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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
Commission file number 333-52442
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TRAVELCENTERS OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3856519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24601 Center Ridge Road, Suite 200
Westlake, OH 44145-5639
(Address of principal executive offices, including zip code)
(440) 808-9100
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
As of April 30, 2003, there were outstanding 6,939,498 shares of our common
stock, par value $0.00001 per share. The outstanding shares of our common stock
were issued in transactions not involving a public offering. As a result, there
is no public market for our common stock.
TRAVELCENTERS OF AMERICA, INC.
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause our actual results to differ from future
performance suggested herein. In the context of forward-looking information
provided in this Form 10-Q and in other reports, please refer to the discussion
of risk factors detailed in, as well as the other information contained in, our
filings with the Securities and Exchange Commission.
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet as of December 31, 2002 (derived
from audited data) and March 31, 2003 (unaudited)..................... 2
Unaudited Consolidated Statement of Operations and
Comprehensive Income for the three months ended
March 31, 2002 and 2003............................................... 3
Unaudited Consolidated Statement of Cash Flows for the three
months ended March 31, 2002 and 2003.................................. 4
Unaudited Statement of Nonredeemable Stockholders' Equity
for the three months ended March 31, 2002 and 2003.................... 5
Selected Notes to Unaudited Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition 19
and Results of Operations.............................................
Item 3. Quantitative and Qualitative Disclosures About 27
Market Risk...........................................................
Item 4. Controls and Procedures............................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders................... 28
Item 5. Other Information..................................................... 28
Item 6. Exhibits and Reports on Form 8-K...................................... 28
SIGNATURE................................................................................ 29
CERTIFICATIONS........................................................................... 30
1
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31,
DECEMBER 31, 2003
2002 (UNAUDITED)
---------------------------
ASSETS (IN THOUSANDS OF DOLLARS)
Current assets:
Cash ........................................................................... $ 14,047 $ 23,345
Accounts receivable (less allowance for doubtful accounts of $2,025 for 2002
and $1,943 for 2003) ........................................................ 44,295 59,011
Inventories .................................................................... 61,937 61,706
Deferred income taxes .......................................................... 4,221 4,323
Other current assets ........................................................... 8,164 7,773
--------- ---------
Total current assets ...................................................... 132,664 156,158
Property and equipment, net ....................................................... 445,692 447,324
Goodwill .......................................................................... 23,585 23,585
Deferred financing costs, net ..................................................... 27,452 26,631
Deferred income taxes ............................................................. 16,069 17,554
Other noncurrent assets ........................................................... 15,087 15,145
--------- ---------
Total assets .............................................................. $ 660,549 $ 686,397
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ........................................... $ 3,460 $ 3,460
Accounts payable ............................................................... 58,512 74,713
Other accrued liabilities ...................................................... 51,440 58,986
--------- ---------
Total current liabilities ................................................. 113,412 137,159
Commitments and contingencies ..................................................... - -
Long-term debt (net of unamortized discount) ...................................... 525,131 525,699
Deferred income taxes ............................................................. 2,364 2,361
Other noncurrent liabilities ...................................................... 3,696 5,954
--------- ---------
644,603 671,173
Redeemable equity ................................................................. 681 900
Nonredeemable stockholders' equity:
Common stock and other nonredeemable stockholders' equity ...................... 215,843 217,673
Accumulated deficit ............................................................ (200,578) (203,349)
Total nonredeemable stockholders' equity .................................. 15,265 14,324
--------- ---------
Total liabilities, redeemable equity and nonredeemable stockholders' equity $ 660,549 $ 686,397
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
2
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2003
--------- ---------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel ............................................................................ $ 254,178 $ 414,193
Non-fuel ........................................................................ 138,887 146,223
Rent and royalties .............................................................. 3,990 3,515
--------- ---------
Total revenues ............................................................ 397,055 563,931
Cost of goods sold (excluding depreciation):
Fuel ............................................................................ 230,106 388,662
Non-fuel ........................................................................ 56,180 59,537
--------- ---------
Total cost of goods sold (excluding depreciation) ......................... 286,286 448,199
--------- ---------
Gross profit (excluding depreciation) .............................................. 110,769 115,732
Operating expenses ................................................................. 80,712 82,845
Selling, general and administrative expenses ....................................... 9,755 10,090
Depreciation and amortization expense .............................................. 14,211 14,685
(Gain) loss on sales of property and equipment ..................................... 8 (32)
--------- ---------
Income from operations ............................................................. 6,083 8,144
Interest and other financial costs, net ............................................ (12,906) (12,046)
--------- ---------
Loss before income taxes and the cumulative effect of a change in accounting
principle ....................................................................... (6,823) (3,902)
Benefit for income taxes ........................................................... (2,063) (1,384)
--------- ---------
Loss before the cumulative effect of a change in accounting principle .............. (4,760) (2,518)
Cumulative effect of a change in accounting principle, net of related taxes (Note 2) - (253)
--------- ---------
Net (loss) ......................................................................... (4,760) (2,771)
Other comprehensive income (expense), net of tax (Note 3):
Unrealized gain on derivative instruments ...................................... 618 -
Foreign currency translation adjustments ....................................... - 233
--------- ---------
Comprehensive income (loss) ........................................................ $ (4,142) $ (2,538)
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2003
-------------- --------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)..................................................................... $ (4,760) $ (2,771)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of a change in accounting principle, net of related - 253
tax....................................................................
Depreciation and amortization expense....................................... 14,211 14,685
Amortization of deferred financing costs.................................... 728 821
Deferred income tax provision............................................... (2,269) (1,581)
Provision for doubtful accounts............................................. 250 333
(Gain) loss on sales of property and equipment.............................. 8 (32)
Changes in assets and liabilities, adjusted for the effects of business
acquisitions:
Accounts receivable....................................................... (14,390) (15,046)
Inventories............................................................... 3,833 317
Other current assets...................................................... 336 402
Accounts payable and other accrued liabilities............................ 23,175 25,477
Other, net.................................................................. (954) (1,256)
---------- ----------
Net cash provided by operating activities................................... 20,168 21,602
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions ......................................................... (1,891) (5,741)
Proceeds from sales of property and equipment.................................. 772 1,083
Capital expenditures........................................................... (9,174) (9,395)
---------- ----------
Net cash used in investing activities....................................... (10,293) (14,053)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loan borrowings (repayments), net.................................... (4,900) 2,600
Long-term debt repayments...................................................... (820) (864)
Merger and recapitalization expenses paid...................................... (150) -
---------- ----------
Net cash provided by (used in) financing activities......................... (5,870) 1,736
---------- ----------
Effect of exchange rate changes on cash..................................... - 13
---------- ----------
Net increase in cash...................................................... 4,005 9,298
Cash at the beginning of the period............................................... 19,888 14,047
---------- ----------
Cash at the end of the period..................................................... $ 23,893 $ 23,345
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2002 2003
-------------------------------------
(IN THOUSANDS OF DOLLARS)
COMMON STOCK:
Balance at beginning and end of period.................................... $ 3 $ 3
=========== ===========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period............................................ $ 215,840 $ 215,840
Accretion of nonredeemable equity..................................... - (219)
Issuance of stock warrants............................................ - 1,816
----------- -----------
Balance at end of period.................................................. $ 215,840 $ 217,437
=========== ===========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of period............................................ $ (1,920) $ -
Change in fair value of interest rate protection agreement, net
of tax............................................................. 618 -
Foreign currency translation adjustments, net of tax.................. - 233
----------- -----------
Balance at end of period.................................................. $ (1,302) $ 233
=========== ===========
ACCUMULATED DEFICIT:
Balance at beginning of period............................................ $ (201,588) $ (200,578)
Net loss........................................................... (4,760) (2,771)
----------- -----------
Balance at end of period.................................................. $ (206,348) $ (203,349)
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system and in Canada to serve long-haul trucking fleets and their
drivers, independent truck drivers and general motorists. At March 31, 2003, our
geographically diverse nationwide network of full-service travel centers
consisted of 152 sites located in 40 states and the province of Ontario, Canada.
