness.  There can be no assurance  that the Company will be profitable in
the future.  See Item 7,  "Management's  Discussion  and  Analysis of  Financial
Condition and Results of Operations."

Significant Borrowings and Future Financings

       The  development  of new  restaurants  and the  acquisition  of  existing
restaurants  requires funds for construction,  tenant  improvements,  furniture,
fixtures, equipment, training of employees, permits, 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   indebtedness  to  effect  its  restaurant
developments,  acquisitions,  and conversions to date, and the Company may incur
substantial  additional  indebtedness  in the future in order to  implement  its
business  plan and growth  strategy.  The  Company had  long-term  debt of $23.4
million,  subordinated notes of $18.3 million,  obligations under capital leases
aggregating $39.4 million,  and a working capital deficit of $36.5 million as of
December 31, 1997.

       The Company utilized the proceeds from sales of restaurants during fiscal
1997  and  the  first   quarter  of  fiscal  1998  to  reduce  its   outstanding
indebtedness.  The Company may seek  additional  equity or debt financing in the
future,  however, to provide funds to develop or acquire additional restaurants.
In addition,  the Company currently intends to raise sufficient capital,  either
through the sale of equity or by incurring replacement  indebtedness,  to enable
it to retire  its  Series B 13%  Subordinated  Notes  due 2003 in the  principal
amount of  approximately  $18.3 million (the "Series B Notes") prior to the date
on which the related  Series B Warrants  become  exercisable  on March 29, 1999.
There can be no  assurance  that such  financing  will be  available  or will be
available  on  satisfactory  terms;  that the Company will be able to develop or
acquire new restaurants or to otherwise expand its restaurant  operations;  that
the Company will be able to refinance,  restructure,  or satisfy its obligations
as they  become  due;  or that the  Company  will be able to retire the Series B
Notes before the related Series B Warrants are  exercised.  See Item 1, "Special
Considerations  -  Expansion  of  Operations"  and  "Special   Considerations  -
Inability to Develop  Restaurants."  While debt financing enables the Company to
add  more  restaurants  than it  would  otherwise  be able to do,  expenses  are
increased by such  financing  and such  financing  must be repaid by the Company
regardless of the Company's  operating  results.  Future equity financings could
result in dilution to shareholders. 
                                       15
<PAGE>
Risks Associated with Business Strategy

       The Company intends to pursue a strategy of growth primarily  through the
development  of  new  Black-eyed  Pea  restaurants  and  the  expansion  of  its
operations to include one or more additional  restaurant concepts.  There can be
no assurance that the Company will be successful in developing  new  restaurants
or acquiring existing  restaurants on acceptable terms and conditions,  that its
operations  can be  expanded  to include  other  restaurant  concepts,  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  execution  of the
Company's  strategy will require the  availability of substantial  funds.  These
funds historically have been provided by sale-leaseback  financing arrangements.
The Company currently has financing  commitments  available from various lenders
in amounts that it believes will be sufficient  for its  anticipated  restaurant
development and acquisition  activities  during 1998. There can be no assurance,
however,  that  adequate  financing  will  continue  to be  available  on  terms
acceptable  to the Company.  See Item 1, "Special  Considerations  - Significant
Borrowings and Future Financings."

       Unforeseen expenses,  difficulties,  and delays frequently encountered in
connection  with the rapid expansion of operations also 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,  including the availability of suitable sites, the ability to negotiate
suitable  terms,  the  Company's  financial   resources,   the  availability  of
restaurant  management and other  personnel,  the ability to obtain any required
consents from Denny's,  Inc. or the Company's  lenders for such developments and
acquisitions and general economic and business conditions. Many of these factors
will be beyond the control of the Company.

Expansion of Operations

       The Company's  operations  have expanded  significantly  since 1990.  The
Company's  success in the future will depend on its ability to expand the number
of its  restaurants  either through  increasing the number of its Black-eyed Pea
and Denny's  restaurants  or  expanding  its  operations  to include one or more
additional  restaurant concepts, or both, and to operate and manage successfully
its growing operations. The Company's ability to expand successfully will depend
upon a number  of  factors,  including  the  availability  and cost of  suitable
restaurant locations for development; the availability of restaurant acquisition
opportunities;  the hiring, training, and retaining of additional management and
restaurant  personnel;  the  availability of adequate  financing;  the continued
development  and   implementation  of  management   information   systems;   and
competitive factors.

       The rate at which the  Company  will be able to  increase  the  number of
restaurants it operates will vary  depending  upon whether the Company  acquires
existing  restaurants or develops new  restaurants.  The acquisition of existing
restaurants  will depend  upon the  Company's  ability to  identify  and acquire
restaurants on satisfactory terms and conditions. The opening of new restaurants
will  depend upon the  Company's  ability to locate  suitable  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;   to  obtain  financing  for  construction,   tenant  improvements,
furniture,  fixtures, and equipment;  to negotiate acceptable leases or terms of
purchase;  to secure  liquor  licenses and zoning,  environmental,  health,  and
similar regulatory approvals;  to recruit and train qualified personnel;  and to
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.  There can be no assurance that the Company will be successful
in  achieving  its  expansion  goals  through   development  or  acquisition  of
additional  restaurants or that any additional restaurants that are developed or
acquired will be profitable.
                                       16
<PAGE>
Reliance On Denny's, Inc.

       The  Company  currently  operates  103 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;  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.  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,
or the failure to operate  successfully  the Denny's  restaurants  that Denny's,
Inc.  itself owns could have a material  adverse effect on the Company.  In this
regard,  Advantica  Restaurant Group, Inc., the successor to Flagstar Companies,
Inc.  ("Flagstar"),  recently  emerged from bankruptcy  protection and announced
that Flagstar  recorded a loss of  approximately  $134.5 million in fiscal 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.  Negative
publicity  with  respect to Denny's,  Inc. or the Denny's  name could  adversely
affect the Company.  For example,  the Company  experienced a decline in traffic
and  restaurant  sales in certain of its Denny's  restaurants as a result of the
negative  publicity  that arose in 1993  relating  to claims of  alleged  racial
discrimination  against  customers in certain  Denny's,  Inc.  restaurants and a
subsequent  investigation  of such  claims by the United  States  Department  of
Justice.

Inability to Develop Restaurants

       The Company  currently  intends to focus on developing new Black-eyed Pea
restaurants.  See Item 1,  "Business - Strategy"  and  "Business - Expansion  of
Operations."  The  Company's  ability to  develop  new  Black-eyed  Pea or other
restaurants  will depend  upon  numerous  factors,  particularly  the  Company's
ability to identify  suitable  sites,  obtain  adequate  financing on acceptable
terms,  and other  factors over which the Company may have little or no control.
There can be no  assurance  that the Company  will be able to secure  sufficient
restaurant  sites that it deems to be suitable or to develop  Black-eyed  Pea or
other  restaurants on such sites on terms and conditions it considers  favorable
in order to meet its growth objectives.

Restrictions Imposed By Denny's Franchise Agreements

       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% of weekly gross sales.  Such amounts must
be paid or expended  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.  relating  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. The failure of the Company to satisfy such requirements could
result  in the loss of the  Company's  franchise  rights  for some or all of its
Denny's  restaurants.  See Item 1,  "Business  - Denny's  Restaurants  - Denny's
Franchise Agreements."

         In the event that the  Company  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,  including the right
to what the Company believes are favorable franchise  arrangements and the right
to use the "Denny's"  trademarks and trade styles. The loss of such rights would
have a material adverse effect on the Company.
                                       17
<PAGE>
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.

       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 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.  The
Denny's  Franchise  Agreements  also provide that, in the event an assignment is
deemed to have  occurred  thereunder,  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.

Certain Factors Affecting the Restaurant Industry

       The  ownership and  operation of  restaurants  may be affected by adverse
changes in national, regional, or local economic or market conditions; increased
costs  of labor  (including  those  which  may  result  from  the  increases  in
applicable minimum wage requirements enacted in 1996 and 1997);  increased costs
of food products;  fuel shortages and price increases;  competitive factors; the
number,  density,  and location of  competitors;  limited  alternative  uses for
properties  and  equipment;  changing  consumer  tastes,  habits,  and  spending
priorities;  the  cost  and  availability  of  insurance  coverage;   management
problems;  uninsured  losses;  changing  demographics;   changes  in  government
regulation;  changing traffic patterns;  weather conditions;  and other factors.
The Company may be the subject of litigation based on  discrimination,  personal
injury,  or other claims,  including  claims that may be based upon  legislation
that imposes liability on restaurants or their employees for injuries or damages
caused by the negligent service of alcoholic  beverages to an intoxicated person
or to a minor.  Multi-unit  restaurant  operators,  such as the Company,  can be
adversely affected by publicity resulting from food quality, illness, injury, or
other  health  and  safety  concerns  or  operating  issues  resulting  from one
restaurant  or a limited  number of  restaurants  operated  under the same name,
including those not owned by the Company. None of these factors can be predicted
with any degree of certainty,  and any one or more of these factors could have a
material adverse effect on the Company.

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 attractive  restaurant  sites and the  availability  of
restaurant  personnel  and  managers.  The  Company  has  many  well-established
competitors with financial and other resources  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.  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.
                                       18
<PAGE>
Control by Certain Shareholders; Conflicts of Interest

       The  directors and officers of the Company  currently  own  approximately
35.3% of the Company's  outstanding  Common Stock.  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.

       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, currently hold an aggregate of $16,794,000 in principal
amount of the Company's  Series B Notes in addition to their Common Stock.  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. There can be no assurance
that the holders of the Series B Notes will waive any default under the notes. 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  and have granted
waivers  with respect to  non-compliance  of certain  debt  covenants  under the
Series  B Notes as of  September  30,  1997 and  March  31,  1998.  See Item 13,
"Certain Relationships and Related Transactions."

Dependence 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 and adverse affect on the Company.

Government Regulation

       The  Company  is  subject  to  various  federal,  state,  and local  laws
affecting its 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, in those  restaurants  currently  operated by the Company at
which alcoholic  beverages are served,  state and local licensing of the sale of
alcoholic beverages.  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 (such as the increase
enacted  during  1996  and  1997),   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.   With  respect  to  its   franchised   Black-eyed  Pea
restaurants,  the  Company  is  subject  to  regulation  by  the  Federal  Trade
Commission  and must comply with certain state laws  governing the offer,  sale,
and termination of franchises and the refusal to renew franchises.
                                       19
<PAGE>
Year 2000 Compliance

       Many currently installed computer systems and software products are coded
to accept  only  two-digit  entries to  represent  years in the date code field.
Computer  systems and products that do not accept  four-digit  year entries will
need to be  upgraded or replaced  to accept  four-digit  entries to  distinguish
years  beginning  with 2000 from prior years.  The Company has  determined  that
certain of its software  programs are not "Year 2000" compliant.  The vendor for
those software  programs  currently is developing  modifications to the software
code in order to enable those programs to function properly on and after January
1, 2000.  The Company  currently is evaluating the Year 2000 issue as it relates
to its entire internal  computer system as well as computer  systems operated by
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 related to making its computer  systems Year 2000 compliant.  The
Company will expense these costs as incurred.  The Company has not yet completed
the evaluation of its Year 2000  compliance and therefore  currently is not able
to quantify  the costs that may be incurred  to bring its  computer  system into
Year 2000  compliance.  Because  the  appropriate  course of action may  include
replacing or  upgrading  certain  equipment  or software,  the Company may incur
significant costs in resolving its Year 2000 issues.  Furthermore,  there can be
no assurance that the Company will be able to make its computer system Year 2000
compliant  in a timely  manner.  In  addition,  there can be no  assurance  that
computer  systems  operated  by third  parties  with which the  Company  systems
interface will continue to properly  interface with the Company 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.

Possible Volatility of Stock Price

       The market price of the  Company's  Common Stock could be subject to wide
fluctuations in response to 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.

Rights to Acquire Shares

       Employee and director  stock options to acquire an aggregate of 1,145,300
shares of Common Stock currently are outstanding.  An additional  821,667 shares
have been  reserved  for issuance  upon  exercise of options that may be granted
under  the  Company's  existing  stock  option  plans.  See Item 11,  "Executive
Compensation - Stock Option Plans." In addition,  warrants to acquire  1,083,026
shares of Common Stock currently are  outstanding.  Series B Warrants to acquire
an additional  477,953  shares of Common Stock will become  exercisable on March
29, 1999 unless the Company repays all of the  outstanding  Series B Notes prior
to that date. During the terms of such options and warrants, the holders thereof
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.
                                       20
<PAGE>
Shares Eligible for Future Sale

       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,  1998,  there  were  outstanding
13,447,777 shares of the Company's Common Stock. Of these shares,  approximately
6,141,900  shares  are  freely   transferable   without  restriction  under  the
Securities Act of 1933, as amended (the "Securities Act"),  unless they are held
by  "affiliates"  of the Company,  as that term is defined in the Securities Act
and the regulations  promulgated thereunder or unless transfer of certain shares
is  restricted   as  a  result  of   contractual   obligations.   The  remaining
approximately  7,305,900  shares  of  Common  Stock  currently  outstanding  are
"restricted  securities,"  as  that  term  is  defined  in Rule  144  under  the
Securities  Act, and may be sold only in compliance  with Rule 144,  pursuant to
registration  under the Securities  Act, or pursuant to an exemption  therefrom.
Affiliates also are subject to certain of the resale  limitations of Rule 144 as
promulgated under the Securities Act. 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  2,900,800 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.

