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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------
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 June 30, 2003
Commission file number 333-52442
----------------------------
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 July 31, 2003, there were outstanding 6,929,498 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.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet as of December 31, 2002
(restated) and June 30, 2003 (unaudited)............................ 2
Unaudited Consolidated Statement of Operations and
Comprehensive Income for the three months and six months
ended June 30, 2002 (restated) and 2003............................. 3
Unaudited Consolidated Statement of Cash Flows for the six
months ended June 30, 2002 (restated) and 2003...................... 4
Unaudited Statement of Nonredeemable Stockholders' Equity
for the six months ended June 30, 2002 (restated) and 2003.......... 5
Selected Notes to Unaudited Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 25
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................................... 35
Item 4. Controls and Procedures............................................. 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 36
Item 4. Submission of Matters to a Vote of Security Holders................. 36
Item 5. Other Information................................................... 36
Item 6. Exhibits and Reports on Form 8-K.................................... 36
SIGNATURE........................................................................................ 37
1
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, JUNE 30,
2002 2003
(RESTATED) (UNAUDITED)
------------------------------
ASSETS (IN THOUSANDS OF DOLLARS)
Current assets:
Cash.............................................................................. $ 14,047 $ 25,304
Accounts receivable (less allowance for doubtful accounts of $2,025 for 2002 and
$1,982 for 2003)............................................................... 44,295 56,094
Inventories....................................................................... 61,937 57,547
Deferred income taxes............................................................. 4,222 3,728
Other current assets.............................................................. 8,164 6,677
---------- ----------
Total current assets......................................................... 132,665 149,350
Property and equipment, net.......................................................... 444,197 445,338
Goodwill............................................................................. 23,585 24,236
Deferred financing costs, net........................................................ 27,452 25,781
Deferred income taxes................................................................ 17,781 16,880
Other noncurrent assets.............................................................. 15,087 15,338
---------- ----------
Total assets................................................................. $ 660,767 $ 676,923
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................................. $ 3,460 $ 3,345
Accounts payable.................................................................. 58,512 66,843
Other accrued liabilities......................................................... 51,339 54,812
---------- ----------
Total current liabilities.................................................... 113,311 125,000
Commitments and contingencies........................................................
Long-term debt (net of unamortized discount)......................................... 523,934 522,881
Deferred income taxes................................................................ 2,107 2,151
Other noncurrent liabilities......................................................... 6,209 8,575
---------- ----------
645,561 658,607
Redeemable equity.................................................................... 681 648
Nonredeemable equity:
Common stock and other stockholders' equity....................................... 217,293 217,706
Accumulated deficit............................................................... (202,768) (200,038)
---------- ----------
Total nonredeemable equity................................................... 14,525 17,668
---------- ----------
Total liabilities, redeemable equity and nonredeemable stockholders' equity.. $ 660,767 $ 676,923
========== ==========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2003 2002 2003
(RESTATED) (RESTATED)
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Revenues:
Fuel............................................. $ 302,293 $ 360,256 $ 556,309 $ 774,449
Nonfuel.......................................... 159,354 166,843 297,973 313,066
Rent and royalties............................... 3,997 3,500 7,987 7,015
---------- ---------- ---------- ----------
Total revenues............................. 465,644 530,599 862,269 1,094,530
Cost of goods sold (excluding depreciation):
Fuel............................................. 276,578 330,975 506,683 719,637
Nonfuel.......................................... 65,911 68,673 122,092 128,210
---------- ---------- ---------- ----------
Total cost of goods sold (excluding
depreciation)........................... 342,489 399,648 628,775 847,847
---------- ---------- ---------- ----------
Gross profit (excluding depreciation)............... 123,155 130,951 233,494 246,683
Operating expenses.................................. 82,397 86,505 163,070 169,350
Selling, general and administrative expenses........ 9,851 10,215 19,279 20,305
Depreciation and amortization expense............... 15,039 14,626 29,132 29,200
(Gain) loss on sales of property and equipment...... (21) (261) (14) (293)
---------- ---------- ---------- -----------
Income from operations.............................. 15,889 19,866 22,027 28,121
Interest and other financial costs, net............. (13,072) (11,525) (26,012) (23,288)
---------- ---------- ---------- ----------
Income (loss) before income taxes and the
cumulative effect of a change in accounting
principle........................................ 2,817 8,341 (3,985) 4,833
Provision (benefit) for income taxes................ 850 3,080 (1,205) 1,850
---------- ---------- ---------- ----------
Income (loss) before the cumulative effect of a
change in accounting principle................... 1,967 5,261 (2,780) 2,983
Cumulative effect of a change in accounting
principle, net of related taxes (Note 2)......... - - - (253)
---------- ---------- ---------- ----------
Net income (loss)................................... 1,967 5,261 (2,780) 2,730
Other comprehensive income (expense), net of
tax (Note 3):
Unrealized gain on derivative instruments....... 283 - 901 -