Our operations are conducted through three distinct types of travel centers:
- - sites owned or leased and operated by us, which we refer to as
company-operated sites;
- - sites owned by us and leased to independent lessee-franchisees, which we
refer to as leased sites; and
- - sites owned and operated by independent franchisees, which we refer to as
franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system and in Canada, typically on 20- to 25-acre sites. Operating under
the "TravelCenters of America" and "TA" brand names, our nationwide network
provides our customers with diesel fuel and gasoline as well as non-fuel
products and services such as truck repair and maintenance services,
full-service restaurants, fast food restaurants, travel and convenience stores
with a selection of over 4,000 items and other driver amenities. We also collect
rents and franchise royalties from the franchisees who operate the leased sites
and franchisee-owner sites and, as a franchisor, assist our franchisees in
providing service to long-haul trucking fleets and their drivers, independent
truck drivers and general motorists.
The consolidated financial statements include the accounts of
TravelCenters of America, Inc. and its wholly owned subsidiaries, TA Operating
Corporation and TA Franchise Systems Inc., as well as TA Licensing, Inc., TA
Travel, L.L.C., TravelCenters Realty, L.L.C. and TravelCenters Properties, L.P.,
3703000 Nova Scotia Company, TravelCentres Canada Inc., and TravelCentres Canada
Limited Partnership, which are all direct or indirect wholly owned subsidiaries
of TA Operating Corporation. Intercompany accounts and transactions have been
eliminated. With only one of our 152 travel centers located in Canada, the
amounts of revenues and long-lived assets located in Canada are not material.
The accompanying unaudited, consolidated financial statements as of and
for the quarters ended March 31, 2002 and 2003 have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, these statements should be read in conjunction with our audited
financial statements as of and for the year ended December 31, 2002. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, all of which were of a normal recurring
nature, necessary to present fairly, in all material respects, our consolidated
financial position at March 31, 2003, and our results of operations, changes in
nonredeemable stockholders' equity and cash flows for the three-month periods
ended March 31, 2002 and 2003, and are not necessarily indicative of the results
to be expected for the full year.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
FAS 143. As of January 1, 2003, we began recognizing the future costs
to remove our underground storage tanks over the estimated useful lives of each
tank in accordance with the provisions of Statement of Financial Accounting
Standards (FAS) No. 143, "Accounting for Asset Retirement Obligations." A
liability for the fair value of an asset retirement obligation with a
corresponding increase to the carrying value of the related long-lived asset is
recorded at the time an underground storage tank is installed. We will amortize
the amount added to property and equipment and recognize accretion expense in
connection with the discounted liability over the remaining life of the
respective underground storage tank. The estimated liability is based on
historical experiences in removing these tanks, estimated tank useful lives,
external estimates as to the cost to remove the tanks in the future and
regulatory requirements. The liability is a discounted liability using a
credit-adjusted risk-free rate of approximately 12.8%. Revisions to the
liability could occur due to changes in tank removal costs, tank useful lives or
if new regulations regarding the removal of such tanks are enacted.
6
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Upon adoption of FAS 143, we recorded a discounted liability of
$589,000, increased property and equipment by $172,000 and recognized a one-time
cumulative effect charge of $253,000 (net of deferred tax benefit of $164,000).
The pro forma effect for the three months ended March 31, 2002, assuming the
adoption of FAS 143 as of January 1, 2002, was not material.
A reconciliation of our asset retirement obligation liability, which is
included within other noncurrent liabilities in our consolidated balance sheet,
for the three months ended March 31, 2003 was as follows (in thousands):
Balance at January 1, 2002.............................$ 589
Liabilities incurred................................... -
Liabilities settled.................................... -
Accretion expense...................................... 19
Revisions to estimates................................. -
-----------
$ 608
===========
FIN 46. In January 2003, the Financial Accounting Standards Board
issued FASB Interpretation No. (FIN) 46, "Consolidation of Variable Interest
Entities." We must adopt this accounting guidance by July 1, 2003. Under FIN 46,
as the lessor with whom we have entered into our master lease program is
currently capitalized and structured, we would be required to consolidate the
lessor in our consolidated financial statements. We and the lessor are currently
evaluating our alternatives with respect to the master lease facility and have
not yet concluded on our course of action. Consolidating the lessor would affect
our consolidated balance sheet by increasing property and equipment, other
assets and long-term debt and would affect our consolidated statement of
operations by reducing operating expenses, increasing depreciation expense and
increasing interest expense. Consolidating the lessor is not expected to result
in a violation of our debt covenants or to have an effect on our liquidity. We
adopted the disclosure requirements of FIN 46 in our consolidated financial
statements for 2002.
3. COMPREHENSIVE INCOME
In recognizing the gain on derivative instruments related to the
changes in fair value of our interest rate protection agreements for the three
months ended March 31, 2002, we decreased our deferred tax assets by $319,000.
For the three months ended March 31, 2003, we increased our deferred tax
liabilities by $156,000 in connection with recognizing foreign currency
translation adjustments.
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, MARCH 31,
2002 2003
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
Non-fuel merchandise...................................................... $ 55,460 $ 55,371
6,335
Petroleum products........................................................ 6,477 6,414
------------ ------------
Total inventories..................................................... $ 61,937 $ 61,706
============ ============
7
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the three months
ended March 31, 2002 and 2003 were as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2002 2003
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
Balance as of beginning of period......................................... $ 19,343 $ 23,585
Goodwill recorded during the period....................................... 1,225 -
----------- -----------
Balance as of end of period............................................... $ 20,568 $ 23,585
=========== ===========
During the three months ended March 31, 2002, we recorded $1,225,000 of
goodwill as a result of the business acquisitions we completed in connection
with converting two leased sites to company-operated sites.
The net carrying amount of intangible assets is included within other
noncurrent assets in our consolidated balance sheet. Intangible assets, net
consisted of the following:
DECEMBER 31, MARCH 31,
2002 2003
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
Amortizable intangible assets:
Noncompetition agreements............................................ $ 17,200 $ 17,200
Leasehold interest................................................... 1,724 1,724
Other................................................................ 849 849
------------ ------------
Total amortizable intangible assets.............................. 19,773 19,773
Less - accumulated amortization...................................... 18,848 19,322
------------ ------------
Net carrying value of amortizable intangible assets.............. 925 451
Net carrying value of trademarks............................................ 1,398 1,398
------------ ------------
Intangible assets, net........................................... $ 2,323 $ 1,849
============ ============
Total amortization expense for our amortizable intangible assets for
the three-month periods ended March 31, 2002 and 2003 were $474,000 and
$474,000, respectively. The estimated aggregate amortization expense for our
amortizable intangible assets for the year ending December 31, 2003 and each of
the two succeeding fiscal years are $678,000 for 2003; $176,000 for 2004 and
$70,000 for 2005. Our amortizable intangible assets will be fully amortized by
December 31, 2005.
8
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK-BASED EMPLOYEE COMPENSATION
We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. For granted options
that vest over time, no compensation expense is reflected in net income, as all
of those options had an exercise price equal to or greater than the market value
of the underlying common stock at the date of grant. For granted options that
vest based on attaining certain measures of performance, compensation expense is
recognized when it becomes probable that the performance triggers for such
options will be achieved. The following table illustrates the effect on net
income (loss) if we had applied the fair value recognition provisions of FAS No.
123 to stock-based employee compensation.
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2003
------------------------------
(IN THOUSANDS OF DOLLARS)
Net (loss), as reported......................................................... $ (4,760) $ (2,771)
Add back - Stock-based employee compensation expense, net of related tax
effects, included in net (loss) as reported................................. - -
Deduct - Total stock-based employee compensation expense determined under fair
value based methods for all awards, net of related tax effects.............. (176) (171)
---------- ---------
Pro forma net (loss)............................................................ $ (4,936) $ (2,942)
========== =========
The fair value of these options used to calculate the pro forma
compensation expense amounts was estimated at the date of grant using the
Black-Sholes option-pricing model with the following weighted average
assumptions: a risk-free interest rate of 5.5%, a dividend yield of 0.0%, a
volatility factor of 0.0001%, and an expected life of the options of ten years.