Lack of Dividends; Restrictions on Ability to Pay Dividends in the Future

       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

       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.

Cautionary Statement Regarding Forward-Looking Statements

       Certain statements and information contained in this Report under Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations," and Item 1, "Business" 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 in the Securities Act.  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."
                                       21
<PAGE>
ITEM 2.           PROPERTIES.

       The Company  leases for a term expiring in September  1998  approximately
20,000  square  feet of  office  space in  Scottsdale,  Arizona,  for use as its
principal corporate offices. 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 sales, facilities, and maintenance operations. The Company
currently  believes  that  these  facilities  are  adequate  for its  reasonably
anticipated needs.

       The  Company's  restaurants  generally  are  located  in  single-purpose,
one-story,  freestanding  buildings  with a  capacity  of  between  90  and  150
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 15% of
total rent expense for each of fiscal 1995, 1996, and 1997. 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.
                                       22
<PAGE>
                                     PART II

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

       The Company's  Common Stock is traded on the American Stock Exchange (the
"AMEX") under the symbol "DEN." 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 since the Company's  initial public offering on
October 18, 1994.

<TABLE>
<CAPTION>
                                                                              Common Stock
                                                                              ------------
                                                                          High            Low
                                                                          ----            ---
           <S>                                                            <C>             <C>  
           1994
           ----

           Fourth Quarter (beginning October 18, 1994).............       $5.13           $3.50

           1995
           ----

           First Quarter...........................................       $4.13           $2.63
           Second Quarter..........................................        4.75            3.13
           Third Quarter...........................................        5.25            4.00
           Fourth Quarter..........................................        6.00            4.00

           1996
           ----

           First Quarter...........................................       $5.63           $3.94
           Second Quarter .........................................        5.69            3.00
           Third Quarter...........................................        5.50            3.50
           Fourth Quarter..........................................        5.13            3.13

           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
</TABLE>

           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, 1998, there were  approximately 110 holders of record
of the Company's Common Stock. On March 31, 1998, the closing sales price of the
Company's Common Stock on the AMEX was $2.19 per share.
                                       23
<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,
1997  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 31, 1994 are derived from DRC's historical financial
statements,  which 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)
                                               --------------------------------------------------------------
                                                  1993         1994         1995          1996        1997
                                                  ----         ----         ----          ----        ----
                                                                   (Dollars in thousands)
<S>                                             <C>          <C>          <C>          <C>         <C>     
Statement of Operations Data(2):
Restaurant sales..............................  $32,584      $47,323      $74,683      $241,480    $300,579
Charge for impaired assets....................       --           --          523            --      14,100
Restaurant operating income...................    3,147        4,539        6,643        22,137       9,101
Administrative expenses.......................    2,050        2,619        3,380        10,303      13,684
Operating income (loss).......................    1,328        1,320        3,263        11,834      (4,583)
Interest expense, net.........................     (736)      (1,301)      (2,467)       (9,605)    (13,655)
Net income (loss).............................      140         (341)         200         1,118     (20,977)

Other Data:
EBITDA(3).....................................  $ 2,656      $ 2,821      $ 6,722       $18,834     $18,884
Cash interest expense.........................      669        1,140        2,397         8,904      10,033
Cash provided by (used in) operating activities   2,493        2,410        7,486         9,664      (1,458)
Cash used in investing activities ............   (1,002)      (9,667)      (8,736)       (9,393)     (6,316)
Cash provided by (used in) financing activities  (1,168)       7,092        2,273         1,157       6,432
Capital expenditures..........................    1,574        9,667        8,736        11,584      10,449
Depreciation and amortization.................    1,328        1,501        2,936         7,000       9,367
Ratio of earnings to fixed charges(4).........     1.15           --         1.10          1.14          --
Number of restaurants, end of period..........       37           70          102           307         283

Balance Sheet Data:
Working capital (deficit) ....................  $(3,568)     $(6,107)     $(9,406)     $(33,029)   $(36,417)
Total assets .................................   14,529       35,028       53,785       179,189     170,264
Long-term debt, less current portion .........    2,135        7,552       10,371        69,903      39,022
Obligations under capital leases,
  less current obligations...................     4,307        7,151       19,881        24,229      39,396
Redeemable convertible preferred stock .......       --        7,397        7,501            --          --
Shareholders' equity (deficit) ...............   (1,218)         957          564        22,128       1,248
</TABLE>
---------------

(1)  The  Company's  fiscal  years 1993 through 1997 ended on December 30, 1993,
     December 28, 1994,  December  27, 1995,  January 1, 1997,  and December 31,
     1997, respectively.
(2)  The  Company  has  consummated  various  acquisitions  and has  opened  new
     restaurants  during  each of the  five  fiscal  years  shown.  Accordingly,
     revenue  increases  in  each  of  the  years  shown  arise  primarily  from
     restaurant acquisitions and openings in each year.
(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) and fiscal 1997 ($17,719,000).
                                       24
<PAGE>
ITEM 7.           MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION
                  AND RESULTS OF OPERATIONS.

Basis of Presentation

       Upon consummation of the Merger, the former  shareholders of DRC owned an
aggregate of approximately  53.0% of the outstanding voting power of the Company
immediately  following the Merger.  See Item 1,  "Business - Development  of the
Company."  Accordingly,  the Merger has been accounted for as a reverse purchase
under  generally  accepted  accounting  principles,  pursuant  to  which  DRC is
considered to be the acquiring entity and AFR the acquired entity for accounting
purposes, even though the Company is the surviving legal entity. In addition, as
permitted  under  generally  accepted  accounting  principles,   for  accounting
purposes the Merger was deemed to have occurred on March 27, 1996,  the last day
of DRC's  first  quarter  for  fiscal  1996.  As a  result,  (i) the  historical
financial  statements  of AFR for periods prior to the date of the Merger are no
longer the historical  financial  statements of the Company and therefore are no
longer presented;  (ii) the historical  financial  statements of the Company for
periods  prior to the  Merger  are  those of DRC;  (iii) all  references  to the
financial  statements  of  the  "Company"  apply  to  the  historical  financial
statements of DRC prior to and subsequent to the Merger; and (iv) any references
to "AFR" apply solely to American  Family  Restaurants,  Inc. and its  financial
statements prior to the Merger. On July 3, 1996, the Company acquired all of the
issued and outstanding common stock of BEP. The effective accounting date of the
BEP Acquisition was June 24, 1996.

       The results of operations for 1996 were materially impacted by the Merger
and the BEP  Acquisition.  During  fiscal  1996 and 1997,  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.  As a  result,  fiscal  1997  operating  results  are  not
comparable to those of fiscal 1995 and fiscal 1996. 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.

General

       During 1997 the Company (i) converted 10  non-branded  restaurants to the
Denny's concept; (ii) sold 11 non-branded  restaurants;  (iii) sold or closed 17
Denny's restaurants;  (iv) developed four new Black-eyed Pea restaurants and one
new Denny's restaurant; (v) purchased the leasehold interests in nine Black-eyed
Pea restaurants from franchisees; and (vi) closed two Black-eyed Pea restaurants
and  sold  the  related  leasehold  interests.  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.

       In March  1998,  the Company  completed  the sale of 63 Denny's and eight
non-branded  restaurants,  of which six were closed, to a Denny's franchisee for
$28.7  million.  Cash  proceeds  of  $25.2  million  were  used to (i)  repay an
outstanding  promissory  note  issued to the  seller  of BEP (the "BEP  Purchase
Note") at a $2.3  million  discount  from its  outstanding  principal  amount of
approximately  $15.3  million;  (ii)  cancel  outstanding  warrants  to  acquire
approximately 1,000,000 shares of Common Stock at an exercise price of $1.90 per
share,  which  were  issued in  connection  with the BEP  Purchase  Note;  (iii)
permanently  reduce  its  outstanding  borrowings  under the "Term  Loan" of the
credit  facility  described  below  to $1.5  million;  and  (iv)  repay  certain
equipment  operating  leases  associated  with  the  restaurants  sold  in  this
transaction.  The Company has included a charge for impaired  assets  associated
with the restaurants sold of approximately  $14.1 million,  due primarily to the
reduction  of  intangibles  of  $29.0  million,  in its  consolidated  financial
statements for fiscal 1997.

       The Company  currently  operates 104  Black-eyed  Pea  restaurants  in 14
states and  franchises  three  Black-eyed  Pea  restaurants  in two states.  The
Company operates 66 Black-eyed Pea restaurants in Texas and Oklahoma,  which the
Company  considers to be its core market for  Black-eyed  Pea  restaurants.  The
average unit sales for all  company-owned  Black-eyed Pea  restaurants  was $1.5
million and $1.4 million in fiscal 1996 and 1997, respectively, as compared with
average unit sales at restaurants in the core market of $1.6 million during both
of
                                       25
<PAGE>
those periods.  Through December 31, 1997, comparable same-store sales decreased
5.3% for all of the  Company's  Black-eyed  Pea  restaurants,  while  comparable
same-store  sales  decreased by 3.3% for Black-eyed Pea  restaurants in the core
market.  During 1997,  however,  the Company did not increase menu prices at its
Black-eyed Pea restaurants.  The guest check average at the Company's Black-eyed
Pea  restaurants  is  $7.90,   and  alcohol  and  carry-out  sales  account  for
approximately 2.1% and 11.0% of sales, respectively. In order to accommodate the
Company's  senior  lenders,  in connection  with the BEP Acquisition the Company
entered into a five-year  equipment lease with LH Leasing  Company,  Inc. Annual
payments  related to these  leases  total  approximately  $3.8  million  and are
included  in other  restaurant  operating  costs in the  Company's  consolidated
financial   statements.   See  Item  13,  "Certain   Relationships  and  Related
Transactions."

       As of December 31, 1997, the Company operated 176 Denny's  restaurants in
28  states.  The  Company's  Denny's  restaurants  that were open for a 12-month
period had average  restaurant sales of $917,000 in fiscal 1997 as compared with
$911,000 in fiscal 1996.  Excluding the results of the restaurants sold in March
1998,  average  restaurant  sales in  fiscal  1997  would  have  been  $997,000.
Comparable  store sales declined 4.6% as a result of lower guest counts,  offset
somewhat by a 3.6% increase in the average guest check to approximately $5.30 in
December  1997.  Food costs as a percentage of revenue  decreased in 1997 due to
the  withdrawal  from  promotional  value  pricing.  Labor costs  increased as a
percentage  of  revenue,   however,  due  to  minimum  wage  increases  and  the
implementation of certain health benefits for restaurant level management during
fiscal 1997.

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.
<TABLE>
<CAPTION>
                                                                                          Fiscal Year
                                                                         ------------------------------------------
                                                                            1995             1996            1997
                                                                            ----             ----            ----
<S>                                                                       <C>               <C>            <C>   
Restaurant sales:
   Denny's restaurants........................................             94.2%             62.7%          54.9%
   Black-eyed Pea restaurants.................................             --                28.6           42.9
   Other restaurants..........................................              5.8               8.7            2.2
                                                                          -----             -----          ----- 
     Total restaurant sales...................................            100.0%            100.0%         100.0%
                                                                          -----             -----          ----- 
Restaurant operating expenses:
   Food and beverage costs....................................             27.2              27.3           27.4
   Payroll and payroll related costs..........................             33.5              34.3           34.4
   Depreciation and amortization..............................              3.9               2.9            3.1
   Other operating expenses...................................             25.7              26.3           27.4
   Charge for impaired assets.................................              0.7              --              4.7
                                                                          -----             -----          ----- 
     Total restaurant operating expenses......................             91.0              90.8           97.0
                                                                          -----             -----          ----- 
Restaurant operating income...................................              9.0               9.2            3.0
Administrative expenses.......................................              4.5               4.3            4.6
                                                                          -----             -----          ----- 
Operating income (loss).......................................              4.5               4.9           (1.5)
Interest expense, net.........................................             (3.3)             (4.0)          (4.6)
Minority interest in joint ventures...........................             (0.4)              0.1            0.2
                                                                          -----             -----          ----- 
Income before income taxes and extraordinary item.............              0.8               1.0           (5.9)
Income tax provision..........................................              0.5               0.4            1.1
                                                                          -----             -----          ----- 
Income (loss) before extraordinary item.......................              0.3               0.6           (7.0)
Extraordinary loss............................................             --                (0.2)          --
                                                                          -----             -----          ----- 
Net income (loss).............................................              0.3%              0.4%          (7.0)%
                                                                          =====             =====          ===== 
</TABLE>
                                       26
<PAGE>
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,  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  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.
                                       27
<PAGE>
Fiscal 1996 Compared with Fiscal 1995

       Restaurant Sales.  Restaurant sales increased $166.8 million,  or 223.3%,
to $241.5  million in fiscal 1996 as  compared  with  restaurant  sales of $74.7
million in fiscal 1995.  This increase was primarily  attributable to restaurant
sales associated with restaurants acquired as a result of the Merger and the BEP
Acquisition during 1996.

       Food and Beverage  Costs.  Food and beverage costs  increased to 27.3% of
restaurant  sales in fiscal 1996 as compared with 27.2% of  restaurant  sales in
fiscal  1995,  primarily  due  to  higher  food  costs  at  the  Black-eyed  Pea
restaurants  and the  non-branded  restaurants.  Excluding the food and beverage
costs at the  non-branded  restaurants  but including food and beverage costs at
Black-eyed Pea  restaurants,  food and beverage costs for fiscal 1996 would have
been 27.0% of restaurant sales, a decrease of 0.2% from fiscal 1995.