Foreign currency translation adjustments........ - 399 - 632
---------- ---------- ---------- ----------
Comprehensive income (loss)......................... $ 2,250 $ 5,466 $ (1,879) $ 3,168
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
---------------------------------
2002 2003
(RESTATED)
--------------- -------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (2,780) $ 2,730
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Cumulative effect of a change in accounting principle.......................... - 253
Depreciation and amortization expense.......................................... 29,132 29,200
Amortization of deferred financing costs....................................... 1,480 1,671
Deferred income tax provision.................................................. (1,519) 1,345
Provision for doubtful accounts................................................ 500 500
(Gain) on sales of property and equipment...................................... (14) (293)
Changes in assets and liabilities, adjusted for the effects of business
acquisitions:
Accounts receivable......................................................... (12,276) (12,711)
Inventories................................................................. 2,394 5,116
Other current assets........................................................ 1,435 1,504
Accounts payable and other accrued liabilities.............................. 34,692 12,323
Other, net..................................................................... (2,257) (952)
-------- --------
Net cash provided by operating activities..................................... 50,787 40,686
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions......................................................... (3,063) (8,302)
Proceeds from sales of property and equipment................................. 2,535 1,378
Capital expenditures.......................................................... (23,739) (21,236)
-------- ---------
Net cash used in investing activities......................................... (24,267) (28,160)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in checks drawn in excess of bank balances................ (9,275) 696
Revolving loan borrowings (repayments), net................................... (10,600) 11,100
Long-term debt repayments..................................................... (863) (13,014)
Repurchase of common stock.................................................... - (252)
Issuance of common stock...................................................... 39 -
Merger and recapitalization expenses paid..................................... (150) -
-------- --------
Net cash used in financing activities......................................... (20,849) (1,470)
-------- --------
Effect of exchange rate changes on cash....................................... - 201
-------- --------
Net increase (decrease) in cash........................................... 5,671 11,257
Cash at the beginning of the period.................................................. 19,888 14,047
-------- --------
Cash at the end of the period........................................................ $ 25,559 $ 25,304
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY
SIX MONTHS ENDED
JUNE 30,
------------------------------
2002
(RESTATED) 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.................................................... $ 217,290 $ 217,290
Accretion of redeemable equity................................................ - (219)
--------- ---------
Balance at end of period.......................................................... $ 217,290 $ 217,071
========= =========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of period.................................................... $ (1,920) $ -
Change in fair value of interest rate protection agreement, net of tax........ 901 -
Foreign currency translation adjustments, net of tax.......................... - 632
--------- ---------
Balance at end of period......................................................... $ (1,019) $ 632
========= =========
ACCUMULATED DEFICIT:
Balance at beginning of period.................................................... $(204,039) $(202,768)
Net income (loss)............................................................. (2,780) 2,730
--------- ---------
Balance at end of period.......................................................... $(206,819) $(200,038)
========= =========
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 to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. At June 30, 2003, our geographically
diverse nationwide network of full-service travel centers consisted of 153 sites
located in 41 states and the province of Ontario, Canada. Our operations are
conducted through three distinct types of travel centers: (1) sites owned or
leased and operated by us, which we refer to as company-operated sites; (2)
sites owned by us and leased to independent lessee-franchisees, which we refer
to as leased sites; and (3) 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-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, 20 different brands of 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-owned 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., TravelCenters Properties, L.P.,
3073000 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 153 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
June 30, 2003 and for the three- and six-month periods ended June 30, 2002 and
2003 have been prepared in accordance with generally accepted accounting
principles. Accordingly, these statements should be read in conjunction with our
audited financial statements as of and for the year ended December 31, 2002. As
further discussed in Note 11, our audited financial statements for the year
ended December 31, 2002 have been restated. 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
June 30, 2003, our results of operations for the three- and six-month periods
ended June 30, 2002 and 2003, and our changes in nonredeemable stockholders'
equity and cash flows for the six-month periods ended June 30, 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 six months ended June, 2003 was as follows (in thousands of dollars):
Balance at January 1, 2002................................................ $ 589
Liabilities incurred...................................................... 10
Liabilities settled....................................................... -
Accretion expense......................................................... 38
Revisions to estimates.................................................... -
-----
$ 637
=====
FIN 46. In January 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. (FIN) 46, "Consolidation of Variable
Interest Entities." We must adopt this accounting guidance by July 1, 2003.
