HOST INTERNATIONAL INC /DE/
10-K, 1999-03-30
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                       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 JANUARY 1, 1999

                                       OR

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

           FOR THE TRANSITION PERIOD FROM ___________ TO ____________

                          COMMISSION FILE NO. 33-95060

                            HOST INTERNATIONAL, INC.

                    DELAWARE                      52-124233
                    --------                      ---------             
         (State or Other Jurisdiction   (I.R.S. Employer Identification Number)
      of Incorporation or Organization)


              6600 ROCKLEDGE DRIVE
               BETHESDA, MARYLAND                  20817
               ------------------                  -----                   
      (Address of principal executive offices)   (Zip Code)

                              (301) 380-7000
            (Registrant's telephone number, including area code)


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,  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 this
Form 10-K.

                       DOCUMENTS INCORPORATED BY REFERENCE
                Notice of 1999 Annual Meeting and Proxy Statement
                      of Host Marriott Services Corporation



<PAGE>




                                                      
                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Host International, Inc. (the "Company"), a wholly-owned subsidiary of Host
Marriott  Services  Corporation  ("Host  Marriott  Services"),  is  the  leading
provider of food, beverage and retail concessions at airports, on tollroads, and
in shopping malls, with facilities at nearly every major commercial  airport and
tollroad in the United States.

       The  Company  operates   primarily  in  the  United  States  through  its
subsidiaries.  The Company  manages six  tollroad  contracts  for Host  Marriott
Tollroads,  Inc. ("Host Marriott Tollroads"),  a wholly-owned subsidiary of Host
Marriott  Services.  The  Company  also has  international  airport  concessions
operations in The  Netherlands,  New Zealand,  Australia,  Canada,  Malaysia and
People's Republic of China.

     The Company's operations are grouped into three business segments: Airports
(including gift and news retail outlets in off-airport locations), Travel Plazas
and Shopping Malls, which represented 83.5%,  14.7% and 1.8%,  respectively,  of
total revenues in 1998. See Note 12 to the Consolidated Financial Statements for
financial information about the Company's business segments.

       The Company also  receives  fees for managing six tollroad  contracts for
Host Marriott Tollroads.

BUSINESS STRATEGY

      The Company's  strategic objective is to generate higher revenues and cash
flows by increasing  revenues per enplaning  passenger  ("RPE") and revenues per
vehicle ("RPV"),  as well as maximizing real estate at its existing  concessions
facilities,  retaining existing contracts,  gaining incremental business through
securing  new  contracts  in core  markets  and  expanding  profitably  into the
international  food and  beverage  and  shopping  mall  food  court  concessions
markets.  Specifically,  key elements of the Company's business strategy include
the following:

REVENUE GROWTH AT EXISTING LOCATIONS

     The Company continues to increase the average amount spent by each customer
by  transforming  core markets  from  generic  offerings to a blend of local and
internationally known branded concepts,  improving customer service and offering
innovative facility designs.  The Company has the largest portfolio of brands in
the industry with more than 100  franchised,  licensed or  internally  developed
brands that are familiar to frequent  travelers.  The Company leads the industry
in brand development by researching customer  preferences,  targeting the latest
trends in retail as well as food and beverage,  identifying  the best brands and
then working to adapt them into its operating environment.  In 1998, the Company
continued to adapt and rollout successful unique and premium niche brands to its
portfolio,  including Cheesecake Factory, California Pizza Kitchen, Chili's too,
Victoria's Secret, Lands End and Johnston and Murphy.

     Branded  concept  revenues in all of the  Company's  venues have grown at a
compound  annual  growth rate of 15.1% over the last three years.  Revenues from
branded concepts increased by 14.9% during 1998 and accounted for $456.8 million
of the  Company's  total  annual  revenues.  The  majority of this  increase was
related to the continued expansion of branded sales at airports and on tollroads
as well as  revenues  from the  heavily  branded  mall food court  segment.  The
Company's  exposure to any one brand is limited  given the  diversity  of brands
that are offered.

RETAINING EXISTING CONTRACTS

     The Company has  maintained its market  leadership  position by striving to
provide  outstanding  service to its customers and maintaining high standards in
maintenance and innovation at each of its concession  facilities.  The Company's
strong  relationships  with airport and highway  authorities  and its successful
concession  operations  have enabled the Company to retain the vast  majority of
its concession contracts.  Since the beginning of 1996, the 


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Company has  retained  81.9% of contracts  managed or operated  that were up for
renewal, weighted by contract size.

     The  Company  is  committed  to  creating   opportunities  for  woman-  and
minority-owned businesses and currently participates with such businesses in the
substantial  majority  of its airport  concessions  contracts.  While  increased
participation  by woman-  and  minority-owned  businesses  are  expected  in the
future,  the  impact  of this  industry  trend on future  revenue  growth in the
airport segment is expected to be more than offset by operating  initiatives and
the addition of branded concessions.

     During the past few years,  several contracts have been negatively affected
by  airport  authorities  fracturing  master  contracts  into  several  separate
contracts.  However,  the  Company  has been  successful  in  retaining  a major
operating presence at most locations through its development of unique,  branded
concepts.

SECURING NEW CONTRACTS IN CORE MARKETS

     The Company's core operating markets consist of domestic airport and travel
plaza  concessions.  The Company's business  development  organization is widely
recognized as among the most  experienced  and innovative in the industry with a
demonstrated  track record of securing  new  contracts  at  attractive  economic
returns.  Securing  new  contracts  requires  considerable  management  time and
financial resources.  The individuals in the business  development  organization
provide the Company with the  expertise  and depth to pursue  multiple  projects
simultaneously.  Since 1996, the Company has secured eight new contracts in core
markets, with estimated annual revenues of $67.1 million.

EXPANDING PROFITABLY INTO NEW MARKETS AND VENUES

     The Company has identified  international food and beverage concessions and
shopping mall food courts as its primary growth markets. Since 1996, the Company
has secured 14 new contracts in growth markets with estimated annual revenues of
$91.0 million.

     During  1998,  the  Company  commenced   operations  at  the  Kuala  Lumpur
International Airport in Malaysia and added a new international airport contract
at  China's  Shenzhen  Huangtian  International  Airport,  which  increased  the
Company's presence to six countries outside of the United States.

     The Company  believes  that food court  opportunities  in large malls align
well with the operating  skills and brand expertise of the Company's  management
team. The Company  developed a concession model for shopping mall food courts in
late 1996 and since  that time has had great  success in  changing  the way real
estate developers view their food courts. By providing mall developers with food
courts  having  branded  concepts  operated  by  trained  and  highly  motivated
employees,  their leasing and property management activities are simplified.  In
addition,  the Company believes that its operating  skills,  brand portfolio and
brand expertise,  compared to the skills of individual  operators,  will provide
mall  developers  with  better  overall  returns  and  superior  service to mall
customers.

     During 1998, the Company opened its fourth mall food court at  Independence
Center  Mall near  Kansas  City,  Missouri  and its fifth mall food court at the
Leesburg  Corner Premium Outlets in Leesburg,  Virginia.  These mall food courts
are expected to generate  approximately  $6.0 million in annualized  revenues by
2000.

     The Company announced four new mall contracts in 1998. First,  there was an
agreement with Forest City Ratner  Companies to develop and manage 35,000 square
feet of food and beverage operations in its 42nd Street Entertainment and Retail
Project  located in New York's  Times  Square.  This  project will be one of the
Company's largest mall and entertainment  projects with annual sales expected to
exceed $15.0 million once  construction  of the units has been completed in late
1999. The second contract was a 12-year deal with The Taubman Company to operate
the food and beverage  concessions  in a 7,000 square foot food court in the 1.0
million square foot MacArthur Center in Norfolk, Virginia, which opened in March
of 1999.  The third  contract was a ten-year deal with Glimcher  Realty Trust to
operate the food and beverage  concessions in a 10,800 square


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<PAGE>



foot food court in the 1.3 million square foot Jersey Gardens Mall in Elizabeth,
New  Jersey,  beginning  in the late Fall of 1999.  The  fourth  contract  was a
ten-year  deal with  Michael  Swerdlow  Companies,  Inc. to operate the food and
beverage concessions in a 9,000 square foot food court in the 1.4 million square
foot Dolphin Mall in Miami-Dade County,  Florida,  beginning in 2000. These four
new  contacts,  as well as the Concord  Mills Mall  contract  announced  in 1997
(opening  late 1999),  are expected to generate  over $50 million in  annualized
revenues.


AIRPORT CONCESSIONS

     The Company is the leading provider of airport food,  beverage,  and retail
concessions  in the  United  States.  The  Company  operates  concessions  at 63
domestic airports, 8 international  airports and 17 off-airport  locations.  The
Company's  portfolio of airport  contracts is highly  diversified in the U.S. in
terms of  geographic  location  and airport  terminal  type and size.  No single
airport contract constitutes a material portion of the Company's total revenues.

     Revenues in the Airport segment,  which include domestic and  international
airports as well as food, beverage,  gift and news retail outlets in off-airport
locations,  totaled  $1,028.8  million  and  $956.7  million  in 1998 and  1997,
respectively.  This segment  represented 83.5% of total Company revenues in both
1998 and 1997.

     Revenues from airport concessions were $985.5 million and $913.5 million in
1998 and 1997,  respectively.  The  concentration of revenues from the Company's
ten largest airport  contracts was 29.3% of the Company's total revenues in 1998
and 29.4% of total revenues in 1997.  Airport  revenues have grown at a compound
annual growth rate of 3.4% over the last three years.  Revenues from off-airport
locations increased slightly to $43.3 million in 1998.

     All of the Company's airport  concessions are operated under contracts with
original  terms  typically  ranging from 5 to 15 years.  Contracts are generally
awarded  by  airport  authorities  through  a  competitive  process,  but  lease
extensions are often negotiated  before contracts expire.  The  weighted-average
life remaining on the Company's airport contracts was approximately 7.0 years at
the end of 1998 compared with 7.2 years at the end of 1997. Rents paid under the
contracts  averaged 16.0% of the Company's  total airport  revenues in both 1998
and 1997.  Rent  payments are  typically  determined  as a  percentage  of sales
subject  to a minimum  annual  guarantee,  which may be stated as either a fixed
dollar amount per year, a percentage of the prior year's rental  obligation,  or
calculated on a per enplaning  passenger  basis.  During 1998, rent payments for
most of the Company's airport contracts exceeded the minimum annual guarantee on
those contracts.

     The Company's  off-airport  concession contracts usually have initial terms
of five or more  years.  The  Company  leases its  premises  at a fee,  which is
negotiated at the time the concession contract is awarded.  The weighted-average
life  remaining  on  the  Company's  17  off-airport  concession  contracts  was
approximately 1.8 years at the end of 1998.

OPERATING LOCATIONS

     The Company  operates or manages  concessions  facilities  at the following
airports:

     UNITED STATES:  Anchorage,  AK; Atlanta, GA; Baltimore,  MD; Billings,  MT;
Birmingham, AL; Boston, MA; Charleston, SC; Charlotte, NC; Chicago, IL (O'Hare);
Cincinnati,  OH;  Cleveland,  OH; Columbia,  SC; Corpus Christi,  TX; Dallas, TX
(DFW); Dayton, OH; Detroit, MI; Fort Myers, FL; Grand Rapids, MI; Harlingen, TX;
Hartford,  CT;  Honolulu,  HI;  Houston,  TX;  Indianapolis,  IN;  Jackson,  MS;
Jacksonville,  FL; Kansas City, MO; Kauai,  HI; Las Vegas,  NV; Little Rock, AR;
Los Angeles,  CA (LAX);  Louisville,  KY; Lubbock,  TX; Maui, HI;  Memphis,  TN;
Miami, FL; Milwaukee, WI; Minneapolis,  MN; New York, NY (JFK); New York, NY (La
Guardia);  Newark, NJ; Omaha, NE; Ontario,  CA; Orange County, CA; Orlando,  FL;
Phoenix,  AZ; Portland,  ME; Raleigh,  NC; Reno, NV;  Sacramento,  CA; Salt Lake
City, UT; San Diego, CA; San Francisco,  CA (SFO);  San


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Jose, CA;  Sarasota,  FL; Savannah,  GA; Seattle,  WA; St. Louis, MO; Tampa, FL;
Toledo,  OH;  Washington,   D.C.  (Dulles);   Washington,  D.C.  (Ronald  Reagan
Washington National); West Palm Beach, FL; and Wichita, KS.

     INTERNATIONAL:  Auckland, New Zealand; Cairns, Australia; Christchurch, New
Zealand;  Kuala  Lumpur,  Malaysia;  Melbourne,  Australia;  Vancouver,  Canada;
Montreal,  Canada;  Schiphol, The Netherlands;  and Shenzhen,  China (operations
commenced in January 1999).

     The Company  operates or manages  concessions at the following  off-airport
locations:

     Dallas  Reunion  Arena,   Houston  Space  Center,   Empire  State  Building
Observatory, New Orleans Aquarium, Atlantic City (4 sites), Las Vegas (4 sites),
Memphis Peabody Hotel Gift Shop,  Polynesian  Cultural Center,  Raleigh Crabtree
Hotel Gift Shop,  Reno-Souvenir  & Gift Emporium,  Orlando  Arena,  and Bob Carr
Performing Arts Center.

     The airport segment  facilities  operated by the Company offer five product
lines which are described below.

BRANDED FOOD AND BEVERAGE CONCESSIONS

     The  Company  has  been a  pioneer  in  providing  airport  travelers  with
well-known food and beverage branded concessions such as Burger King,  Starbucks
Coffee,  Pizza Hut,  Sbarro,  Cinnabon,  Cheesecake  Factory,  California  Pizza
Kitchen ASAP,  Nathan's  Famous,  Chili's Too, TCBY "Treats," Taco Bell,  Dunkin
Donuts and Popeyes.  These branded concepts typically perform better and produce
higher RPE as  compared  to  non-branded  concepts.  Brand  awareness,  customer
familiarity  with product  offerings,  and the  perception of superior value and
consistency are all factors contributing to higher RPE in branded facilities. As
a licensee or franchisee of these brands,  the Company pays royalty fees ranging
from 2% to 10% of  total  sales.  Royalties  expense  as a  percent  of  branded
revenues averaged 6.0% in 1998.

     Branded food and beverage  revenues in the airports  segment have increased
17.5% when  comparing  1998 and 1997.  This increase can be attributed to large,
new branded concept  developments  at Chicago,  Miami,  Cleveland,  Los Angeles,
Minneapolis and San Francisco airports.  Airport branded product sales increased
to $295.8 million, or 28.8% of airport segment revenues,  for 1998 compared with
$251.8 million, or 26.3% of airport segment revenues, for 1997.

NON-BRANDED FOOD AND BEVERAGE CONCESSIONS

     These  concessions  are operated  under a generic name and serve  primarily
non-branded food and beverages in a restaurant or cafeteria-style  setting.  The
majority of the food sold in these  facilities  is prepared on the  premises and
includes fresh salads,  hot dogs,  hamburgers,  sandwiches  and desserts.  While
branded  items such as Pizza Hut Personal  Pan Pizza are sold  through  separate
vending  stands  within  these  facilities,   the  majority  of  the  sales  are
non-branded food and beverage  revenues.  Non-branded food and beverage revenues
generated  approximately  35.3% of airport segment revenues in 1998 and 36.6% of
airport segment revenues in 1997,  reflecting the Company's efforts to transform
its core airport  markets from  generic  offerings to a blend of  international,
internal and unique local branded  concepts.  Revenues of  non-branded  food and
beverage  products  were up $13.3  million,  or 3.8%,  to  $363.3  million  when
comparing 1998 and 1997.

ADULT BEVERAGES

     The  Company  serves  alcoholic  and  nonalcoholic  drinks,  together  with
selected food items,  through  specialty lounges  (generally  operated under the
Premium Stock Airpub name),  restaurants,  cafeterias,  and  microbrewery  pubs.
These   facilities  are  designed  to  provide  a  comfortable   and  convenient
environment for passengers  waiting for their flights.  During 1998, the Company
continued  to  introduce  its popular  microbrewery  pubs which  include,  among
others,  Samuel  Adams Brew  House and  Shipyard  Brew Pub.  These bar and grill
concepts bring local flavors to the Company's  airport  contracts and complement
the Company's proprietary Premium Stock Airpub lounges.  Other specialty lounges
introduced in 1998 include Fox Sports Sky Box, a bar and grill concept developed
with sports innovator Fox Sports; the world's first Jose Cuervo Tequilaria;  and
Casa Bacardi.  Adult

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beverages generated approximately 16.8% of airport segment revenues in both 1998
and 1997. Adult beverage sales in the airport segment were up $12.3 million,  or
7.7%, in 1998 when compared with 1997.

MERCHANDISE OUTLETS

       The Company  operates  branded and nonbranded  merchandise  outlets at 26
airport locations and 13 off-airport locations.  The Company's merchandise shops
sell  newspapers,   magazines,   souvenirs,   gifts,  books,  snacks  and  other
convenience  items. The Company utilizes a team of merchandise  specialists who,
based  on  extensive  research,   create  exciting  visual  displays,  bring  in
custom-designed  merchandise  that  reflects  the  regional  flavor and  develop
marketing  programs which capture  customer  interest.  In an effort to maximize
RPE, the Company continues to add internally developed specialty retail concepts
such as Simply Books, Global News, News Connection and Aviation, Inc. as well as
develop and sublease  specialty  retail  concepts  such as Tie Rack,  Victoria's
Secret,  Lands End,  The Body Shop and Johnston  and Murphy.  During  1998,  the
Company acquired Sky Gifts,  Inc., a concession  company  operating eight retail
locations  at the  Phoenix  Sky  Harbor  International  Airport  with  estimated
annualized revenues of $7.0 million. Merchandise outlets generated approximately
15.8%  and  16.1%  of  total  airport   concession   sales  in  1998  and  1997,
respectively. Merchandise sales in the airport segment increased by $7.8 million
in 1998 to $162.3 million when compared with 1997.

DUTY-FREE SHOPS

     Duty-free shops sell items such as liquor, tobacco, perfume, leather goods,
cosmetics and gifts on a tax- and duty-free  basis to  international  travelers.
The Company's largest airport duty-free  operations are located at Detroit Metro
International  Airport,   Sea-Tac  International  Airport,   Hartsfield  Atlanta
International Airport and Minneapolis/St.  Paul International Airport. Duty-free
shops generated approximately 3.3% and 4.2% of total airport segment revenues in
1998 and 1997,  respectively.  Duty-free merchandise sales totaled $34.5 million
during  1998,  a decrease  of 13.3%  compared to 1997,  primarily  due to weaker
enplanements  stemming from the slowdown in the Asian economy and lower spending
by Asian travelers.

OUTLOOK

     In March of 1998, the Federal Aviation  Administration  ("FAA")  forecasted
long-term average annual passenger  enplanement  growth of U.S. carriers of 3.7%
through  the year  2009.  Given  recent  trends in the  airline  industry,  1999
enplanement  growth may be less than the long-term average growth rate. The U.S.
airport  concession  industry is  expected  to  continue to benefit  from strong
industry  fundamentals  and the  expansion  of  low-fare  airline  carriers.  In
addition,  to sustain low-fare  positioning and improve  financial  performance,
most  airlines  have  lowered  their costs by reducing or  eliminating  inflight
catering  services.  The Company  continues  to benefit  from this trend with an
increased  opportunity to serve passengers whose needs are not met in the air as
a result of the reduction in airline catering services.

     The  transformation  of the  Company's  core  airport  markets from generic
offerings  to a blend  of  international,  internal  and  unique  local  branded
concepts  will  attract  more  customers.  Currently,  branded food and beverage
revenues make up only 44.9% of the Company's total food and beverage revenues in
the airport segment (28.8% of total airport segment revenues), demonstrating the
considerable potential for growth. Further, the Company is committed to refining
its core operating processes to improve efficiencies,  reduce costs and increase
revenues.  The Company  has  renewed  its focus on managing  food cost and labor
productivity while continuing to improve customer service.  Several  initiatives
are under way to focus on loss prevention,  recruiting and associate  selection,
development and training. Further, the Company expects continued success in 1999
and beyond in making its core  airport  concessions  contracts  more  profitable
through new concepts and operating excellence initiatives.

     Over the next three years, 31 airport  concessions  contracts  representing
approximately  $183.8 million, or 13.6% of annualized total revenues,  will come
up for  renewal.  The  Company  expects  continued  success  in  retaining  such
contracts and is committed to striving for the highest levels of product quality
and  improved  customer  satisfaction.  Over that same  period,  10  off-airport
concessions  contracts  representing  approximately  $26.6  million,  or 2.0% of
annualized total revenues, will come up for renewal.

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TRAVEL PLAZA CONCESSIONS

     The Travel Plazas segment consists of 92 travel plazas spread throughout 13
tollroads,  which is the  largest  network  of  travel  plazas  in the U.S.  The
Company's  travel  plazas  are  located  in  the  mid-Atlantic,  midwestern  and
northeastern  states,  as well as in Florida.  The  Company  operates or manages
these travel plazas and it currently  holds the leading market  position on each
of the top ten tollroads on which it operates or manages.  The  relatively  high
level of traffic on tollroads in the mid-Atlantic and northeastern  states makes
those roads the highest revenue-producing tollroads.

     Revenues in the travel plaza business segment,  including  management fees,
were  $181.1  million  and $174.2  million in 1998 and 1997,  respectively.  The
Company's travel plaza concession  revenues in 1998 and 1997 were  approximately
14.7% and 15.2%, of the Company's total revenues  (including  management  fees),
respectively.   The  five  largest   travel  plaza   contracts   accounted   for
approximately 12.5% and 12.9% of total revenues  (including  management fees) in
1998 and 1997,  respectively.  No single  travel plaza  contract  constitutes  a
material portion of the Company's total revenues.

     Travel  plazas  are  operated  or  managed  under  contracts  with  highway
authorities that are typically 10 to 15 years in duration. Contracts are awarded
through a  competitive  process,  but lease  extensions  often can be negotiated
before contracts expire.  The  weighted-average  remaining life of the Company's
managed and operated travel plaza contracts was  approximately  6.1 years at the
end of 1998.