       Payroll and Payroll Related Costs. Payroll and payroll related costs were
34.3% of  restaurant  sales in fiscal 1996 as compared  with 33.5% of restaurant
sales  in  fiscal  1995.  This  increase  was  primarily   attributable  to  the
non-branded  restaurants,  where payroll and payroll related costs were 38.0% of
restaurant sales. In addition,  the payroll and payroll related costs associated
with the AFR Denny's restaurants were 35.7% of restaurant sales.

       Depreciation   and   Amortization.   Depreciation   and  amortization  of
restaurant  equipment  and  leasehold   improvements,   intangible  assets,  and
pre-opening  costs totaled $7.0 million,  or 2.9% of restaurant sales, in fiscal
1996 as compared with $2.9 million, or 3.9% of restaurant sales, in fiscal 1995.
The increase of approximately  $4.1 million was attributable to the amortization
of the capital leases  associated  with new  restaurants,  the  amortization  of
intangible assets associated with the 1996 acquisitions, and the amortization of
pre-opening costs.

       Other  Operating  Expenses.   Other  operating  expenses  were  26.3%  of
restaurant  sales in fiscal 1996 as compared with 25.7% of  restaurant  sales in
fiscal 1995. The increase was primarily  attributable  to the operating costs of
36.2% of  restaurant  sales at the  non-branded  restaurants,  which  include no
franchise  costs. If the  non-branded  restaurant  results were excluded,  other
operating  costs for fiscal 1996 would have been 25.3% of  restaurant  sales,  a
decrease of 0.4% from fiscal 1995.

       Restaurant  Operating Income.  Restaurant operating income increased $8.5
million to $11.8  million in fiscal 1996 as compared with $3.3 million in fiscal
1995. This increase was principally the result of increased restaurant sales and
the factors described above.

       Administrative  Expenses.  Administrative  expenses  decreased to 4.3% of
restaurant  sales in fiscal 1996 as compared  with 4.5% of  restaurant  sales in
fiscal 1995.  This decrease was  primarily the result of increased  sales volume
without  proportionate  cost increases.  Administrative  expenses in fiscal 1996
included non-recurring Merger-related costs of approximately $1.1 million.

       Interest Expense.  Interest expense increased to $9.6 million, or 4.0% of
restaurant  sales,  in fiscal 1996 as  compared  with $2.5  million,  or 3.3% of
restaurant sales in fiscal 1995. This increase was attributable to the increased
level  of  long-term  debt  associated  with  the  1996   acquisitions  and  the
capitalized lease obligations associated with new store development.

       Income  Taxes.  The income tax  provision was $870,000 for fiscal 1996 as
compared  with the income tax  provision  of $305,000  for fiscal  1995.  Due to
certain tax credits,  the tax rate  decreased from 60.3% to 35.0% in fiscal 1995
and 1996, respectively.

Liquidity and Capital Resources

       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 $9.4 million
at December 27, 1995,  $33.0  million at January 1, 1997,  and $36.4  million at
December 31, 1997. The Company believes that it
                                       28
<PAGE>
has funded the excessive working capital deficit acquired in the Merger and that
its current  working  capital  deficit is  consistent  with the working  capital
position of restaurant  companies of similar size. The Company  anticipates that
it will continue to operate with a working capital deficit.

       The Company  historically has satisfied its capital  requirements through
credit  facilities  and  the  sale  and  leaseback  of  developed  and  acquired
restaurants  or  restaurants  converted  to the  Denny's  concept.  The  Company
requires capital  principally for the development of new restaurants and to fund
the  acquisition  and  conversion  of  existing  restaurants.  Expenditures  for
property and equipment totaled  approximately $8.7 million,  $11.6 million,  and
$10.5 million for fiscal 1995,  fiscal 1996, and fiscal 1997,  respectively.  As
described below, the Company  currently has commitments that it believes will be
adequate to meet its financing needs during 1998.

       Net cash provided by (used in) operating  activities  increased from $7.5
million in fiscal  1995 to $9.7  million in fiscal 1996 and  decreased  to $(1.5
million)  in fiscal  1997.  The  increase  in fiscal  1996 over  fiscal  1995 is
attributable to an increase in net income and the increase in  depreciation  and
amortization arising from the various acquisitions completed during fiscal 1996.
The decrease in fiscal 1997 is attributable to the reduction in accounts payable
associated  with   restaurants  sold  or  closed  and  the  payment  of  certain
liabilities assumed in connection with the Merger and the BEP Acquisition.

       Net cash used in  investing  activities  increased  from $8.7  million in
fiscal 1995 to $9.4  million in fiscal  1996 and  decreased  to $6.3  million in
fiscal 1997.  These changes are primarily  attributable  to the  acquisition  of
property  and  equipment  or the purchase of  restaurants.  In addition,  during
fiscal 1997 the Company disposed of approximately $4.1 million of various assets
acquired in the Merger and the BEP Acquisition.

       Net cash provided by financing  activities decreased from $2.3 million in
fiscal 1995 to $1.2  million in fiscal  1996 and  increased  to $6.4  million in
fiscal 1997.  Cash provided by financing  activities  arose  primarily  from the
proceeds  of  borrowing  activities   associated  with  certain  Black-eyed  Pea
locations, net of the principal reductions in long-term debt.

       In  April  1997,  the  Company  sold  11  non-branded  restaurants  to an
unrelated party for cash and notes totaling  $850,000.  The Company utilized the
proceeds  from this  transaction  for  working  capital  purposes.  The  Company
recognized  a gain of  approximately  $600,000  on this  transaction,  which  is
included as a reduction of other restaurant operating expenses.

       On July 31, 1997, the Company sold its leasehold  interests in 14 Denny's
and two  non-branded  restaurants  to an unrelated  party for $2.1 million.  The
Company  utilized the proceeds from this  transaction to permanently  repay $1.0
million  of  senior  debt  obligations  and for  working  capital  purposes.  In
conjunction with this  transaction,  the Company  recognized a gain of $250,000,
which is included as a reduction of other restaurant operating expenses.

       In two separate transactions  completed in October and November 1997, the
Company purchased from two franchisees certain assets and leasehold interests in
nine  Black-eyed Pea restaurants  located in Arizona and Florida.  In connection
with this  transaction,  the Company and one of the franchisees  settled certain
threatened  litigation.  Under this  settlement,  the Company will forego future
royalty payments from 13 franchised  restaurants located in Colorado operated by
the  franchisee.  The effect of the loss of  royalty  income  will be  partially
offset by operating income from the restaurants  acquired.  Under the settlement
agreement,  the Company also agreed that it will not operate any  restaurant  in
Colorado that competes  with the  Black-eyed  Pea concept prior to October 2002,
provided  that  the  franchisee   continues  to  utilize  the  "Black-eyed  Pea"
trademarks and is not otherwise in default under the settlement agreement during
that period. In conjunction with the closing of this  transaction,  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  $2.7  million  in cash  that has been
recorded as a deferred gain to be amortized over the life of the leases.

       On October 1, 1997,  the Company  entered  into a series of  transactions
with CNL.  The Company  utilized  the proceeds  from these  transactions,  which
totaled approximately $25.0 million, to repay senior debt obligations
                                       29
<PAGE>
of the Company. In connection with these  transactions,  on October 1, 1997, the
Company  purchased 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.  Consideration  consisted of a
$7.7 million  promissory  note,  which  amortizes over 10 years with an interest
rate of 9% per annum, and a $4.4 million subordinated convertible debenture. The
subordinated  convertible  debenture  bears  interest  of 5% per annum,  payable
quarterly,  and is convertible at the holder's  option through October 2002 into
the Company's  Common Stock at 90% of the share price  immediately  prior to the
conversion.   The  Company  subsequently  entered  into  15-year  sale-leaseback
arrangements  with CNL for the nine  Denny's  restaurants  described  above  and
received $8.0 million. No gain or loss was recognized on these transactions. The
Company   also  entered  into   equipment   notes   payable  with  CNL  totaling
approximately $12.5 million.  The notes payable are secured by certain equipment
located in 44 Denny's restaurants,  bear interest at 10% per annum, and amortize
over a seven-year period. No gain or loss was recognized in connection with this
transaction.  In addition,  the Company sold eight  buildings  located on ground
leases to CNL for proceeds of $4.6  million and entered into capital  leases for
these locations. No gain or loss was recognized on this transaction.

       In  March  1998,  the  Company  sold 63  Denny's  restaurants  and  eight
non-branded  restaurants  located in 13 states to an  unrelated  party for $28.7
million,  consisting of cash of $25.2  million and notes  totaling $3.5 million.
The Company  utilized the proceeds  from this  transaction  to (i) repay the BEP
Purchase Note at a $2.3 million  discount from its outstanding  principal amount
of  approximately  $15.3 million;  (ii) cancel  outstanding  warrants to acquire
approximately  1.0 million  shares of Common Stock at an exercise price of $1.90
per share;  (iii) permanently  reduce its outstanding  borrowings under the Term
Loan portion of its credit facility,  as described below; and (iv) repay certain
equipment operating leases associated with the sold restaurants. The Company has
included a charge for impaired assets  associated  with the restaurants  sold of
approximately  $14.1  million,  due primarily to the reduction of intangibles of
approximately $29.0 million, in its consolidated financial statements for fiscal
1997.

       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 utilized
the  proceeds  from this  transaction  to  permanently  reduce  its  outstanding
borrowings under the Term Loan portion of its credit facility.

       During fiscal 1997, the Company  converted 10 non-branded  restaurants to
the  Denny's  concept.  In  addition,   during  1997  the  Company  closed  nine
restaurants. The Company intends to continue to evaluate its existing restaurant
portfolio and to close or sell  restaurants as appropriate.  As described above,
the operating results of the Company's Denny's  restaurants have been negatively
impacted by same-store sales declines.  The Company intends to pursue a strategy
to  lessen  its  dependence  on the  Denny's  brand and has  identified  certain
geographic  markets where restaurant  dispositions may be appropriate.  Proceeds
from such  dispositions  will be used to retire  debt and to reduce the  working
capital deficit.

       The Company  intends to  continue to expand the number of its  Black-eyed
Pea restaurants in its core market through the  development of new  restaurants.
During  1997,  the  Company  opened  four new  Black-eyed  Pea  restaurants  and
purchased  nine  franchised  restaurants  located  in  Arizona,   including  the
associated  development  rights,  and  purchased  three  franchised  restaurants
located in  Florida.  The Company  believes  that the  Arizona  market  provides
significant growth  opportunities.  The Company believes that its future capital
requirements  will  be  primarily  for the  development  of new  Black-eyed  Pea
restaurants, for continued restaurant acquisitions, and for capital expenditures
related to  restaurant  maintenance.  The  Company  estimates  that its costs to
develop  and open new  Black-eyed  Pea  restaurants,  excluding  real estate and
building costs, will be approximately $350,000 to $450,000 per restaurant.

       The Company  historically has satisfied its capital  requirements through
credit  facilities and  sale-leaseback  financing.  The Company requires capital
principally  for the  development of new restaurants and to fund the acquisition
and conversion of existing restaurants.  Expenditures for property and equipment
and  intangibles  totaled  approximately  $10.5 million  during fiscal 1997. The
Company currently has commitments available from
                                       30
<PAGE>
various  lenders  in  amounts  that  it  believes  will  be  sufficient  for its
anticipated restaurant development and acquisition activities during 1998.

       In  connection  with the  Merger  and the BEP  Acquisition,  the  Company
entered into a credit facility with Banque Paribas,  as agent, and the Company's
other  senior  lenders  (the  "Credit   Facility").   The  Credit  Facility  was
subsequently  amended  and  certain  waivers  were  granted  by the  lenders  in
connection with transactions  completed by the Company during 1997 and 1998. The
Credit  Facility  currently  consists  of a term  loan  (the  "Term  Loan")  and
revolving loans (the  "Revolver").  In connection  with the Merger,  the Company
borrowed $35.0 million under the Term Loan, which was used to refinance  certain
indebtedness  of AFR and DRC  existing  prior to the Merger  and to pay  certain
transaction  expenses  incurred  in  connection  with the  Merger and the Credit
Facility.  The Company used the proceeds from various transactions during fiscal
1997,  as described  above,  to repay a portion of the Term Loan. As of December
31, 1997, the Company had outstanding  borrowings of approximately $10.1 million
under the Term Loan.  The Company  used a portion of the proceeds of the sale of
71 restaurants in March 1998 to permanently repay additional amounts outstanding
under  the  Term  Loan.  As of March  31,  1998,  the  Company  had  outstanding
borrowings of approximately $1.5 million under the Term Loan, as amended,  which
will  mature  and become  payable on June 30,  1998.  The Credit  Facility  also
includes  a $15.0  million  Revolver  that the  Company  may  utilize to finance
working capital needs, to repay the Term Loan, to make capital expenditures, and
to support  letters  of  credit.  As of  December  31,  1997,  the  Company  had
approximately  $2.3 million  available for  borrowings  under the Revolver.  The
Revolver will mature and become  payable  December 31, 2001. A Delayed Draw Term
Loan that was previously part of the Credit Facility was cancelled during fiscal
1997 in connection  with certain  amendments to the Credit  Facility and certain
waivers by the lenders.