7. COMMITMENTS AND CONTINGENCIES
Guarantees
In the normal course of business we periodically enter into agreements
that incorporate indemnification provisions. While the maximum amount to which
we may be exposed under such agreements cannot be estimated, it is the opinion
of management that these indemnifications are not expected to have a material
adverse effect on our consolidated financial position or result of operations.
We also offer a warranty of our workmanship in our truck maintenance and repair
shops, but the annual warranty expense and corresponding liability are
immaterial.
Lease Commitments
We have entered into lease agreements covering certain of our travel
center locations, warehouse and office space, computer and office equipment and
vehicles. Most long-term leases include renewal options, escalation clauses and,
in certain cases, purchase options. Certain operating leases specify scheduled
rent increases over the lease term. The effects of those scheduled rent
increases, which are included in minimum lease payments, are recognized in rent
expense over the lease term on a straight-line basis. Future minimum lease
payments required under operating leases that have remaining noncancelable lease
terms in excess of one year, as of March 31, 2003, were as follows:
9
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDING MINIMUM LEASE
DECEMBER 31, PAYMENTS
- ------------ ---------------------------
(IN THOUSANDS OF DOLLARS)
2003................................................................................... $ 12,491
2004................................................................................... 15,947
2005................................................................................... 15,147
2006................................................................................... 56,275
2007................................................................................... 9,175
Thereafter............................................................................. 77,138
-------------
$ 186,173
The amount in the above table for minimum lease payments for 2006
assumes we will not renew the master lease program described below and will
instead pay to the lessor the $44,077,000 residual guarantee amount. Currently,
we would expect to attempt to renew and extend the lease at that time and not
expend this amount.
On September 9, 1999, we entered into a master lease program with a
lessor that has been used to finance the construction of eight travel centers on
land we own. These lease transactions were evaluated for lease classification in
accordance with FAS 13. We do not consolidate the lessor so long as the owners
of the lessor maintain a substantial residual equity investment of at least
three percent that is at risk during the entire term of the lease, which has
been the case to date and is expected to remain the case. Consolidating the
lessor would affect our consolidated balance sheet by increasing property and
equipment, other assets and long-term debt and would affect our consolidated
statement of operations by reducing operating expenses, increasing depreciation
expense and increasing interest expense. The initial term of the lease expires
on September 9, 2006, at which time, if the lease is not renewed and extended,
we have the option to purchase the improvements for approximately $58,188,000.
Alternatively, we could return the travel centers to the lessor. In this case,
we would be required to make a residual value guarantee payment to the lessor of
$44,077,000. However, the lessor would be required to remit to us any portion of
the payment which, when combined with the net sale proceeds of the property,
exceeded the lessor's $58,188,000 investment in the property.
In January 2003, the FASB issued FIN 46 "Consolidation of Variable
Interest Entities." We must adopt this accounting guidance by July 1, 2003.
Under FIN 46, as the lessor with whom we have entered into our master lease
program is currently capitalized and structured, we would be required to
consolidate the lessor in our consolidated financial statements. We and the
lessor are currently evaluating our alternatives with respect to the master
lease facility and have not yet concluded on our course of action.
Environmental Matters
Our operations and properties are extensively regulated through
environmental laws and regulations ("Environmental Laws") that (i) govern
operations that may have adverse environmental effects, such as discharges to
air, soil and water, as well as the management of petroleum products and other
hazardous substances ("Hazardous Substances"), or (ii) impose liability for the
costs of cleaning up sites affected by, and for damages resulting from, disposal
or other releases of Hazardous Substances. We own and use underground storage
tanks and aboveground storage tanks to store petroleum products and waste at our
facilities. We must comply with requirements of Environmental Laws regarding
tank construction, integrity testing, leak detection and monitoring, overfill
and spill control, release reporting, financial assurance and corrective action
in case of a release from a storage tank into the environment. At some
locations, we must also comply with Environmental Laws relating to vapor
recovery and discharges to water. We believe that all of our travel centers are
in material compliance with applicable requirements of Environmental Laws.
10
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We have received notices of alleged violations of Environmental Laws,
or are aware of the need to undertake corrective actions to comply with
Environmental Laws, at company-owned travel centers in a number of
jurisdictions. We do not expect that any financial penalties associated with
these alleged violations, or compliance costs incurred in connection with these
violations or corrective actions, will be material to our results of operations
or financial condition. We are conducting investigatory and/or remedial actions
with respect to releases of Hazardous Substances at a number of our sites. While
we cannot precisely estimate the ultimate costs we will incur in connection with
the investigation and remediation of these properties, based on our current
knowledge, we do not expect that the costs to be incurred at these properties,
individually or in the aggregate, will be material to our results of operations
or financial condition. While the matters discussed above are, to the best of
our knowledge, the only proceedings for which we are currently exposed to
potential liability, particularly given the environmental indemnities obtained
as part of the Unocal and BP acquisitions, we cannot be certain that additional
contamination does not exist at these or additional network properties, or that
material liability will not be imposed in the future. If additional
environmental problems arise or are discovered, or if additional environmental
requirements are imposed by government agencies, increased environmental
compliance or remediation expenditures may be required, which could have a
material adverse effect on us. At March 31, 2003, we had a reserve for these
matters of $3,898,000 and a receivable for estimated recoveries of these
estimated future expenditures of $1,219,000. We estimate that the cash outlays
related to the matters for which we have accrued this reserve will be
approximately $2,211,000 in the remainder of 2003; $866,000 in 2004; $502,000 in
2005; $116,000 in 2006; $116,000 in 2007 and $87,000 thereafter. While it is not
possible to quantify with certainty the environmental exposure, in our opinion,
the potential liability, beyond that considered in the reserve, for all
environmental proceedings, based on information known to date, will not have a
material adverse effect on our financial condition, results of operations or
liquidity.
Pending Litigation
We are involved from time to time in various legal and administrative
proceedings and threatened legal and administrative proceedings incidental to
the ordinary course of our business. We believe that we are not now involved in
any litigation, individually, or in the aggregate, which could have a material
adverse affect on our business, financial condition, results of operations or
cash flows.
8. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2002 2003
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
Revolving loan borrowings................................................. $ 120,800 $ 144,600
Revolving loan repayments................................................. (125,700) (142,000)
----------- -----------
Revolving loan borrowings (repayments), net............................. $ (4,900) $ 2,600
=========== ===========
Cash paid during the period for:
Interest........................................................... $ 6,053 $ 4,592
Income taxes (net of refunds)...................................... $ 100 $ 195
During the first quarter of 2002, we acquired $590,000 of inventory and
property and equipment in settlement of accounts receivable as part of the
conversions of leased sites to company-operated sites and received a $100,000
note in payment for inventories sold in connection with the sale of a
company-operated site.
11
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. OTHER INFORMATION
Interest and other financial costs consisted of the following:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2003
------------- --------------
(IN THOUSANDS OF DOLLARS)
Cash interest expense...................................................... $ (11,912) $ (10,595)
Cash interest income....................................................... 24 19
Amortization of discount on debt........................................... (290) (649)
Amortization of deferred financing costs................................... (728) (821)
---------- ----------
Interest and other financial costs, net.................................... $ (12,906) $ (12,046)
========== ==========
10. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance
sheet schedules as of December 31, 2002 and March 31, 2003 and our condensed
consolidating statement of operations schedules and condensed consolidating
statement of cash flows schedules for the three-month periods ended March 31,
2002 and 2003. In the following schedules, "Parent Company" refers to the
unconsolidated balances of TravelCenters of America, Inc., "Guarantor
Subsidiaries" refers to the consolidated balances of TA Operating Corporation
and its domestic subsidiaries, but excluding its three Canadian subsidiaries,
and "Nonguarantor Subsidiaries" refers to the combined balances of TA Franchise
Systems Inc. and our three Canadian subsidiaries, which are included only since
January 2003. "Eliminations" represent the adjustments necessary to (a)
eliminate intercompany transactions and (b) eliminate investments in
subsidiaries.