     The Company offers branded concepts in a clean, safe environment, which are
designed to appeal to travelers who desire  high-quality  meals without  exiting
the tollroad.  Travel plaza concessions are dominated by branded concepts, which
comprised  79.5% of travel plaza  concessions  revenues in 1998 (87.9% of travel
plaza food and beverage revenues).  The core business of most travel plazas is a
food court offering branded concepts,  including Burger King, Roy Rogers,  Bob's
Big Boy, Sbarro, TCBY "Treats",  Starbucks Coffee, Pizza Hut Express, Miami Subs
Grill,  Dunkin  Donuts  and  Popeye's.  Retail  gift  shops  selling  souvenirs,
postcards,  snacks,  newspapers and magazines frequently are located adjacent to
these food courts and  accounted for  approximately  $15.9  million,  or 9.6% of
revenues in 1998.  Travel plazas  generally  include  automated teller machines,
vending  machines and business  centers and all of the facilities are accessible
to the disabled.

OPERATING LOCATIONS

     The Company operates or manages travel plazas on the following tollroads:

     Atlantic City Expressway;  Delaware Turnpike;  Florida's  Turnpike;  Garden
State  Parkway;   Illinois   Tollway;   Maine   Turnpike;   Maryland   Turnpike;
Massachusetts  Turnpike;  New Jersey Turnpike;  New York Thruway; Ohio Turnpike;
Pennsylvania Turnpike; and West Virginia Parkways.

OUTLOOK

     The Company has projected, based on historical experience,  that the impact
on  travel  plaza  revenue  growth  due to  growth in  tollroad  traffic  in the
Northeastern  corridor of the U.S. will be  approximately  1% to 2% on an annual
basis.  Moderate pricing  increases and the introduction of new branded food and
beverage  concepts,  to replace mature brands,  are expected to further increase
revenues in 1999 and beyond. Management is focused on operational excellence and
has dedicated  resources to review  opportunities for renewing key contracts and
adding new brands.

     Over  the  next  three  years,  four  travel  plaza  concessions  contracts
representing  approximately  $38.1 million, or 2.8%, of annualized total Company
revenues,  will come up for  renewal.  Over the next three  years,  one  managed
travel plaza contract will come up for renewal.  Management fee income  relating
to this  managed  contract  totaled $1.6  million in 1998.  The Company  expects
continued success in retaining both operated and managed contracts.


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SHOPPING MALL CONCESSIONS

     The Shopping Malls segment  includes food facilities at six malls. The food
facilities are  principally  located in a food court setting within the shopping
mall.  The  Company's  portfolio  of  shopping  mall  concession   contracts  is
diversified in the U.S. in terms of geographic location and mall developer.

     Shopping mall food court concessions generated $22.1 million of revenues in
1998,  approximately  1.8% of total Company revenues and generated $15.4 million
in revenues in 1997,  approximately  1.3% of total Company revenues.  Total food
and beverage  revenues  accounted for 98.2% of the  segment's  revenues in 1998,
compared  with  98.7% in 1997.  Retail  sales  comprised  1.8% of the  Company's
shopping mall concession revenues compared with 1.3% in 1997. No single contract
constitutes a material portion of the Company's total revenues.

     Shopping mall food court  concessions  contracts usually have initial terms
of 10 to 12 years  with the  Company's  rights to extend an  additional  5 to 20
years.  Rent  payments  are  determined  as a percentage  of sales  subject to a
minimum fee, which is negotiated at the time the concession contract is awarded.
The  weighted-average   remaining  life,  including  extension  rights,  of  the
Company's  shopping malls contracts was  approximately  18.2 years, up from 11.8
years in 1997 due to the  addition of new mall  locations  with  longer  average
contract lives.

OPERATING LOCATIONS

     The Company operates concessions at the following shopping mall locations:

     Grapevine Mills Mall,  Ontario Mills Mall,  Vista Ridge Mall,  Independence
Center Mall,  Leesburg Corner Premium Outlets and MacArthur  Center  (operations
began in March of 1999).

OUTLOOK

     The  Company is actively  pursuing  new food court  operations  both in new
malls and malls undergoing renovation. With the opening of MacArthur Center mall
in Norfolk,  Virginia, in March of 1999, the Company increased its operations to
six shopping mall food courts and is scheduled to have four additional  openings
in 1999. The annualized  revenue from these 10 contracts is estimated to be over
$80.0 million. The Company expects to begin operations at the Concord Mills Mall
near  Charlotte,  North  Carolina,  in late  1999,  the Jersey  Gardens  Mall in
Elizabeth,  New Jersey, in Fall of 1999, the Times Square 42nd Street Project in
New York in late 1999, and the Dolphin Mall in Miami-Dade  County,  Florida,  in
2000.

     Since  entering the mall food court  business  three years ago, the Company
has gained valuable experience, especially in the area of matching the number of
concession facilities with volume of customer traffic. The Company will leverage
this experience to new projects going forward to increase the  profitability  of
this segment.  The Company will continue its aggressive shopping mall food court
development  efforts in 1999 and in future  years.  For the next several  years,
start-up  costs are  expected to be high as the Company  initially  expands into
this business segment.

THE DISTRIBUTION

     Host Marriott  Services is the  successor to the food,  beverage and retail
concession  businesses  of  Host  Marriott  Corporation  ("Host  Marriott").  On
December 29, 1995 (the "Distribution Date"), Host Marriott distributed,  through
a special  dividend to holders of Host  Marriott's  common  stock,  31.9 million
shares  of  common  stock of Host  Marriott  Services  (the  Company's  parent),
resulting  in the  division  of Host  Marriott's  operations  into two  separate
companies.  The  shares  were  distributed  on the  basis  of one  share of Host
Marriott Services' common stock for every five shares of Host Marriott stock.

                                       7

<PAGE>


RELATIONSHIP WITH HOST MARRIOTT

      For purposes of  governing  certain of the ongoing  relationships  between
Host Marriott  Services and Host Marriott after the  Distribution and to provide
for an orderly transition, Host Marriott Services and Host Marriott entered into
various  agreements,  including a Distribution  Agreement,  an Employee Benefits
Allocation  Agreement and a  Transitional  Services  Agreement.  The  agreements
established  certain obligations for Host Marriott Services to issue shares upon
exercise of Host  Marriott  warrants,  which Host  Marriott  Services  has since
fulfilled its obligation,  and to issue shares or pay cash to Host Marriott upon
exercise of stock  options and upon  release of  deferred  stock  awards held by
certain former employees of Host Marriott.

RELATIONSHIP WITH MARRIOTT INTERNATIONAL

     On October 8, 1993 (the "MI Distribution  Date"), Host Marriott distributed
through a special  dividend to holders of Host Marriott common stock, all of the
outstanding shares of its wholly owned subsidiary Marriott  International,  Inc.
("Marriott  International").  In  connection  with  the  Marriott  International
distribution,  Host  Marriott  and Marriott  International  entered into various
management and transitional service agreements.

        In  connection  with the spin-off of Host  Marriott  Services  from Host
Marriott, Host Marriott Services and Marriott International entered into several
transitional agreements, each of which is described below:

     CONTINUING SERVICES  AGREEMENT.  This agreement provides that Host Marriott
Services will receive (i) various  corporate  services such as computer  systems
support and telecommunication  services; (ii) various procurement services, such
as developing  product  specifications,  selecting  vendors and distributors for
proprietary products and purchasing certain identified  products;  (iii) various
product supply and distribution  services;  (iv) casualty claims  administration
services  solely  for claims  which  arose on or before  October  8,  1993;  (v)
employee benefit  administration  services and (vi) a sublease for Host Marriott
Services'  headquarters  office  space.  The office  sublease was  terminated in
February  1997  when  Host  Marriott  Services  relocated  to its new  corporate
headquarters.

     As a part of the Continuing Services  Agreement,  the Company paid Marriott
International  $75.4  million,  $77.3 million and $76.9 million for purchases of
food and  supplies  and paid $8.8  million,  9.8 million  and $10.7  million for
corporate support services during 1998, 1997 and 1996, respectively.

     NONCOMPETITION  AGREEMENT.  In connection  with the MI  Distribution,  Host
Marriott and Marriott  International  entered  into a  Noncompetition  Agreement
dated October 8, 1993 (the  "Noncompetition  Agreement")  pursuant to which Host
Marriott and its subsidiaries, including those comprising its food, beverage and
retail  concession  businesses  (the  "Operating  Group"),  are prohibited  from
entering  into, or acquiring an ownership  interest in any entity that operates,
any business that (i) competes with the food and facilities  management business
as currently  conducted  by Marriott  International's  wholly-owned  subsidiary,
Marriott Management Services,  Inc. ("MMS," with such business being referred to
as the  "MMS  Business"),  provided  that  such  restrictions  do not  apply  to
businesses  that  constitute  part of the  business  comprising  the  then  Host
Marriott's  Operating Group or (ii) competes with the hotel management  business
as conducted by Marriott International,  subject to certain exceptions. Marriott
International  is  prohibited  from  entering  into,  or  acquiring an ownership
interest  in any entity that  operates,  any  business  that  competes  with the
businesses  comprising the then Host Marriott's Operating Group,  providing that
such  restrictions  do not apply to businesses that constitute a part of the MMS
Business. The Noncompetition Agreement provides that the parties (including Host
Marriott  Services) and any  successor  thereto will continue to be bound by the
terms of the  agreement  until  October  8,  2000.  On March 27,  1998,  the MMS
Business became the principal business of Sodexho Marriott Services, Inc., which
was combined with the North  American  operations  of Sodexho  Alliance S.A. The
rights and duties of Host Marriott Services under the  noncompetition  agreement
with Marriott International were preserved in the transaction.  Sodexho Marriott
Services, Inc. is now a party to the noncompetition agreement with Host Marriott
Services.

     LICENSE  AGREEMENT.  Pursuant to the terms of a License  Agreement  between
Host  Marriott and Marriott  International  dated  October 8, 1993 (the "License
Agreement"), the right, title and interest in certain trademarks,

                                       8


<PAGE>

including the "Marriott" name, were conveyed to Marriott  International and Host
Marriott and its  subsidiaries,  including those comprising the Operating Group.
As a result, Host Marriott Services was granted a license to use such trademarks
in its  corporate  name and in  connection  with the  Operating  Group  business
subject  to  certain  restrictions  set  forth  in  the  License  Agreement.  In
connection  with  the   Distribution,   Host  Marriott   Services  and  Marriott
International  entered  into a new  License  Agreement  pursuant  to which  Host
Marriott  Services  and its  subsidiaries,  retained  the  license  to use  such
trademarks subject to the License Agreement.

COMPETITION

     The Company  competes  with  certain  international,  national  and several
regional  and local  companies  to obtain the rights from  airport,  highway and
municipal  authorities,  and shopping mall developers to operate food,  beverage
and retail concessions.  The U.S. airport food and beverage concession market is
principally  serviced  by  several  companies,  including  the  Company,  CA One
Services,  Concessions  International  and McDonald's.  The U.S.  airport retail
concession industry is more fragmented.  The major competitors include: Paradies
Shops, W.H. Smith, Duty Free  International,  DFS Group Limited and Hudson News.
The U.S.  tollroad  market  principally is served by the Company and McDonald's,
with  Hardee's  holding  a  minor  share  of  the  segment.  The  shopping  mall
concessions  segment is  fragmented  and  principally  dominated  by  individual
operators. The international concession market is fragmented, with Compass Group
holding the leading market share in European  airports and Canadian  Airways and
Railway Association holding the leading market share in Canada.

     To compete  effectively,  the  Company  regularly  updates  and refines its
product  offerings  (including the addition of branded products) and facilities.
Through these efforts,  the Company  strives to generate higher sales per square
foot of concession space and thereby  increase returns to the Company's  clients
(airport and highway  authorities and mall  developers)  and Brand Partners,  as
well as to the Company.  Attaining these financial results,  as well as striving
to  achieve  higher  customer  and  client  satisfaction  levels,  enhances  the
Company's ability to renew contracts or obtain new contracts.

GOVERNMENT REGULATION

     The  Company  is  subject  to  various  governmental  regulations,  such as
environmental, employment, health and safety regulations and regulations related
to security of airports.  The Company maintains internal controls and procedures
to  monitor  and  comply  with  such  regulations.  The  cost  of the  Company's
compliance programs is not material.

EMPLOYEES

     At January 1, 1999,  the  Company  or its  subsidiaries  directly  employed
approximately  24,100  employees.  Approximately  6,100 of these  employees  are
covered by  collective  bargaining  agreements,  which are subject to review and
renewal on a regular  basis.  The Company has good relations with its unions and
has not  experienced  any material  business  interruption  as a result of labor
disputes.

                                       9

<PAGE>


ITEM 2.  PROPERTIES

     In addition  to the  operating  properties  discussed  in Item 1.  Business
above,  Host  Marriott  Services  leased  88,000  square feet of office space in
Bethesda,   Maryland,   which  serves  as  Host  Marriott  Services'   corporate
headquarters. The majority of the leased space is covered under an initial lease
agreement  that expires on December 31, 2003 and Host Marriott  Services has the
right to renew the lease for one  five-year  term.  A second  lease for  certain
additional space expires on December 31, 2006.

     The  Company's  telephone  number  is  (301)  380-7000.  Business  results,
financial  reports and press releases of Host Marriott  Services can be obtained
via fax, mail or audio playback by dialing 1-888-380-HOST.  Such information can
also be accessed on Host Marriott  Services' Web Site at  www.hmscorp.com on the
Internet's World Wide Web.

ITEM 3. LEGAL PROCEEDINGS

LITIGATION

     The  Company  and its  subsidiaries  are  from  time to  time  involved  in
litigation  matters  incidental  to their  businesses.  Such  litigation  is not
considered by management to be significant  and its resolution  would not have a
material  adverse effect on the financial  condition or results of operations of
the Company or its subsidiaries.

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

     None.

                                       10

<PAGE>


                                                      PART II

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

The Company's common stock is not publicly traded.

ITEM 6. SELECTED FINANCIAL DATA

       The following table presents summary selected  historical  financial data
derived from the Company's audited  consolidated  financial statements as of and
for the five most recent fiscal years ended January 1, 1999. The  information in
the table  should  be read in  conjunction  with  "Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations" and the consolidated
financial  statements of the Company included  elsewhere  herein.  The Company's
fiscal year ends on the Friday closest to December 31.

<TABLE>
<CAPTION>

- ------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
                                                               1998(1)    1997(2)    1996(3)    1995(4)    1994(5)
- ------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S>                                                            <C>         <C>       <C>        <C>        <C>    
      
                                                                                    (IN MILLIONS)

STATEMENT OF OPERATIONS DATA:
    Total revenues                                              $1,232     $1,146     $1,140       $993       $944 
    Operating profit                                                59         66         60          2         22 
    Income (loss) before extraordinary item                         23         20         13        (42)       (14)
    Net income (loss)                                               23         20         13        (51)       (14)
    Dividends declared and paid to parent                            6        ---        ---        ---        --- 

BALANCE SHEET DATA:
    Total assets                                                   531        500        538        473        523 
    Borrowings under line-of-credit agreement                       12        ---        ---        ---        --- 
    Total long-term debt                                           407        407        408        409        393 
    Shareholder's deficit                                          (94)      (111)      (130)      (150)       (47)

OTHER OPERATING DATA:
    Cash flows provided by operations(6)                            74         46         99         46         57 
    Cash flows used in investing activities                       (104)       (75)       (50)       (43)       (32)
    Cash flows provided by (used in) financing activities            3         (4)        (1)        18        (29)
    EBITDA(7)                                                      119        120        110         94         85 
    Cash interest expense                                           39         39         39         40         41 

- ------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<FN>

(1)  The results for 1998  included  $5.9 million of  write-downs  of long-lived
     assets  and a $11.1  million  tax  benefit  to  recognize  the  anticipated
     utilization of certain tax credits previously considered unrealizable.
(2)  The results for 1997  included  $4.2 million of  write-downs  of long-lived
     assets, $3.9 million of restructuring  charge reversals related to the 1995
     restructuring  plan  and a  $1.9  million  tax  benefit  to  recognize  the
     utilization of certain tax credits previously considered unrealizable.
(3)  Fiscal year 1996 includes 53 weeks.  All other years include 52 weeks.
(4)  The results for 1995 included  $22.0 million of  write-downs  of long-lived
     assets  (reflecting  the adoption of a new  accounting  standard) and $14.5
     million of  restructuring  charges related to initiatives to improve future
     operating results.
(5)  The results for 1994 included a $12.0 million charge for the transfer of an
     unprofitable  stadium  concessions  contract  to a third  party,  which was
     partially offset by a $4.4 million reduction in self insurance reserves for
     general liability and workers' compensation claims.
(6)  Cash flows  provided by  operations  in 1996 and 1997 were  affected by the
     Company's  transition to a new financial system.  Current  liabilities were
     temporarily  high at the end of 1996 and were reduced to seasonal levels in
     1997.
(7)  EBITDA  consists of the sum of  consolidated  net income (loss),  interest,
     income taxes, depreciation and amortization and certain other noncash items
     (principally  restructuring  reserves  and  asset  write-downs,   including
     subsequent payments against such previously established  reserves).  EBITDA
     data is  presented  because  such  data is used  by  certain  investors  to
     determine the Company's  ability to meet debt service  requirements  and is
     used in certain debt covenant  calculations required under the Senior Notes
     Indenture.  The Company considers EBITDA to be an indicative measure of the
     Company's  operating  performance.  EBITDA  can  be  used  to  measure  the
     Company's ability to service debt, fund capital expenditures and expand its
     business; however, such information should not be considered an alternative
     to net income,  operating profit, cash flows from operations,  or any other
     operating or liquidity performance measure prescribed by generally accepted
     accounting  principles.  Cash  expenditures for various  long-term  assets,
     interest and income taxes have been,  and will be,  incurred  which are not
     reflected  in the  EBITDA  presentations.  In order to  conform to the 1998
     presentation, EBITDA has been revised for fiscal years 1994 through 1997 to
     exclude interest income.  The calculation of EBITDA for the Company may not
     be  comparable  to the same  calculation  by other  companies  because  the
     definition of EBITDA varies throughout the industry.
</FN>
</TABLE>

                                       11

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

GENERAL

     On December 29, 1995, Host Marriott  Services  Corporation  ("Host Marriott
Services")  became a publicly  traded company and the successor to Host Marriott
Corporation's ("Host Marriott") food, beverage and retail concession  businesses
in travel and entertainment  venues. On that date, 31.9 million shares of common
stock  of  Host  Marriott  Services  were  distributed  to the  holders  of Host
Marriott's  common stock in a special  dividend (the  "Distribution"  - see Note
13).  Host  International,  Inc. (the  "Company") is the principal  wholly-owned
subsidiary of Host Marriott Services.

     The Company  receives  fees for managing six  tollroad  contracts  for Host
Marriott Tollroads,  Inc. ("Host Marriott  Tollroads"),  which is a wholly-owned
subsidiary  of Host Marriott  Services.  Base  management  fees related to these
travel plaza contracts are based on a percentage of total revenues  generated by
each of the travel plazas, with additional  incentive management fees determined
as a percentage of available  cash flow.  Management  fees  received  related to
these travel plaza concession  facilities  totaled $14.6 million,  $13.9 million
and $13.9 million in 1998, 1997 and 1996, respectively.

     Over 80% of the Company's annual revenues,  excluding  management fees, are
generated from operating food and beverage  concessions with the remaining being
generated from news, gift and specialty retail  concessions.  The Company's core
operations,  domestic airport and travel plaza  concessions,  accounted for over
90% of total 1998 revenues. The Company's diversified branded concept portfolio,
which  consists of over 100  internationally  known brands,  regional  specialty
concepts and  proprietary  concepts,  is a unique  competitive  advantage in the
marketplace.

     The  Company's  revenues  and  operating  profit,   excluding  general  and
administrative  expenses  and  unusual  items,  have grown at a compound  annual
growth  rate  ("CAGR")  of 4.0% and 4.7% over the past  three  years  (including
management fees). Revenue growth has been driven primarily by increased customer
traffic in airports and on tollroads,  improvements in product offerings through
the  introduction  of branded  concepts,  moderate  increases in menu prices and
success in winning new business and retaining contracts in core markets. Despite
the growth in revenues, operating profit margins were constrained in 1998 by the
slowdown in the Asian economy, the Northwest Airlines pilots' strike, short-term
business disruptions due to facility construction,  Year 2000 costs,  tightening
labor  markets  and the  addition of several  new  concepts  with higher cost of
sales.  The  lowering  of menu  prices as part of  several  large  new  contract
renewals during 1998 also negatively affected margins.

     The Company's  airport segment,  which includes  domestic and international
airports as well as food, beverage,  gift and news retail outlets in off-airport
locations,  contributed  approximately  83.5% of the Company's total revenues in
fiscal year 1998. Airport segment revenues and operating profit,  before general
and administrative  expenses and unusual items, have grown at a CAGR of 3.4% and
4.1%, respectively, over the last three years.

     The Company's travel plazas concessions contributed  approximately 14.7% of
the Company's  total revenues in fiscal year 1998 (including  management  fees).
Since 1996,  travel plazas  revenues and operating  profit,  before  general and
administrative  expenses  and  unusual  items,  have grown at a CAGR of 1.9% and
10.7%, respectively, including management fees.

     The remaining  1.8% of the Company's  1998 revenues were generated from the
operation of food court  facilities  at shopping  malls.  Shopping mall revenues
have grown  significantly  since the Company entered this start-up  business and
began operations at its first mall food court in 1996. Since that time, two mall
contracts  were added in 1997 and two  additional  contracts were added in 1998.
The operating profit,  excluding general and administrative expenses and unusual
items,  has been  constrained  by  pre-opening  expenses  of new mall  projects,
start-up  inefficiencies and lower than anticipated operating performance at two
locations.


                                       12


<PAGE>

     Certain minor  reclassifications  were made to the 1997 and 1996  financial
information to conform to the 1998 presentation.