       The  Company was not in  compliance  with  certain of its debt  covenants
under the Credit  Facility  at  December  31,  1997,  for which the  Company has
received waivers.  Based upon information currently available,  the Company does
not believe that it will be in  compliance  with its debt  covenants as of March
31, 1998. Therefore, the Company has classified its obligations under its Credit
Facility as current in its consolidated  financial statements as of December 31,
1997. The Company intends to pursue various  alternatives to either  restructure
its current  Credit  Facility  or to seek  additional  lenders.  There can be no
assurance that any refinancing or restructuring  alternatives  will be available
to the  Company  or that  such  alternatives,  if  any,  will  be  available  on
satisfactory  terms.  In  addition,  certain  holders of the Series B Notes have
deferred the  interest  due as of September  30, 1997 and March 31, 1998 and the
Company has received waivers from those holders for non-compliance of certain of
the debt covenants under the Series B Notes. See Item 13, "Certain Relationships
and Related Transactions."

       The Company  plans to further  increase its working  capital as necessary
through equity or debt financings in the public or private  securities  markets,
additional  sale-leaseback  transactions,  the  disposition  of  underperforming
restaurants,  and additional credit facilities.  The Company also intends to use
its best  efforts to redeem all of the Series B Notes prior to the date on which
the Series B Warrants become exercisable. The Company currently anticipates that
it will be  required  to  obtain  the funds  needed to repay the  Series B Notes
through the sale of equity securities or by increasing its debt financing. There
can be no assurance  that  financing for any of these purposes will be available
or will be available on satisfactory terms.

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.
                                       31
<PAGE>
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

         The Company  currently is evaluating  the Year 2000 issue as it relates
to its entire internal  computer  system.  The Company  anticipates that it will
incur internal  staff costs as well as consulting and other expenses  related to
making its computer systems Year 2000 compliant.  The Company will expense these
costs as incurred.  The Company has not yet completed the evaluation of its Year
2000  compliance  and therefore  currently is not able to quantify the cost that
may be incurred to bring its computer system into Year 2000 compliance.  Because
the  appropriate  course of action may include  replacing or  upgrading  certain
equipment or software,  the Company may incur significant costs in resolving its
Year 2000 issues. See Item 1, "Special Considerations - Year 2000 Compliance."

New Accounting Standards

       In February  1997,  the Financial  Accounting  Standards  Board  ("FASB")
issued Statement of Financial  Accounting  Standards ("SFAS") No. 128, "Earnings
per Share",  effective for both interim and annual periods ending after December
15, 1997. This statement specifies the computation, presentation, and disclosure
of earnings per share for entities  with publicly held common stock or potential
common stock.  The Company  adopted SFAS No. 128 in fiscal 1997 and earnings per
share for fiscal 1995 and 1996 have been  restated in  accordance  with SFAS No.
128 in the consolidated financial statements included elsewhere in this Report.

       In June 1997,  the FASB  issued SFAS No.  130,  "Reporting  Comprehensive
Income," which is effective for fiscal years  beginning after December 15, 1997.
The statement  changes the reporting of certain items currently  reported in the
stockholders' equity section of the balance sheet and establishes  standards for
reporting of  comprehensive  income and its  components in a full set of general
purpose  financial  statements.  The Company  will  comply  with the  disclosure
requirements set forth by this standard beginning in 1998.

       In June 1997,  the FASB also  issued  SFAS No.  131,  "Disclosures  About
Segments of an  Enterprise  and Related  Information,"  which is  effective  for
fiscal years beginning after December 15, 1997. This standard  requires segments
of a business  enterprise to be reported based on the way  management  organizes
and  evaluates   segments  within  the  Company.   The  standard  also  requires
disclosures  regarding  products and  services,  geographical  areas,  and major
customers.  The  Company  plans to  adopt  SFAS No.  131 in  1998.  The  Company
currently is evaluating the impact of this standard on its disclosures.

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 by reference.
                                       32
<PAGE>
ITEM 9.           CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE.

       As a result of the reverse  purchase  accounting  treatment  described in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Basis of  Presentation,"  the Company  determined that it was in
its best  interests  that  Deloitte & Touche LLP  ("Deloitte  & Touche"),  DRC's
independent  public  accountants  prior to the  Merger,  serve as the  Company's
independent  public  accountants  following the Merger.  Accordingly,  effective
April 29, 1996, the Company  ceased its  client-auditor  relationship  with KPMG
Peat Marwick LLP ("Peat  Marwick") and on April 29, 1996,  the Company  retained
Deloitte  &  Touche  as  its  independent  public  accountants.  The  change  in
independent  public  accountants  was  approved by the Board of Directors of the
Company,  including  all of the members of the Audit  Committee  of the Board of
Directors.

       Peat Marwick's  report on the financial  statements of AFR, which are not
included in this Report,  for the years ended  September  28, 1994 and September
27, 1995 did not contain an adverse  opinion or a disclaimer  of opinion and was
not  qualified  or  modified  as to  uncertainty,  audit  scope,  or  accounting
principles.  In connection with the two audits for the years ended September 28,
1994 and September 27, 1995, and  subsequently to April 29, 1996,  there were no
disagreements  on any matter of accounting  principles  or practices,  financial
statement disclosure, or auditing scope or procedure, which disagreement, if not
resolved  to the  satisfaction  of Peat  Marwick,  would have  caused it to make
reference  to the subject  matter of the  disagreement  in  connection  with its
report.  Prior to retaining Deloitte & Touche, no discussions took place between
the  Company and  Deloitte & Touche  regarding  the  application  of  accounting
principles  or the type of  opinion  that  might be  rendered  on the  Company's
financial  statements  since the  historical  financial  statements  of DRC,  as
audited  by  Deloitte  & Touche,  will be the  continuing  historical  financial
statements of the Company.  The Company has  authorized  Peat Marwick to respond
fully to inquiries from Deloitte & Touche.
                                       33
<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.

<TABLE>
<CAPTION>
                Name                              Age                          Position
                ----                              ---                          --------

<S>                                                <C>         <C>
Jack M. Lloyd..........................            48          Chairman of the Board, President, and Chief
                                                                  Executive Officer

William J. Howard......................            53          Executive Vice President, Secretary, and Director

William G. Cox.........................            49          Chief Operating Officer and Director

Robert J. Gentz........................            48          Executive Vice President - Franchising and 
                                                                  Development

Todd S. Brown..........................            41          Senior Vice President, Chief Financial Officer,
                                                                  Treasurer, and Director

Michael Larsen.........................            43          Vice President

John M. Holliman, III..................            44          Director

C. Alan MacDonald......................            64          Director

Fred W. Martin.........................            67          Director
</TABLE>

       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,  and Masterview  Window
Company, a privately held company.

       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.
                                       34
<PAGE>
       Robert J. Gentz has served as Executive Vice President - Franchising  and
Development  of the Company since January 1997.  Mr. Gentz  oversees  restaurant
acquisitions  and  sales,  franchise  operations,   new  restaurant  development
activities,  and related  financings.  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.

       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.

       Michael  Larsen has served as a Vice President of the Company since March
29, 1996.  From 1993 until March 1996,  Mr. Larsen  served as Vice  President of
Real Estate and Development of DRC. Mr. Larsen directs the due diligence of site
and building  acquisitions  and coordinates the construction of new restaurants.
From April 1984 to April 1993,  Mr.  Larsen was the  Operations  Manager for B&B
Properties, an advisor to several publicly traded real estate investment trusts.

       John M.  ("Jock")  Holliman,  III has served as a director of the Company
since March 29, 1996. Mr. Holliman served as a director of DRC from January 1995
until March 1996. Mr.  Holliman is the sole general  partner of AGP  Management,
L.P., which is the managing general partner of Valley Ventures,  L.P., a limited
partnership  formed in 1993 to purchase the venture capital  portfolio of Valley
National  Bank of  Arizona.  From 1985 to 1993,  Mr.  Holliman  served as Senior
Managing  Director of Valley  National  Investors,  Inc.,  a wholly  owned Small
Business Investment  Corporation  subsidiary of Valley National Bank of Arizona.
Mr. Holliman also currently serves as a director of Voxel, OrthoLogic Corp., and
Pilgrim America Capital Corp., each of which are publicly held corporations, and
several  other  privately  held  corporations.  Mr.  Holliman  also  serves as a
director of several non-profit organizations.

       C. Alan  MacDonald  has served as a director  of the  Company  since July
1993. Mr. MacDonald currently is a General Partner of the Marketing  Partnership
Inc., a packaged goods  marketing  consulting  firm. From 1992 through 1994, Mr.
MacDonald  was  Chairman  of the Board and Chief  Executive  Officer  of Lincoln
Snacks Company and continues to serve on that company's Board of Directors. From
1983 to 1995, Mr. MacDonald  served as President and Chief Executive  Officer of
the Nestle Foods Corporation. From 1955 through 1982, Mr. MacDonald was employed
by the Stouffers  Corporation,  serving as President of The Stouffer Frozen Food
Company from 1971 through 1982. Mr. MacDonald  currently serves as a director of
several privately held corporations.

       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.

       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.   Messrs.   Holliman  and  
                                       35
<PAGE>
MacDonald  constitute the Audit  Committee;  Messrs.  Holliman,  MacDonald,  and
Martin  constitute the Compensation  and 1992 Stock Option Plan Committees;  and
Messrs.  Lloyd and Howard  constitute  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 January 1, 1997, 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 except that (i) William G. Cox
filed a late  report on Form 4 covering  two  transactions,  and (ii)  Robert J.
Gentz  filed  a late  report  on Form 5 with  respect  to his  ownership  of the
Company's  securities as of the date on which he became an executive  officer of
the Company.
                                       36
<PAGE>
ITEM 11.          EXECUTIVE COMPENSATION.

       The following table sets forth information concerning the compensation of
each of the Company's  Chief  Executive  Officers and the four other most highly
compensated  executive  officers whose cash salary and bonuses exceeded $100,000
during the fiscal year ended December 31, 1997 (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            1997        $520,000         --              --                  --
   Board, President, and Chief            1996         375,200         --              --                  --
   Executive Officer(2)                   1995         312,000         --              --                  --

William J. Howard, Executive              1997        $260,000         --              --                  --
   Vice President and Secretary (3)       1996         187,600         --              --                  --
                                          1995         156,000         --              --                  --

William G. Cox, Chief Operating           1997        $220,000         --              --                  --
   Officer                                1996         221,795(4)      --           300,000              $15,921

Robert J. Gentz, Executive Vice           1997        $166,027(5)      --           100,000                --
   President - Franchising and 
   Development

Todd S. Brown, Vice President,            1997        $127,372         --              --                  --
   Chief Financial Officer, and           1996         115,700      $75,000         124,800                --
   Treasurer(3)                           1995          91,000         --              --                  --
</TABLE>
------------------

(1)  Each of the Named Executive  Officers  received  certain  perquisites,  the
     value of which did not exceed 10% of their salary during fiscal 1997.
(2)  Mr. Lloyd became the Company's  President and Chief Executive  Officer upon
     consummation  of the Merger on March 29,  1996,  and  became the  Company's
     Chairman of the Board on July 9, 1996.  Amounts  shown for periods prior to
     March 29, 1996 represent payments to Mr. Lloyd for services as an executive
     officer of DRC prior to the Merger.  See Item 7,  "Management's  Discussion
     and Analysis of Financial  Condition  and Results of  Operations - Basis of
     Presentation."
(3)  Each of Messrs.  Howard and Brown became executive  officers of the Company
     upon  consummation  of the  Merger on March  29,  1996.  Amounts  shown for
     periods prior to March 29, 1996 represent  payments to each such person for
     services as an  executive  officer of DRC prior to the Merger.  See Item 7,
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations - Basis of Presentation."
(4)  Represents amounts accrued or paid beginning on March 29, 1996, the date of
     Mr. Cox's employment with the Company.
(5)  Represents  amounts  accrued or paid beginning on January 6, 1997, the date
     of Mr. Gentz' employment with the Company.
                                       37
<PAGE>
Option Grants

       The following table sets forth certain  information with respect to stock
options  granted to the Named  Exectuive  Officers  during the fiscal year ended
December 31, 1997.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                              Individual Grants                     
                           ---------------------------------------------------------   Potential Realizable Value
                                           Percentage                                       at Assumed Annual
                            Number of       of Total                                      Rates of Stock Price
                            Securities      Options                                         Appreciation for
                            Underlying     Granted to      Exercise                           Option Term(2)
                             Options      Employees in       Price       Expiration    --------------------------
       Name                 Granted(#)    Fiscal Year      ($/Sh)(1)        Date            5%           10%
       ----                 ----------    ------------     ---------        ----            --           ---
<S>                          <C>              <C>            <C>           <C>           <C>           <C>     
Jack M. Lloyd.........          --             --             --             --             --            --
William J. Howard.....          --             --             --             --             --            --
William G. Cox........          --             --             --             --             --            --
Robert J. Gentz.......       100,000          100%           $3.44         1/6/07        $216,183      $547,849
Todd S. Brown.........          --             --             --             --             --            --
</TABLE>
---------------

(1)    Twenty-five  percent of the options  were vested and  exercisable  on the
       date of grant.  The remainder of the options vest and become  exercisable
       in three equal annual installments  beginning on the first anniversary of
       the date of grant.
(2)    Potential  gains  are  net  of  the  exercise  price,  but  before  taxes
       associated with the exercise.  Amounts represent  hypothetical gains that
       could be achieved for the  respective  options if exercised at the end of
       the option term. The assumed 5% and 10% rates of stock price appreciation
       are provided in accordance  with the rules of the Securities and Exchange
       Commission  and do not represent the Company's  estimate or projection of
       the future price of the Company's Common Stock.  Actual gains, if any, on
       stock option  exercises  will depend upon the future market prices of the
       Company's Common Stock.