The Guarantor Subsidiaries, (TA Operating Corporation, TA Licensing, Inc.,
TA Travel, L.L.C., TravelCenters Realty, L.L.C. and TravelCenters Properties,
L.P.), are direct or indirect wholly-owned subsidiaries of ours and have fully
and unconditionally, jointly and severally, guaranteed the indebtedness of
Travelcenters of America, Inc., which consists of the Senior Credit Facility and
the Senior Subordinated Notes due 2009.
12
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:
DECEMBER 31, 2002
-----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash.................................. $ - $ 14,047 $ - $ - $ 14,047
Accounts receivable, net.............. - 44,429 857 (991) 44,295
Inventories........................... - 61,937 - - 61,937
Deferred income taxes................. - 4,181 40 - 4,221
Other current assets.................. 445 7,719 - - 8,164
---------- ---------- ---------- ---------- ----------
Total current assets............. 445 132,313 897 (991) 132,664
Property and equipment, net.............. - 445,692 - - 445,692
Goodwill................................. - 23,585 - - 23,585
Deferred financing costs................. 27,452 - - - 27,452
Deferred income taxes.................... 23,696 (7,627) - - 16,069
Other noncurrent assets................ 996 14,091 - - 15,087
Investment in subsidiaries............... 243,555 - - (243,555) -
---------- ---------- ---------- ---------- ----------
Total assets..................... $ 296,144 $ 608,054 $ 897 $ (244,546) $ 660,549
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.. $ 3,280 $ 180 $ - $ - $ 3,460
Accounts payable...................... - 58,354 158 - 58,512
Other accrued liabilities............. 3,079 48,212 1,140 (991) 51,440
---------- ---------- ---------- ---------- ----------
Total current liabilities........ 6,359 106,746 1,298 (991) 113,412
Long-term debt (net of unamortized
discount)............................. 522,440 2,691 - - 525,131
Deferred income taxes.................... - 2,364 - - 2,364
Intercompany advances.................... (249,856) 255,223 (5,367) - -
Other noncurrent liabilities............. - 3,696 - - 3,696
---------- ---------- ---------- ---------- ----------
Total liabilities................ 278,943 370,720 (4,069) (991) 644,603
Redeemable equity........................ 681 - - - 681
Nonredeemable stockholders' equity:
Common stock and other stockholders'
equity.............................. 217,098 192,336 - (193,591) 215,843
Retained earnings (accumulated deficit) (200,578) 44,998 4,966 (49,964) (200,578)
---------- ---------- ---------- ---------- ----------
Total nonredeemable stockholders'
equity........................ 16,520 237,334 4,966 (243,555) 15,265
---------- ---------- ---------- ---------- ----------
Total liabilities, redeemable
equity and nonredeemable
stockholders' equity.......... $ 296,144 $ 608,054 $ 897 $ (244,546) $ 660,549
========== ========== ========== ========== ==========
13
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
------------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------------------------ ---------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash................................... $ - $ 22,976 $ 369 $ - $ 23,345
Accounts receivable, net............... - 59,183 792 (964) 59,011
Inventories............................ - 61,615 91 - 61,706
Deferred income taxes.................. - 4,283 40 - 4,323
Other current assets................... 317 7,406 99 (49) 7,773
---------- ---------- ---------- ---------- ----------
Total current assets.............. 317 155,463 1,391 (1,013) 156,158
Property and equipment, net............... - 441,686 5,638 - 447,324
Goodwill.................................. - 23,585 - - 23,585
Deferred financing costs, net............. 26,631 - - - 26,631
Deferred income taxes..................... 25,048 (7,494) - - 17,554
Other noncurrent assets................... 978 14,167 - - 15,145
Investment in subsidiaries................ 244,969 1,794 - (246,763) -
---------- ---------- ---------- ---------- ----------
Total assets...................... $ 297,943 $ 629,201 $ 7,029 $ (247,776) $ 686,397
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.. $ 3,280 $ 180 $ - $ - $ 3,460
Accounts payable...................... - 74,472 241 - 74,713
Other accrued liabilities............. 8,431 50,162 1,406 (1,013) 58,986
---------- ---------- ---------- ---------- ----------
Total current liabilities........ 11,711 124,814 1,647 (1,013) 137,159
Long-term debt (net of unamortized
discount)............................. 523,024 2,675 - - 525,699
Deferred income taxes.................... - 2,361 - - 2,361
Intercompany payable (receivable)........ (253,037) 254,576 (1,539) - -
Other noncurrent liabilities............. - 5,954 - - 5,954
---------- ---------- ---------- ---------- ----------
Total liabilities................ 281,698 390,380 108 (1,013) 671,173
Redeemable equity........................ 900 - - - 900
Nonredeemable stockholders' equity:
Common stock and other
nonredeemable stockholders' equity... 218,694 192,494 1,891 (195,406) 217,673
Retained earnings
(accumulated deficit)................ (203,349) 46,327 5,030 (51,357) (203,349)
---------- ---------- ---------- ---------- ----------
Total nonredeemable stockholders'
equity........................ 15,345 238,821 6,921 (246,763) 14,324
---------- ---------- ---------- ---------- ----------
Total liabilities, redeemable
equity and nonredeemable
stockholders' equity.......... $ 297,943 $ 629,201 $ 7,029 $ (247,776) $ 686,397
========== ========== ========== ========== ==========
14
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:
THREE MONTHS ENDED MARCH 31, 2002
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------------------------------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 254,178 $ - $ - $ 254,178
Non-fuel............................... - 138,887 - - 138,887
Rent and royalties..................... - 3,589 1,424 (1,023) 3,990
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 396,654 1,424 (1,023) 397,055
Cost of goods sold (excluding depreciation) - 286,286 - - 286,286
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 110,368 1,424 (1,023) 110,769
Operating expenses........................ - 80,696 1,039 (1,023) 80,712
Selling, general and
administrative expenses............... 545 8,825 385 - 9,755
Depreciation and amortization expense..... - 14,211 - - 14,211
Loss on sales of property and equipment - 8 - - 8
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (545) 6,628 - - 6,083
Interest and other financial costs, net... (8,395) (4,511) - - (12,906)
Equity income (loss)...................... 1,141 - - (1,141) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... (7,799) 2,117 - (1,141) (6,823)
Provision (benefit) for income taxes...... (3,039) 976 - - (2,063)
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ (4,760) $ 1,141 $ - $ (1,141) $ (4,760)
========== ========== ========== ========== ==========
15
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 412,129 $ 2,064 $ - $ 414,193
Non-fuel............................... - 145,610 613 - 146,223
Rent and royalties..................... - 3,120 1,359 (964) 3,515
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 560,859 4,036 (964) 563,931
Cost of goods sold (excluding depreciation) - 445,981 2,218 - 448,199
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 114,878 1,818 (964) 115,732
Operating expenses........................ - 82,466 1,343 (964) 82,845
Selling, general and
administrative expenses............... 201 9,638 251 - 10,090
Depreciation and amortization expense..... - 14,617 68 - 14,685
(Gain) on sales of property and equipment - (32) - - (32)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (201) 8,189 156 - 8,144
Interest and other financial costs, net... (6,141) (5,857) (48) - (12,046)
Equity income (loss)...................... 1,414 (21) - (1,393) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and the
cumulative effect of a change in
accounting principle................... (4,928) 2,311 108 (1,393) (3,902)
Provision (benefit) for income taxes...... (2,157) 729 44 - (1,384)
----------- ---------- ---------- ---------- ----------
Income (loss) before the cumulative effect
of a change in accounting principle. (2,771) 1,582 64 (1,393) (2,518)
Cumulative effect of a change in
accounting principle, net of related
taxes............................... - (253) - - (253)
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ (2,771) $ 1,329 $ 64 $ (1,393) $ (2,771)
========== ========== ========== ========== ==========-
16
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SCHEDULES:
THREE MONTHS ENDED MARCH 31, 2002
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ --------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ (2,409) $ 22,738 $ (161) $ - $ 20,168
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (1,891) - - (1,891)
Proceeds from sales of property and
equipment........................... - 772 - - 772
Capital expenditures................... - (9,174) - - (9,174)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (10,293) - - (10,293)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loan borrowings
(repayments), net................... (4,900) - - - (4,900)
Long-term debt repayments........... (820) - - - (820)
Merger and recapitalization
expenses paid.................... (150) - - - (150)
Intercompany advances............... 8,279 (8,440) 161 - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 2,409 (8,440) 161 - (5,870)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash..... - 4,005 - - 4,005
Cash at the beginning of the period....... - 19,888 - - 19,888
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 23,893 $ - $ - $ 23,893
========== ========== ========== ========== ==========
17
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ --------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ 1,401 $ 17,700 $ 685 $ 1,816 $ 21,602
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - - (5,741) - (5,741)
Proceeds from sales of property and
equipment........................... - 1,083 - - 1,083
Capital expenditures................... - (9,314) (81) - (9,395)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (8,231) (5,822) - (14,053)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loan borrowings
(repayments), net................... 2,600 - - - 2,600
Long-term debt repayments........... (820) (44) - - (864)
Issuance of common stock............ - - 1,816 (1,816) -
Intercompany advances............... (3,181) (496) 3,677 - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. (1,401) (540) 5,493 (1,816) 1,736
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on
cash..............................- - 13 - 13
- --------- ---------- ---------- ----------
Net increase in cash................ - 8,929 369 - 9,298
Cash at the beginning of the period....... - 14,047 - - 14,047
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 22,976 $ 369 $ - $ 23,345
========== ========== ========== ========== ==========
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and selected notes to unaudited
consolidated financial statements included herein, and the audited financial
statements and the Management's Discussion and Analysis included with our Form
10-K for the year ended December 31, 2002.