1998 COMPARED TO 1997

REVENUES

     Revenues for the year ended  January 1, 1999  increased by 7.5% to $1,232.0
million compared with revenues of $1,146.3 million for the year ended January 2,
1998.  Revenues  were  driven by  strong  growth in  domestic  airport  food and
beverage concessions,  particularly from sales at locations recently opening new
branded  concepts.  An increase in enplanements,  customer traffic on tollroads,
the  opening of two new mall  contracts  in the  fourth  quarter of 1997 and the
conversion  of the  Miami  International  Airport  contract  from  a  management
agreement  to an  operating  agreement  during  the  second  quarter of 1998 all
contributed to overall revenue growth.

AIRPORTS

     Airport segment  revenues  increased 7.5% to $1,028.8  million in 1998 from
$956.7 million a year ago.

     Airport  concession  revenues  were up $72.0  million,  or 7.9%,  to $985.5
million for fiscal year 1998. Domestic airport concession revenues grew 8.1%, to
$918.6 million for 1998,  with passenger  enplanements up an estimated 1.7% over
last year and revenue per enplaned passenger up 6.3%. RPE is the primary measure
of how effective the Company is at capturing  potential customers and increasing
customer spending. Moderate increases in menu prices, the opening of new branded
concepts at a number of the Company's  larger  locations,  including  Miami, Los
Angeles,  San  Francisco,  Minneapolis  and  Cleveland,  and various real estate
maximization  efforts  contributed to the growth in RPE.  International  airport
revenues were up 5.2% to $66.9 million.  The opening of the Company's operations
at the Montreal International Airport - Dorval in Canada during 1997 contributed
to the increase in international  airport revenues.  International  results were
affected by exchange rate fluctuations and by weaker enplanements  stemming from
the slowdown in the Asian  economy.  The slowdown in the Asian  economy has also
had a  negative  impact on a number of the  Company's  duty-free  operations  in
several key gateway airports in the United States.

     Revenues in off-airport  locations  increased  slightly to $43.3 million in
1998 from $43.2 million in 1997.

TRAVEL PLAZAS

     Travel plaza  concession  revenues for 1998 were up 3.9% to $166.5 million.
In  addition,  travel  plaza  management  fee income for 1998 was $14.6  million
compared with $13.9 million in 1997.  Revenue  growth  benefited  from increased
tollroad traffic due to low gasoline prices,  moderate  increases in menu prices
and the  introduction  of several  new branded  concepts to selected  locations,
including  Starbucks  Coffee and Pizza Hut  Express.  Travel  plazas,  including
management  fees  received,  consistently  produce a significant  portion of the
Company's  overall cash flow,  contributing  approximately  21% and 20% of total
operating cash flow in 1998 and 1997, respectively.

SHOPPING MALLS

     Shopping  mall food court  concession  revenues  increased  $6.7 million to
$22.1  million in 1998.  This increase in revenues was a result of the Company's
continued  expansion  into shopping mall food court  concessions.  The Company's
entry into this start-up business has not been without challenges.  Results were
below  expectations at one regional mall project where the operating real estate
is being phased in to the Company over several years.

     During 1998, the Company opened its fourth food court concessions  location
at the Independence Center Mall near Kansas City,  Missouri,  and its fifth food
court  concessions  location at the Leesburg Corner Premium Outlets in Leesburg,
Virginia.  Also during 1998, the Company  announced that it reached an agreement
with  Forest  City Ratner  Companies  to develop  and manage  food and  beverage
operations at the 42nd Street  Entertainment  and Retail Project  located in New
York's  Times  Square;  a deal with The Taubman  Company to operate the food and

                                       13


<PAGE>

beverage  concessions  at  MacArthur  Center in Norfolk,  Virginia;  a deal with
Glimcher  Realty  Trust to operate the food and beverage  concessions  at Jersey
Gardens  Mall  in  Elizabeth,  New  Jersey;  and a deal  with  Michael  Swerdlow
Companies,  Inc. to operate the food and beverage concessions at Dolphin Mall in
Miami-Dade County, Florida.

OPERATING COSTS AND EXPENSES

     The  Company's  total  operating  costs and expenses  increased to 95.2% of
total  revenues  compared  with 94.2% of total  revenues in 1997.  The operating
profit margin  decreased to 4.8% in 1998 compared with 5.8% in 1997 and reflects
a 60 basis  point  increase  in the cost of sales  margin  and a 60 basis  point
increase in the payroll  margin.  Further  constraints  on the operating  profit
margin  include  significant  facility  construction  at several  key  airports,
shopping mall start-up  activities and Year 2000 costs.  Several initiatives are
under  way to focus on loss  prevention,  recruiting  and  associate  selection,
development  and  training.  The Company is also  evaluating  new ways to better
leverage its size through technology and process changes.

     Cost of sales increased 9.9% above last year to $362.2 million,  reflecting
a 60 basis point increase in the cost of sales margin,  which totaled 29.4%. The
margins are influenced by a mix shift to higher cost of product  concepts,  such
as  Starbucks,  and the  lowering of menu  prices as part of large new  contract
renewals in 1998. In addition,  the Company experienced commodity cost increases
in produce,  premium  coffee beans and dairy  products when  comparing  1998 and
1997.

     Payroll and benefits  totaled  $371.5  million during 1998, a 9.8% increase
over 1997.  Payroll and benefits as a percentage of total revenues  increased 60
basis points to 30.2%.  The increase in the payroll and benefits margin reflects
the  impact  of the  Northwest  Airline's  pilots  strike,  which,  despite  the
Company's  short-term  layoffs,  more than offset benefits from the use of labor
scheduling  software and the  implementation of store manager training programs.
In addition, payroll margins increased due to construction of new concessions at
several airports and to slight tightening in local labor markets.

     Rent  expense  totaled  $188.9  million for 1998,  an increase of 4.7% from
1997.  Rent expense as a percentage of total revenues  decreased 40 basis points
in 1998 to 15.3%.  Contract rent expense  determined as a percentage of revenues
decreased during 1998 and can be attributed to sales increases on contracts with
fixed rental rates and new or renewed contracts with favorable rent margins.

     Royalties  expense  for 1998  increased  by 13.7%  to $25.7  million.  As a
percentage of total  revenues,  royalties  expense  increased 10 basis points to
2.1%.  The  increase in  royalties  expense  reflects  the  Company's  continued
introduction of branded concepts to its airport  concessions  operations and the
continued   expansion  into  the  heavily  branded   shopping  mall  food  court
concessions  business.  Royalties  expense  as a  percentage  of  branded  sales
averaged  6.0% in 1998 compared  with 6.3% in 1997,  reflecting  the addition of
branded concepts with lower-than-average royalty percentages. Branded facilities
generate  higher sales per square foot,  contribute  toward  increased  RPE, and
position the Company to win and retain concession contracts.

     Depreciation and amortization expense,  excluding $2.0 million of corporate
depreciation  on property  and  equipment,  which is included as a component  of
general  and  administrative  expenses,  was $51.8  million  for 1998,  up 5.5%,
excluding $1.7 million of corporate  depreciation  on property and equipment for
1997. Increased depreciation related to contract extensions, the buildout of new
branded  locations and amortization of pre-opening  costs for new mall contracts
was  partially  offset by lower  depreciation  related to the  write-down of one
impaired airport unit in the fourth quarter of 1997.

     General  and  administrative  expenses  were  $58.0  million  for 1998,  an
increase of 6.8%.  Approximately half of the increase related to $1.1 million in
external costs and approximately  $0.8 million of internal costs relating to the
Company's Year 2000 compliance program. The level of corporate expenses incurred
during 1998 also reflects increased costs related to annual salary increases and
some  additional  corporate  resources  to focus on  growth  initiatives  in the
Company's core markets and new venues.

                                       14


<PAGE>

     Other operating  expenses,  which include  utilities,  casualty  insurance,
equipment maintenance, trash removal and other miscellaneous expenses, increased
3.5% to $109.2 million total for 1998. Other operating  expenses as a percentage
of total revenues decreased 30 basis points and reflects operating leverage from
revenue growth.

UNUSUAL ITEMS

>    During 1998, the Company determined that its  investment  in an  internally
     used software  system was partially  impaired  because all of the purchased
     modules of the system that were  originally  intended to provide  operating
     efficiencies  could  not be fully  implemented.  As a result,  the  Company
     recorded a partial write-down of $3.5 million of the remaining $5.5 million
     book value of the system. Also during 1998, the Company determined that its
     investment  in a shopping mall food court  contract was fully  impaired and
     recorded  a  write-down  of $2.4  million.  The food court  contract  was a
     regional mall where the  operating  real estate under the contract is being
     phased in to the Company over several years.  Customer  traffic and capture
     rates  at  this  mall  were  well  below  the  Company's  expectations  and
     insufficient to support the number of concepts  developed (see "Impairments
     of Long-Lived Assets").
     
     During 1997,  an  operating  cash flow  analysis of one airport  concession
     contract  revealed that the Company's  investment  was partially  impaired,
     resulting  in a $4.2 million  write-down.  The partial  impairment  was the
     result of  construction  cost  overruns,  airline  traffic  shifts and weak
     operating performance. Since the time of the write-down, two major airlines
     have increased  their  presence at this location,  resulting in significant
     unexpected enplanement growth. Accordingly, the outlook for 1999 and beyond
     for this airport location is very positive.

>    During 1998 and 1997, the Company  recognized  the expected  utilization of
     $11.1  million  and $1.9  million,  respectively,  of certain  tax  credits
     previously  considered  unrealizable,  resulting  in  a  reduction  in  the
     deferred tax asset valuation allowance.

>    The 1997 results include a $3.9 million  reversal of  substantially  all of
     the  remaining  restructuring  reserves  to reflect the  conclusion  of the
     restructuring plan created in 1995 (see "1995 Restructuring").


OPERATING PROFIT

     Operating profit, excluding unusual items, decreased 2.6% to $64.7 million.
The overall  operating  profit  margin,  excluding  general  and  administrative
expenses and unusual  items,  decreased to 10.0% in 1998  compared with 10.5% in
1997.  This  decrease was largely due to the negative  effects of the  Northwest
Airlines' strike and the Asian economic slowdown.  The remaining decrease in the
operating profit margin resulted from increases in the cost of sales and payroll
margins,  offset  by lower  rent and other  operating  cost  margins.  Operating
profits  for  airports,  prior  to  the  allocation  of  corporate  general  and
administrative  expenses and  excluding  unusual  items,  were $99.2 million and
$98.1  million  for 1998 and 1997,  respectively.  Operating  profits for travel
plazas,  excluding general and  administrative  expenses and unusual items, were
$24.5 million and $21.3 million for 1998 and 1997, respectively.  Operating loss
for the shopping mall segment, excluding general and administrative expenses and
unusual items,  totaled $1.0 million in 1998 compared with operating  profits of
$1.3 million for 1997.

     The  airport  segment  operating  profit  margin,   excluding  general  and
administrative expenses and unusual items, showed a 70 basis point reduction for
1998 and totaled 9.6%.  The travel plazas  operating  profit  margin,  excluding
general and  administrative  expenses and unusual  items,  increased to 13.5% in
1998 from 12.2% in 1997.  The  shopping  mall  segment  operating  loss  margin,
excluding  general and  administrative  expenses and unusual items, was 4.5% for
1998  compared with an operating  profit  margin of 8.4% in 1997.  The operating
loss in 1998 can be  attributed to $1.2 million in  pre-opening  expenses of new
mall projects and start-up inefficiencies; however, the Company also experienced
lower than anticipated operating performance at two locations.

INTEREST EXPENSE

     Interest expense was $39.9 million for 1998 compared with $39.8 million for
1997. The minimal variance  reflects the 9.5% fixed rate of interest on the $400
million of Senior Notes.

                                       15


<PAGE>

INTEREST INCOME

     Interest  income  decreased  $1.3  million to $1.7  million for 1998.  Cash
balances  during  1998  were  lower  due  to  the  increased  level  of  capital
expenditures  as well as share  repurchases.  Cash  balances  during  the  first
quarter of 1997 were  temporarily  higher due to a transition to a new financial
system at year-end  1996.  This  transition  resulted in beginning cash balances
being higher than the Company's normal seasonal level. The 1997 results included
$0.4 million of non-recurring interest income relating to a negotiated agreement
with an Airport  Authority which  reimbursed the Company for the cost of funding
certain capital  improvements.  The 1997 interest income also reflected slightly
higher short-term interest rates during 1997.

INCOME TAXES

     The benefit for income taxes for 1998 totaled $2.5 million  compared with a
provision for income taxes of $9.7 million for 1997.  The effective tax rate was
(12.2)%  and 33.0%  for 1998 and 1997,  respectively.  The  effective  tax rates
reflect the  recognition  of $11.1 million and $1.9 million of certain  purchase
business combination tax credits previously considered  unrealizable in 1998 and
1997, respectively. (see "Deferred Tax Assets")

NET INCOME

     The Company's net income  increased  17.9% to $23.1 million.  This increase
reflects the benefit from recognizing  certain tax credits previously thought to
be unrealizable, which was offset by a decrease in operating profit, write-downs
of certain long-lived assets and lower interest income.

1997 COMPARED TO 1996

REVENUES

     Revenues  for the year ended  January 2, 1998,  which  included 52 weeks of
operations, increased by $6.6 million to $1,146.3 million compared with revenues
of $1,139.7  million for the year ended January 3, 1997, which included 53 weeks
of operations.

AIRPORTS

     Airport segment  revenues  decreased $6.0 million to $956.7 million in 1997
from  $962.7  million  in 1996 and can be  attributed  to the  expiration  of an
off-airport  food and  beverage  contract  and the  planned  exit  from  several
off-airport retail contracts in late 1996.

     Airport  concessions  revenues  were up $2.0 million to $913.5  million for
1997.  Domestic airport concession revenues decreased by 0.6%, to $849.9 million
for 1997 and  international  airport  revenues were up 13.0% to $63.6 million in
1997.  The opening of the  Company's  operations  at the Montreal  International
Airport  -  Dorval  in  Canada  during  1997  contributed  to  the  increase  in
international  airport  revenues,  which was  partially  offset by the  negative
impact of exchange rate fluctuations in 1997.

     Comparable  domestic  airport  contracts  exclude  the  negative  impact of
several  contracts  with  significant  changes in scope of operation,  contracts
undergoing significant construction of new facilities and the positive impact of
new contracts.  Revenue growth at comparable  domestic airport locations,  which
comprise over 90% of total airport  revenues,  grew a solid 5.9% and reflects an
estimated 3.7% growth in passenger  enplanements  and 2.2% growth in revenue per
enplaned passenger  ("RPE"),  excluding an additional week of operations in 1996
(see "Accounting Period").  The growth in RPE can be attributed to the continued
addition of branded  locations,  selective moderate increases in menu prices and
various real estate  maximization  efforts.  Airport revenue growth was achieved
despite construction  projects in several comparable domestic airport locations,
including Cleveland,  Los Angeles and Minneapolis,  where the Company introduced
branded  concepts.  Revenues also increased despite the benefit of severe winter
weather in 1996, which caused air traffic delays,  contributing to the Company's
airport sales in that year.

                                       16


<PAGE>

       Off-airport  concessions revenues were $43.2 million and $51.2 million in
1997 and 1996, respectively. This decrease reflects the expiration of a food and
beverage  contract and the Company's  planned exit from several retail contracts
in late 1996.

TRAVEL PLAZAS

     Travel plaza concession  revenues for 1997 were $160.3 million,  level with
1996. In addition, travel plaza management fee income for 1997 was $13.9 million
compared  with  $13.9  million  for 1996.  Traffic  growth  and  moderate  price
increases  were offset by one less week of operations  during 1997, as well as a
slight  decrease in revenues per vehicle.  Travel plazas,  including  management
fees  received,  consistently  produce a  significant  portion of the  Company's
overall cash flow,  contributing  approximately 20% of total operating cash flow
in 1997.

SHOPPING MALLS

     Shopping mall concession  revenues increased $12.7 million to $15.4 million
in 1997.  This  increase in  revenues  was a result of the  Company's  continued
expansion  into shopping mall food court  concessions.  During 1997, the Company
opened its second food court  concessions  location at the Grapevine  Mills Mall
near  Dallas/Fort  Worth, and its third food court  concessions  location at the
Vista Ridge Mall in  Lewisville,  Texas (just outside of the  Dallas/Fort  Worth
area).

OPERATING COSTS AND EXPENSES

     The  Company's  total  operating  costs and expenses  decreased to 94.2% of
total  revenues  compared  with 94.7% of total  revenues in 1996.  The  improved
operating  profit margin of 5.8% in 1997 compared with 5.3% in 1996 reflects the
implementation of several operating  initiatives,  resulting in a 70 basis point
improvement in the cost of sales margin.

     Cost of sales  decreased  $6.3 million,  or 1.9%,  below last year.  During
1997, the Company  benefited from its customer service and operating  excellence
initiatives. These initiatives include the rollout of the Store Manager concept;
the creation of the StoreCard  reporting system and the  implementation of Labor
Pro software;  the  renegotiation  of all  distributor  agreements for books and
magazines in 1996 in the Company's  airports and travel  plazas;  as well as the
Brand Champion Program.

     Payroll and benefits  totaled  $338.4  million during 1997, a 1.0% increase
over 1996.  Payroll and benefits as a  percentage  of total  revenues  increased
slightly to 29.5% as a result of initiatives  put in place to increase  revenues
and decrease other cost areas.

     Rent expense  totaled  $180.4  million for 1997, a decrease of $0.5 million
from 1996.  Rent expense as a percentage  of total  revenues  decreased 20 basis
points in 1997 to 15.7%.  Contract  rent expense  determined  as a percentage of
revenues decreased during 1997, offset by increased rent from equipment rentals.
The increase in equipment rent was due to the continued  rollout of new computer
technology to the Company's airport operating units.

     Royalties  expense  for  1997  increased  by 9.2% to  $22.6  million.  As a
percentage of total  revenues,  royalties  expense  increased 20 basis points to
2.0%.  The  increase in  royalties  expense  reflects  the  Company's  continued
introduction  of  branded  concepts  to  its  airport  concessions   operations.
Royalties  expense  as a  percentage  of  branded  sales  averaged  6.3% in 1997
compared with 6.8% in 1996. Branded facilities  generate higher sales per square
foot and contribute toward increased RPE, which offset royalty payments required
to operate the concepts.

     Depreciation and amortization expense,  excluding $1.7 million of corporate
depreciation  on property  and  equipment,  which is included as a component  of
general and  administrative  expenses,  was $49.1  million for 1997,  down 1.2%,
excluding $0.7 million of corporate  depreciation  on property and equipment for
1996.

                                       17


<PAGE>

     General  and  administrative  expenses  were  $54.3  million  for 1997,  an
increase of 4.8%. The level of corporate  expenses  incurred during 1997 reflect
increased  costs  related  to  additional  corporate  resources  in  operations,
finance,  business  development and strategic planning and marketing to focus on
growth  initiatives  in the  Company's  core  markets  and  new  venues.  Higher
corporate   depreciation  expense  associated  with  the  new  headquarters  and
financial system also contributed  substantially to the increases in general and
administrative expenses.

     Other operating  expenses,  which include  utilities,  casualty  insurance,
equipment maintenance,  trash removal and other miscellaneous expenses, remained
relatively flat at $105.5 million total for 1997. Other operating  expenses as a
percentage of total revenues decreased 10 basis points.

UNUSUAL ITEMS

>    The 1997 results include a $3.9 million  reversal of  substantially  all of
     the  remaining  restructuring  reserves  to reflect the  conclusion  of the
     restructuring plan created in 1995 (see "1995 Restructuring").

>    During 1997,  an operating  cash flow analysis of one airport unit in which
     the Company was obligated to add new facilities revealed that the Company's
     investment was partially impaired,  resulting in a $4.2 million write-down.
     The  partial  impairment  was the  result of  construction  cost  overruns,
     airline traffic shifts and weak operating  performance (see "Impairments of
     Long-Lived Assets").

>    The  Company  recognized  the  utilization  of $1.9  million of certain tax
     credits  previously  considered  unrealizable  during 1997,  resulting in a
     reduction in the deferred tax asset valuation allowance.

OPERATING PROFIT

     Operating  profit increased 10.0% to $66.1 million.  The overall  operating
profit margin,  excluding general and administrative expenses and unusual items,
increased to 10.5% in 1997 compared with 9.8% in 1996,  primarily reflecting the
70 basis point  improvement in the cost of sales margin.  Operating  profits for
the  airport  segment,   prior  to  the  allocation  of  corporate  general  and
administrative  expenses and  excluding  unusual  items,  were $98.1 million and
$91.6  million  for 1997 and 1996,  respectively.  Operating  profits for travel
plazas,  excluding general and  administrative  expenses and unusual items, were
$21.3  million  and $20.0  million  for 1997 and 1996,  respectively.  Operating
profits for the shopping  mall  segment,  excluding  general and  administrative
expenses and unusual  items,  totaled $1.3 million and $0.3 million for 1997 and
1996, respectively.

     The  airport  segment  operating  profit  margins,  excluding  general  and
administrative  expenses and unusual items,  showed a 80 basis point improvement
for  1997 and  totaled  10.3%.  The  travel  plazas  operating  profit  margins,
excluding general and  administrative  expenses and unusual items,  increased 70
basis  points to 12.2% in 1997.  The  shopping  mall  segment  operating  profit
margin,  excluding  general  and  administrative  expenses  and  unusual  items,
decreased to 8.4% for 1997 compared with 11.1% in 1996.

INTEREST EXPENSE

     Interest expense was $39.8 million for 1997 compared with $40.3 million for
1996. The slight decrease in interest expense reflects the continuing  principal
reduction in the Company's other long-term debt.

INTEREST INCOME

     Interest  income  increased  $0.6  million to $3.0  million for 1997.  Cash
balances  during  the first  quarter  of 1997 were  temporarily  higher due to a
transition to a new financial system at year-end 1996. This transition  resulted
in beginning  cash  balances  being higher than the  Company's  normal  seasonal
level. The 1997 results  included $0.4 million of non-recurring  interest income
relating to a negotiated agreement with an Airport Authority that reimbursed the
Company for the cost of funding certain capital improvements.  Also contributing
to the increase in interest  income were  slightly  higher  short-term  interest
rates and the Company's  increased  cash balances in  interest-bearing  accounts
during 1997.