Option Holdings

       The  following  table sets forth  information  concerning  the number and
value of all options held at December 31, 1997, by the Named Executive Officers.

                             YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                         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
               ----                                  -----------     -------------     -----------   -------------

<S>                                                    <C>              <C>                <C>           <C>
Jack M. Lloyd.....................................       --               --               N/A           N/A
William J. Howard.................................       --               --               N/A           N/A
William G. Cox....................................     120,000          180,000            $0            $0
Robert J. Gentz...................................      25,000           75,000            $0            $0
Todd S. Brown.....................................      49,920           74,880            $0            $0
</TABLE>
---------------                                                             
 (1)     The exercise prices of all options held by the Named Executive Officers
         were  greater than the  Company's  Common Stock of $1.9375 per share on
         December 31, 1997.
                                       38
<PAGE>
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.

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. 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  provides for his employment until
March 29, 1999,  subject to extension  for  additional  one-year  periods  under
mutually agreeable terms and conditions. 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 -
Franchising and Development 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
                                       39
<PAGE>
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  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 of 1986,  as amended (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
                                       40
<PAGE>
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.

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 100% vest 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."
                                       41
<PAGE>
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
1997. None of such individuals had any contractual or other  relationships  with
the Company during fiscal 1997 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)
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.
                                       42
<PAGE>
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, 1998 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.

<TABLE>
<CAPTION>
                                                                          Number            Percentage
Name and Address of Beneficial Holder(1)                               of Shares(2)        Ownership(2)
----------------------------------------                               ------------        ------------

Directors and Executive Officers
--------------------------------
<S>                                                                    <C>                    <C>  
Jack M. Lloyd                                                          3,176,504              23.6%
William J. Howard                                                      1,553,752              11.6%
William G. Cox                                                           181,000(3)            1.3%
Robert J. Gentz                                                           50,000(4)            *
Todd S. Brown                                                             77,680(5)            *
Michael Larsen                                                            60,000(6)            *
John M. Holliman, III                                                     22,436(7)            *
C. Alan MacDonald                                                         47,500(8)            *
Fred W. Martin                                                            16,000(9)            *
All directors and executive officers as a group (9 persons)            5,188,872              37.4%

Non-Management 5% Shareholders
------------------------------
BancBoston Ventures, Inc.(10)                                          2,124,352              15.8%
Jeffrey D. Miller (11)                                                   689,451               5.1%
</TABLE>
--------------
*   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 C-240, Scottsdale, Arizona 85253.
(2)  The  numbers  and  percentages  shown  include  the shares of Common  Stock
     actually  owned as of March 31,  1998 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,  1998  upon the  exercise  of  options  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  1,000 shares of Common Stock and 180,000 shares of Common Stock
     issuable upon the exercise of vested options.
(4)  Represents  50,000 shares of Common Stock  issuable upon exercise of vested
     options.
(5)  Represents 2,800 shares of Common Stock and 74,880 shares issuable upon the
     exercise of vested options.
(6)  Represents  60,000  shares of Common  Stock  issuable  upon the exercise of
     vested options.
(7)  Represents  9,436 shares of Common Stock and 10,000  shares  issuable  upon
     exercise of vested options held by Mr.  Holliman and 3,000 shares of Common
     Stock  beneficially  owned by Mr. Holliman as trustee under a trust for the
     benefit of his mother.
(8)  Represents  47,500  shares of Common  Stock  issuable  upon the exercise of
     vested options.
(9)  Represents  6,000 shares of Common Stock held by Mr.  Martin and his spouse
     and 10,000 shares 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.
                                       43
<PAGE>
(11) Mr. Miller is a former  officer and director of the Company.  Mr.  Miller's
     address is 13845 East Laurel Lane, Scottsdale, Arizona 85259.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       During 1995, DRC entered into leases for two restaurant  properties owned
by Lloyd/Howard L.L.C. ("Lloyd/Howard"),  a limited liability company controlled
by Jack M. Lloyd  (Chairman of the Board and Chief  Executive  Officer of DRC at
that time) and William J. Howard (President and a director of DRC at that time).
Lloyd/Howard  acquired these two properties  and certain other  properties  from
Kettle  Restaurants,  Inc. in consideration of the assumption by Lloyd/Howard of
environmental  liabilities  associated  with the two  properties  leased by DRC.
During  1996,  Lloyd/Howard  sold one of the  properties  to CNL and the Company
entered into a lease with CNL for that location.  The second restaurant was sold
to a third party during fiscal 1997. Prior to that sale, the Company did not pay
any rent to Lloyd/Howard with respect to that restaurant during fiscal 1997.

       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.

       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. On September 30,
1997 and  March  31,  1998,  Messrs.  Lloyd  and  Howard  deferred  interest  of
approximately $728,000 and $364,000, respectively, due as of each of those dates
on the Series B Notes and granted  waivers  with  respect to  non-compliance  of
certain  of the  debt  covenants  under  the  Series B Notes as of each of those
dates.

       During fiscal 1997,  the Company made various  advances to Jack M. Lloyd.
Such advances totaled $378,000 as of December 31, 1997.
                                       44
<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

<TABLE>
<CAPTION>
Exhibit No                                                 Description of Exhibit
----------                                                 ----------------------

<S>               <C>                                                
    2.1           Amended and Restated  Agreement and Plan of Merger,  dated as of August 9, 1995, between American
                  Family Restaurants, Inc. and Denwest Restaurant Corp.(1)
    2.4           List of  Schedules to Amended and Restated  Agreement  and Plan of Merger,  dated as of August 9,
                  1995, between American Family Restaurants, Inc. and Denwest Restaurant Corp.(1)
    2.5           Stock Purchase Agreement dated May 31, 1996, between BEP Holdings,  Inc. and DenAmerica  Corp.(2)
    3.1           Articles of Restatement of the Articles of Incorporation of American Family Restaurants, Inc. and
                  Articles of Amendment thereto.(3)
    3.1A          Articles of Amendment to the Articles of Incorporation  of DenAmerica  Corp., as filed on July 2,
                  1997.(4)
    3.2           Amended and Restated Bylaws of American Family Restaurants, Inc.(5)
    3.3           Certificate of Merger of Denwest Restaurant Corp. into American Family Restaurants, Inc.(6)
    4.1           Form of Indenture between  DenAmerica Corp. and State Street Bank and Trust Company,  as trustee,
                  relating to the Series A Notes (including the Form of Series A Note).(6)
    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).(6)
    4.4           Form of Series B Common Stock Purchase Warrant.(1)
    4.5           Common Stock Purchase Warrant dated March 29, 1996, issued to Banque Paribas.(6)
    4.6           Supplemental  Indenture  (Series B Notes)  between  DenAmerica  Corp.  and State  Street Bank and
                  Trust Company, as trustee(2)
    4.7           Common Stock Purchase Warrant dated July 3, 1996, issued to BEP Holdings, Inc.(2)
    4.8           Common Stock Purchase Warrant dated July 3, 1996, issued to Banque Paribas(2)
    10.1          American Family Restaurants, Inc. 1992 Stock Option Plan.(3)
    10.1A         American Family Restaurants, Inc. Amended and Restated 1992 Stock Option Plan.(3)
    10.2          American Family Restaurants, Inc. Directors Stock Option Plan.(3)
    10.23         Joint Venture Agreement of Densouth Restaurants II Joint Venture,  entered into September 4, 1992
                  and  effective  January 2, 1992,  by and between  Great  Restaurants  of the  Midsouth,  Inc. and
                  Densouth  Foods II, Ltd.,  including  First  Amendment  thereto,  dated  September  4, 1992,  and
                  Amendment thereto, dated April 15, 1993.(3)
    10.28         Letter Agreement  between Great American  Restaurants,  Inc. and Denny's,  Inc., dated August 25,
                  1992, regarding reorganization.(3)
</TABLE>
                                                        45
<PAGE>
<TABLE>
<CAPTION>
Exhibit No                                                 Description of Exhibit
----------                                                 ----------------------

<S>               <C>                                                
    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.)(3)
    10.32A        Schedule of warrants substantially identical to Exhibit 10.32.(3)
    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.)(3)
    10.33A        Schedule of registration rights agreements substantially identical to Exhibit 10.33.(3)
    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.)(3)
    10.60A        Letter Agreement  between American Family  Restaurants,  Inc. and Denny's,  Inc., dated September
                  13, 1994, regarding change of control provisions.(3)
    10.60B        Letter Agreement  between American Family  Restaurants,  Inc. and Denny's,  Inc., dated September
                  13, 1994, regarding non-compete provisions.(3)
    10.60A        Schedule of franchise agreements substantially identical to Exhibit 10.60.(3)
    10.65         Form of Warrant  Agreement  between American Family  Restaurants,  Inc. and Fahnestock & Co. Inc.
                  for 290,000 shares of Common Stock.(3)
    10.66         Stock Pledge and Assignment between American Family Restaurants,  Inc., and Denny's,  Inc., dated
                  June 13, 1994.(3)
    10.67         Letter  Agreement  between CNL Group,  Inc.  and  American  Family  Restaurants,  Inc.  regarding
                  sale-leaseback transactions, dated August 18, 1994.(3)
    10.68         Letter  Agreement from CNL Group,  Inc. to American Family  Restaurants,  Inc., dated October 13,
                  1994, regarding the commitment letter.(3)
    10.73         Employment  Agreement  dated  December 8, 1995  between  American  Family  Restaurants,  Inc. and
                  William G. Cox.(1)
    10.75         Asset  Purchase  Agreement,  dated  as of  September  8,  1995,  by and  among  Fables-Innkeepers
                  Management, Inc. and American Family Restaurants, Inc.(1)
    10.76         General Bill of Sale and Assignment of Assets,  Properties  and Business of Certain  Restaurants,
                  dated as of January 1, 1995,  by and between  DenGlass  Foods Joint  Venture and American  Family
                  Restaurants, Inc.(1)
    10.78         Amendment to American Family Restaurants, Inc. Amended and Restated 1992 Stock Option Plan.(1)
    10.79         Letter  Agreement,  dated December 20, 1995, from American Family  Restaurants,  Inc. to Denny's,
                  Inc. and Denwest Restaurant Corp.(1)
    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.(1)
    10.81         Franchise  Development  Agreement,  dated  November 9, 1994,  between  Denny's,  Inc. and Denwest
                  Restaurant Corp.(1)
    10.82         Executive  Employment  Agreement,  dated  November  9, 1994,  between  Jack M. Lloyd and  Denwest
                  Restaurant Corp.(1)
    10.83         Executive  Employment  Agreement,  dated November 9, 1994,  between William J. Howard and Denwest
                  Restaurant Corp.(1)
    10.84         Executive  Employment  Agreement,  dated  November 9, 1994,  between  William S. Leto and Denwest
                  Restaurant Corp.(1)
    10.85         Executive Employment  Agreement,  dated as of November 9, 1994, between Todd S. Brown and Denwest
                  Restaurant Corp.(1)
    10.86         Amended and Restated Joint Venture  Agreement of Denwest Joint Venture  between Denwest Corp. and
                  Denwest Foods, Ltd. dated December 30, 1991.(1)
</TABLE>
                                                        46
<PAGE>
<TABLE>
<CAPTION>
Exhibit No                                                 Description of Exhibit
----------                                                 ----------------------

<S>               <C>                                                
    10.87         Joint Venture  Agreement of Denwest II Joint Venture  between L&H  Restaurant  Corp.  and Denwest
                  Foods II, Ltd. dated December 30, 1991.(1)
    10.89         Commitment Letter,  dated as of January 5, 1996, by and among American Family Restaurants,  Inc.,
                  Denwest Restaurant Corp. and Banque Paribas.(1)
    10.90         Intercreditor  Agreement among DenAmerica Corp.,  certain holders of DenAmerica's Series B Notes,
                  and State Street Bank and Trust Company.(6)
    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).(6)
    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(2)
    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.(4)
    10.93         Security  Agreement dated as of February 29, 1996,  between  DenAmerica Corp. and Banque Paribas,
                  as Agent.(6)
    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.(6)
    10.95         Stock Option Agreement dated March 29, 1996, between DenAmerica Corp. and William G. Cox.(6)
    10.96         Senior  Subordinated  Promissory  Note dated July 3, 1996, in the  principal sum of  $15,000,000,
                  payable by DenAmerica Corp. to BEP Holdings, Inc.(2)
    10.97         Registration  Rights  Agreement  dated  as of July 3,  1996,  between  DenAmerica  Corp.  and BEP
                  Holdings, Inc.(2)
    10.98         Intercreditor  Agreement among DenAmerica Corp.,  certain holders of DenAmerica's Series B Notes,
                  and State Street Bank and Trust Company(2)
    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.(2)
    10.100        Form of Lease dated July 3, 1996, between FFCA Acquisition Corp. and DenAmerica Corp.(2)
    10.101        Form of Sublease dated July 3, 1996, between DenAmerica Corp. and Black-eyed Pea U.S.A., Inc.(2)
    10.102        Form of Sublease dated July 3, 1996, between DenAmerica Corp. and Texas BEP, L.P.(2)
    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.(2)
    10.104        Equipment  Purchase  Agreement and Bill of Sale dated July 3, 1996,  between LH Leasing  Company,
                  Inc. and Texas BEP, L.P.(2)
    10.105        Equipment Lease dated July 3, 1996, between LH Leasing Company, Inc. and DenAmerica Corp.(2)
    10.106        Equipment  Sublease dated July 3, 1996,  between  DenAmerica  Corp. and Black-eyed  Pea,  U.S.A.,
                  Inc.(2)
    10.107        Equipment Sublease dated July 3, 1996, between DenAmerica Corp. and Texas BEP, L.P.(2)
    10.108        Asset Purchase Agreement effective as of July 3, 1996, among Mid-American Restaurants, Inc., Haig
                  V. Antranikian, and DenAmerica Corp.(2)
    10.109        Stock Option Agreement dated April 29, 1996, between DenAmerica Corp. and Todd S. Brown(7)
    10.110        DenAmerica  Corp.  1996 Stock Option  Plan.(8)
    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.(4)
    10.112        5-Year 5% Convertible  Redeemable  Debenture dated September 30, 1997 in the principal  amount of
                  $4,400,000.(4)
    10.113        Subordinated Promissory Note dated September 30, 1997 in the principal amount of $7,700,000.(4)
</TABLE>
                                                        47
<PAGE>
<TABLE>
<CAPTION>
Exhibit No                                                 Description of Exhibit
----------                                                 ----------------------