CRITICAL ACCOUNTING POLICIES
We have no material changes to the disclosure on this matter made in
our annual report on Form 10-K for the year ended December 31, 2002, except that
on January 1, 2003 we adopted FAS 143, "Accounting for Asset Retirement
Obligations." As of January 1, 2003, we recognize the future cost to remove an
underground storage tank over the estimated useful life of the storage tank. A
liability for the fair value of an asset retirement obligation with a
corresponding increase to the carrying value of the related long-lived asset is
recorded at the time an underground storage tank is installed. We will amortize
the amount added to property and equipment and recognize accretion expense in
connection with the discounted liability over the remaining life of the
respective underground storage tank. The estimated liability is based on
historical experiences in removing these tanks, estimated tank useful lives,
external estimates as to the cost to remove the tanks in the future and
regulatory requirements. The liability is a discounted liability using a
credit-adjusted risk-free rate of approximately 12.8%. Revisions to the
liability could occur due to changes in tank removal costs, tank useful lives or
if new regulations regarding the removal of such tanks are enacted. Upon
adoption of FAS 143, we recorded a discounted liability of $589,000, increased
property and equipment by $172,000 and recognized a one-time cumulative effect
charge of $253,000 (net of deferred tax benefit of $164,000).
OVERVIEW
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. Our network is the largest, and only
nationwide, full-service travel center network in the United States. At March
31, 2003, our geographically diverse network consisted of 152 sites located in
40 states and the province of Ontario, Canada. Our operations are conducted
through three distinct types of travel centers:
- sites owned or leased and operated by us, which we refer to as
company-operated sites;
- sites owned by us and leased to independent lessee-franchisees, which
we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer to
as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system, typically on 20- to 25-acres sites. Most of our network
properties were developed more than 20 years ago when prime real estate
locations along the interstate highway system were more readily available than
they are today, making a network such as ours difficult to replicate. Operating
under the "TravelCenters of America" and "TA" brand names, our nationwide
network provides an advantage to long-haul trucking fleets by enabling them to
route their trucks within a single network from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, more than 20 different brands of fast food
restaurants, travel and convenience stores and other driver amenities.
19
The non-fuel products and services we offer to our customers complement
our fuel business and provide us a means to increase our revenues and gross
profit despite price pressure on fuel as a result of competition and volatile
crude oil and petroleum product prices. For the three-month periods ended March
31, 2002 and 2003, our revenues and gross profit were composed as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2003
-------------- --------------
Revenues:
Fuel................................................................................ 64.0% 73.5%
Non-fuel............................................................................ 35.0% 25.9%
Rent and royalties.................................................................. 1.0% 0.6%
--------- ---------
Total revenues................................................................ 100.0% 100.0%
========= =========
Gross profit (excluding depreciation):
Fuel................................................................................ 21.7% 22.1%
Non-fuel............................................................................ 74.7% 74.9%
Rent and royalties.................................................................. 3.6% 3.0%
--------- ---------
Total gross profit (excluding depreciation)................................... 100.0% 100.0%
========= =========
COMPOSITION OF OUR NETWORK
The changes in the number of sites within our network and in their
method of operation (company-operated, leased or franchisee-owned) are
significant factors influencing the changes in our results of operations. The
following table summarizes the changes in the composition of our network from
December 31, 2001 through March 31, 2003:
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
-------------- -------------- -----------------------------
Number of sites at December 31, 2001.................... 119 25 9 153
2002 First Quarter Activity:
Sales of sites....................................... (1) - - (1)
Conversions of leased sites to company-operated sites 2 (2) - -
------ ------ ------ ----
Number of sites at March 31, 2002....................... 120 23 9 152
April - December 2002 Activity:
New sites............................................ 1 - 1 2
Sales of sites....................................... (2) - - (2)
Conversions of leased sites to
company-operated sites............................. 3 (3) - -
------ ------ ------ ----
Number of sites at December 31, 2002.................... 122 20 10 152
2003 Activity:
New sites............................................ 1 - - 1
Sales of sites....................................... (1) - - (1)
------ ------ ------ -----
Number of sites at March 31, 2003....................... 122 20 10 152
====== ====== ====== =====
In April 2003, we added a new company-operated site to our network
through the acquisition of an operating site and we converted one leased site
into a company-operated site upon the termination of the lease and franchise
agreements covering that site.
20
RESULTS OF OPERATIONS
SAME-SITE RESULTS COMPARISONS
As part of our discussion and analysis of operating results we refer to
increases and/or decreases in results on a same-site basis. For purposes of
these comparisons, we include a site in the same-site comparisons if it was open
for business under the same method of operation (company-operated, leased or
franchisee-owned) for the entire period under discussion in both years being
compared. Sites are not excluded from the same-site comparisons as a result of
expansions in the square footage of the sites or in the amenities offered at the
sites.
QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002
Revenues. Our consolidated revenues for the quarter ended March 31,
2003 were $563.9 million, which represents an increase from the quarter ended
March 31, 2002 of $166.9 million, or 42.0%, that is primarily attributable to an
increase in fuel revenue.
Fuel revenue for the quarter ended March 31, 2003 increased by $160.0
million, or 63.0%, as compared to the same period in 2002. The increase was
attributable principally to increases in diesel fuel and gasoline average
selling prices. Average diesel fuel and gasoline sales prices for the quarter
ended March 31, 2003 increased by 60.2% and 52.0%, respectively, as compared to
the same period in 2002, reflecting the increases in commodity prices in 2003,
as compared to the same period in 2002, that were attributable to historically
low refined petroleum products inventories in the United States, the
exceptionally cold weather throughout much of the United States and disruptions
in, and uncertainty concerning, the world crude oil supply, particularly from
Iraq, Venezuela and Nigeria. The fuel revenue increase also resulted from an
increase in gasoline sales volumes and a decrease in diesel fuel sales volumes.