                                       18


<PAGE>


INCOME TAXES

     The  provision for income taxes for 1997 and 1996 was $9.7 million and $9.3
million,  respectively.  Overall,  the  effective  tax rate declined for 1997 to
33.0% from 41.9% in 1996.  The lower  effective tax rate reflects a $1.9 million
benefit  to  recognize  certain  tax  credits  that were  previously  considered
unrealizable and a reduced state tax provision.  The 1996 results include a $5.2
million  decrease in the  valuation  allowance  due to the decrease in the state
effective  tax rate and the  expiration  of purchase  business  combination  tax
credits.

NET INCOME

     The Company's net income  increased  51.9% to $19.6 million.  This increase
reflects strong growth in operating profits,  an increase in interest income and
a lower effective tax rate.



LIQUIDITY AND CAPITAL RESOURCES

     Historically,  the  Company has funded its  ongoing  capital  expenditures,
debt-service  requirements and treasury  purchases from cash flow generated from
ongoing  operations  and current cash  balances.  The Company has more  recently
drawn on existing credit facilities to fund increased capital spending. In 1999,
the Company  anticipates  using the same sources.  However,  should  significant
growth   opportunities   arise,  such  as  business   combinations  or  contract
acquisitions,   alternative   financing   arrangements  will  be  evaluated  and
considered.

     In May 1995,  the  predecessor  corporation  to the Company  issued  $400.0
million of Senior Notes,  which are now  obligations of the Company.  The Senior
Notes, which will mature in May 2005, were issued at par and have a fixed coupon
rate of 9.5%. The Senior Notes can be called beginning in May 2000 at a price of
103.56%,  declining to par in May 2003.  Since 1996, the Company's cash interest
coverage ratio has improved from 2.9 to 1.0 to 3.1 to 1.0 in 1998.

     The Company is required to make semi-annual  cash interest  payments on the
Senior Notes at a fixed  interest  rate of 9.5%.  The Company is not required to
make principal  payments on the Senior Notes until maturity  except in the event
of (i)  certain  changes  in control or (ii)  certain  asset  sales in which the
proceeds are not invested in other properties within a specified period of time.

     The  Senior  Notes  are  secured  by a pledge  of stock  and are  fully and
unconditionally  guaranteed  (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent  conveyance under applicable law), on a
joint and  several  basis by  certain  subsidiaries  (the  "Guarantors")  of the
Company. The Senior Notes Indenture contains covenants that, among other things,
limit the  ability  of the  Company  and  certain of its  subsidiaries  to incur
additional  indebtedness  and issue preferred stock, pay dividends or make other
distributions,  repurchase  capital stock or subordinated  indebtedness,  create
certain liens,  enter into certain  transactions  with affiliates,  sell certain
assets,  issue or sell capital stock of the  Guarantors,  and enter into certain
mergers and consolidations.

     The First National Bank of Chicago,  as agent for a group of  participating
lenders, has provided credit facilities ("Facilities") to the Company consisting
of a $75.0 million  revolving  credit  facility (the "Revolver  Facility") and a
$25.0 million letter of credit facility.  The revolving credit facility provides
for working  capital and can be used for general  corporate  purposes other than
hostile acquisitions. At the end of 1998, the Company had drawn $11.6 million of
outstanding  indebtedness  under the  revolving  credit  facility  at an average
interest  rate  of  7.77%.  All  borrowings  under  the  Facilities  are  senior
obligations of the Company and are secured by Host Marriott Services' pledge of,
and a first  perfected  security  interest  in, all of the capital  stock of the
Company and certain of its subsidiaries.

     The loan agreements  relating to the Facilities  contain dividend and stock
retirement  covenants that are  substantially  similar to those set forth in the
Senior Notes  Indenture,  and provide that  dividends  payable to Host  Marriott
Services are limited to 25% of the Company's consolidated net income, as defined
in the loan agreements.  During 1998 and in compliance with the Facilities,  the
Company  paid $5.6  million of dividends  to Host  Marriott  Services.  The loan
agreements also contain certain financial ratio and capital expenditure

                                       19


<PAGE>

covenants. Any indebtedness outstanding under the Facilities may be declared due
and payable upon the  occurrence  of certain  events of default,  including  the
Company's  failure to comply  with the several  covenants  noted  above,  or the
occurrence of certain events of default under the Senior Notes Indenture.  As of
January 1, 1999,  and throughout the two fiscal years ended January 1, 1999, the
Company was in compliance with the covenants described above.

     The  Company's  cash  flows  from  operating  activities  are  affected  by
seasonality.  Cash from  operations  generally  is the  strongest  in the summer
months between  Memorial Day and Labor Day. Cash provided by operations,  before
changes in working capital and deferred income taxes,  totaled $88.1 million for
1998, $78.1 million for 1997 and $68.4 million for 1996, respectively.

     The  primary  uses of cash  in  investing  activities  consist  of  capital
expenditures and acquisitions.  The Company incurs capital expenditures to build
out new  facilities,  including  growth  initiatives,  to expand  or  reposition
existing  facilities  and to maintain  the quality  and  operations  of existing
facilities.  The Company's  capital  expenditures in 1998, 1997 and 1996 totaled
$95.6 million, $66.0 million and $54.9 million,  respectively.  During 1999, the
Company expects to make capital  expenditure  investments of approximately $81.0
million in its core markets  (domestic  airport and travel plaza business lines)
and $35.0 million in growth markets  (international  airports and food courts in
shopping malls).  Over the long term, capital  expenditures in core markets have
ranged from below 3% to nearly 10% of revenues,  with a median of  approximately
4%. The Company's recent success in winning new contracts and renewing  existing
ones, which extended the Company's overall weighted-average  contract lives, has
resulted in 1998 capital  expenditures  as a percentage of revenues at the upper
end of the historic range.  Multi-year  construction  projects at these recently
renewed and new  contracts  are  expected to result in capital  expenditures  of
approximately  7% of revenues in 1999.  In 2000,  the  Company  expects  capital
expenditures in its core markets to begin to decline  reaching  approximately 5%
of revenues in 2001.

     The  Company's  cash  provided  by  financing  activities  in 1998 was $3.0
million compared with cash used in financing activities of $4.0 million and $0.8
million in 1997 and 1996, respectively. Cash provided by financing activities in
1998 included cash inflows from the  line-of-credit  borrowings  totaling  $11.6
million and proceeds from the issuance of debt of $1.4  million,  offset by $5.6
million of dividends paid to Host Marriott  Services,  a $3.5 million payment of
the  Company's  obligation to pay for the 1997  exercise of  nonqualified  stock
options and the 1997 release of deferred stock incentive  shares held by certain
former  employees of Host Marriott  corporation  as well as $1.1 million of debt
repayments.

     Cash used in financing  activities  during 1997 consisted of a $2.2 million
payment in settlement  of the Company's  obligation to pay for the 1996 exercise
of  nonqualified  stock options and the 1996 release of deferred stock incentive
shares held by certain former  employees of Host Marriott  Corporation  and $1.7
million of debt repayments.

     The Company manages its working capital  throughout the year to effectively
maximize the financial returns to the Company. If needed, the Company's Revolver
Facility  provides  funds for liquidity,  seasonal  borrowing  needs,  increased
capital spending and other general corporate purposes.  In the fourth quarter of
1996, the Company  transitioned  to a new financial  system.  As a result of the
transition,  the Company experienced  temporarily high balances in cash and cash
equivalents   and  current   liabilities   at  year-end  1996  and   encountered
systems-related  issues.  During  1997,  the  Company  reduced its cash and cash
equivalents  and current  liabilities  balances to seasonal levels and worked to
resolve other systems issues.

     The Company's consolidated earnings before interest,  taxes,  depreciation,
amortization  and other  non-cash  items  ("EBITDA")  was $119.0 million in 1998
compared with $119.9 million and $110.0 million in 1997 and 1996,  respectively.
The EBITDA  margin  decreased 80 basis points to 9.7% of revenues  from 10.5% in
1997 and 9.7% in 1996.  The Company's  cash interest  coverage ratio (defined as
EBITDA to interest  expense less  amortization of deferred  financing costs) was
3.1 to 1.0 in 1998  compared  with 3.2 to 1.0 in 1997  and 2.9 to 1.0 for  1996.
EBITDA during 1998 exceeded capital  expenditures of $95.6 million.  The Company
considers EBITDA to be a meaningful measure for assessing operating performance.
EBITDA can be used to measure  the  Company's  ability  to  service  debt,  fund
capital investments and expand its business. EBITDA information should

                                       20


<PAGE>

not be considered an alternative  to net income,  operating  profit,  cash flows
from  operations,  or any  other  operating  or  liquidity  performance  measure
recognized by Generally Accepted Accounting Principles ("GAAP"). The calculation
of EBITDA for the Company may not be comparable to the same calculation by other
companies because the definition of EBITDA varies throughout the industry.

The following is a reconciliation of net income to EBITDA:
<TABLE>
<CAPTION>

       ---------------------------------------------------- -------------- -------------- ---------------
                                                                1998           1997            1996
       ---------------------------------------------------- -------------- -------------- ---------------

                                                                           (IN MILLIONS)
       <S>                                                       <C>           <C>              <C>
       NET INCOME                                               $   23.1        $   19.6       $   12.9 
       Interest, net                                                38.2            36.8           37.9 
       (Benefit) provision for income taxes                         (2.5)            9.7            9.3 
       Depreciation and amortization                                53.8            50.8           50.4 
       Unusual items, net                                            5.9             0.3            --- 
       Other non-cash items                                          0.5             2.7           (0.5)
       ---------------------------------------------------- -------------- -------------- ---------------
       EBITDA                                                   $  119.0        $  119.9       $  110.0 
       ---------------------------------------------------- -------------- -------------- ---------------
</TABLE>

     The Senior Notes Indenture and the Facilities require interest income to be
included in the EBITDA calculation. Under this definition, EBITDA totaled $120.7
million,   $122.9  million  and  $112.4   million  for  1998,   1997  and  1996,
respectively.

IMPAIRMENTS OF LONG-LIVED ASSETS

     The Company reviews its long-lived  assets (such as property and equipment)
and certain  identifiable  intangible  assets for impairment  whenever events or
circumstances  indicate  that  the  carrying  value  of  an  asset  may  not  be
recoverable.  If the sum of the  undiscounted  estimated future cash flows of an
asset is less than the carrying value of the asset,  an impairment loss equal to
the  difference  between the  carrying  value and the fair value of the asset is
recognized.  Fair value is estimated to be the present value of expected  future
cash flows,  as  determined by  management,  after  considering  such factors as
future air travel and toll-paying vehicle data and inflation.

      During 1998, the Company  determined  that its investment in an internally
used software system was partially impaired because all of the purchased modules
of the system that were originally  intended to provide  operating  efficiencies
could not be fully  implemented.  As a result,  the  Company  recorded a partial
write-down  of $3.5  million of the  remaining  book value of the system of $5.5
million. The Company also determined that its investment in a shopping mall food
court contract was fully impaired and recorded a write-down of $2.4 million. The
food court contract is a regional mall where the operating real estate under the
contract is being phased in to the Company over several years.  Customer traffic
and capture  rates at this mall were well below the Company's  expectations  and
insufficient to support the number of concepts developed.

     During 1997,  an operating  cash flow analysis of one airport unit in which
the Company was  obligated to add new  facilities  revealed  that the  Company's
investment was partially impaired,  resulting in a $4.2 million write-down.  The
partial impairment was the result of construction cost overruns, airline traffic
shifts and weak operating  performance.  Since the time of the  write-down,  two
major  airlines have increased  their  presence at this  location,  resulting in
significant unexpected enplanement growth. Accordingly, the outlook for 1999 and
beyond for this airport location is very positive.

1995 RESTRUCTURING

     Management  approved a formal  restructuring  plan in October  1995 and the
Company recorded a pretax  restructuring  charge to earnings of $14.5 million in
the fourth quarter of 1995. The restructuring  charge was primarily comprised of
involuntary  employee  termination  benefits  (related  to  its  realignment  of
operational  responsibilities)  and lease cancellation  penalty fees and related
costs  resulting  from the  Company's  plan to exit  certain  activities  in its
entertainment  venues.  In the fourth quarter of 1997, the Company concluded the


                                       21


<PAGE>

restructuring plan and reversed substantially all of the remaining restructuring
reserve,  which resulted in a $3.9 million pretax  reduction of other  operating
expenses.

DEFERRED TAX ASSETS

     The Company has recognized net assets of $79.7 million and $68.2 million at
January 1, 1999 and January 2, 1998,  respectively,  related to deferred  taxes,
which  generally  represent tax credit  carryforwards  and tax effects of future
available  deductions from taxable income.  During 1998, the Company  recognized
$11.1 million of certain purchase business  combination tax credits,  previously
believed  unrealizable and reduced the valuation  allowance  established against
these credits to reflect their probable  utilization.  The purchase business tax
credits carryforwards and the related valuation allowance was further reduced by
$1.5 million due to adjustments by the Internal  Revenue  Service.  During 1997,
the Company  recognized  the  utilization  of $1.9  million of certain  purchase
business combination tax credits previously believed unrealizable,  reducing the
valuation allowance.

     Management has considered  various  factors as described below and believes
that the Company's  recognized  net deferred tax assets are more likely than not
to be realized.

     Realization  of the net deferred tax assets are  dependent on the Company's
ability to generate future taxable  income.  During the period 1995 to 1998, the
Company  would have  generated  taxable  and pretax book income in each year and
cumulative  taxable and pretax book income for this period of $142.0 million and
$74.8  million,  respectively,  after  adjusting  for the pro forma  effects  of
certain  transfers  related  to the  Distribution  and for  unusual  income  and
charges.  The  relationship of pretax book income and taxable income is expected
to  continue   indefinitely,   with  future  originating  temporary  differences
offsetting  the  reversal  of  existing  temporary  differences.  The  Company's
deferred tax assets primarily  relate to temporary  differences for property and
equipment,  accrued rent and reserves and to alternative minimum tax and general
business  tax  credit  carryforwards.   All  of  these  items  represent  future
reductions in the Company's regular tax liabilities.

     Management  believes  that it is more likely  than not that future  taxable
income will be  sufficient  to realize the net deferred  tax assets  recorded at
January 1, 1999 and January 2, 1998.  Management  anticipates  that increases in
taxable  income  will  arise in  future  periods  primarily  as a result  of the
business  strategies   discussed  herein  (see  "Item  1.  Business  -  Business
Strategy") and reduced operating costs resulting from the ongoing  restructuring
of the Company's business  processes.  The anticipated  improvement in operating
results is expected to increase  the taxable  income base to a level which would
allow realization of the existing net deferred tax assets within eight to twelve
years.

     Future  levels of operating  income and other  taxable  gains are dependent
upon general economic and industry  conditions,  including  airport and tollroad
traffic,  inflation,  competition  and demand for  development of concepts,  and
other  factors  beyond the  Company's  control.  No assurance  can be given that
sufficient  taxable  income will be generated for full  utilization of these tax
credits and  deductible  temporary  differences.  Management  has considered the
above  factors in reaching its  conclusion  that it is more likely than not that
operating income will be sufficient to utilize these deferred  deductions fully.
The amount of the net deferred tax assets considered realizable,  however, could
be reduced if estimates of future taxable income are not achieved.

SHAREHOLDER'S DEFICIT

     The level of long-term debt  distributed to the Company in connection  with
its spin-off from Host  Marriott was based on the Company's  ability to generate
sufficient  operating  cash  flow to  service  the  Senior  Notes.  The level of
distributed  long-term debt resulted in the Company  reflecting a  shareholder's
deficit of $94.4 million and $111.3 million as of January 1, 1999 and January 2,
1998, respectively.

INFLATION

     The  Company's  expenses are affected by inflation.  While price  increases
generally can be instituted as inflation occurs, most contracts require landlord
approval before prices can be increased,  which may temporarily  

                                       22

<PAGE>

have an adverse impact on profit  margins.  Management  believes that over time,
however, the Company will be able to raise prices and sustain profit margins.

ACCOUNTING PERIOD

     The Company's 1998 and 1997 fiscal years contained 52 weeks, while the 1996
fiscal year  contained 53 weeks.  The  Company's  fiscal year ends on the Friday
nearest to December 31.


RISK FACTORS AND FORWARD-LOOKING STATEMENTS

     This report,  the Company's  other reports  filed with the  Securities  and
Exchange  Commission or furnished to shareholders and its public  statements and
press releases may contain  "forward-looking  statements"  within the meaning of
the federal  securities  laws,  including  statements  concerning  the Company's
outlook for 1999 and beyond;  the growth in total  revenue and  earnings in 1999
and  subsequent  years;  the amount of  additional  revenues  expected  from new
domestic and  international  shopping mall food court and airport contracts that
were added in 1997 or 1998 or that are  expected  to be added or renewed in 1999
and subsequent years; efforts and expectations relating to Year 2000 compliance;
anticipated  retention  rates of  existing  contracts  in core  business  lines;
capital  spending  plans;  projected  cash flows from certain  operating  units;
business  strategies  and their  anticipated  results;  and  similar  statements
concerning future events and expectations that are not historical facts.

     These  forward-looking   statements  are  subject  to  numerous  risks  and
uncertainties,  including  the  effects of  seasonality,  airline  and  tollroad
industry  fundamentals  and general  economic  conditions  (including  commodity
prices and the current economic downturn in Asia), competitive forces within the
food, beverage and retail concessions industries,  the availability of cash flow
to fund future  capital  expenditures,  government  regulation and the potential
adverse  impact of union labor  strikes  and the Year 2000 issue on  operations.
Forward-looking   statements  are  inherently  uncertain,   and  investors  must
recognize that actual results could differ  materially  from those  expressed or
implied by the statements.

     SEASONALITY.  The  Company's  revenues and  operating  profit  margins have
varied,  and are  expected to continue to vary,  significantly  from  quarter to
quarter as a result of seasonal  traffic  patterns.  The  Company's  business is
seasonal in nature,  with the highest  vacation  traffic taking place during the
peak summer  travel  months,  particularly  between  Memorial Day and Labor Day.
Results of  operations  for any  particular  quarter  may not be  indicative  of
results of operations for future periods.

     INDUSTRY FUNDAMENTALS AND GENERAL ECONOMIC CONDITIONS. The Company could be
adversely impacted during  inflationary  periods. If operating expenses increase
in the future due to  inflation,  the Company can recover some of the  increased
costs by  increasing  menu prices.  However,  most  contracts  require  landlord
approval before prices can be increased,  which could reduce profit margins.  In
addition, a significant  recession could reduce air travel or cause users of the
Company's  facilities to cancel,  reduce or postpone their use of the facilities
or cause  patrons to reduce their  spending on food,  beverage  and  merchandise
while at such facilities.

     COMPETITIVE  FORCES. The food and beverage and retail concessions  business
in  airports,  on tollroads  and in shopping  malls is highly  competitive.  The
Company  competes to retain existing  contracts and to obtain new contracts from
airport,  highway and municipal  authorities and shopping mall  developers.  The
Company's  contracts generally have a fixed term and in any fiscal year a number
of  these  contracts  either  expire  or come up for  renewal.  There  can be no
assurance that the Company will be able to retain and renew  existing  contracts
or obtain new contracts.  Competition within the industry is likely to intensify
as  the  Company  and  its  competitors  attempt  to  expand  operations.   Such
intensified  competition  could have a material  adverse impact on the Company's
business, financial condition and results of operations (see "Item 1. Business -
Competition").

     CAPITAL EXPENDITURES.  The Company incurs capital expenditures to build out
new  facilities,  expand or re-concept  existing  facilities and to maintain the
quality and improve  operations  of existing  facilities.  The Company funds its
capital  expenditures  with a combination  of cash flow  generated  from ongoing
operations,  current cash balances and existing credit facilities.  There can be
no assurance  that cash flow from  operations in future periods will be adequate
to sustain the level of capital expenditures made in prior periods.

                                       23


<PAGE>


     GOVERNMENT  REGULATION.  The food, beverage and retail concessions business
is  subject  to  numerous  federal,  state  and  local  government  regulations,
including  regulations relating to the sale of alcoholic beverages,  preparation
and  sale of  food,  employer/employee  relations  and  regulations  related  to
security of airports.  The application of these regulations to the Company, such
as the loss of a liquor license at an operating  location,  and changes in these
regulations,  such as any substantial increases in the minimum wage or mandatory
health care coverage,  could adversely affect the Company's business,  financial
condition and results of operations.

     UNION LABOR STRIKES.  The Company's  operations could be adversely impacted
by union labor  strikes,  such as the  Northwest  Airlines  pilots'  strike that
occurred  during the third  quarter of 1998.  While such strikes  have  occurred
infrequently  in the past, a prolonged  strike by an airline's union labor force
could reduce air travel,  especially in hub  locations  serviced by the affected
airline.  Due to the Company's  level of fixed  operating  costs,  a significant
reduction in passenger  enplanements  could reduce  operating  profit margins at
airport locations affected by the union strike.

     YEAR 2000. The Company is currently working to resolve the potential impact
of the Year 2000 on the Company's  operations.  If the Company, its customers or
its  vendors are unable to resolve  these  issues in a timely  manner,  it could
result in material  financial risk to the Company.  In January 1999, the General
Accounting Office (the "GAO") issued a report concerning the status of airports'
Year 2000 readiness. A significant number of airports surveyed did not expect to
meet the Federal Aviation Administration's  recommended preparation date and had
not completed  contingency  plans. As a result, the GAO reported that it appears
likely that there will be some critical  equipment  failure or  malfunction  and
that airport efficiencies will be degraded,  which could result in flight delays
or airport  closures.  The  Company can not predict the effect of such delays or
closures on its operations.  If significant  delays were to occur, the Company's
results  may reflect  short-term  benefits;  however,  should  extended  airport
closures  occur the Company's  results could be materially  adversely  affected.
(See "Other Matters").