<S>               <C>                                                
    10.114        Registration  Rights Agreement dated as of September 30, 1997 between  DenAmerica  Corp., and CNL
                  Growth Corp.(4)
    10.115        Agreement dated as of September 30, 1997 by and among DenAmerica Corp.,  Beck Holdings,  Inc. and
                  Unigate Holdings, NV.(4)
    10.116        Asset Purchase Agreement dated January 27, 1998, among DenAmerica Corp., Olajuwon Holdings, Inc.,
                  and Akinola Olajuwon(9)
    10.117        First  Amendment  to Asset  Purchase  Agreement  dated March 16, 1998 between  DenAmerica  Corp.,
                  Olajuwon Holdings, Inc., and Akinola Olajuwon(9)
    10.118        Promissory Note dated March 25, 1998,  from Olajuwon  Holdings,  Inc. to DenAmerica  Corp. in the
                  principal amount of of $1,800,000(9)
    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(9)
    12.1          DenAmerica Corp. Ratio of Income to Fixed Charges.
    16.           Letter Re: Change in Certifying Accountant.(10)
    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.(1)
    27.1          Financial Data Schedule.
</TABLE>
---------------

(1)   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.
(2)   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.
(3)   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.
(4)   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.
(5)   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.
(6)   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.
(7)   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.
(8)   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.
(9)   Incorporated  by  reference to the  Exhibits to the  Registrant's  Current
      Report on Form 8-K as filed on April 9, 1998.
(10)  Incorporated  by  reference to the  Exhibits to the  Registrant's  Current
      Report on Form 8-K as filed on May 3, 1996.
                                       48
<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 14th day of
April, 1998.

                                        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.

<TABLE>
<CAPTION>
             Signature                                   Title                                Date
             ---------                                   -----                                ----

<S>                                       <C>                                           <C>
  /s/ Jack M. Lloyd                       Chairman of the Board, President, and         April 14, 1998
--------------------------------------    Chief Executive Officer, (Principal
Jack M. Lloyd                             Executive Officer)

  /s/ William J. Howard                   Executive Vice President, Secretary,          April 14, 1998
--------------------------------------    and Director
William J. Howard

  /s/ William G. Cox                      Chief Operating Officer and Director          April 14, 1998
--------------------------------------
William J. Howard

  /s/ Todd S. Brown                       Vice President, Chief Financial               April 14, 1998
--------------------------------------    Officer, Treasurer, and Director
Todd S. Brown                             (Principal Financial and Accounting
                                          Officer)

  /s/ John M. Holliman, III                Director                                     April 14, 1998
--------------------------------------
John M. Holliman, III

  /s/ Fred W. Martin                      Director                                      April 14, 1998
--------------------------------------
Fred W. Martin

  /s/ C. Alan MacDonald                   Director                                      April 14, 1998
--------------------------------------
C. Alan MacDonald
</TABLE>
                                       49
<PAGE>
                                DENAMERICA CORP.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----

<S>                                                                                                             <C>
Independent Auditors' Report....................................................................................F-2

Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997.......................................F-3

Consolidated Statements of Operations for each of three years in the period ended
         December 31, 1997......................................................................................F-5

Consolidated Statements of Changes in Shareholders' Equity for each of the three years in
         the period ended December 31, 1997.....................................................................F-6

Consolidated Statements of Cash Flows for each of the three years in the period ended
         December 31, 1997......................................................................................F-7

Notes to Consolidated Financial Statements......................................................................F-8
</TABLE>
                                      F-1
<PAGE>
Deloitte &
  Touche LLP
------------             -------------------------------------------------------
                         Suite 1200                    Telephone: (602) 234-5100
                         2901 North Central Avenue     Facsimile: (602) 234-5186
                         Phoenix, Arizona 85012-2799


INDEPENDENT AUDITORS' REPORT


The 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, 1996 and 1997, and the related
consolidated statements of operations,  shareholders' equity, and cash flows for
each  of  the  three  years  in  the  period  ended  December  31,  1997.  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, 1996 and 1997,  and the results of their  operations  and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.


/s/ DELOITTE & TOUCHE LLP

March 27, 1998
                                       F-2
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                   December 31,
ASSETS                                                                          1996         1997
<S>                                                                          <C>          <C>      
CURRENT ASSETS:
  Cash and cash equivalents                                                  $   2,609    $   1,267
  Receivables                                                                    4,102        3,192
  Inventories                                                                    3,520        3,244
  Other current assets                                                           4,151        5,564
  Assets held for sale                                                                       28,700
                                                                             ---------    ---------
          Total current assets                                                  14,382       41,967
PROPERTY AND EQUIPMENT - Net                                                    65,535       61,328
INTANGIBLE ASSETS - Net                                                         80,618       51,545
DEFERRED INCOME TAXES                                                            6,669        5,312
OTHER ASSETS                                                                    11,985       10,112
                                                                             ---------    ---------
TOTAL                                                                        $ 179,189    $ 170,264
                                                                             ---------    ---------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                                           $  18,202    $  16,511
  Accrued compensation                                                           8,487        6,354
  Accrued taxes                                                                  4,636        4,522
  Other current liabilities                                                      8,424        8,363
  Current portion of long-term obligations                                       7,662       42,634
                                                                             ---------    ---------
          Total current liabilities                                             47,411       78,384
LONG-TERM OBLIGATIONS - Less current portion                                    94,132       78,418
OTHER LONG-TERM LIABILITIES                                                     15,518       12,214
                                                                             ---------    ---------
          Total liabilities                                                    157,061      169,016
                                                                             ---------    ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
  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, 13,399,277 and 13,447,777 shares, respectively       1,340        1,344
  Additional paid-in capital                                                    35,706       35,799
  Accumulated deficit                                                          (14,918)     (35,895)
                                                                             ---------    ---------
          Total shareholders' equity                                            22,128        1,248
                                                                             ---------    ---------
TOTAL                                                                        $ 179,189    $ 170,264
                                                                             =========    =========
</TABLE>

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,
                                                  1995            1996            1997

<S>                                          <C>             <C>             <C>         
RESTAURANT SALES                             $     74,683    $    241,480    $    300,579
                                             ------------    ------------    ------------
RESTAURANT OPERATING EXPENSES:
  Food and beverage cost                           20,343          65,966          82,255
  Payroll and payroll related costs                25,025          82,794         103,451
  Other operating expenses                         19,213          63,583          82,305
  Depreciation and amortization                     2,936           7,000           9,367
  Charge for impaired assets                          523                          14,100
                                             ------------    ------------    ------------
          Total operating expenses                 68,040         219,343         291,478
                                             ------------    ------------    ------------
RESTAURANT OPERATING INCOME                         6,643          22,137           9,101
ADMINISTRATIVE EXPENSES                             3,380          10,303          13,684
                                             ------------    ------------    ------------
OPERATING INCOME (LOSS)                             3,263          11,834          (4,583)
INTEREST EXPENSE - Net                              2,467           9,605          13,655
MINORITY INTEREST IN JOINT VENTURES                   291            (256)           (519)
                                             ------------    ------------    ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEM                                  505           2,485         (17,719)
INCOME TAX PROVISION                                  305             870           3,258
                                             ------------    ------------    ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM               200           1,615         (20,977)
EXTRAORDINARY LOSS - Net of tax of $331                               497
                                             ------------    ------------    ------------
NET INCOME (LOSS)                                     200           1,118         (20,977)
PREFERRED STOCK DIVIDEND AND ACCRETION               (593)           (149)
                                             ------------    ------------    ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
  SHAREHOLDERS                               $       (393)   $        969    $    (20,977)
                                             ============    ============    ============

BASIC AND DILUTED INCOME (LOSS) PER SHARE:
  Before extraordinary item                  $      (0.06)   $       0.14    $      (1.56)
                                             ============    ============    ============
  Applicable to common shareholders          $      (0.06)   $       0.08    $      (1.56)
                                             ============    ============    ============
BASIC AND DILUTED WEIGHTED AVERAGE
  SHARES OUTSTANDING:
    Basic                                       6,937,500      11,698,000      13,437,000
                                             ============    ============    ============
    Diluted                                     6,937,500      11,844,000      13,437,000
                                             ============    ============    ============
</TABLE>
                                      F-4
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                            Additional 
                                                  Common      Paid-in    Accumulated
                                                   Stock      Capital      Deficit       Total
                                                                                     
<S>                                              <C>         <C>          <C>          <C>     
BALANCE, 1994                                    $      7    $  3,260     $ (2,310)    $    957
                                                                                     
  Preferred stock accretion                                      (104)                     (104)
                                                                                     
  Preferred stock dividends                                                   (489)        (489)
                                                                                     
  Net income                                                                   200          200
                                                 --------    --------     --------     --------
                                                                                     
BALANCE, 1995                                           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, 1996                                       1,340      35,706      (14,918)      22,128
                                                                                     
  Stock options exercised                               4          93                        97
                                                                                     
  Net loss                                                                 (20,977)     (20,977)
                                                 --------    --------     --------     --------
                                                                                     
BALANCE, 1997                                    $  1,344    $ 35,799     $(35,895)    $  1,248
                                                 ========    ========     ========     ========
</TABLE>

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,
                                                                   1995        1996        1997
<S>                                                             <C>         <C>         <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                             $    200    $  1,118    $(20,977)
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
      Depreciation and amortization                                2,936       7,000       9,367
      Amortization of deferred financing costs                       144         350         763
      Charge for impaired assets                                     523                  14,100
      Deferred income taxes                                          145         870       3,221
      Deferred rent                                                  196         249         645
      Other - net                                                   (417)        241      (1,368)
      Changes in operating assets and liabilities:
        Receivables                                                  (75)     (2,129)        910
        Inventories                                                 (394)       (425)       (439)
        Other current assets                                         (14)       (647)       (727)
        Accounts payable and accrued liabilities                   4,242       3,037      (6,953)
                                                                --------    --------    --------
          Net cash provided by (used in) operating activities      7,486       9,664      (1,458)
                                                                --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                              (7,003)     (9,879)     (8,147)
  Purchase of intangibles                                         (1,733)     (1,705)     (2,302)
  Net cash paid to acquire fair value of assets                                 (231)
  Proceeds from sale of assets                                                 2,422       4,133
                                                                --------    --------    --------
          Net cash used in investing activities                   (8,736)     (9,393)     (6,316)
                                                                --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal reductions of long-term debt                          (1,154)    (11,655)    (25,018)
  Proceeds from borrowings                                         4,031      13,361      31,353
  Other                                                             (604)       (549)         97
                                                                --------    --------    --------
          Net cash provided by financing activities                2,273       1,157       6,432
                                                                --------    --------    --------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                                 1,023       1,428      (1,342)
CASH AND CASH EQUIVALENTS, BEGINNING  OF YEAR                        158       1,181       2,609
                                                                --------    --------    --------
CASH AND CASH EQUIVALENTS, END OF YEAR                          $  1,181    $  2,609    $  1,267
                                                                ========    ========    ========
</TABLE>

                                                                     (Continued)
                                      F-6
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                      1995        1996       1997
<S>                                                                 <C>         <C>        <C>     
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
    Cash paid for:
      Interest                                                      $  2,397    $  8,904   $ 10,033
                                                                    --------    --------   --------
      Income taxes                                                  $    100    $     36   $     37
                                                                    --------    --------   --------
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                                          $ 12,700    $  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>

See notes to consolidated financial statements.                      (Concluded)
                                      F-7
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE FISCAL YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
(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 31 states.  At December  31,  1997,  the Company  operated  176 Denny's
      restaurants,  104 Black-eyed Pea restaurants and three other  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.