Diesel fuel and gasoline sales volumes for the quarter ended March 31, 2003
decreased 0.4% and increased 27.8%, respectively, as compared to the same period
in 2002. For the quarter ended March 31, 2003, we sold 336.5 million gallons of
diesel fuel and 40.6 million gallons of gasoline, as compared to 337.7 million
gallons of diesel fuel and 31.7 million gallons of gasoline for the quarter
ended March 31, 2002. The diesel fuel sales volume decrease of 1.2 million
gallons resulted from a 4.5% decrease in same-site diesel fuel sales volumes, a
net increase in sales volumes at sites we added to or eliminated from our
network during 2002 and 2003 and an increase in wholesale diesel fuel sales
volume. The gasoline sales volume increase was primarily attributable to a 10.2%
increase in same-site gasoline sales volumes and a 5.2 million gallon increase
in wholesale gasoline sales volumes. We believe the same-site diesel fuel sales
volume decrease resulted from a decline in trucking activity in the first
quarter of 2003 as compared to the first quarter of 2002, resulting from the
general condition of the United States economy, and occurred in spite of our
continued emphasis on competitively pricing our diesel fuel. We believe the
same-site increase in gasoline sales volume resulted primarily from increased
general motorist visits to our sites as a result of our more aggressive retail
gasoline pricing program as well as site improvements made as part of our
capital investment program.
Non-fuel revenues for the quarter ended March 31, 2003 of $146.2
million reflected an increase of $7.3 million, or 5.3%, as compared to the same
period in 2002. The increase was primarily attributable to a 3.2% increase in
same-site non-fuel revenues and also attributable to the increased sales at the
company-operated sites added to our network in 2002 and 2003. We believe the
same-site increase reflected increased customer traffic resulting, in part, from
the significant capital improvements that we have made in the network under our
capital investment program to re-image, re-brand and upgrade our travel centers
and also from our fuel pricing strategy.
Rent and royalty revenues for the quarter ended March 31, 2003
reflected a $0.5 million, or 11.9%, decrease as compared to the same period in
2002. This decrease was primarily attributable to the rent and royalty revenue
lost as a result of the conversions of leased sites to company-operated sites.
This decrease was partially offset by a 5.0% increase in same-site royalty
revenue and a 3.0% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the quarter
ended March 31, 2003 was $115.7 million, compared to $110.8 million for the same
period in 2002, an increase of $5.0 million, or 4.5%. The increase in our gross
profit was primarily due to increases in gasoline and non-fuel sales volumes and
increases in diesel fuel and gasoline margin per gallon that were partially
offset by a decrease in diesel fuel sales volume and decreased rent and royalty
revenue.
21
Operating and Selling, General and Administrative Expenses. Operating
expenses included the direct expenses of company-operated sites and the
ownership costs of leased sites. Selling, general and administrative expenses
included corporate overhead and administrative costs.
Our operating expenses increased by $2.1 million, or 2.6%, to $82.8
million for the quarter ended March 31, 2003 compared to $80.7 million for the
same period in 2002. This increase was attributable to a $0.7 million, or 0.9%,
increase on a same-site basis and a $1.5 million net increase resulting from
company-operated sites we added to our network or eliminated from our network
during 2002 or 2003. On a same-site basis, operating expenses as a percentage of
non-fuel revenues for 2003 were 56.2%, compared to 57.5% for the same period in
2002, reflecting the results of our cost-cutting measures at our sites,
partially offset by increased utility expense related to the severe winter and
increased labor costs related to the increased level of non-fuel revenues.
Our selling, general and administrative expenses for the quarter ended
March 31, 2003 were $10.1 million, which reflected a $0.3 million, or 3.4%
increase from the same period in 2002 that is primarily attributable to
increased insurance premiums.
Depreciation and Amortization Expense. Depreciation and amortization
expense for 2003 was $14.7 million, compared to $14.2 million for 2002, an
increase of $0.5 million or 3.3%. During the quarter ended March 31, 2002 we
recognized an impairment charge of $0.3 million with respect to certain of the
sites we were holding for sale as a result of reductions in estimated sales
proceeds.
Income from Operations. We generated income from operations of $8.1
million for the quarter ended March 31, 2003, compared to income from operations
of $6.1 million for the same period in 2002. This increase of $2.1 million, or
33.9%, was primarily attributable to the increase in gross profit that was
partially offset by the increase in operating expenses.
Adjusted EBITDA for the quarter ended March 31, 2003 was $22.8 million,
as compared to Adjusted EBITDA of $20.3 million for the quarter ended March 31,
2002. This increase of $2.5 million, or 12.5%, reflected our increased level of
income from operations. Adjusted EBITDA, as used here, is based on the
definition for "EBITDA" in our bank debt agreement and consists of net income
plus the sum of (a) income taxes, (b) interest expense, net, (c) depreciation,
amortization and other noncash charges, which includes stock compensation
expense, (d) transition expense and (e) the costs of the merger and
recapitalization transactions. We have included this information concerning
Adjusted EBITDA because Adjusted EBITDA is a key financial measure monitored by
our stockholders and lenders and, importantly, is a primary component of the
financial ratio covenants in our debt agreements. We also use Adjusted EBITDA as
a basis for determining bonus payments to our corporate and site-level
management employees and as a key component in the formula for calculating the
fair value of our redeemable common stock and stock options. Adjusted EBITDA
should not be considered in isolation from, or as a substitute for, net income,
income from operations, cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles. While the non-GAAP measures "EBITDA"
and "Adjusted EBITDA" are frequently used by other companies as measures of
operations and/or ability to meet debt service requirements, Adjusted EBITDA as
we use the term is not necessarily comparable to similarly titled captions of
other companies due to differences in methods of calculation. The following
table sets forth a reconciliation of Adjusted EBITDA to the amounts of income
from operations for each period.
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2002 2003
--------------- ---------------
(IN MILLIONS OF DOLLARS)
Income from operations............................................................. $ 6.1 $ 8.1
Add back:
Depreciation and amortization expense......................................... 14.2 14.7
--------- ---------
Adjusted EBITDA.................................................................... $ 20.3 $ 22.8
========= =========
22
Interest and Other Financial Costs--Net. Interest and other financial
costs, net, for the quarter ended March 31, 2003 decreased by $0.9 million, or
6.7%, compared to 2002. This decrease resulted from our reduced level of
indebtedness in 2003 as compared to 2002 and the decline in interest rates since
the first quarter of 2002.
Income Taxes. Our effective income tax benefit rates for the quarters
March 31, 2003 and 2002 were 35.5% and 30.2%, respectively. These rates differed
from the federal statutory rate due primarily to state income taxes and
nondeductible expenses, partially offset by the benefit of certain tax credits.
Cumulative Effect of a Change in Accounting Principle. Effective
January 1, 2003, we adopted FAS 143, "Accounting for Asset Retirement
Obligations." As of January 1, 2003, we recognize the future cost to remove an
underground storage tank over the estimated useful life of the storage tank. A
liability for the fair value of an asset retirement obligation with a
corresponding increase to the carrying value of the related long-lived asset is
recorded at the time an underground storage tank is installed. We will amortize
the amount added to property and equipment and recognize accretion expense in
connection with the discounted liability over the remaining life of the
respective underground storage tank. The estimated liability is based on
historical experiences in removing these tanks, estimated tank useful lives,
external estimates as to the cost to remove the tanks in the future and
regulatory requirements. The liability is a discounted liability using a
credit-adjusted risk-free rate of approximately 12.8%. Revisions to the
liability could occur due to changes in tank removal costs, tank useful lives or
if new regulations regarding the removal of such tanks are enacted. Upon
adoption of FAS 143, we recorded a discounted liability of $589,000, increased
property and equipment by $172,000 and recognized a one-time cumulative effect
charge of $253,000 (net of deferred tax benefit of $164,000. The pro forma
effect for the three months ended March 31, 2002, assuming the adoption of FAS
143 as of January 1, 2002, was not material.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements are to meet our working capital
and capital expenditure needs, including expenditures for acquisitions and
expansion, and to service the payments of principal and interest on outstanding
indebtedness. Our principal source of liquidity to meet these requirements is
operating cash flows. The revolving credit facility of our Senior Credit
Facility provides us a secondary source of liquidity, primarily to better match
the timing of cash expenditures to the timing of our cash receipts primarily due
to effects of changes in petroleum product prices, the uneven level of capital
expenditures throughout the year and the timing of debt and interest payments.