     ASIAN MARKETS.  During 1998,  the deepening of the Asian economic  downturn
adversely  affected  a small  number of the  Company's  concessions  operations,
particularly its duty-free merchandise  concessions catering to Asian travelers.
The Asian  markets are not expected to improve  significantly  in the near term,
resulting in continued  negative  impact on the  Company's  operations  in these
selected airports.


OTHER MATTERS

     The Company is currently  addressing Year 2000 issues with action plans for
its: (1) information  systems,  (2) embedded chip systems,  including  equipment
that operates such items as the Company's freezers, air conditioning and cooling
systems,  fryers and security  systems,  (3)  third-party  (vendor and supplier)
relationships and (4) contingency planning.

     The Company has  established a Year 2000 Project Team,  headed by the Chief
Information  Officer,  who reports to the Chief  Financial  Officer,  to resolve
significant  Year 2000  issues in a timely  manner as they are  identified.  The
project steering team includes executive management and employees with expertise
from various disciplines including  information  technology,  finance,  internal
audit, legal and operations.  In addition, the Company has retained the services
of consulting firms with particular expertise in the Year 2000 problem.

     INFORMATION  SYSTEMS.  To date,  the  Company  has  identified  20 internal
systems that will require correction.  The Company is resolving Year 2000 issues
through  replacement of equipment,  modification  of software and replacement of
certain software systems. For mission critical systems, third-party experts will
be engaged to verify Year 2000 compliance testing.  The Company anticipates that
all mission critical information  technology systems at corporate  headquarters,
which perform  financial  management  processes,  will be Year 2000 compliant by
April 1999 and  anticipates  that other  systems  will be completed by the third
quarter of 1999.

     EMBEDDED SYSTEMS.  As of the end of 1998, a comprehensive  inventory of the
Company's  mission  critical  and  date-sensitive   embedded  systems  had  been
completed  for  approximately  half of the  Company's  locations.  The 

                                       24


<PAGE>

remaining  locations  are  expected to be fully  inventoried  by  mid-1999.  All
manufacturers  of inventoried  components  utilized in the operations  have been
contacted in order to determine  whether the components are Year 2000 compliant.
The Company  intends to  remediate or replace,  as  applicable,  any  identified
non-compliant  systems and expects to complete this process by August 1999.  The
quality of the responses  received from  manufacturers,  the estimated impact of
the individual system on the Company,  and the ability of the Company to perform
meaningful  tests  will  influence  its  decision  regarding  whether to conduct
independent testing of embedded systems.

     THIRD-PARTY  RELATIONSHIPS.  Formal  communications with all critical third
parties have been initiated to determine  potential  exposure which would result
in their  failure to remediate  their own Year 2000 issues.  These third parties
have  included  the  Company's  supply  chain,  airport  authorities,  financial
institutions and utility  companies.  New business  relationships with alternate
providers of products and services will be considered if deemed necessary.

     RISKS/CONTINGENCY PLANS. As part of the Company's normal business practice,
it maintains plans to follow during emergency circumstances, some of which could
arise from Year 2000-related  problems.  The Company's  contingency planning for
the Year 2000 will address  various  alternatives  and will include  assessing a
variety of scenarios to which the Company may be required to react.  The Company
continues  to  develop  its  contingency  plans for Year 2000  issues,  and each
individual  location will develop a contingency plan for the impact of Year 2000
business  interruptions.  The Company's operations are geographically  dispersed
and it has a large  supplier  base,  which should  mitigate  any adverse  impact
resulting from supplier problems.

     POTENTIAL RISKS. Potential sources of risk include operational  disruptions
caused by equipment failure and the inability of principal  suppliers to be Year
2000  compliant,  which could result in delays in product  deliveries  from such
suppliers.  Utility  services,  including  electric,  telephone  and water,  are
necessary  for the  Company's  basic  operations.  Should any of these  critical
vendors  fail,  the  impact  of any such  failure  could  become  a  significant
challenge  to the  Company's  ability to operate its  facilities  at  individual
locations.  Based on the information  supplied to date by the Company's critical
vendors and suppliers,  the Company believes the probability of such failures to
be low. However,  the Company's action plan emphasizes  continued  monitoring of
the  progress of these  critical  vendors and  suppliers  toward their Year 2000
compliance.

     In addition,  the  Company's  operations  may also be affected by Year 2000
issues facing the Federal  Aviation  Administration  and the airlines related to
air traffic control  systems,  aircraft  equipment and security  systems used in
airports.  These  issues  could  potentially  lead to  degraded  flight  safety,
grounded or delayed flights, selected airport closures,  increased airline costs
and customer inconvenience.  Since the Company is not responsible for addressing
these issues,  it cannot  control or predict the impact on future  operations of
the Year 2000 problem as it pertains to air traffic control and airport security
systems.  If airline passenger  traffic declines  significantly in late 1999 and
the year  2000 as a  result  of Year  2000  problems  experienced  by the FAA or
individual airlines or the public's fear of such problems, the Company's results
of operations may be materially adversely affected.

     FINANCIAL  IMPLICATIONS.  The Company  currently  estimates  that  external
costs, such as consulting experts,  for its Year 2000 systems compliance program
will total  approximately  $4.0  million in 1999 and $0.5  million in 2000.  The
Company currently  estimates that internal costs, such as remediation coding and
system support,  for Year 2000 compliance will total  approximately $1.1 million
in 1999 and $0.3 million in 2000.  Additionally,  final  remediation may require
further  capital  investments  to replace  equipment and software.  During 1998,
approximately  $1.1 million in external costs and approximately  $0.8 million in
internal  costs  were  incurred  relating  to  Year  2000  implementation.   The
anticipated costs associated with the Company's Year 2000 compliance  program do
not  include  time and costs that may be  expensed as a result of the failure of
any third parties,  including suppliers,  to become Year 2000 compliant or costs
to implement any contingency plans.

     The discussion of the Company's  efforts and expectations  relating to Year
2000 compliance are forward-looking statements. The Company's ability to achieve
Year 2000  compliance  and the  level of costs  associated  therewith,  could be
adversely  impacted  by,  among  other  things,  the  availability  and  cost of
programming  and  
  
                                     25
<PAGE>

testing  resources,   vendors'  ability  to  modify  proprietary  software,  and
anticipated problems identified in the ongoing compliance review.

     The  statements   contained  in  this  section  are  "Year  2000  Readiness
Disclosures"  as  provided  for in  the  Year  2000  Information  and  Readiness
Disclosure Act.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The  Company is  exposed to market  risk from  changes in  interest  rates,
foreign currency exchange rates and commodity prices, which could impact results
of operations and financial condition. Changes in market interest rates over the
next year would not  materially  impact  earnings or cash flow as the  Company's
cash  investments  are  short-term,  interest  rates under the revolving  credit
facility are  short-term and the interest rates on the long-term debt are fixed.
The  Company's  exposure to changes in foreign  currency  exchange  rates is not
material to earnings or cash flows. Due to the Company's wide variety of product
offerings and diverse brand portfolio, the Company would not expect fluctuations
in commodity prices to be material to earnings or cash flows.

     The fair  value of fixed rate  long-term  debt is  sensitive  to changes in
interest  rates,  which would result in gains/losses in the market value of this
debt due to  differences  between  the  market  interest  rates and rates at the
inception of the debt  obligation.  Based on a hypothetical  immediate 150 basis
point  increase in interest  rates at the end of fiscal years 1998 and 1997, the
market  value of fixed rate  long-term  debt would  result in a net  decrease of
$28.7 million and $32.5  million,  respectively.  Conversely,  a 150 basis point
decrease in interest rates would result in a net increase in the market value of
fixed rate long-term  debt  outstanding at the end of fiscal years 1998 and 1997
of $32.1 million and $37.2 million,  respectively.  Changes in fair value of the
Company's long-term debt does not impact earnings or cash flows.

     The  Company  has the  ability  to  borrow  up to $75.0  million  against a
revolving credit facility. As of the end of 1998,  borrowings  outstanding under
the revolving  credit facility totaled $11.6 million at an average interest rate
of 7.77%.  A  hypothetical  10% increase or decrease in interest rates would not
have  had a  material  effect  on  earnings  in  1998  as  the  average  balance
outstanding was $0.6 million.

     Significant  changes in  commodity  prices could  impact  future  operating
profit margins and cash flows. The Company has the ability to recover from sharp
increases in commodity  prices by increasing its menu prices.  However,  in some
instances, increases in menu prices require prior landlord approval.

                                       26

<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial information is included on the pages indicated.

                                                                         PAGE(S)
                                                                         -------
        Report of Independent Public Accountants                           28

        Consolidated Balance Sheets as of January 1, 1999 
              and January 2, 1998                                          29

        Consolidated Statements of Operations for the Fiscal
              Years Ended January 1, 1999, January 2, 1998 and
              January 3, 1997                                              30

        Consolidated Statements of Cash Flows for the Fiscal
              Years Ended January 1, 1999, January 2, 1998 and
              January 3, 1997                                              31

        Consolidated Statements of Shareholder's Deficit for the
              Fiscal Years Ended January 1, 1999, January 2, 1998
              and January 3, 1997                                          32

        Notes to Consolidated Financial Statements                      33 - 47

                                       27

<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholder of Host International, Inc.:



        We have audited the  accompanying  consolidated  balance  sheets of Host
International, Inc. and subsidiaries, as of January 1, 1999 and January 2, 1998,
and  the  related  consolidated   statements  of  operations,   cash  flows  and
shareholder's  deficit for each of the three  fiscal  years in the period  ended
January  1, 1999.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

        We conducted our audits in accordance with generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

        In our opinion, the consolidated  financial statements referred to above
present  fairly,  in all  material  respects,  the  financial  position  of Host
International,  Inc. and subsidiaries as of January 1, 1999 and January 2, 1998,
and the results of their  operations  and their cash flows for each of the three
fiscal years in the period ended January 1, 1999, in conformity  with  generally
accepted accounting principles.





ARTHUR ANDERSEN LLP
Washington, D.C.
January 27, 1999

                                       28

<PAGE>


HOST INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 1999 AND JANUARY 2, 1998

<TABLE>
<CAPTION>

- --------------------------------------------------------------------------- ----------------- ----------------
                                                                                  1998             1997
- --------------------------------------------------------------------------- ----------------- ----------------
<S>                                                                                <C>             <C>   

                                                                                     (IN MILLIONS)

                                  ASSETS
Current assets:
   Cash and cash equivalents                                                        $  33.1          $  60.3 
   Accounts receivable, net                                                            28.8             23.3 
   Inventories                                                                         38.1             38.5 
   Deferred income taxes                                                               19.7             12.9 
   Prepaid rent                                                                         7.4              7.0 
   Other current assets                                                                 6.7              6.2 
- --------------------------------------------------------------------------- ----------------- ----------------
   Total current assets                                                               133.8            148.2 

Property and equipment, net                                                           290.2            252.5 
Intangible assets                                                                      21.9             21.9 
Deferred income taxes                                                                  60.0             55.3 
Other assets                                                                           24.8             22.1 
- --------------------------------------------------------------------------- ----------------- ----------------

Total assets                                                                        $ 530.7          $ 500.0 
- --------------------------------------------------------------------------- ----------------- ----------------

                  LIABILITIES AND SHAREHOLDER'S DEFICIT

Current liabilities:
   Accounts payable                                                                 $  75.8          $  67.7 
   Accrued payroll and benefits                                                        44.5             46.1 
   Accrued interest payable                                                             4.8              4.7 
   Current portion of long-term debt                                                    1.1              1.0 
   Borrowings under line-of-credit agreement                                           11.6              --- 
   Other current liabilities                                                           35.2             36.4 
- --------------------------------------------------------------------------- ----------------- ----------------
   Total current liabilities                                                          173.0            155.9 

Long-term debt                                                                        405.9            405.8 
Other liabilities                                                                      46.2             49.6 
- --------------------------------------------------------------------------- ----------------- ----------------
Total liabilities                                                                     625.1            611.3 

Common stock, no par value, 100 shares authorized,
   issued and outstanding                                                               ---              --- 
Accumulated other comprehensive income                                                  0.1             (0.1)
Retained deficit                                                                      (94.5)          (111.2)
- --------------------------------------------------------------------------- ----------------- ----------------
   Total shareholder's deficit                                                        (94.4)          (111.3)
- --------------------------------------------------------------------------- ----------------- ----------------
Total liabilities and shareholder's deficit                                         $ 530.7          $ 500.0 
- --------------------------------------------------------------------------- ----------------- ----------------

</TABLE>






               See notes to the consolidated financial statements.

                                       29

<PAGE>


HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997

<TABLE>
<CAPTION>

- -------------------------------------------------------------------- ---------------- ----------------- ----------------
                                                                          1998              1997             1996
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
<S>                                                                        <C>              <C>              <C> 
                                                                                       (IN MILLIONS)

REVENUES                                                                   $1,232.0          $1,146.3         $1,139.7 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------

OPERATING COSTS AND EXPENSES
   Cost of sales                                                              362.2             329.6            335.9 
   Payroll and benefits                                                       371.5             338.4            335.0 
   Rent                                                                       188.9             180.4            180.9 
   Royalties                                                                   25.7              22.6             20.7 
   Depreciation and amortization                                               51.8              49.1             49.7 
   Write-downs of long-lived assets                                             5.9               4.2              --- 
   Reversal of restructuring charges                                            ---              (3.9)             --- 
   General and administrative                                                  58.0              54.3             51.8 
   Other                                                                      109.2             105.5            105.6 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
Total operating costs and expenses                                          1,173.2           1,080.2          1,079.6 

OPERATING PROFIT                                                               58.8              66.1             60.1 

   Interest expense                                                           (39.9)            (39.8)           (40.3)
   Interest income                                                              1.7               3.0              2.4 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
INCOME BEFORE INCOME TAXES                                                     20.6              29.3             22.2 

Provision (benefit) for income taxes                                           (2.5)              9.7              9.3 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
NET INCOME                                                                 $   23.1          $   19.6         $   12.9 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------

</TABLE>


















               See notes to the consolidated financial statements.

                                       30

<PAGE>


HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997

<TABLE>
<CAPTION>

- -------------------------------------------------------------------- ---------------- ----------------- ----------------
                                                                          1998              1997             1996
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
<S>                                                                      <C>               <C>               <C>    
                                                                                       (IN MILLIONS)

OPERATING ACTIVITIES
Net income                                                                   $ 23.1            $ 19.6           $ 12.9 

Adjustments to reconcile cash from operations:
   Depreciation and amortization                                               53.8              50.8             50.4 
   Deferred financing                                                           1.3               1.3              1.3 
   Deferred income taxes                                                      (11.5)             10.5             (5.5)
   Write-downs of long-lived assets                                             5.9               4.2              --- 
   Reversal of restructuring charges                                            ---              (3.9)             --- 
   Other                                                                        4.0               6.1              3.8 

   Working capital changes:
        (Increase) decrease in accounts receivable                             (4.7)              5.4              2.1 
        (Increase) decrease in inventories                                     (0.4)              1.5             (6.8)
        Increase in other current assets                                       (2.1)             (5.7)            (1.6)
        Increase (decrease) in accounts payable and accruals                    4.3             (43.9)            41.9 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
Cash provided by operations                                                    73.7              45.9             98.5 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------

INVESTING ACTIVITIES
Capital expenditures                                                          (95.6)            (66.0)           (54.9)
Net proceeds from the sale of assets                                            ---               ---              2.4 
Other, net                                                                     (8.3)             (8.7)             2.6 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
Cash used in investing activities                                            (103.9)            (74.7)           (49.9)
- -------------------------------------------------------------------- ---------------- ----------------- ----------------

FINANCING ACTIVITIES
Payment to Host Marriott Corporation for Marriott  International
   options and deferred shares                                                 (3.5)             (2.2)             --- 
Repayments of long-term debt                                                   (1.1)             (1.7)            (0.8)
Issuance of long-term debt                                                      1.4               ---              --- 
Issuance of intercompany debt                                                  10.0               ---              --- 
Repayment of intercompany debt                                                (10.0)              ---              --- 
Net borrowings under line-of-credit agreement                                  11.6               ---              --- 
Dividends to Host Marriott Services                                            (5.6)              ---              --- 
Other                                                                           0.2              (0.1)             --- 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
Cash provided by (used in) financing activities                                 3.0              (4.0)            (0.8)
- -------------------------------------------------------------------- ---------------- ----------------- ----------------

(DECREASE) INCREASE IN CASH AND
   CASH EQUIVALENTS                                                           (27.2)            (32.8)            47.8 

CASH AND CASH EQUIVALENTS, beginning of year                                   60.3              93.1             45.3 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
CASH AND CASH EQUIVALENTS, end of year                                       $ 33.1            $ 60.3           $ 93.1 
- -------------------------------------------------------------------- ---------------- ----------------- ----------------

</TABLE>
                             
               See notes to the consolidated financial statements.

                                       31

<PAGE>


HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
(IN MILLIONS)

<TABLE>
<CAPTION>


- --------------------------------------------------------------- ------------ ------------- ------------------ -----------
                                                                                              ACCUMULATED
                                                                                                 OTHER
                                                                  COMMON       RETAINED      COMPREHENSIVE
                                                                   STOCK       DEFICIT          INCOME          TOTAL
- --------------------------------------------------------------- ------------ ------------- ------------------ -----------
<S>                                                                 <C>          <C>             <C>             <C> 

Balance, December 29, 1995                                          $  ---       $(150.2)            $  ---     $(150.2)

Comprehensive income:
   Net income                                                          ---          12.9                ---        12.9 
- --------------------------------------------------------------- ------------ ------------- ------------------ -----------
Total comprehensive income                                             ---          12.9                ---        12.9 

Adjustments to distribution of capitalization of Company               ---           4.6                ---         4.6 
Deferred compensation                                                  ---           2.7                ---         2.7 
- --------------------------------------------------------------- ------------ ------------- ------------------ -----------
Balance, January 3, 1997                                               ---        (130.0)               ---      (130.0)

Comprehensive income:
   Net income                                                          ---          19.6                ---        19.6 
   Foreign currency translation adjustments                            ---           ---               (0.1)       (0.1)
- --------------------------------------------------------------- ------------ ------------- ------------------ -----------
Total comprehensive income                                             ---          19.6               (0.1)       19.5 

Deferred compensation                                                  ---           1.4                ---         1.4 
Payment to Host Marriott Corporation for Marriott
   International options and deferred shares                                        (2.2)               ---        (2.2)
- --------------------------------------------------------------- ------------ ------------- ------------------ -----------
Balance, January 2, 1998                                               ---        (111.2)              (0.1)     (111.3)

Comprehensive income:
   Net income                                                          ---          23.1                ---        23.1 
   Foreign currency translation adjustments                            ---           ---                0.2         0.2 
- --------------------------------------------------------------- ------------ ------------- ------------------ -----------
Total comprehensive income                                             ---          23.1                0.2        23.3 

Deferred compensation                                                  ---           2.7                ---         2.7 
Payment to Host Marriott Corporation for Marriott
   International options and deferred shares                                        (3.5)               ---        (3.5)
Dividend to Host Marriott Services                                     ---          (5.6)               ---        (5.6)
- --------------------------------------------------------------- ------------ ------------- ------------------ -----------
Balance, January 1, 1999                                            $  ---       $ (94.5)             $ 0.1    $  (94.4)
- --------------------------------------------------------------- ------------ ------------- ------------------ -----------

</TABLE>









              See notes to the consolidated financial statements.

                                       32


<PAGE>


            

                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Prior to December 21, 1995, Host International,  Inc. (a Delaware  corporation -
the  "Company") was a  wholly-owned  subsidiary of Host Marriott  Travel Plazas,
Inc.  ("HMTP"),  a wholly-owned  subsidiary of Host Marriott  Corporation ("Host
Marriott"),  and  operated  most of the  airport,  travel  plaza and  sports and
entertainment  concessions  facilities of Host  Marriott.  On December 21, 1995,
HMTP was merged into the  Company  with the  Company  emerging as the  surviving
entity.  Pursuant to the merger,  the Company  became the operator or manager of
all of the food, beverage and merchandise  concessions  businesses in travel and
entertainment  venues of Host  Marriott.  The Company also became the obligor on
the $400.0 million of senior notes,  due in 2005 (the "Senior Notes") which were
issued by HMTP in May 1995 (see Note 5).
        On  December  29,  1995,  (the  "Distribution   Date"),   Host  Marriott
distributed, to holders of its common stock, 31.9 million shares of common stock
of Host Marriott  Services  Corporation  ("Host  Marriott  Services")  through a
special dividend,  resulting in the division of Host Marriott's  operations into
two separate  companies.  Through a series of transactions that were consummated
prior to the Distribution Date, the Company became a wholly-owned  subsidiary of
Host Marriott Services.
     The consolidated  financial  statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 50% or less owned
affiliates  over  which the  Company  has the  ability to  exercise  significant
influence are accounted for using the equity method.  All material  intercompany
transactions  and balances  between the Company and its  subsidiaries  have been
eliminated.

DESCRIPTION OF THE BUSINESS

The Company operates or manages  restaurants,  gift shops and related facilities
at 71 airports  and 17  off-airport  locations,  on 13 tollroads  (including  92
travel  plazas) and in 5 shopping  malls.  The Company  conducts its  operations
primarily in the United States and manages the travel plaza concessions business
of its affiliate,  Host Marriott Tollroads,  Inc. ("Tollroads"),  a wholly-owned
subsidiary  of Host  Marriott  Services.  The  Company  also  has  international
operations in the  Netherlands,  New Zealand,  Australia,  Canada,  Malaysia and
China.


FISCAL YEAR

The Company's fiscal year ends on the Friday nearest to December 31, with fiscal
quarters  of 12 weeks in each of the first  three  quarters  and 16 weeks in the
fourth quarter (except in a 53-week year,  which has a 17-week fourth  quarter).
Fiscal years 1998 and 1997  include 52 weeks while fiscal year 1996  includes 53
weeks.  Fiscal  year 1998  ("1998")  ended on January 1, 1999;  fiscal year 1997
("1997")  ended on January  2, 1998;  and  fiscal  year 1996  ("1996")  ended on
January 3, 1997.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents generally include all highly liquid investments with a
maturity of three months or less at the date of purchase.