      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 1995, 1996 and 1997 fiscal years, which
            represent  the 52 week period ended  December 25, 1995,  the 53 week
            period ended  January 1, 1997 and the 52 week period ended  December
            31, 1997,  have been  described in the  financial  statements as the
            years ended December 31, 1995, 1996 and 1997.

      b.    Cash equivalents consist of highly liquid  investments,  principally
            certificates of deposit,  purchased with initial maturities of three
            months or less.

      c.    Inventories  consist 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 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
            which were sold in March 1998 (Note 14).

      e.    Property,  equipment  and leased  properties  are  recorded at cost.
            Depreciation is computed under the straight-line depreciation method
            over the estimated  useful lives of the assets which range from 4-20
            years.  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-8
<PAGE>
      f.    Franchise  rights  - The  franchise  agreements  with  Denny's  Inc.
            require the Company to pay a franchise fee for each unit opened. The
            fees  are   capitalized   and   amortization   is  recorded  on  the
            straight-line method over the lives of the franchise agreements. The
            franchise agreements provide for a term of 20 years. 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.

      g.    Franchise  revenue - The Company  franchises the right to operate 29
            and 3  Black-eyed  Pea  restaurants  at the  end of 1996  and  1997,
            respectively,  to third parties. Royalties are based on a percentage
            of franchise  restaurant  sales and are  recognized in the period in
            which services are provided and the related  franchisee sales occur.
            Royalty revenues,  which are included in restaurant  revenues,  were
            approximately  $621 and $1,142  during  fiscal  years 1996 and 1997,
            respectively.

      h.    Preopening costs,  goodwill and intangible assets - Preopening costs
            are direct  costs  incurred  in  connection  with the opening of new
            restaurants are deferred and amortized on a straight-line basis over
            a one-year period following the opening of the restaurant.  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. As a result of
            the planned disposition of assets (Note 14), the Company recorded an
            impairment loss of $14,100.

      i.    Deferred  financing costs are amortized using the effective interest
            method  over the terms of the  related  loans and  included in other
            assets.  Deferred  financing  costs,  net of  amortization,  totaled
            $3,801 and $4,456 at December 31, 1996 and 1997, respectively.

      j.    Deferred rent represents the accrual resulting from recording rental
            expense on a straight-line  basis. As of December 31, 1996 and 1997,
            deferred rent totaled $2,195 and $2,511, respectively.

      k.    Earnings  per share - The  Company  presents  earnings  per share in
            accordance with Statement of Financial  Standards No. 128,  Earnings
            per Share ("SFAS No. 128").  SFAS No. 128  prescribes a presentation
            of basic  earnings per share,  which is  calculated  utilizing  only
            weighted average common shares  outstanding,  and a diluted earnings
            per share,  which  gives  effect to all  dilutive  potential  common
            shares outstanding during the reporting periods.  Earnings per share
            for 1995 and 1996 has been restated in accordance with SFAS No. 128.

            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,  and the total  outstanding  shares of the Company's  common
            stock.  Earnings per share for the year ended December 31, 1995, was
            computed  based upon the shares of  DenAmerica  Corp.  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.

      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.
                                      F-9
<PAGE>
      m.    Reclassifications - Certain  reclassifications have been made to the
            1995  and  1996   financial   statements  to  conform  to  the  1997
            presentation.

      n.    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.

      o.    Fair  value  - The  fair  value  of  notes  receivable  approximates
            carrying value due to the short-term  nature of the notes.  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.

      p.    New accounting  standards - In June 1997,  the Financial  Accounting
            Standards Board issued Statement of Financial  Accounting  Standards
            No. 130,  Reporting  Comprehensive  Income ("SFAS No. 130"), and No.
            131,  Disclosures  about  Segments  of  an  Enterprise  and  Related
            Information  ("SFAS No. 131"). Both of these standards are effective
            for fiscal years  beginning  after  December 15, 1997.  SFAS No. 130
            changes the  reporting of certain  items  currently  reported in the
            stockholders'  equity section of the balance sheet and requires that
            comprehensive income and its components be prominently  displayed in
            the financial statements.  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.  The
            Company will implement the interim and annual  disclosures  required
            under these standards during 1998.

2.    ACQUISITIONS AND DIVESTITURES

      During 1996, the company  primarily  expanded the number of restaurants it
      operates through certain mergers and acquisitions as discussed below:

            The total  purchase  price of the Merger in 1996 was  $31,400.  This
            amount was  allocated to the assets of AFR acquired and  liabilities
            of AFR assumed,  based upon their  estimated  fair value as of March
            27, 1996.  Assets  acquired and  liabilities  assumed were deemed to
            have fair values  substantially equal to their historic book values,
            except for property and equipment,  certain  intangible  assets, and
            certain  liabilities  related to the costs  associated  with closing
            certain  restaurants.   Restaurant  closing  costs  of  $6,000  were
            recorded in connection with the Merger.

            On  July  3,  1996,  the  Company  acquired  all of the  issued  and
            outstanding common stock of Black-eyed Pea U.S.A., Inc. ("BEP") from
            BEP Holdings,  Inc.  ("BEP  Holdings")  pursuant to a Stock Purchase
            Agreement (the "BEP Acquisition").  In accordance with the terms and
            conditions of the Stock Purchase Agreement, the effective accounting
            date of the BEP  Acquisition  was June 24, 1996.  The purchase price
            for the stock of BEP  consisted  of (i) cash of $50,000,  and (ii) a
            promissory note in the principal amount of $15,000.

            The BEP Acquisition has been accounted for using the purchase method
            of  accounting  with the total  purchase  price of  $65,000.  Assets
            acquired  and  liabilities  assumed  were deemed to have fair values
            substantially  equal to  their  historic  book  values,  except  for
            property and equipment,  intangible assets, deferred and current tax
            accounts and certain  liabilities  associated  with closing  certain
            restaurants.  Restaurant  closing  costs of $1,500 were  recorded in
            connection with the acquisition.
                                      F-10
<PAGE>
            Additionally, during 1996, the Company sold the assets related to 23
            restaurants  operated under the "Ike's" and "Jerry's" trade names to
            Mid-American Restaurants, Inc. ("Mid-American").  As payment for the
            restaurants, Mid-American issued to the Company a promissory note in
            the  principal  amount  of $4,600  (the  "Mid-American  Note").  The
            Mid-American  Note is secured by the assets sold,  requires  monthly
            payments  of $65 to $85,  and bears  interest at the rate of 10% per
            annum  through June 30, 2001,  11% per annum  through June 30, 2002,
            and 12% per annum  through June 30, 2003.  All unpaid  principal and
            interest  on the  Mid-American  Note will be due and payable on June
            30, 2003.

      The following represents the summary pro forma results of operations as if
      the Merger and the BEP Acquisition had occurred at the beginning of fiscal
      1995.  The  historical  accounts of BEP include (i) store closing costs of
      $10,200  during the period ended December 31, 1995, and (ii) losses on the
      disposition  of assets of $717 and $229 for the periods ended December 31,
      1995 and December 31, 1996,  respectively.  These  amounts are included in
      the pro forma results of operations shown below. The pro forma results are
      not necessarily indicative of the results that will occur in the future.

                                                      1995         1996
                                                   (52 weeks)   (53 weeks)

      Restaurant revenues                          $ 327,035    $ 336,589
      Income (loss) before extraordinary item         (1,634)      (3,952)
      Net income (loss)                               (1,634)      (4,449)
      Earnings (loss) per share                        (0.13)       (0.38)


      During 1997, the Company (i) converted 10  non-branded  restaurants to the
      Denny's  concept;  (ii) sold 11  non-branded  restaurants;  (iii)  sold or
      closed 17 Denny's restaurants;  (iv) developed four new Black-eyed Pea and
      one new Denny's restaurants; (v) purchased the leasehold interests in nine
      Black-eyed  Pea  restaurants  from   franchisees;   and  (vi)  closed  two
      Black-eyed Pea restaurants and sold the related leasehold interests. 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.  See  Note 14 for  information
      regarding the disposition of additional restaurants subsequent to December
      31, 1997.

      In connection with the restaurant sales, the Company  recognized a gain of
      approximately  $850,  which is included as a reduction of other restaurant
      operating expenses.

      In connection with the BEP franchisee transaction,  the Company and one of
      the  franchisees  settled  certain  threatened   litigation.   Under  this
      settlement,  the  Company  will forego  future  royalty  payments  from 13
      franchised restaurants located in Colorado operated by the franchisee. The
      effect of the loss of royalty income will be partially offset by operating
      income from the restaurants  acquired.  In conjunction with the closing of
      the BEP franchisee transaction,  CNL acquired certain assets directly from
      the BEP 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 to be amortized over the life of the leases.
                                      F-11
<PAGE>
      In October 1997, the Company  entered into a series of  transactions  with
      CNL Group,  Inc.  ("CNL").  The Company  utilized the proceeds  from these
      transactions,  which totaled  approximately  $25,000, to repay senior debt
      obligations of the Company.  In connection  with these  transactions,  the
      Company  purchased  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
      the nine  Denny's  restaurants  described  above 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  $12.5 million.  No gain or loss was recognized on
      these transactions.

3.    PROPERTY AND EQUIPMENT

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

                                                           1996      1997

      Buildings                                          $21,440   $32,093
      Restaurant equipment                                27,690    29,069
      Leasehold improvements                              19,468    12,360
      Other                                                7,951     2,451
                                                         -------   -------

      Total                                               76,549    75,973
      Less accumulated depreciation and amortization      11,014    14,645
                                                         -------   -------

      Equipment and leasehold improvement - net          $65,535   $61,328
                                                         =======   =======


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

                                                       1996          1997

      Buildings                                      $19,457       $30,110
      Other                                            7,059        11,368
                                                     -------       -------
      Total                                           26,516        41,478
      Less accumulated amortization                    4,021         6,106
                                                     -------       -------
      Total                                          $22,495       $35,372
                                                     =======       =======


      Depreciation  and amortization  expense was $1,977,  $4,594 and $5,324 for
      the fiscal years ended 1995, 1996 and 1997, respectively.

      In connection with the  disposition of restaurants  subsequent to December
      31,  1997  described  in Note 14,  the  Company  reclassified  $11,616  of
      property and equipment to assets held for sale.
                                      F-12
<PAGE>
4.    INTANGIBLE ASSETS

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

                                                       1996          1997

      Goodwill                                       $78,799       $52,653
      Franchise rights                                 2,238         1,960
      Pre-opening costs                                2,382         3,697
      Favorable lease arrangements                     1,059         1,130
                                                     -------       -------
      Total                                           84,478        59,440
      Less accumulated amortization                    3,860         7,895
                                                     -------       -------
      Intangible assets - net                        $80,618       $51,545
                                                     =======       =======


      Amortization  expense  was $959,  $2,406 and  $4,043 for the fiscal  years
      ended 1995, 1996 and 1997, respectively.

      In connection with the  disposition of restaurants  subsequent to December
      31,  1997  described  in Note 14,  the  Company  reclassified  $29,000  of
      goodwill to assets held for sale.

5.    OTHER CURRENT LIABILITIES

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

                                                          1996       1997

      Accrued insurance                                  $1,500     $2,022
      Estimated closed restaurant obligations             1,000      1,000
      Rent                                                1,848        452
      Due to franchisor                                   1,068        315
      Interest                                              615      2,544
      Other                                               2,393      2,030
                                                         ------     ------
      Total accrued liabilities                          $8,424     $8,363
                                                         ======     ======


      In 1996 and 1997, other long-term  liabilities includes long-term reserves
      of $5,690 and $3,491,  respectively,  for estimated obligations for closed
      restaurants and $5,100 and $1,473, respectively, for estimated obligations
      for insurance.

6.    RESERVES FOR STORE CLOSINGS

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

                                             1995        1996        1997

      Beginning Balance                     $  584      $  871      $6,971
      Additions (Note 2)                       523       7,150
      Less charges                             236       1,050       2,480
                                            ------      ------      ------
      Ending Balance                        $  871      $6,971      $4,491
                                            ======      ======      ======
                                      F-13
<PAGE>
7.    DEBT OBLIGATIONS

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

                                                             1996      1997

      LONG-TERM OBLIGATIONS:
        Obligations under credit facility                  $39,190
        CNL obligations                                               22,673
        Series B subordinated notes (face value $18,250)    15,204    15,690
        BEP purchase note                                   14,901
        Other notes payable                                    608       659
        Capital lease obligations (Note 8)                  24,229    39,396
                                                           -------   -------
        Total long-term obligations                        $94,132   $78,418
                                                           =======   =======

      CURRENT PORTION OF LONG-TERM OBLIGATIONS:
        Obligations under credit facility                  $ 5,500   $22,777
        CNL obligations                                                1,885
        BEP purchase note                                             15,285
        Other notes payable                                    283       206
        Capital lease obligations (Note 8)                   1,879     2,481
                                                           -------   -------
        Total current obligations                          $ 7,662   $42,634
                                                           =======   =======


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

      (a)   Credit Facility

            In conjunction with the Merger and the BEP acquisition (Note 2), the
            Company  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 term loan
            and a $15,000  revolving  credit loan.  These loans bear interest at
            150 basis points over prime, which was 8.5% at December 31, 1997. As
            of December  31, 1997,  the Company had  outstanding  borrowings  of
            $10,050 under the term loan and $12,727  under the revolving  credit
            loan. In connection  with the sale of certain  restaurants  in March
            1998 (Note 14),  the  Company  repaid  $8,550 of the term loan.  The
            remaining  balance  of the term loan is due as of June 30,  1998 and
            the revolving  credit loan matures in December 2001. At December 31,
            1997, the fair value of the Credit  Facility  approximates  carrying
            value as the balance due is current.  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,  1997,  the fair value of the  warrants is
            $889.

            The Company was not in compliance with certain of its debt covenants
            under the  Credit  Facility  at  December  31,  1997,  for which the
            Company has received  waivers  through  March 25,  1998.  Based upon
            information  currently available,  the Company does not believe that
            it will be in compliance
                                      F-14
<PAGE>
            with its debt  covenants  beyond the date of its waiver.  Therefore,
            the Company has classified its obligations under the Credit Facility
            as current in the consolidated  financial  statements as of December
            31, 1997.  The Company  intends to pursue  various  alternatives  to
            either  restructure  its current Credit  Facility or seek additional
            lenders.