The primary risks we face with respect to the expected levels of operating cash
flows are a decrease in the demand by our customers for our products and
services, increases in crude oil and/or petroleum product prices and increases
in interest rates. It is reasonably likely that the United States economy could
either worsen, or make a slower recovery than expected during the remainder of
2003. Similarly, it is reasonably likely that interest rates and petroleum
product prices will increase further during the remainder of 2003 from levels
that existed during 2002 and the first quarter of 2003, possibly to levels
greater than that contemplated in our expectations. The uncertainty surrounding
each of the economy, interest rates and petroleum product prices is exacerbated
by the political and military situation in Iraq, crude oil production issues in
various countries and the intentions and actions of OPEC member nations. If the
United States economy remains stagnate or worsens, our customers could be
adversely affected, which could further intensify competition within our
industry and reduce the level of cash we could generate from our operations. A
one-percentage point increase in interest rates increases our annual cash
outlays by approximately $4.2 million. A significant increase in diesel fuel and
gasoline prices increases our cash investment in working capital and can also
have a depressing effect on our sales volumes and fuel margins per gallon. The
primary risk we face with respect to the expected availability of borrowing
under our revolving credit facility are the limitations imposed upon us by the
covenants contained in our Senior Credit Facility. Should our level of sales
volume or interest rate and petroleum products price levels vary adversely and
significantly from expectations, it is reasonably likely that we would need to
reduce our capital expenditures or be effectively barred from further revolving
credit facility borrowings in order to maintain compliance with our debt
covenants, in the absence of a debt covenant waiver or an amendment to the
related agreement. We were in compliance with all of our debt covenants
throughout the first quarter of 2003 and as of March 31, 2003, and we expect to
remain in compliance with all of our debt covenants throughout 2003.
We anticipate that we will be able to fund our 2003 working capital
requirements and capital expenditures primarily from funds generated from
operations, supplemented, to the extent necessary, from borrowings under our
revolving credit facility. Our long-term liquidity requirements, including
capital expenditures, are expected to be financed by a combination of internally
generated funds, borrowings and other sources of external financing as needed.
Our ability to fund our capital investment requirements, interest and principal
payment obligations and working capital requirements and to comply with all of
the financial covenants under our debt agreements depends
23
on our future operations, performance and cash flow. These are subject to
prevailing economic conditions and to financial, business and other factors,
some of which are beyond our control. At March 31, 2003, we had outstanding
revolving credit facility borrowings and issued letters of credit of $25.0
million and $21.7 million, respectively, leaving $53.3 million of our $100
million revolving credit facility available for borrowings.
The amounts we have invested for capital improvements have declined
each year from 2000 to 2002. The declining level of cash investments is in line
with our development plans and reflects our response to the slowing and then
stagnant U.S. economy throughout 2000, 2001 and 2002. Our capital investment
program to re-image, rebrand and upgrade our network has been substantially
completed. The capital expenditures budget for 2003 is approximately $42
million. Given our forecasted level of cash flows from operations for 2003 and
our planned level of capital expenditures, and barring a further decline in the
U.S. economy and/or an extended conflict in the Middle East or some other factor
that leads to significantly increased petroleum product prices, we expect that
during 2003 we will make our scheduled debt payments of $3.5 million and will
also repay an additional amount of outstanding borrowings under our term loan
and revolving credit facilities, including an $11.3 million mandatory term loan
prepayment made in April 2003.
HISTORICAL CASH FLOWS
Net cash provided by operating activities was $21.6 million for the
first quarter of 2003, compared to $20.2 million for the same period in the
prior year. This $1.4 million increase in cash provided by operations was
primarily attributable to a $2.1 million increase in operating income and a $0.9
million decrease in interest expense that were somewhat offset by a $2.1 million
decrease in the amount of cash generated from net working capital reductions.
Net cash used in investing activities was $14.1 million for the first
quarter of 2003, as compared to $10.3 million for the first quarter of 2002.
This increase in cash used in investing activities was primarily attributable to
a $3.9 million increase in cash paid for business acquisitions in the first
quarter of 2003 as compared to the same period in 2002. In the first quarter of
2003, we invested $5.7 million to acquire a travel center in Woodstock, Ontario,
Canada. In the first quarter of 2002 we completed two business acquisitions of
former franchisees' businesses for $1.9 million. The level of capital
expenditures, net of proceeds from sales, in the first quarter of 2003 was about
even with that in the first quarter of 2002. We expect cash used in investing
activities for the year ending December 31, 2003 to total $43 million, as
compared to $42 million for the year ended December 31, 2002.
Net cash provided by financing activities was $1.7 million during the
first quarter of 2003, as compared to $5.9 million of cash used in financing
activities for the first quarter of 2002. In the first quarter of 2003, we made
net borrowings of revolving credit facility indebtedness of $2.6 million and
made scheduled debt repayments of $0.9 million. In the first quarter of 2002 we
made net repayments of revolving credit facility indebtedness of $4.9 million
and made a scheduled payment of term loan indebtedness of $0.8 million.
DESCRIPTION OF INDEBTEDNESS
We have no material changes to the disclosure on this matter made in
our annual report on Form 10-K for the year ended December 31, 2002, except that
at March 31, 2003, we had outstanding revolving credit facility borrowings and
issued letters of credit of $25.0 million and $21.7 million, respectively,
leaving $53.3 million of our $100 million revolving credit facility available
for borrowings.
24
OFF-BALANCE SHEET ARRANGEMENTS
On September 9, 1999, we entered into a master lease program with a
lessor that has been used to finance the construction of eight travel centers on
land we own. These lease transactions were evaluated for lease classification in
accordance with FAS 13. We do not consolidate the lessor so long as the owners
of the lessor maintain a substantial residual equity investment of at least
three percent that is at risk during the entire term of the lease, which has
been the case to date and is expected to remain the case. Consolidating the
lessor would affect our consolidated balance sheet by increasing property and
equipment, other assets and long-term debt and would affect our consolidated
statement of operations by reducing operating expenses, increasing depreciation
expense and increasing interest expense. The initial term of the lease expires
on September 9, 2006, at which time, if the lease is not renewed and extended,
we have the option to purchase the improvements for approximately $58.2 million.
Alternatively, we could return the travel centers to the lessor. In this case,
we would be required to made a residual value guarantee payment to the lessor of
$44.1 million. However, the lessor would be required remit to us any portion of
the payment which, when combined with the net sale proceeds of the property,
exceeded the lessor's $58.2 million investment in the property.
Under the related lease agreement, our quarterly lease payments are
based on the capitalization and weighted-average cost of capital of the lessor.
The lessor was initially capitalized with $2.4 million of equity and entered
into a loan and security agreement through which it borrowed $69.7 million. The
lessor's equity holders receive a return on their contributed capital equal to
LIBOR plus 10.75%, while the interest rate for the indebtedness is equal to
LIBOR plus a spread that will decrease from 4.0% to 3.0% as our leverage ratio
(as defined in our bank debt agreement) improves. Our quarterly rent payments
are calculated to equal the quarterly interest expense, return on equity and
debt amortization requirements of the lessor, based on a straight-line
amortization schedule that ensures 20% of the underlying indebtedness is repaid
by the expiration of the initial lease term on September 9, 2006. We do not
guarantee the indebtedness of the lessor and the lessor's creditors have no
recourse against us beyond our obligation to continue our rent payments.
The following are additional amounts related to the master lease
program (all amounts are as of or for the quarter ended March 31, 2003):
- The lessor's total capitalization of $67.9 million consisted of $65.5
million of a term loan secured by the related travel centers assets
and underlying leasehold interests, and $2.4 million of general and
limited partners' contributed capital.
- The lessor's assets related to the master lease program consisted of
$67.5 million of tangible fixed assets, $1.7 million of capitalized
interest and $2.9 million of deferred financing costs.
- During the three months ended March 31, 2003, we recognized and paid
lease rent expense under this master lease program of $1.4 million.
Excluding this rent expense, the eight leased sites generated income
of $2.6 million for the three months ended March 31, 2003.