INVENTORIES

Inventories consist of merchandise, food items and supplies, which are stated at
the lower of average  cost or market.  The cost of food  items and  supplies  is
determined using the first-in,  first-out method. Merchandise cost is determined
using the retail method.

PROPERTY AND EQUIPMENT

Property and  equipment  are recorded at cost.  Leasehold  improvements,  net of
estimated residual value, are amortized using the straight-line  method over the
shorter of the useful life of the asset,  generally 5 to 15 years,  or the lease
term. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 3 to 10 years for furniture and equipment.

INTANGIBLE ASSETS

Intangible  assets  consist of goodwill of $5.0 million in 1998 and $5.2 million
in 1997, and contract rights of $17.0 million in 1998 and $16.7 million in 1997.
These  intangibles  are  amortized on a  straight-line  basis over periods of 40
years for goodwill and the life of the  contract,  generally 5 to 15 years,  for
contract rights. Amortization expense totaled $2.3 million in 1998, $2.9 million
in 1997 and $2.8 million in 1996. Accumulated amortization totaled $14.7 million
and $13.9 million as of January 1, 1999 and January 2, 1998, respectively.

IMPAIRMENTS OF LONG-LIVED ASSETS

Property  and  equipment  and  intangible  assets are  reviewed  for  impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of undiscounted expected future cash
flows is less than the

                                       33


<PAGE>

                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



carrying amount of an individual operating unit's assets, the Company recognizes
an impairment loss based on the amount by which the carrying amount of the asset
exceeds  the fair value of the asset.  Fair value is  calculated  as the present
value of expected future cash flows on an individual operating unit basis.

SELF-INSURANCE PROGRAM

Prior to October 1993,  Host  Marriott was  self-insured  for certain  levels of
general   liability  and  workers'   compensation.   Estimated  costs  of  these
self-insurance  programs were accrued at present values of projected settlements
for  known  and  anticipated   claims.   Host  Marriott's   costs  for  workers'
compensation and general liability insurance were allocated to the Company based
on specific  identification  of claims.  Host  Marriott,  including the Company,
discontinued its self-insurance program for claims arising subsequent to October
1993.  Self-insurance  liabilities  amounted to $5.5 million and $9.9 million at
January 1, 1999 and January 2, 1998, respectively.

FOREIGN CURRENCY TRANSLATION

Results of operations for foreign  entities are translated to U.S. dollars using
the  average  exchange  rates  during the  period.  Assets and  liabilities  are
translated  using  the  exchange  rate in  effect  at the  balance  sheet  date.
Resulting  translation  adjustments  are reflected in  shareholders'  deficit as
cumulative foreign currency translation adjustments.

INCOME TAXES

The Company recognizes deferred tax assets and liabilities based on the expected
future tax consequences of existing  differences between the financial reporting
and tax reporting  bases of assets and  liabilities  and operating  loss and tax
credit carryforwards.

NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

The Company adopted  Statement of Financial  Accounting  Standards  ("SFAS") No.
130, "Reporting Comprehensive Income," during 1998 and the adoption did not have
a material effect on the Company's 1998 consolidated  financial statements.  The
Company  adopted  SFAS  No.  129,   "Disclosure  of  Information  about  Capital
Structure," and SFAS No. 131,  "Disclosures  about Segments of an Enterprise and
Related  Information," during 1997. The adoption of these standards did not have
a material effect on the Company's 1997 consolidated  financial  statements (see
Note 12). The Company  adopted the  disclosure-only  provisions of SFAS No. 123,
"Accounting for Stock-Based  Compensation,"  during 1996 (see Note 7). Statement
of  Position  ("SOP")  98-1,  "Accounting  for the  Costs of  Computer  Software
Developed or Obtained for Internal Use" and SOP 98-5, "Reporting on the Costs of
Start-Up  Activities"  were  issued  subsequent  to the end of 1997  and must be
adopted in fiscal years beginning after December 15, 1998, with earlier adoption
permitted.  Subsequent to the end of 1998, the Company  adopted SOP 98-1 and SOP
98-5. As a result of the adoption of SOP 98-1, the Company  anticipates  that it
will  capitalize  approximately  $0.8  million of internal  payroll and benefits
costs during 1999 that previously would have been expensed.  The adoption of SOP
98-5 in the first quarter of 1999 resulted in a $0.7 million charge,  net of tax
of $0.5 million, for a change in accounting principle. Additionally, the Company
expects to expense  approximately $2.6 million of anticipated  start-up costs in
1999 that otherwise would have been  capitalized and amortized in 2000 under the
Company's former accounting policy.

USE OF ESTIMATES

The preparation of the consolidated  financial statements requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the period. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain  reclassifications were made to the prior years' financial statements to
conform to the 1998 presentation.


2.  PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>

- ------------------------------------ ---------- -----------
                                       1998        1997
- ------------------------------------ ---------- -----------
<S>                                    <C>         <C>   
                                         (IN MILLIONS)

Leasehold improvements                $ 413.5     $ 367.7 
Furniture and equipment                 214.4       208.6 
Construction in progress                 37.2        32.9 
- ------------------------------------ ---------- -----------
Total property and equipment            665.1       609.2 
Less:  accumulated
       depreciation and
       amortization                    (374.9)     (356.7)
- ------------------------------------ ---------- -----------
Property and equipment, net           $ 290.2     $ 252.5 
- ------------------------------------ ---------- -----------
</TABLE>


                                       34
  
<PAGE>

                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


   During 1998, an operating  cash flow  analysis  revealed that the Company's
investment  in one  shopping  mall food  court was  fully  impaired  and that an
investment in an internally  used software system was partially  impaired.  As a
result, the Company recognized non-cash, pretax charges against earnings of $2.4
million and $3.5 million, respectively. The shopping mall contract is a regional
mall where the  operating  real estate  under the contract is being phased in to
the Company over several years.  Customer traffic and capture rates at this mall
were well below the  Company's  expectations  and  insufficient  to support  the
number of concepts developed.  The capitalized system software was determined to
be partially  impaired  because all of the purchased  modules of the system that
were originally  intended to provide operating  efficiencies  could not be fully
implemented.
     During 1997,  the Company  recognized  a non-cash,  pretax  charge  against
earnings of $4.2 million  related to one airport  unit.  The partial  impairment
stemmed  from  construction  cost  overruns,  airline  traffic  shifts  and weak
operating performance.

3.  INCOME TAXES

The provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>

- --------------------------- -------- ---------- ----------
                             1998      1997       1996
- --------------------------- -------- ---------- ----------
<S>                          <C>       <C>        <C>    
                                    (IN MILLIONS)
Current:
   Federal                  $  6.4      $(3.2)     $11.1 
   Foreign                     0.2        ---        0.2 
   State                       2.4        2.4        3.5 
- --------------------------- -------- ---------- ----------
Total current
   provision (benefit)         9.0       (0.8)      14.8 
- --------------------------- -------- ---------- ----------

Deferred:
   Federal                     0.8       10.1       (2.3)
   Foreign                     ---        ---       (0.2)
   State                       0.3        2.3        2.2 
   Decrease in
     valuation allowance     (12.6)      (1.9)      (5.2)
- --------------------------- -------- ---------- ----------
Total deferred
   (benefit) provision       (11.5)      10.5       (5.5)
- --------------------------- -------- ---------- ----------

Total (benefit) provision   $ (2.5)     $ 9.7      $ 9.3 
- --------------------------- -------- ---------- ----------

</TABLE>

     At the  end of  1998,  the  Company  had  approximately  $10.6  million  of
alternative minimum tax credit carryforwards that do not expire and $7.4 million
of other tax credits that expire through 2018.
     The  Company  establishes  a valuation  allowance  in  accordance  with the
provisions  of  SFAS  No.  109,  "Accounting  for  Income  Taxes."  The  Company
continually reviews the adequacy of the valuation allowance and recognizes these
benefits only when  reassessment  indicates  that it is more likely than not the
benefits will be realized.
     In 1998,  the  Company  assessed  its past  earnings  history  and  trends,
budgeted sales and expiration dates of  carryforwards  and determined that it is
more likely than not that $11.1 million of certain purchase business combination
tax credits,  previously believed unrealizable,  will be realized. The valuation
allowance  established  against  these  credits  was  reduced to  reflect  their
probable  utilization.  The purchase  business tax credit  carryforwards and the
related  valuation  allowance  were  further  reduced  by  $1.5  million  due to
adjustments  by the Internal  Revenue  Service.  During  1997,  the Company also
recognized  the  utilization  of $1.9  million of these  purchase  business  tax
credits and reduced the valuation allowance accordingly.
     Realization  of the net deferred  tax assets is dependent on the  Company's
ability to generate sufficient future taxable income during the periods in which
temporary differences reverse or the tax credits are utilized. The amount of the
net  deferred tax assets  considered  realizable,  however,  could be reduced if
estimates of future taxable income are not achieved. Although realization is not
assured,  the Company  believes it is more likely than not that the net deferred
tax assets will be realized.
     The tax effect of each type of temporary  difference and carryforward  that
gives rise to a significant portion of deferred tax assets and liabilities is as
follows:

<TABLE>
<CAPTION>

- ------------------------------------- --------- ----------
                                        1998      1997
- ------------------------------------- --------- ----------
<S>                                      <C>      <C>   
                                         (IN MILLIONS)

Deferred tax assets:
   Tax credit carryforwards             $18.0      $21.7 
   Property and equipment                57.7       52.9 
   Casualty insurance                     8.7        8.8 
   Reserves                               4.7        5.9 
   Employee benefits                      0.3        2.6 
   Accrued rent                           9.4       10.7 
   Other                                  2.0        0.9 
- ------------------------------------- --------- ----------
Gross deferred tax assets               100.8      103.5 

Less:  valuation allowance              (13.9)     (26.5)
- ------------------------------------- --------- ----------
Net deferred tax assets                  86.9       77.0 
- ------------------------------------- --------- ----------

Deferred tax liabilities:
   Safe harbor lease investments         (2.2)      (3.8)
   Other deferred tax liabilities        (5.0)      (5.0)
- ------------------------------------- --------- ----------
Gross deferred tax liabilities           (7.2)      (8.8)
- ------------------------------------- --------- ----------
Net deferred income taxes               $79.7      $68.2 
- ------------------------------------- --------- ----------

</TABLE>

                                       35

<PAGE>
      
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     A  reconciliation  of the  statutory  federal  tax  rate  to the  Company's
effective income tax rate follows:

<TABLE>
<CAPTION>

- ------------------------- ---------- ----------- ----------
                            1998        1997       1996
- ------------------------- ---------- ----------- ----------
<S>                        <C>          <C>        <C>    

Statutory Federal
   tax rate                  35.0 %      35.0 %     35.0 %
State income tax,
   net of Federal
   tax benefit                4.9         4.9        4.9  
Tax credits                   1.3        (3.2)       6.5  
Change in valuation
   allowance                (61.2)       (6.5)     (23.4) 
Effect of state tax
   rate changes on
   deferred taxes             ---         ---       13.8  
Other, net                    7.8         2.8        5.1  
- ------------------------- ---------- ----------- ----------

Effective income
   tax rate                 (12.2)%      33.0 %     41.9 %
- ------------------------- ---------- ----------- ----------

</TABLE>

     The  Company  files a  consolidated  Federal  income tax  return  with Host
Marriott  Services,  which  includes all of its  subsidiaries.  The Company made
income tax payments of $9.1  million,  $2.5  million and $15.9  million in 1998,
1997 and 1996, respectively.

4.  DETAIL OF OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<TABLE>
<CAPTION>

- ---------------------------------- ---------- ---------
                                     1998       1997
- ---------------------------------- ---------- ---------
<S>                                  <C>         <C>   
                                      (IN MILLIONS)

Accrued rent                           $ 8.1     $ 7.9
Operating insurance accruals            10.2       8.6
International accruals                   4.8       3.5
Accrued franchise fees                   2.3       1.8
Other                                    9.8      14.6
- ---------------------------------- ---------- ---------
Total other current liabilities        $35.2     $36.4
- ---------------------------------- ---------- ---------

</TABLE>

5.  DEBT

Debt consists of the following:

<TABLE>
<CAPTION>

- ----------------------------------- --------- ---------
                                      1998      1997
- ----------------------------------- --------- ---------
<S>                                   <C>        <C>    
                                      (IN MILLIONS)
Senior Notes with a fixed rate
   of 9.5%, due 2005                 $400.0    $400.0 
Capital lease obligations               0.3       0.6 
Other                                   6.7       6.2 
- ----------------------------------- --------- ---------
Total debt                            407.0     406.8 
Less:  current portion                 (1.1)     (1.0)
- ----------------------------------- --------- ---------

Total long-term debt                 $405.9    $405.8 
- ----------------------------------- --------- ---------

</TABLE>

SENIOR NOTES

The  $400.0  million  of  senior  notes  (the  "Senior  Notes")  are  fully  and
unconditionally  guaranteed  (limited only to the extent necessary to avoid such
guarantees being  considered a fraudulent  conveyance under applicable law) on a
joint  and  several   basis  by  certain   subsidiaries   of  the  Company  (the
"Guarantors").  The Senior  Notes are also  secured  by a pledge of the  capital
stock  of  the  Guarantors.  The  indenture  governing  the  Senior  Notes  (the
"Indenture")  contains covenants that, among other things,  limit the ability of
the Company and certain of its subsidiaries to incur additional indebtedness and
issue preferred  stock,  pay dividends or make other  distributions,  repurchase
capital stock or repay  subordinated  indebtedness,  create certain liens, enter
into certain  transactions with affiliates,  sell certain assets,  issue or sell
capital   stock  of  the   Guarantors   and  enter  into  certain   mergers  and
consolidations.
     As of January 1, 1999,  the Company  had  approximately  $148.2  million of
unrestricted  funds available for  distribution to Host Marriott  Services under
the  provisions  of the  Indenture.  However,  certain  covenants  of  the  loan
agreements  referred to below further restrict the Company's ability to dividend
these funds to Host Marriott Services.  The Senior Notes can be called beginning
in May 2000 at a price of 103.56%, declining to par in May 2003.

CREDIT FACILITIES

The  First  National  Bank of  Chicago,  as agent  for a group of  participating
lenders,  has  provided  credit  facilities  (the  "Facilities")  to the Company
consisting  of  a  $75.0  million   revolving  credit  facility  (the  "Revolver
Facility") and a $25.0 million letter of credit facility maturing in April 2002.
The $75.0 million  Revolver  Facility  provides for working  capital and general
corporate purposes other than hostile acquisitions. As of the end of 1998, there
was $11.6 million of outstanding indebtedness under the Revolver Facility, at an
average  interest rate of 7.77%. An annual  commitment fee ranging from 0.25% to
0.375% is charged on the unused portion of the Facilities.  All borrowings under
the  Facilities  are senior  obligations  of the Company and are secured by Host
Marriott  Services' pledge of, and a first perfected  security  interest in, the
capital stock of the Company and certain of its subsidiaries.
     The loan agreements  relating to the Facilities  contain dividend and stock
retirement  covenants that are  substantially  similar to those set forth in the
Indenture,  except that  dividends  payable to the Company are limited to 25% of
the Company's consolidated net income, as defined in the loan agreement.  During
1998 and in  compliance  with the  Facilities,  the Company paid $5.6 million of
dividends to Host Marriott Services.

                                       36


<PAGE>
      
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     Aggregate debt maturities,  excluding capital lease obligations, at the end
of 1998 are as follows:

<TABLE>
<CAPTION>

- ------------------------------------ ------------------
Year
- ------------------------------------ ------------------
<S>                                              <C>
                                       (IN MILLIONS)

1999                                            $  1.1
2000                                               1.2
2001                                               1.3
2002                                               1.2
2003                                               1.0
Thereafter                                       400.9
- ------------------------------------ ------------------
Total debt                                      $406.7
- ------------------------------------ ------------------

</TABLE>

     The Company's other indebtedness  totaled $6.7 million with an average rate
of 8.1%.  Nearly $1.5 million of other debt is  denominated  in Dutch  Guilders.
     Deferred financing costs,  which are included in other assets,  amounted to
$7.8  million and $9.1 million at the end of 1998 and 1997,  respectively.  Cash
paid for interest was $38.6  million,  $38.5  million and $38.8 million in 1998,
1997 and 1996, respectively.

6.  SHAREHOLDER'S DEFICIT

One  hundred  shares  of  common  stock,  without  par  value,  are  issued  and
outstanding as of the end of 1998, 1997 and 1996. All of the shares are owned by
the Company's parent, Host Marriott Services.

HOST MARRIOTT STOCK OPTIONS AND DEFERRED STOCK AWARDS HELD BY MARRIOTT
INTERNATIONAL EMPLOYEES

On the Distribution  Date,  certain  employees of Marriott  International,  Inc.
("Marriott  International" - see Note 13) held Host Marriott  nonqualified stock
options (the "MI Host Marriott  Options") and deferred  stock  incentive  shares
(the "MI Host Marriott Deferred Stock"). As a result of the Distribution, the MI
Host Marriott  Options  remained options to acquire only shares of Host Marriott
common  stock,  except  that the  exercise  price of and the  number  of  shares
underlying  such options were  adjusted to preserve the  intrinsic  value of the
options to their  holders.  Likewise,  each award for MI Host Marriott  Deferred
Stock remained awards to be paid using Host Marriott common stock and the number
of shares was adjusted to preserve the  intrinsic  value.  Host Marriott and the
Company have agreed to share the cost to Host Marriott of the adjustments to the
MI Host Marriott Options and the MI Host Marriott Deferred Stock.
     Host Marriott  Services may issue to Host Marriott up to 1.4 million shares
of common  stock upon the exercise of the MI Host  Marriott  Options and 204,000
shares upon the release of the MI Host Marriott  Deferred  Stock.  Host Marriott
Services has the option to satisfy these  obligations by paying to Host Marriott
cash equal to the value of such shares of Host Marriott  Services'  common stock
on the last day of the fiscal  year in which the options  are  exercised  or the
deferred shares are released.  Additionally, Host Marriott Services will receive
approximately  11% of the  exercise  price  of  each  MI  Host  Marriott  Option
exercised.  During 1998,  the Company paid Host Marriott $3.5 million in partial
settlement  of its  obligation  to pay  for  the  1997  exercise  of the MI Host
Marriott Options and the release of the MI Host Marriott Deferred Stock.  During
1997,  the Company paid Host  Marriott $2.2 million for the 1996 exercise of the
MI Host Marriott Options and the release of the MI Host Marriott Deferred Stock.
     These  obligations,  which were  recorded at an average  price of $5.29 per
share,  are shown as a component  of  shareholder's  deficit  and  totaled  $5.5
million and $7.0 million as of year-end 1998 and 1997, respectively.

7.  STOCK-BASED COMPENSATION PLANS

The employees of the Company participate in certain employee stock plans of Host
Marriott  Services,  including the  Comprehensive  Stock Plan and Employee Stock
Purchase Plan. Under the Comprehensive Stock Plan,  employees of the Company may
receive (i) awards of restricted shares of Host Marriott Services' common stock,
(ii) deferred  awards of shares of Host  Marriott  Services'  common stock,  and
(iii) awards of options to purchase Host  Marriott  Services'  common stock.  In
addition,  employees  of the  Company  participate  in Host  Marriott  Services'
Employee Stock Purchase Plan.  Host Marriott  Services has reserved 10.0 million
and 1.3  million  shares of common  stock for  issuance in  connection  with the
Comprehensive Stock Plan and the Employee Stock Purchase Plan, respectively. The
compensation  costs related to restricted  stock and deferred stock awards under
these  plans  have  been  reflected  in the  operations  of the  Company  as all
employees of Host Marriott Services are employees of the Company.  The principal
terms and conditions of each of the plans are summarized below.

RESTRICTED STOCK AWARDS

Restricted shares are awarded to certain key executives.  As of January 1, 1999,
there  were  1.0  million   restricted  share  awards   outstanding,   of  which
approximately 751,000 were new restricted shares issued in 1998 and 256,000 were
shares issued in prior years.
     Compensation expense related to the 751,000 new share awards consists of an
annual  time-based   component  as  well  as  a   performance-based   component.

                                       37

<PAGE>
      
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Compensation expense under both components is calculated using the fair value of
the shares on the date of issuance and is  contingent  on continued  employment.
The vesting, and corresponding compensation expense, of 256,000 shares under the
annual time-based component occurs ratably over a three-year period beginning on
the grant date. The vesting, and corresponding  compensation expense, of 495,000
shares under the  performance-based  component can be accelerated from a maximum
seven-year  period to a minimum  three-year  period by the attainment of certain
performance criteria during fiscal years 2001 through 2005.
     Restricted  share awards  outstanding  from prior grants totaled 256,000 at
the end of 1998.  Subsequent to year-end,  131,000 shares were released,  53,000
shares  were  forfeited  and 72,000  shares will be  released  upon  retirement.
Compensation  expense  related to share grants prior to 1998 was recognized over
the award period and consisted of time- and  performance-based  components.  The
time-based expense was calculated using the fair value of the shares on the date
of issuance and was contingent on continued  employment.  The  performance-based
expense was calculated using the fair value of the Company's common stock during
the award  period  and was  contingent  on  attainment  of  certain  performance
criteria.