      (b)   CNL Obligations

            As described in Note 2, in October 1997, the Company  entered into a
            series of  transactions  with CNL. As a result,  the Company entered
            into  certain  promissory  notes  totaling  $13,250.  The notes bear
            interest at 10% payable  monthly,  mature in November  2004, and are
            collateralized  with certain  equipment assets located in 44 Denny's
            restaurants.  At December 31, 1997, the fair value of the promissory
            notes  approximate  carrying value as the interest rate approximates
            borrowing rates currently available to the Company.

            In addition, in October 1997 the Company purchased CNL's interest in
            three  joint  ventures,   which  operated  a  total  of  16  Denny's
            restaurants,   for  consideration  of  (i)  a  $7,700   subordinated
            promissory  note,  bearing  interest at 9%,  payable  quarterly  and
            maturing in September 2007; and (ii) a $4,400 face value Convertible
            Redeemable  Debenture bearing interest at 5%, recorded net of a $658
            discount at December 31, 1997, with interest only payable  quarterly
            and maturing in September 2002. At December 31, 1997, the fair value
            of the subordinated  promissory note approximates  carrying value as
            the rate  approximates  borrowing rates  currently  available to the
            Company.  The fair value of the convertible  redeemable debenture is
            $4,400.

      (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 warrants to purchase an aggregate
            of 666,000 shares of the Company's common stock at an exercise price
            of $0.01 per  share.  Certain  holders  of the  Series B Notes  have
            deferred the  interest  due as of  September  30, 1997 and March 31,
            1998 and the Company has  received  waivers  from those  holders for
            noncompliance  of certain of the debt  covenants  under the Series B
            Notes. The fair value of the Series B Notes at December 31, 1997, is
            $18,250.

      (d)   BEP Purchase Note

            The BEP purchase note ("BEP Note") is an unsecured obligation of the
            Company  in the  principal  amount of  $15,285.  The BEP Note  bears
            interest at 12% and matures  March 31, 2002. As part of a litigation
            settlement  agreement  with the holder of the BEP Note in  September
            1997, the Company has the option to repurchase  the promissory  note
            for $13,000 on or before March 27, 1998.  In addition,  if repaid by
            March  27,  1998,   common  stock   purchase   warrants  to  acquire
            approximately  1,000,000 shares of Common Stock at an exercise price
            of $1.90  per  share  will be  canceled.  Because  of the  Company's
            intention to repay the BEP Note to obtain the discount, the BEP Note
            was  classified  as current at December 31,  1997.  The BEP Note was
            repaid and the warrants canceled as of March 27, 1998 (Note 14). The
            fair value of the BEP Note at December 31, 1997, is $13,000.
                                      F-15
<PAGE>
      The aggregate annual maturities of long-term debt, excluding capital lease
      obligations,  for the  years  subsequent  to  December  31,  1997,  are as
      follows:

      1998                                                   $40,153
      1999                                                     2,091
      2000                                                     2,300
      2001                                                     2,534
      2002                                                     2,791
      Thereafter                                              29,306
                                                             -------
      Total                                                  $79,175
                                                             =======


8.    LEASES

      The  Company's   operations   utilize  leased  property,   facilities  and
      equipment.  At  December  31,  1997,  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 20 years,  exclusive  of options to renew.  The leases  have
      expiration  dates  through  June  2015 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, 1997, and restaurants sold as described in Note 14
      are as follows:

<TABLE>
<CAPTION>
                                                                                   Operating Leases
                                                                                ----------------------
                                                                                  Minimum    Minimum
                                                                        Capital    Lease     Sublease
                                                                        Leases    Payments   Payments

<S>                                                                    <C>        <C>        <C>      
      1998                                                             $  6,853   $ 25,555   $ (5,731)
      1999                                                                6,405     24,729     (5,406)
      2000                                                                5,687     24,063     (5,356)
      2001                                                                5,467     23,817     (5,368)
      2002                                                                5,481     23,301     (5,227)
      Subsequent years                                                   54,748    208,562    (21,090)
                                                                       --------   --------   --------
      Total                                                              84,641   $330,027   $(48,178)
      Less imputed interest - interest rates ranging from 10% to 17%     42,764   ========   ========
                                                                       --------
      Present value of minimum capital lease obligation                  41,877
      Less current portion of capital lease obligation                    2,481
                                                                       --------
      Long-term portion of capital lease obligation                    $ 39,396
                                                                       ========
</TABLE>


      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.  Sold
      units are discussed in Notes 2 and 14.
                                      F-16
<PAGE>
      The following is a summary of rental expense,  excluding sublease amounts,
      under all operating leases for the fiscal years ended:

                                           1995         1996         1997

      Minimum rentals                    $ 5,150      $17,852      $19,060
      Contingent rentals                     282          823          510
                                         -------      -------      -------
      Total rent expense                 $ 5,432      $18,675      $19,570
                                         =======      =======      =======


9.    INCOME TAXES

      Income taxes (benefit)  provisions as of the fiscal years ended consist of
      the following:

                                               1995       1996       1997
      Current:
        Federal                               $  160                $   37
      Deferred:
        Federal                                  123     $  680      2,727
        State                                     22        190        494
                                              ------     ------     ------
      Total deferred                             145        870      3,221
                                              ------     ------     ------

      Total income tax provision              $  305     $  870     $3,258
                                              ======     ======     ======


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

<TABLE>
<CAPTION>
                                                               1995           1996           1997
                                                                                        
<S>                                                          <C>            <C>            <C>      
      Computed expected tax expense (benefit)                $    177       $    869       $ (6,205)
      State income taxes - net of federal benefit                  25            124           (886)
      Nondeductible expenses/(primarily goodwill)                                267          11,191    
      FICA tip credits and other                                  103           (390)          (842)
                                                             --------       --------       --------
      Total                                                  $    305       $    870       $  3,258
                                                             ========       ========       ========
</TABLE>
                                                                              

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

                                                                1996      1997
      Current deferred income tax assets:
        Accrued self insurance and contingent losses          $ 2,701   $   827
        Other accrued expenses                                    254       264
                                                              -------   -------
      Total current deferred income tax assets included in
        other current assets                                  $ 2,955   $ 1,091
                                                              =======   =======
      Non-current deferred income tax assets (liabilities):
        Store closing                                         $ 2,721   $ 1,991
        Intangibles                                            (3,549)   (4,214)
        Net operating loss carryforward                         6,126     9,716
        Valuation allowance                                    (2,789)   (2,789)
        Alternative minimum tax credit carryforward             1,370     2,073
        Depreciation, capitalized leases and deferred gain      1,909     1,584
        Impairment of assets (Note 14)                                   (4,588)
        Other                                                     881     1,539
                                                              -------   -------
      Net non-current deferred income tax assets              $ 6,669   $ 5,312
                                                              =======   =======
                                      F-17
<PAGE>
      As of December  31,  1997,  the Company has  approximately  $24,502 of net
      operating loss carryforwards that expire beginning in 2004 and alternative
      minimum tax credit  carryforwards  of  approximately  $2,073.  The Company
      maintains  a  valuation  allowance  of  $2,789  relating  to  certain  net
      operating loss carryforwards acquired in connection with the Merger.

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
                                                                   
      AFR 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
                                                      ==========      =====
                                                                 

      The following table summarizes information about stock options outstanding
at December 31, 1997:


<TABLE>
<S>                                                                     <C>             <C>
      Range of exercise prices                                          $2.00 - $4.00   $4.75 - $6.00
      Shares outstanding in range                                             865,300         397,500
      Weighted-average exercise price                                   $        3.73   $        5.26
      Weighted-average remaining contractual life                                7.68            7.48
      Shares currently exercisable                                            480,420         229,500
      Weighted-average exercise price of shares currently exercisable   $        3.58   $        5.49
</TABLE>
                                                                
                                      F-18
<PAGE>
      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 Statement of Financial  Accounting Standards
      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 and 1997 would have been adjusted to the pro
      forma amounts indicated below:


<TABLE>
<CAPTION>
                                                                            1996       1997

<S>                                                                       <C>       <C>        
      Net income (loss) applicable to common shareholders - as reported   $   969   $  (20,977)
                                                                          =======   ==========
      Net income (loss) applicable to common shareholders - pro forma     $   707   $  (21,239)
                                                                          =======   ==========
      Basic and diluted income (loss) per share - as reported             $  0.08   $    (1.56)
                                                                          =======   ==========
      Basic and diluted income (loss) per share - pro forma               $  0.06   $    (1.56)
                                                                          =======   ==========
</TABLE>


      For 1996,  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
      50%; risk free interest rates ranging from 6% to 7%; and expected lives of
      five years.

12.   EARNINGS PER SHARE

      Earnings per share is calculated as follows:

<TABLE>
<CAPTION>
                                                              1995        1996        1997

<S>                                                         <C>         <C>         <C>      
      Income (loss) before extraordinary item               $    200    $  1,615    $(20,977)
      Less:  Extraordinary loss                                             (497)
      Preferred stock dividend and accretion                    (593)       (149)
                                                            --------    --------    --------
      Net (loss) income applicable to common shareholders       (393)        969     (20,977)
      Shares basic income per share                            6,938      11,698      13,437
      Dilutive effect of common stock equivalents                            146
                                                            --------    --------    --------
      Shares diluted income per share                       $  6,938    $ 11,844    $ 13,437
                                                            ========    ========    ========
      Basic and diluted (loss) income per share:
        Before extraordinary item                           $  (0.06)   $   0.14    $  (1.56)
                                                            ========    ========    ========
        Applicable to common shareholders                   $  (0.06)   $   0.08    $  (1.56)
                                                            ========    ========    ========
</TABLE>
                                      F-19
<PAGE>
13.   RELATED PARTY TRANSACTIONS

      During fiscal years ended  December 31, 1995,  1996 and 1997,  the Company
      entered into a number of transactions with officers and/or shareholders of
      the  Company or  affiliated  companies.  The  following  summarizes  those
      transactions for the fiscal years then ended:


                                                     1995     1996     1997

      Advances due from officers and shareholders   $   35   $  435   $  378
                                                    ======   ======   ======
      Note receivable from shareholders             $2,600   $2,600   $2,600
                                                    ======   ======   ======
      LH Leasing (described below)                           $1,902   $3,804
                                                             ======   ======
      Lease expense paid to shareholders            $   40   $  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.

      The note receivable from  shareholder,  which is included in other current
      assets at December 31, 1997,  bears  interest at 6% and is due in November
      1998.  Related  parties of the  Company  are the holders of $18,250 of the
      Series B Notes (discussed in Note 7).

14.   SUBSEQUENT EVENTS

      In March  1998,  the  Company  completed  the sale of 63 Denny's and eight
      non-branded restaurants, of which six were closed, to a Denny's franchisee
      for gross proceeds $28,700.  Net cash proceeds of $25,200 were used to (i)
      repay the BEP 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 Common  Stock at an  exercise
      price of $1.90 per share,  which were  issued in  connection  with the BEP
      Note; (iii) permanently reduce the Company's outstanding  borrowings under
      the term loan of the Credit  Facility  to $1,500;  and (iv) repay  certain
      equipment  operating  leases  associated with the restaurants sold in this
      transaction.  The  Company  has  included  a charge  for  impaired  assets
      associated   with  the   restaurants   sold  of   approximately   $14,100,
      representing the write-off of intangibles.

      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
      utilized the proceeds  from this  transaction  to  permanently  reduce its
      outstanding borrowings under the term loan portion of its Credit Facility.
                                      F-20
<PAGE>
15.   QUARTERLY DATA (UNAUDITED)

      The  following  table  presents  selected  unaudited  quarterly  operating
      results for the  two-year  period ended  December  31,  1997.  The Company
      believes that all necessary  adjustments have been included in the amounts
      shown below to present fairly the related quarterly results.

<TABLE>
<CAPTION>
                                                                       1996
                                                  ----------------------------------------------
                                                   1st Qtr.    2nd Qtr.    3rd Qtr.    4th Qtr.
                                                  (13 weeks)  (14 weeks)  (13 weeks)  (13 weeks)
                                                  ----------  ----------  ----------  ----------
                                                                                      
<S>                                                <C>         <C>         <C>         <C>     
      Restaurant sales                             $ 20,161    $ 59,012    $ 84,599    $ 77,708
      Operating (loss) income                          (178)      3,873       5,897       2,242
      (Loss) income before                                                            
        extraordinary item                             (677)        697       1,782        (187)
      Net (loss) income                              (1,174)        697       1,782        (187)
      Net (loss) income applicable to                                                 
        common shareholders                          (1,323)        697       1,782        (187)
      Basic and diluted (loss) income per share:                                      
        Before extraordinary item                  $  (0.10)   $   0.05    $   0.13    $  (0.01)
        Applicable to common shareholders          $  (0.19)   $   0.05    $   0.13    $  (0.01)
</TABLE>                                                                   
                                                                  
<TABLE>                                                             
<CAPTION>                                                           
                                                                       1997           
                                                  ----------------------------------------------
                                                   1st Qtr.    2nd Qtr.    3rd Qtr.    4th Qtr.
                                                  (13 weeks)  (13 weeks)  (13 weeks)  (13 weeks)
                                                  ----------  ----------  ----------  ----------
                                                                                      
<S>                                                <C>         <C>         <C>         <C>     
      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)
</TABLE>                                                        

                                   * * * * * *
                                      F-21