- The depreciation expense and interest expense we would have recognized
with respect to these leased travel centers if we had capitalized them
and not leased them was approximately $1.3 million and $1.0 million,
respectively, for the three months ended March 31, 2003.
In January 2003, the FASB issued FIN 46 "Consolidation of Variable
Interest Entities." We must adopt this accounting guidance by July 1, 2003.
Under FIN 46, as the lessor with whom we have entered into our master lease
program is currently capitalized and structured, we would be required to
consolidate the lessor in our consolidated financial statements. We and the
lessor are currently evaluating our alternatives with respect to the master
lease facility and have not yet concluded on our course of action. Consolidating
the lessor is not expected to result in a violation of our debt covenants.
25
SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our expected obligations to make future
required payments under various types of agreements.
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004-2005 2006-2007 THEREAFTER
-----------------------
--------- --------- --------- --------- ----------
(IN MILLIONS OF DOLLARS)
Long-term debt(1)................... $ 543.2 $ 13.9 $ 6.7 $ 106.1 $ 416.5
Operating leases(2)................. 186.2 12.5 31.1 65.5 77.1
Other long-term liabilities(3)...... 6.0 - 3.2 1.0 1.8
--------- --------- --------- --------- ---------
Total contractual cash obligations.. $ 735.4 $ 26.4 $ 41.0 $ 172.6 $ 495.4
========= ========= ========= ========= =========
(1) Excludes interest.
(2) Assumes that the master lease facility is not renewed at the
expiration of the initial lease term in 2006 and we would make a
residual value guarantee payment of $44.1 million.
(3) We have an obligation to make future payments to redeem common
stock of certain of our management employees upon the death,
disability or scheduled retirement of the employees. Neither the
timing nor the amounts of any such payments can be accurately
estimated. As of March 31, 2003, the aggregate amount of these
future redemption payments, assuming our Board of Directors would
not modify the formula for calculating the fair market value per
share, would be approximately $3.5 million.
Our only commercial commitments of any significance are the $21.7
million of standby letters of credit we had outstanding as of March 31, 2003.
ENVIRONMENTAL MATTERS
We own and operate underground storage tanks and aboveground storage
tanks at company-operated sites and leased sites that must comply with
Environmental Laws. We have estimated the current ranges of remediation costs at
currently active sites and what we believe will be our ultimate share for those
costs and, as of March 31, 2003, we had a reserve of $3.9 million for
unindemnified environmental matters for which we are responsible and a
receivable for estimated recoveries of these estimated future expenditures of
$1.2 million. We estimate that the cash outlays related to the matters for which
we have accrued this reserve will be approximately $2.2 million in the remainder
of 2003; $0.9 million in 2004; $0.5 million in 2005; $0.1 million in 2006; $0.1
million in 2007 and $0.1 million thereafter. Under the environmental agreements
entered into as part of the acquisition of the Unocal and BP networks, Unocal
and BP are required to provide indemnification for, and conduct remediation of,
certain pre-closing environmental conditions. In addition, we have obtained
insurance of up to $25.0 million for known and up to $40.0 million for unknown
environmental liabilities, subject, in each case, to certain limitations. While
it is not possible to quantify with certainty our environmental exposure, we
believe that the potential liability, beyond that considered in the reserve, for
all environmental proceedings, based on information known to date, will not have
a material adverse effect on our financial condition, our results of operations
or our liquidity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." We must adopt this accounting guidance by July 1, 2003.
Under FIN 46, as the lessor with whom we have entered into our master lease
program is currently capitalized and structured, we would be required to
consolidate the lessor in our consolidated financial statements. We and the
lessor are currently evaluating our alternatives with respect to the master
lease facility and have not yet concluded on our course of action. Consolidating
the lessor would affect our consolidated balance sheet by increasing property
and equipment, other assets and long-term debt and would affect our consolidated
statement of operations by reducing operating expenses, increasing depreciation
expense and increasing interest expense. Consolidating the lessor is not
expected to result in a violation of our debt covenants or to have an effect on
our liquidity.
26
FORWARD-LOOKING STATEMENTS
This quarterly report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to our future prospects, developments and business strategies.
The statements contained in this quarterly report that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. We have used the words "may," "will," "expect,"
"anticipate," "believe," "estimate," "plan," "intend" and similar expressions in
this quarterly report to identify forward-looking statements. These
forward-looking statements are made based on our expectations and beliefs
concerning future events affecting us and are subject to uncertainties and
factors relating to our operations and business environment, all of which are
difficult to predict and many of which are beyond our control, that could cause
our actual results to differ materially from those matters expressed in or
implied by forward-looking statements. The following factors are among those
that could cause our actual results to differ materially from the
forward-looking statements:
- competition from other travel center and truck stop operators,
including additional or improved services or facilities of
competitors, and from the potential commercialization of
state-owned interstate rest areas;
- the economic condition of the trucking industry, which in turn is
dependent on general economic factors;
- increased environmental regulation;
- changes in governmental regulation of the trucking industry,
including regulations relating to diesel fuel and gasoline;
- changes in accounting principals generally accepted in the United
States;
- changes in interest rates;
- diesel fuel and gasoline pricing;
- availability of diesel fuel and gasoline supply; and
- availability of sufficient qualified personnel to staff
company-operated sites.
All of our forward-looking statements should be considered in light of
these factors and all other risks discussed from time to time in our filings
with the Securities and Exchange Commission. We do not undertake to update our
forward-looking statements or risk factors to reflect future events or
circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosure on this matter made in
our annual report on Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer, after
conducting an evaluation, together with other members of our management, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of a date within 90 days of the filing of this report, have
concluded that our disclosure controls and procedures (as defined in Exchange
Act Rule 13a-14 (c)) were effective to ensure that information required to be
disclosed by us in our reports filed or submitted under the Securities Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission (the "SEC").
(b) Changes in internal controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of our most recent evaluation of our internal controls.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in various legal and administrative
proceedings and threatened legal and administrative proceedings incidental to
the ordinary course of our business. We believe that we are not now involved in
any litigation, individually, or in the aggregate, which could have a material
adverse affect on our business, financial condition, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
first quarter of 2003.
ITEM 5. OTHER INFORMATION
Our annual report on Form 10-K for the year ended December 31, 2002 was
reviewed by the Securities and Exchange Commission (the "SEC") and we received a
comment letter, dated April 11, 2003, from the SEC following its review. The
comments in the SEC letter focused mainly on supplemental disclosure for items
related to references to non-GAAP financial measures, our accounting for the
value of the initial and contingent warrants issued with our Senior Subordinated
Notes in November 2000, recognition of rent expense for operating leases with
rent escalation clauses and operating lease accounting treatment for our master
lease agreement which expires on September 9, 2006. The SEC's comment letter
also requested us to make additional disclosures in future filings and provide
certain supplemental information.
We responded to the SEC's comment letter on May 14, 2003, with respect
to all of the supplemental information requested as well as sample disclosure
that we undertake to include in our future filings. We have also included, to
the extent applicable, additional disclosures in this filing intended to address
certain matters raised by the SEC. However, there can be no assurance that the
SEC will not have further comments or requests that we disclose additional
information or make additional filings. We will seek to expeditiously resolve
the remaining issues in the SEC's letter or any additional matters the SEC may
wish to address.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the first quarter of 2003, we filed no reports on Form 8-K.
28
SIGNATURE
Pursuant to the requirements 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.
TRAVELCENTERS OF AMERICA, INC.
(Registrant)
Date: May 14, 2003 By: /s/ James W. George
--------------------------------------------
Name: James W. George
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
29
CERTIFICATIONS
I, Edwin P. Kuhn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TravelCenters of
America, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 14, 2003 By: /s/ Edwin P. Kuhn
--------------------------------------------------
Name: Edwin P. Kuhn
Title: Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
30
I, James W. George, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TravelCenters
of America, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ James W. George
----------------------------------------------------
Name: James W. George
Title: Senior Vice President, Chief Financial
Officer and Secretary (Principal
Financial Officer and Principal
Accounting Officer)
31