Under FIN 46, we will be required to consolidate into our consolidated financial
statements the entity that is the lessor under our master lease program (see
Note 7) covering eight of our sites. 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 will not result in a violation of our
debt covenants or have an effect on our liquidity. We adopted the disclosure
requirements of FIN 46 in our consolidated financial statements for 2002.
FAS 150. In May 2003, the FASB issued FAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." FAS
150 was effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, which for us is the third quarter ending
September 30, 2003. Under FAS 150, we will be required to present the balance of
our redeemable common stock as a liability instead of as an item between
liabilities and equity as we have historically presented it. We are currently
evaluating the other effects of adopting FAS 150. Adopting FAS 150 may require
us to recognize as interest expense each quarter any dividends paid with respect
to the redeemable shares and the change during that quarter in the estimated
amount of cash payments that would be necessary to repurchase the redeemable
stock. However, adopting FAS 150 will not affect our cash payments or liquidity.
3. COMPREHENSIVE INCOME
Income tax provision (benefit) related to other comprehensive income
(loss) consisted of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2003 2002 2003
(RESTATED) (RESTATED)
------------ ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Related to gain or loss on derivative instruments....... $ 146 $ - $ 465 $ -
Related to foreign currency translation adjustments..... - 100 - 256
---------- ---------- ---------- ----------
Total................................................. $ 146 $ 100 $ 465 $ 256
========== ========== ========== ==========
7
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, JUNE 30,
2002 2003
------------------------------
(IN THOUSANDS OF DOLLARS)
Nonfuel merchandise............................................................... $ 55,460 $ 52,210
Petroleum products................................................................ 6,477 5,337
------------ ------------
Total inventories............................................................. $ 61,937 $ 57,547
============ ============
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the six-month
periods ended June 30, 2002 and 2003 were as follows:
SIX MONTHS ENDED
JUNE 30,
----------------------------
2002 2003
-------------- -------------
(IN THOUSANDS OF DOLLARS)
Balance as of beginning of period.................................................. $ 19,343 $ 23,585
Goodwill recorded during the period................................................ 3,654 651
----------- -----------
Balance as of end of period........................................................ $ 22,997 $ 24,236
=========== ===========
During the six months ended June 30, 2002, we recorded $3,654,000 of
goodwill as a result of the business acquisitions we completed in connection
with converting three leased sites to company-operated sites. During the six
months ended June 30, 2003, we recorded $651,000 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, JUNE 30,
2002 2003
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
Amortizable intangible assets:
Noncompetition agreements..................................................... $ 17,200 $ 17,200
Leasehold interest............................................................ 1,724 1,724
Other......................................................................... 849 866
------------ ------------
Total amortizable intangible assets....................................... 19,773 19,790
Less - accumulated amortization............................................... 18,848 19,438
------------ ------------
Net carrying value of amortizable intangible assets....................... 925 352
Net carrying value of trademarks..................................................... 1,398 1,398
------------ ------------
Intangible assets, net.................................................... $ 2,323 $ 1,750
============ ============
Total amortization expense for our amortizable intangible assets for
the six-month periods ended June 30, 2002 and 2003 were $948,000 and $590,000,
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 $683,000 for 2003; $181,000 for 2004 and $77,000 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.