DEFERRED STOCK AWARDS

Deferred stock  incentive  shares  granted to key employees  generally vest over
five to ten years in annual  installments  commencing one year after the date of
grant.  Certain  employees  may elect to defer  payments  until  termination  or
retirement.  The Company accrues  compensation expense for the fair market value
of the shares on the date of grant, less estimated forfeitures.
     In connection with the  Distribution,  the deferred stock incentive  shares
granted to employees of the Company and employees of Host Marriott were split in
accordance  with  the  one-for-five  distribution  ratio.  Presented  below is a
summary of the Company's deferred stock award activity since the Distribution:

<TABLE>
<CAPTION>


                                                 SHARES
- ---------------------------------- ---------- -------------
<S>                                                 <C>   

Balance, December 29, 1995                        146,809 
Granted                                           163,813 
Issued                                            (11,308)
Forfeited/expired                                 (34,112)
- ---------------------------------- ---------- -------------
Balance, January 3, 1997                          265,202 
Granted                                           210,180 
Issued                                            (25,894)
Forfeited/expired                                 (26,941)
- ---------------------------------- ---------- -------------
Balance, January 2, 1998                          422,547 
Granted                                             7,500 
Issued                                            (38,091)
Forfeited/expired                                 (24,641)
- ---------------------------------- ---------- -------------
Balance, January 1, 1999                          367,315 
- ---------------------------------- ---------- -------------
</TABLE>

STOCK OPTION AWARDS

Employee  stock  options may be granted to key  employees  at not less than fair
market  value on the date of the grant.  Options  granted  before  May 11,  1990
expire 10 years after the date of grant and  nonqualified  options granted on or
after May 11,  1990,  expire from 10 to 15 years  after the date of grant.  Most
options vest ratably over each of the first four years following the date of the
grant.  There was no  compensation  cost  recognized by the Company  relating to
stock  options  during  1998,  1997  and  1996.   
     In connection with the Distribution,  the outstanding Host Marriott options
held by current  employees of the Company and  employees of Host  Marriott  were
redenominated  in both Company and Host Marriott stock,  and the exercise prices
of the options were adjusted  based on the relative  trading prices of shares of
the common stock of the two companies immediately following the Distribution.
     The  weighted-average  fair value of the Company's  stock  options,  at the
grant date,  calculated using the Black-Scholes  option-pricing model, for 1998,
1997 and 1996 totaled $7.6 million, $2.5 million and $5.3 million, respectively.


                                       38


<PAGE>
      
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     Presented below is a summary of the Company's stock option activity:

<TABLE>
<CAPTION>


- ---------------------------------- ------------ ------------
                                                 WEIGHTED
                                                  AVERAGE
                                     SHARES        PRICE
- ---------------------------------- ------------ ------------
<S>                                    <C>          <C>
    
Balance, December 29, 1995            435,240        $ 3.75

Granted                             1,660,800          7.21
Exercised                             (72,231)         3.57
Forfeited/expired                     (67,635)         5.55
- ---------------------------------- ------------ ------------
Balance, January 3, 1997            1,956,174          6.63

Granted                               433,400         14.21
Exercised                            (161,718)         5.20
Forfeited/expired                    (120,360)         7.22
- ---------------------------------- ------------ ------------
Balance, January 2, 1998            2,107,496          8.27

Granted                             1,564,609         12.71
Exercised                            (165,528)         5.85
Forfeited/expired                    (179,030)         7.11
- ---------------------------------- ------------ ------------
Balance, January 1, 1999            3,327,547        $10.54
- ---------------------------------- ------------ ------------

</TABLE>

     Presented below is a summary of the Company's exercisable and unexercisable
stock options as of the end of fiscal years 1998, 1997 and 1996:

<TABLE>
<CAPTION>

                              EXERCISABLE    UNEXERCISABLE
- ---------------------------- -------------- ----------------
<S>                              <C>              <C>

JANUARY 1, 1999
   Shares                          785,489        2,542,058
   Exercise price range       $0.86-$14.75     $5.07-$14.75
   Weighted-average
     exercise price                  $7.57           $11.46
   Weighted-average
     remaining contractual
     life in years                     9.8              9.7
- ---------------------------- -------------- ----------------
JANUARY 2, 1998
   Shares                          589,949        1,517,547
   Exercise price range        $0.86-$8.88     $5.07-$14.75
   Weighted-average
     exercise price                  $5.80            $9.23
   Weighted-average
     remaining contractual
     life in years                    10.9             10.9
- ---------------------------- -------------- ----------------
JANUARY 3, 1997
   Shares                          254,970        1,701,204
   Exercise price range        $0.86-$5.50      $4.03-$8.88
   Weighted-average
     exercise price                  $3.35            $7.12
   Weighted-average
     remaining contractual
     life in years                    11.0             12.3
- ---------------------------- -------------- ----------------

</TABLE>



EMPLOYEE STOCK PURCHASE PLAN

Under the terms of the Employee  Stock  Purchase  Plan,  eligible  employees may
purchase Host Marriott  Services' common stock through payroll deductions at the
lower of the market value of the stock at the beginning or end of the plan year.
During the first quarter of 1999,  approximately 154,000 common shares were sold
to employees at an exercise  price of $7.88 per share.  During the first quarter
of 1998, 194,573 Host Marriott Services' common shares were sold to employees at
an exercise price of $9.13 per share.  During the first quarter of 1997, 274,021
Host  Marriott  Services'  common  shares were sold to  employees at an exercise
price of $6.06 per share.  
     There was no compensation  cost  recognized by the Company  relating to the
Employee Stock  Purchase Plan during 1998,  1997 and 1996. The fair value of the
option  feature  of the  Employee  Stock  Purchase  Plan,  calculated  using the
Black-Scholes  option-pricing  model,  was  $170,000,  $274,000 and $285,000 for
1998, 1997 and 1996, respectively.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The  Company  has adopted  the  disclosure-only  provisions  of SFAS No. 123 but
applies Accounting  Principles Board Opinion No. 25 and related  interpretations
in  accounting  for its  plans.  Compensation  cost  recognized  by the  Company
relating  to  restricted  stock and  deferred  stock  awards  granted  under the
Comprehensive  Stock Plan was $3.8  million,  $4.0  million and $3.7 million for
1998,  1997  and  1996,  respectively.  Had the  Company  elected  to  recognize
compensation  cost  for  all  awards  granted  under  Host  Marriott   Services'
Comprehensive  Stock Plan and the Employee Stock Purchase Plan based on the fair
value of the awards at the grant dates, consistent with the method prescribed by
SFAS No.  123,  net  income  would have been  changed  to the pro forma  amounts
indicated below:

<TABLE>
<CAPTION>

- ------------------------------------------------------------
                                  1998      1997     1996
- ------------------------------------------------------------
<S>                                <C>       <C>      <C>   
                                       (IN MILLIONS)

Net income          As reported    $23.1     $19.6    $12.9
                    Pro forma       21.3      18.6     12.3
- ------------------------------------------------------------
<FN>


Note:   Because the SFAS No. 123 method of  accounting  has not been  applied to
        options  granted  prior to  January  1, 1995,  the  resulting  pro forma
        compensation cost may not be representative of the effects on net income
        expected in future years.

</FN>
</TABLE>

                                       39
  
<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


   Fair  values  of  stock  options  used to  compute  pro  forma  net  income
disclosures were determined using the  Black-Scholes  option-pricing  model with
the following assumptions:

<TABLE>
<CAPTION>

                          1998      1997      1996
- -----------------------------------------------------
<S>                        <C>      <C>        <C>    
    
Dividend yield                0%        0%        0%
Expected volatility        27.9%     30.8%     34.7%
Risk-free interest rate     6.3%      6.3%      6.0%
Expected holding
   period (in years)           7         7         7
- -----------------------------------------------------

</TABLE>


8.  PROFIT SHARING AND POSTRETIREMENT BENEFIT PLANS

Employees meeting certain  eligibility  requirements can elect to participate in
profit sharing and deferred  compensation plans. The amount to be matched by the
Company is determined annually by the Company's Board of Directors.  The cost of
these  plans is based on  salaries  and  wages of  participating  employees  and
totaled $2.6  million,  $2.5  million and $2.6  million in 1998,  1997 and 1996,
respectively.
     The Company has a  supplemental  retirement  plan for certain key officers.
The liability  relating to this plan recorded as of the end of 1998 and 1997 was
$4.9 million and $5.1 million,  respectively.  The compensation  cost recognized
for each of the years 1998, 1997 and 1996 was $0.3 million.

9.  RESTRUCTURING

Management  approved  a formal  restructuring  plan in  October  of 1995 and the
Company recorded a pretax  restructuring  charge to earnings of $14.5 million in
the fourth quarter of 1995. The restructuring  charge was primarily comprised of
involuntary employee termination benefits (related to the Company's  realignment
of operational responsibilities) and lease cancellation penalty fees and related
costs resulting from the Company's plan to exit certain off-airport  merchandise
contracts.
    In the fourth quarter of 1997, the Company concluded its restructuring  plan
and reversed  substantially all of the remaining  restructuring  reserve,  which
resulted in a $3.9 million pretax reduction of operating expenses.

10.  COMMITMENTS AND CONTINGENCIES

Future minimum annual rental commitments for noncancellable  operating leases as
of the end of 1998 are as follows:

<TABLE>
<CAPTION>

- ----------------------------------------- -------------
Years
- ----------------------------------------- -------------
<S>                                         <C>   
                                        (IN MILLIONS)

1999                                            $150.8
2000                                             136.8
2001                                             123.8
2002                                             104.9
2003                                              89.4
Thereafter                                       302.2
- ----------------------------------------- -------------
Total minimum lease payments                    $907.9
- ----------------------------------------- -------------

</TABLE>

     The Company  leases  property and equipment  under  noncancellable  leases.
Certain leases contain provisions for the payment of contingent rentals based on
sales in excess of stipulated  amounts and many also contain  contractual rental
payment  increases  throughout the term of the lease. The minimum rent increases
are amortized over the term of the applicable  lease on a  straight-line  basis.
Future minimum annual rental commitments of $907.9 million have not been reduced
by minimum  sublease  rentals of $91.8  million  payable  to the  Company  under
noncancellable subleases as of the end of 1998.
     Certain leases require a minimum level of capital  expenditures for initial
investment,  renovations and facility  expansions during the lease terms. At the
end of 1998, the Company was committed to invest approximately $122.6 million in
capital expenditures over the various lease terms.
     Rent  expense,  included  in the  consolidated  statements  of  operations,
consists of:

<TABLE>
<CAPTION>

- ------------------------ --------- ---------- ---------
                           1998      1997       1996
- ------------------------ --------- ---------- ---------
<S>                        <C>        <C>        <C>    
                                 (IN MILLIONS)
Minimum rental on
   operating leases        $126.8     $118.7    $111.2
Additional rental
   based on sales            62.1       61.7      69.7
- ------------------------ --------- ---------- ---------
Total rent expense         $188.9     $180.4    $180.9
- ------------------------ --------- ---------- ---------

</TABLE>

     Rent expense  related to the Company's  corporate  operations,  included in
general and administrative expenses, totaled $3.0 million, $2.9 million and $2.4
million in 1998, 1997 and 1996, respectively.
     The Company's  facilities are operated under numerous long-term  concession
agreements   with  various  airport  and  tollroad   authorities.   The  Company
historically has been successful at retaining such

                                       40

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


arrangements  and winning new business,  enabling it to replace lost  concession
facilities.  However, the expiration of certain of these agreements could have a
significant  impact  on  the  Company's   financial  condition  and  results  of
operations,  and there can be no  assurance  that the  Company  will  succeed in
replacing lost concession  facilities and retaining the remaining  facilities in
the future.
     The  Company  is,  from  time  to  time,  involved  in  litigation  matters
incidental  to its  business.  Management  believes  that any  liability or loss
resulting  from such  matters  will not have a  material  adverse  effect on the
financial position or results of operations of the Company.

11.  FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of the  Company's  financial  instruments,  including  cash and cash
equivalents,  accounts receivable,  accounts payable,  line-of-credit borrowings
and other accrued  liabilities,  the carrying amounts approximate fair value due
to their short maturities. The fair value of the Senior Notes is based on quoted
market  prices  and the fair  value  of other  long-term  debt  instruments  are
estimated by discounting  the expected future cash flows using the current rates
at which  similar debt  instruments  would be provided from lenders for the same
remaining maturities.
     The carrying  values and fair values of certain of the Company's  financial
instruments are shown in the table below:

<TABLE>
<CAPTION>

                           1998                 1997
- ------------------- -------------------- --------------------
                    CARRYING     FAIR     CARRYING    FAIR
                     AMOUNT      VALUE     AMOUNT    VALUE
- ------------------- ---------- ---------- --------- ---------
<S>                    <C>        <C>       <C>        <C>
                                 (IN MILLIONS)
Financial liabilities:
   Senior Notes        $400.0     $415.4    $400.0    $426.8
   Other debt             6.7        7.3       6.2       6.6

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

</TABLE>


12.  BUSINESS SEGMENTS

The  Company's  principal  business  is  providing  food,  beverage  and  retail
concessions at airports,  in travel plazas and at shopping malls.  The Company's
management  evaluates  performance  of each segment based on profit or loss from
operations before  allocation of general and  administrative  expenses,  unusual
items,  interest and income taxes.  The accounting  policies of the segments are
the same as those  described in the summary of significant  accounting  policies
(see Note 1).

<TABLE>
<CAPTION>

(IN MILLIONS)                   1998        1997        1996
- ----------------------------------------------------------------
<S>                              <C>         <C>        <C>    
REVENUES:
   Airports                   $1,028.8      $ 956.7     $ 962.7
   Travel Plazas                 181.1        174.2       174.3
   Shopping Malls                 22.1         15.4         2.7
- ----------------------------------------------------------------
                              $1,232.0     $1,146.3    $1,139.7
- ----------------------------------------------------------------

OPERATING PROFIT (LOSS) (1):
    Airports                    $ 99.2       $ 98.1      $ 91.6
    Travel Plazas                 24.5         21.3        20.0
    Shopping Malls                (1.0)         1.3         0.3
- ----------------------------------------------------------------
                                $122.7       $120.7      $111.9
- ----------------------------------------------------------------

CAPITAL EXPENDITURES:
    Airports                     $85.7        $52.6       $42.7
    Travel Plazas                  3.7          2.0         1.9
    Shopping Malls                 5.1          6.9         4.2
- ----------------------------------------------------------------
                                 $94.5        $61.5       $48.8
- ----------------------------------------------------------------

DEPRECIATION AND
  AMORTIZATION:
    Airports                     $41.0        $39.5       $40.7
    Travel Plazas                  8.3          8.1         8.8
    Shopping Malls                 2.5          1.5         0.2
- ----------------------------------------------------------------
                                 $51.8        $49.1       $49.7
- ----------------------------------------------------------------

ASSETS:
    Airports                    $347.2       $291.7
    Travel Plazas                 54.1         59.4
    Shopping Malls                12.8         14.1
- ----------------------------------------------------
                                $414.1       $365.2
- ----------------------------------------------------
<FN>

(1) Before general and administrative expenses and unusual items.
</FN>
</TABLE>

                                       41


<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Reconciliations of segment results to the Company's consolidated results follow:

<TABLE>
<CAPTION>
                  
     (IN MILLIONS)             1998        1997        1996
- ---------------------------------------------------------------
<S>                            <C>          <C>         <C>    
OPERATING PROFIT:
  Segments                    $122.7       $120.7     $ 111.9 
  General and
    administrative expenses    (58.0)       (54.3)      (51.8)
  Write-downs of
    long-lived assets           (5.9)        (4.2)        --- 
  Reversal of
     restructuring charges       ---          3.9         --- 
- ---------------------------------------------------------------
                              $ 58.8       $ 66.1      $ 60.1 
- ---------------------------------------------------------------

CAPITAL EXPENDITURES:
  Segments                    $ 94.5       $ 61.5      $ 48.8 
  Corporate and other            1.1          4.5         6.1 
- ---------------------------------------------------------------
                              $ 95.6       $ 66.0      $ 54.9 
- ---------------------------------------------------------------

ASSETS:
  Segments                    $414.1       $365.2 
  Corporate and other(1)       116.6        134.8 
- ---------------------------------------------------
                              $530.7       $500.0 
- ---------------------------------------------------
<FN>

(1)The  majority  of the  decrease  in  corporate  and  other was  related  to a
   decrease in corporate cash concentration accounts.

</FN>
</TABLE>

     Revenues for international operations totaled $66.9 million, $63.6 million,
and $56.4 million in 1998, 1997, and 1996, respectively.
     Property and equipment, net of accumulated depreciation,  for international
operations  was $23.6  million  and $17.8  million  at the end of 1998 and 1997,
respectively.


13.  RELATIONSHIP WITH MARRIOTT INTERNATIONAL AND HOST MARRIOTT

On October 8, 1993,  Host  Marriott  distributed  through a special  dividend to
holders  of Host  Marriott  common  stock all of the  outstanding  shares of its
wholly-owned subsidiary, Marriott International (the "MI Distribution").
      In  connection  with  the MI  Distribution,  Host  Marriott  and  Marriott
International   entered  into  various   management  and  transitional   service
agreements.  In connection  with the  Distribution,  Host Marriott  Services and
Marriott   International  entered  into  a  Continuing  Services  Agreement,   a
Noncompetition  Agreement and a License  Agreement.  These  agreements  provide,
among  other  things,  that Host  Marriott  Services  will  receive  (i) certain
corporate  services,  such as  accounting  and computer  systems  support;  (ii)
various  product  supply and  distribution  services;  and (iii)  various  other
transitional services. In accordance with the agreements, Host Marriott Services
will compensate Marriott  International for services rendered  thereunder.  As a
part of the  Continuing  Services  Agreement,  the  Company  purchased  food and
supplies through Marriott  International  totaling $75.4 million,  $77.3 million
and $76.9  million and paid $8.8  million,  $9.8  million and $10.7  million for
corporate support services during 1998, 1997 and 1996, respectively.
     In connection  with the  Distribution,  the Company entered into management
agreements related to certain restaurant  operations  retained by Host Marriott.
Management fees related to these  contracts were $0.2 million,  $0.1 million and
$0.2 million in 1998, 1997 and 1996, respectively.
      For purposes of governing certain of the ongoing relationships between the
Company  and Host  Marriott  after the  special  dividend  and to provide for an
orderly  transition,   the  Company  and  Host  Marriott  entered  into  various
agreements including a Distribution  Agreement,  an Employee Benefits Allocation
Agreement,  a Tax  Sharing  Agreement  and a  Transitional  Services  Agreement.
Payments made to Host Marriott relating to these agreements totaled $0.1 million
in 1996. No payments were made during 1998 or 1997.

                                       42

<PAGE>

                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



15.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                1998(1)
- ------------------------------------------------- ---------------------------------------------------------------------
                                                     FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                       QUARTER      QUARTER(2)    QUARTER(3)    QUARTER(4)       YEAR
- ------------------------------------------------- ------------- ------------- ------------- -------------- ------------
<S>                                                  <C>           <C>           <C>             <C>          <C>     
Revenues                                             $  252.0      $  288.7      $  317.8        $  373.5     $1,232.0
Operating profit                                          4.7          17.8          31.1             5.2         58.8
Net income (loss)                                        (2.4)          5.6          15.9             4.0         23.1


                                                                                1997(1)
- ------------------------------------------------- ---------------------------------------------------------------------
                                                     FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                       QUARTER       QUARTER      QUARTER(5)    QUARTER(6)       YEAR
- ------------------------------------------------- ------------- ------------- ------------- -------------- ------------
Revenues                                             $  238.8      $  259.9      $  298.5        $  349.1     $1,146.3
Operating profit                                          3.4          15.7          32.9            14.1         66.1
Net income (loss)                                        (3.1)          4.4          16.6             1.7         19.6


                                                                                1996(1)
- ------------------------------------------------- ---------------------------------------------------------------------
                                                     FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                       QUARTER       QUARTER       QUARTER        QUARTER        YEAR
- ------------------------------------------------- ------------- ------------- ------------- -------------- ------------
Revenues                                             $  236.2      $  258.4      $  294.5        $  350.6     $1,139.7
Operating profit                                          2.3          14.3          32.1            11.4         60.1
Net income (loss)                                        (3.8)          3.0          13.6             0.1         12.9

<FN>

(1)  The first three quarters of 1998 and 1997 consist of 12 weeks each, and the
     fourth quarter includes 16 weeks. The first three quarters of 1996 consists
     of 12 weeks each, and the fourth quarter includes 17 weeks.
(2)  Second quarter 1998 results include a $2.5 million tax benefit to recognize
     the anticipated  utilization of certain tax credits  previously  considered
     unrealizable.
(3)  Third quarter 1998 results  include a $0.7 million tax benefit to recognize
     the anticipated  utilization of certain tax credits  previously  considered
     unrealizable.
(4)  Fourth  quarter  1998  results  include  $5.9  million  of  write-downs  of
     long-lived  assets  and  a  $7.9  million  tax  benefit  to  recognize  the
     anticipated  utilization  of  certain  tax  credits  previously  considered
     unrealizable.
(5)  Third quarter 1997 results  include a $1.9 million tax benefit to recognize
     the utilization of certain tax credits previously considered unrealizable.
(6)  Fourth  quarter  1997  results  include  $4.2  million  of  write-downs  of
     long-lived  assets and a $3.9  million  reversal of  restructuring  charges
     originally recorded in 1995.

</FN>
</TABLE>

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


                                                  
16.  SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION

All  material  subsidiaries  of the  Company  guarantee  the Senior  Notes.  The
separate financial  statements of each guaranteeing  subsidiary  (together,  the
"Guarantor Subsidiaries") are not presented because the Company's management has
concluded  that such  financial  statements  are not material to investors.  The
guarantee of each Guarantor  Subsidiary is full and  unconditional and joint and
several  and each  Guarantor  Subsidiary  is a  wholly-owned  subsidiary  of the
Company.  Certain of the Company's controlled  affiliates,  in which the Company
owns between  50.01% and 90%  interests,  are not guarantors of the Senior Notes
(the "Non-Guarantor  Subsidiaries").  The ability of the Company's Non-Guarantor
Subsidiaries to make dividends to the Company is restricted to the extent of the
minority  interests' share in the affiliates'  combined net assets.  There is no
subsidiary  of the Company the capital  stock of which  comprises a  substantial
portion of the  collateral  for the Senior Notes within the meaning of Rule 3-10
of Regulation S-X.
        The following condensed  consolidating  financial information sets forth
the combined  financial  position,  results of operations  and cash flows of the
parent, Guarantor Subsidiaries and Non-Guarantor Subsidiaries:

                                       43

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                 1998
- ----------------------------------------- -----------------------------------------------------------------------------------
                                                           GUARANTOR       NON-GUARANTOR    ELIMINATIONS &
(IN MILLIONS)                                PARENT       SUBSIDIARIES     SUBSIDIARIES      ADJUSTMENTS      CONSOLIDATED
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
<S>                                           <C>             <C>               <C>               <C>             <C> 
Current assets:
    Cash and cash equivalents                $   5.6           $  24.3           $  3.2          $    ---          $  33.1 
    Other current assets                         ---              90.2             10.5               ---            100.7 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
    Total current assets                         5.6             114.5             13.7               ---            133.8 

Property and equipment, net                      ---             250.4             39.8               ---            290.2 
Other assets                                     ---             103.6              3.1               ---            106.7 
Investments in subsidiaries                    311.6               ---              ---            (311.6)             --- 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
Total Assets                                 $ 317.2           $ 468.5           $ 56.6           $(311.6)         $ 530.7 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------

Current liabilities:
    Accounts payable                        $    ---           $  65.0           $ 10.8          $    ---          $  75.8 
    Accrued payroll and benefits                 ---              44.5              ---               ---             44.5 
    Borrowings under line-of-credit
      agreement                                 11.6               ---              ---               ---             11.6 
    Other current liabilities                    ---              34.7              6.4               ---             41.1 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
    Total current liabilities                   11.6             144.2             17.2               ---            173.0 

Long-term debt                                 400.0             404.9              1.0            (400.0)           405.9 
Other liabilities                                ---              35.7              0.1              10.4             46.2 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
    Total Liabilities                          411.6             584.8             18.3            (389.6)           625.1 

Owner's equity (deficit)                       (94.4)           (116.3)            38.3              78.0            (94.4)
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
Total Liabilities and Owner's Deficit        $ 317.2           $ 468.5           $ 56.6           $(311.6)         $ 530.7 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
</TABLE>

<TABLE>
<CAPTION>

                                                                                 1997
- ----------------------------------------- -----------------------------------------------------------------------------------
                                                           GUARANTOR       NON-GUARANTOR    ELIMINATIONS &
(IN MILLIONS)                                PARENT       SUBSIDIARIES     SUBSIDIARIES      ADJUSTMENTS      CONSOLIDATED
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
<S>                                            <C>            <C>              <C>                <C>            <C> 
Current assets:
    Cash and cash equivalents                $  31.8           $  27.2           $  1.3          $    ---          $  60.3 
    Other current assets                         ---              80.7              7.2               ---             87.9 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
    Total current assets                        31.8             107.9              8.5               ---            148.2 

Property and equipment, net                      ---             225.4             27.1               ---            252.5 
Other assets                                     ---              99.0              0.3               ---             99.3 
Investments in subsidiaries                    256.9               ---              ---            (256.9)             --- 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
Total Assets                                 $ 288.7           $ 432.3           $ 35.9           $(256.9)         $ 500.0 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------

Current liabilities:
    Accounts payable                        $    ---           $  56.3           $ 11.4          $    ---          $  67.7 
    Accrued payroll and benefits                 ---              46.1              ---               ---             46.1 
    Other current liabilities                    ---              42.1              ---               ---             42.1 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
    Total current liabilities                    ---             144.5             11.4               ---            155.9 

Long-term debt                                 400.0             405.8              ---            (400.0)           405.8 
Other liabilities                                ---              41.7              ---               7.9             49.6 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
    Total Liabilities                          400.0             592.0             11.4            (392.1)           611.3 

Owner's equity (deficit)                      (111.3)           (159.7)            24.5             135.2           (111.3)
- -----------------------------------------  ------------- ----------------- ---------------- ----------------- ----------------
Total Liabilities and Owner's Deficit        $ 288.7           $ 432.3           $ 35.9           $(256.9)         $ 500.0 
- ----------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------

</TABLE>

                                       44

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                 1998
- ------------------------------------------ ----------------------------------------------------------------------------------
                                                          GUARANTOR       NON-GUARANTOR     ELIMINATIONS &
(IN MILLIONS)                                PARENT     SUBSIDIARIES      SUBSIDIARIES       ADJUSTMENTS      CONSOLIDATED
- ------------------------------------------ ----------- ---------------- ------------------ ----------------- ----------------
<S>                                           <C>            <C>              <C>               <C>             <C>    

Revenues                                    $   ---         $1,055.1             $176.9           $   ---         $1,232.0 
Operating costs and expenses                    ---          1,001.5              171.7               ---          1,173.2 
- ------------------------------------------ ----------- ---------------- ------------------ ----------------- ----------------

Operating profit                                ---             53.6                5.2               ---             58.8 
Interest expense                              (39.3)           (39.9)               ---              39.3            (39.9)
Interest income                                 1.7              ---                ---               ---              1.7 
- ------------------------------------------ ----------- ---------------- ------------------ ----------------- ----------------

Income (loss) before income taxes             (37.6)            13.7                5.2              39.3             20.6 
Provision (benefit) for income taxes            4.6             (1.7)              (0.6)             (4.8)            (2.5)
Equity interest in affiliates                  65.3              ---                ---             (65.3)             --- 
- ------------------------------------------ ----------- ---------------- ------------------ ----------------- ----------------
Net income                                   $ 23.1        $    15.4             $  5.8            $(21.2)        $   23.1 
- ------------------------------------------ ----------- ---------------- ------------------ ----------------- ----------------

</TABLE>

<TABLE>
<CAPTION>

                                                                                 1997
- ------------------------------------------ ---------------------------------------------------------------------------------
                                                         GUARANTOR      NON-GUARANTOR     ELIMINATIONS &
(IN MILLIONS)                                PARENT    SUBSIDIARIES     SUBSIDIARIES        ADJUSTMENTS      CONSOLIDATED
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------
<S>                                            <C>        <C>               <C>              <C>              <C>   

Revenues                                    $   ---       $1,019.7             $126.6            $   ---         $1,146.3 
Operating costs and expenses                    ---          960.5              119.7                ---          1,080.2 
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------

Operating profit                                ---           59.2                6.9                ---             66.1 
Interest expense                              (39.3)         (39.8)               ---               39.3            (39.8)
Interest income                                 2.6            0.4                ---                ---              3.0 
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------

Income (loss) before income taxes             (36.7)          19.8                6.9               39.3             29.3 
Provision (benefit) for income taxes          (12.1)           6.5                2.3               13.0              9.7 
Equity interest in affiliates                  44.2            ---                ---              (44.2)             --- 
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------

Net income                                   $ 19.6      $    13.3             $  4.6             $(17.9)        $   19.6 
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------
</TABLE>


<TABLE>
<CAPTION>

                                                                                 1996
- ------------------------------------------ ---------------------------------------------------------------------------------
                                                         GUARANTOR      NON-GUARANTOR     ELIMINATIONS &
(IN MILLIONS)                                PARENT    SUBSIDIARIES     SUBSIDIARIES        ADJUSTMENTS      CONSOLIDATED
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------
<S>                                            <C>        <C>               <C>              <C>              <C>   

Revenues                                    $   ---       $1,017.1             $122.6            $   ---         $1,139.7 
Operating costs and expenses                    ---          963.4              116.2                ---          1,079.6 
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------

Operating profit                                ---           53.7                6.4                ---             60.1 
Interest expense                              (39.3)         (40.3)               ---               39.3            (40.3)
Interest income                                 2.4            ---                ---                ---              2.4 
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------

Income (loss) before income taxes             (36.9)          13.4                6.4               39.3             22.2 
Provision (benefit) for income taxes          (15.5)           5.6                2.7               16.5              9.3 
Equity interest in affiliates                  34.3            ---                ---              (34.3)             --- 
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------
Net income                                   $ 12.9       $    7.8             $  3.7             $(11.5)        $   12.9 
- ------------------------------------------ ----------- -------------- ------------------ ------------------ ----------------
</TABLE>

                                       45

<PAGE>


                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


                                                       
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                 1998
- --------------------------------------------- ----------------------------------------------------------------------------
                                                                               NON-        ELIMINATIONS
                                                            GUARANTOR       GUARANTOR            &
(IN MILLIONS)                                   PARENT     SUBSIDIARIES    SUBSIDIARIES     ADJUSTMENTS     CONSOLIDATED
- --------------------------------------------- ----------- --------------- --------------- ---------------- ---------------
<S>                                             <C>          <C>              <C>              <C>           <C>    

Cash (used in) provided by operations          $ (36.3)         $ 60.3        $   13.4           $ 36.3           $73.7 
- --------------------------------------------- ----------- --------------- --------------- ---------------- ---------------

Investing activities:
   Capital expenditures                            ---           (76.9)          (18.7)             ---           (95.6)
   Other                                           ---            (8.3)           (8.6)             8.6            (8.3)
   Advances (to) from subsidiaries                 4.1            26.2             6.0            (36.3)            --- 
- --------------------------------------------- ----------- --------------- --------------- ---------------- ---------------
   Cash provided by (used in)
      investing activities                         4.1           (59.0)          (21.3)           (27.7)         (103.9)
- --------------------------------------------- ----------- --------------- --------------- ---------------- ---------------

Financing activities:
   Repayments of debt                              ---            (0.9)           (0.2)             ---            (1.1)
   Issuance of debt                                ---             ---             1.4              ---             1.4 
   Dividend to Host Marriott Services             (5.6)            ---             ---              ---            (5.6)
   Payment to Host Marriott Corporation
     for Marriott International options
     and deferred shares                           ---            (3.5)            ---              ---            (3.5)
   Issuance of intercompany debt                  10.0             ---             ---              ---            10.0 
   Repayment of intercompany debt                (10.0)            ---             ---              ---           (10.0)
   Net borrowings under line-of-credit
     agreement                                    11.6             ---             ---              ---            11.6 
   Partnership contributions
     (distributions), net                          ---             ---             8.6             (8.6)            --- 
   Other                                                           0.2             ---              ---             0.2 
- --------------------------------------------- ----------- --------------- --------------- ---------------- ---------------
   Cash used in financing activities               6.0            (4.2)            9.8             (8.6)            3.0 
- --------------------------------------------- ----------- --------------- --------------- ---------------- ---------------

(Decrease) increase in cash and
     cash equivalents                          $ (26.2)        $  (2.9)        $   1.9          $   ---          $(27.2)
- --------------------------------------------- ----------- --------------- --------------- ---------------- ---------------
</TABLE>


<TABLE>
<CAPTION>

                                                                                1997
- ------------------------------------------ -------------------------------------------------------------------------------
                                                                               NON-        ELIMINATIONS
                                                            GUARANTOR       GUARANTOR            &
(IN MILLIONS)                                 PARENT       SUBSIDIARIES    SUBSIDIARIES     ADJUSTMENTS     CONSOLIDATED
- ------------------------------------------ -------------- --------------- --------------- ---------------- ---------------
<S>                                            <C>            <C>             <C>               <C>           <C>   

Cash (used in) provided by operations          $ (35.4)         $ 31.5        $   14.4           $ 35.4          $ 45.9 
- ------------------------------------------ -------------- --------------- --------------- ---------------- ---------------

Investing activities:
   Capital expenditures                            ---           (58.5)           (7.5)             ---           (66.0)
   Other                                           ---            (8.7)            3.9             (3.9)           (8.7)
   Advances (to) from subsidiaries                (8.1)           50.8            (7.3)           (35.4)            --- 
- ------------------------------------------ -------------- --------------- --------------- ---------------- ---------------
   Cash used in investing activities              (8.1)          (16.4)          (10.9)           (39.3)          (74.7)
- ------------------------------------------ -------------- --------------- --------------- ---------------- ---------------

Financing activities:
   Repayments of debt                              ---            (1.7)            ---              ---            (1.7)
   Payment to Host Marriott Corporation
     for Marriott International options
     and deferred shares                           ---            (2.2)            ---              ---            (2.2)
   Partnership contributions
     (distributions), net                          ---             ---            (3.9)             3.9             --- 
   Other                                           ---            (0.1)            ---              ---            (0.1)
- ------------------------------------------ -------------- --------------- --------------- ---------------- ---------------
   Cash used in financing activities               ---            (4.0)           (3.9)             3.9            (4.0)
- ------------------------------------------ -------------- --------------- --------------- ---------------- ---------------

(Decrease) increase in cash and
     cash equivalents                          $ (43.5)       $   11.1           $(0.4)         $   ---          $(32.8)
- ------------------------------------------ -------------- --------------- --------------- ---------------- ---------------
</TABLE>

                                       46

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


<TABLE>
<CAPTION>

                                                                               1996
- ----------------------------------------- -------------------------------------------------------------------------------
                                                                              NON-        ELIMINATIONS
                                                            GUARANTOR       GUARANTOR           &
(IN MILLIONS)                                PARENT       SUBSIDIARIES    SUBSIDIARIES     ADJUSTMENTS     CONSOLIDATED
- ----------------------------------------- -------------- ---------------- -------------- ---------------- ---------------
<S>                                            <C>            <C>              <C>          <C>                <C>   

Cash provided by (used in) operations         $ (35.8)          $ 90.9        $   7.6           $ 35.8          $ 98.5 
- ----------------------------------------- -------------- ---------------- -------------- ---------------- ---------------

Investing activities:
   Capital expenditures                           ---            (39.9)         (15.0)             ---           (54.9)
   Other                                          ---              5.0            5.7             (5.7)            5.0 
   Advances (to) from subsidiaries               95.3            (66.4)           6.9            (35.8)            --- 
- ----------------------------------------- -------------- ---------------- -------------- ---------------- ---------------
   Cash provided by (used in)
      investing activities                       95.3           (101.3)          (2.4)           (41.5)          (49.9)
- ----------------------------------------- -------------- ---------------- -------------- ---------------- ---------------

Financing activities:
   Repayments of debt                             ---             (0.8)           ---              ---            (0.8)
   Partnership contributions
     (distributions), net                         ---              ---           (5.7)             5.7             --- 
- ----------------------------------------- -------------- ---------------- -------------- ---------------- ---------------
   Cash used in
     financing activities                         ---             (0.8)          (5.7)             5.7            (0.8)
- ----------------------------------------- -------------- ---------------- -------------- ---------------- ---------------

Increase (decrease) in cash and
     cash equivalents                          $ 59.5          $ (11.2)         $(0.5)         $   ---          $ 47.8 
- ----------------------------------------- -------------- ---------------- -------------- ---------------- ---------------

</TABLE>


     Certain  reclassifications  were made to  conform  all of the  supplemental
information to the financial presentation on a consolidated basis. The principal
eliminating   entries  eliminate  Company  debt  and  related  interest  charges
reflected  in the  financial  statements  of the  Company (as  obligor)  and the
Guarantor  Subsidiaries  (as  guarantors),  investments,  advances and equity in
earnings in  subsidiaries  and the minority  partners'  equity  interests in the
partnership distributions and establish the minority interest liability.

                                       47

<PAGE>






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

   None.


                                    PART III

        The  information  called for by Items 10-13 is incorporated by reference
from  the  Host  Marriott  Services  Corporation  1999  Annual  Meeting  of  the
Shareholders--Notice  and Proxy  Statement--(to  be filed pursuant to Regulation
14A not later than 120 days after the close of the fiscal year).

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.  EXECUTIVE COMPENSATION

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



                                     PART IV

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

(a)   LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

      (1)  FINANCIAL STATEMENTS

           All financial  statements of the registrant as set forth under Item 8
              of this Report on Form 10-K.

      (2)  FINANCIAL STATEMENT SCHEDULES

           The following  financial  information  is filed herewith on the pages
              indicated.

           FINANCIAL SCHEDULES:                                         PAGE
           --------------------                                         ----   

           I.   Valuation and Qualifying Accounts                    S-1 to S-2

           All other  schedules are omitted  because they are not  applicable or
           the required  information is included in the  consolidated  financial
           statements or notes thereto.

        (3)  EXHIBITS

EXHIBIT
  NO.                           DESCRIPTION
- -------        --------------------------------------------
21              Listing of Subsidiaries of the Registrant

27              Financial Data Schedule (EDGAR Filing Only)



                                       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 30th day of March,
1999.

                            HOST INTERNATIONAL, INC.


                            By: /S/ BRIAN W. BETHERS
                                -----------------------
                                Brian W. Bethers
       Executive Vice President (Principal Financial Officer and Director)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in their indicated capacities and
on the date set forth above.

         SIGNATURE                                    TITLE
- --------------------------         ----------------------------------------

/S/ WILLIAM W. MCCARTEN            President (Principal Executive Officer)
- ------------------------
William W. McCarten

/S/ BRIAN W. BETHERS               Executive  Vice  President  (Principal
- ------------------------             Financial  Officer and Director)
Brian W. Bethers

/S/ TIMOTHY H. PEASE               Vice President (Principal Accounting Officer)
- ------------------------
Timothy H. Pease

/S/ THOMAS G. O'HARE               Director
- ------------------------
Thomas G. O'Hare

/S/ JOHN J. MCCARTHY               Senior Vice President and Director
- ------------------------
John J. McCarthy


                                       49
<PAGE>



                                      
              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES


To the Shareholder of Host International, Inc.:

        We  have  audited  in  accordance  with  generally   accepted   auditing
standards, the consolidated financial statements of Host International, Inc. and
subsidiaries,  included  in this Form 10-K and have  issued our  report  thereon
dated  January  27,  1999.  Our audits  were made for the  purpose of forming an
opinion on the basic  consolidated  financial  statements  taken as a whole. The
schedule appearing on page S-2 is the responsibility of the Company's management
and is  presented  for purposes of complying  with the  Securities  and Exchange
Commission's  rules  and  is  not  part  of  the  basic  consolidated  financial
statements.  This schedule has been subjected to the auditing procedures applied
in the  audits  of the  basic  consolidated  financial  statements  and,  in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic consolidated  financial statements
taken as a whole.


ARTHUR ANDERSEN LLP
Washington, D.C.
January 27, 1999

                                       S-1
<PAGE>


                                                                      SCHEDULE I


                            HOST INTERNATIONAL, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
 FOR THE FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997

<TABLE>
<CAPTION>


- --------------------------------------------- ---------------- -- -------------- -- --------------- --- -------------
                                                                    ADDITIONS
                                                BALANCE AT         CHARGED TO                            BALANCE AT
                                                 BEGINNING          COSTS AND                               END
               DESCRIPTION(2)                    OF PERIOD          EXPENSES        DEDUCTIONS(1)        OF PERIOD
- --------------------------------------------- ---------------- -- -------------- -- --------------- --- -------------
<S>                                                <C>                <C>             <C>                  <C>    
                                                                          (IN MILLIONS)

Allowance for doubtful accounts
      1996                                              $ 9.1              $2.9            $ (1.7)             $10.3
      1997                                               10.3               7.4              (0.1)              17.6
      1998                                               17.6               1.4              (8.7)              10.3


Allowance for notes receivable
      1996                                                ---               0.4               ---                0.4
      1997                                                0.4               0.2               ---                0.6
      1998                                                0.6               0.9              (0.2)               1.3

- --------------------------------------------- ---------------- -- -------------- -- --------------- --- -------------
<FN>

(1) Charges to the  accounts  are for the purpose  for which the  reserves  were
    created.
(2) The deferred tax asset  valuation  allowance has been omitted from this
    schedule because the required information is shown in the notes to the
    financial statements.

</FN>
</TABLE>
                                       S-2




                                                                     EXHIBIT 21


                            HOST INTERNATIONAL, INC.
                             LISTING OF SUBSIDIARIES
<TABLE>
<CAPTION>


<S>                                                            <C>  

                      DOMESTIC                                                       FOREIGN
- -----------------------------------------------------        ---------------------------------------------------------

State:  California                                           Country:  Australia
    The Gift Collection, Inc.                                     Marriott Airport Concessions Pty Ltd.
    Host Gifts, Inc.                                              Host Services Pty Ltd.

State:  Delaware                                             Country:  Canada
    Michigan Host, Inc.                                           Host International of Canada, Ltd.
    Host Services of New York, Inc.
    Las Vegas Terminal Restaurants, Inc.                     Country:  Malaysia
    Turnpike Restaurants, Inc.                                    Host (Malaysia) Sdn. Bhd.
    Host Marriott Services U.S.A., Inc.
    HMS Holdings, Inc.                                       Country:  The Netherlands
    Cincinnati Terminal Services, Inc.                            Horeca Exploitative Maatschappij Schiphol, B.V.
    Cleveland Airport Services, Inc.                              Host of Holland, B.V.
    Marriott Airport Terminal Services, Inc.
    HMS B&L, Inc.                                            Country:  China
                                                                  Shenzhen Host Catering Company, Ltd.
State:  Florida
    Sunshine Parkway Restaurants, Inc.                       Country:  France
                                                                  Host Services (France) SAS
State:  Kansas
    Host International, Inc. of Kansas

State:  Maryland
    Host International, Inc. of Maryland
    Host Marriott Services Family Restaurants, Inc.

State:  Ohio
    Gladieux Corporation

State:  Texas
    Host Services, Inc.

</TABLE>






                                      E-1

<TABLE> <S> <C>

<ARTICLE>                     5
<MULTIPLIER>                                    1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                              JAN-01-1999
<PERIOD-START>                                 JAN-03-1998
<PERIOD-END>                                   JAN-01-1999
<CASH>                                          33,100
<SECURITIES>                                         0
<RECEIVABLES>                                   42,200
<ALLOWANCES>                                    11,600
<INVENTORY>                                     38,100
<CURRENT-ASSETS>                               133,800
<PP&E>                                         665,100
<DEPRECIATION>                                 374,900
<TOTAL-ASSETS>                                 530,700
<CURRENT-LIABILITIES>                          173,000
<BONDS>                                        407,000
                                0
                                          0
<COMMON>                                             0
<OTHER-SE>                                     (94,400)
<TOTAL-LIABILITY-AND-EQUITY>                   530,700
<SALES>                                      1,232,000
<TOTAL-REVENUES>                             1,232,000
<CGS>                                          362,200
<TOTAL-COSTS>                                1,173,200
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              39,900
<INCOME-PRETAX>                                 20,600
<INCOME-TAX>                                    (2,500)
<INCOME-CONTINUING>                             23,100
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    23,100
<EPS-PRIMARY>                                        0
<EPS-DILUTED>                                        0
        


</TABLE>

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