SIX MONTHS ENDED
JUNE 30,
------------------------------
2002
(RESTATED) 2003
------------------------------
(IN THOUSANDS OF DOLLARS)
Net income (loss), as reported (2002 amount restated)........................... $ (2,780) $ 2,730
Add back - Stock-based employee compensation expense, net of related tax
effects, included in net income (loss) as reported.......................... - -
Deduct - Total stock-based employee compensation expense determined under fair
value based methods for all awards, net of related tax effects.............. (352) (327)
---------- ---------
Pro forma net income (loss)..................................................... $ (3,132) $ 2,403
========== ==========
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-Scholes 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 results 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 had remaining noncancelable lease
terms in excess of one year, as of December 31, 2002, 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................................................................................... $ 17,622
2004................................................................................... 18,488
2005................................................................................... 17,793
2006................................................................................... 59,538
2007................................................................................... 9,175
Thereafter............................................................................. 75,604
-----------
$ 198,220
===========
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. 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.
These lease transactions were evaluated for lease classification in
accordance with FAS 13. We have not consolidated the lessor because the owners
of the lessor have maintained a substantial residual equity investment of at
least three percent that is at risk during the entire term of the lease. 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,
we will be required to consolidate the lessor in our consolidated financial
statements. 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 will not result in a violation of our debt covenants or have an
effect on our liquidity.
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.
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
10
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
or financial condition. We are conducting investigatory and/or remedial actions
with respect to releases of Hazardous Substances that have occurred subsequent
to the acquisitions of the Unocal and BP networks and also regarding historical
contamination at certain of the former Burns Bros. and Travel Ports facilities.
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 assure you 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. As of June 30, 2003, we had a
reserve for these matters of $3,474,000 and a receivable for estimated
recoveries of these estimated future expenditures of $1,451,000. We estimate
that the cash outlays related to the matters for which we have accrued this
reserve will be approximately $1,806,000 in the remainder of 2003; $852,000 in
2004; $491,000 in 2005; $119,000 in 2006; $119,000 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
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2002 2003
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
Revolving loan borrowings......................................................... $ 242,500 $ 269,000
Revolving loan repayments......................................................... (253,100) (257,900)
----------- -----------
Revolving loan borrowings (repayments), net..................................... $ (10,600) $ 11,100
=========== ===========
Cash paid during the period for:
Interest........................................................................ $ 23,487 $ 23,343
Income taxes (net of refunds)................................................... $ 275 $ 335
During the six-month period ended June 30, 2002, we acquired $1,494,000
of inventory, property and equipment and goodwill in settlement of accounts and
notes receivable as part of the conversions of leased sites to company-operated
sites and received $250,000 of notes as partial consideration for inventories
sold in connection with the sales of two company-operated sites. During the
six-month period ended June 30, 2003, we acquired $419,000 of inventory in
settlement of accounts receivable as part of the conversions of leased sites to
company-operated sites.
11
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. OTHER INFORMATION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------
2002 2002 2003
(RESTATED) 2003 (RESTATED)
------------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Interest and other financial costs consists of the following:
Cash interest expense.................................. $ (12,031) $ (10,271) $ (23,942) $ (20,912)
Cash interest income................................... 47 23 71 42
Amortization of discount on debt....................... (336) (381) (659) (747)
Amortization of deferred financing costs............... (752) (850) (1,480) (1,671)
---------- ---------- ---------- ----------
Interest and other financial costs, net................ $ (13,072) $ (11,525) $ (26,010) $ (23,288)
========== ========== ========== ==========
10. RELATED PARTY TRANSACTIONS
During the six-month periods ended June 30, 2002 and 2003, we made
purchases of diesel fuel in the amount of $82,851,000 and $118,504,000,
respectively, from a company in which we have a minority investment and made
sales of diesel fuel in the amount of $1,581,000 and $1,690,000, respectively,
to this affiliate. We also lease a travel center from this affiliate. Rent paid
with respect to this site for the six-month periods ended June 30, 2002 and 2003
was $204,000 and $204,000, respectively. At December 31, 2002 and June 30, 2003,
our receivables from this affiliate were $151,000 and $110,000, respectively,
while our payables to this affiliate were $357,000 and $28,000, respectively.
Certain members of our senior management have purchased common stock
pursuant to management subscription agreements. As a result of such purchases,
we have notes and related interest receivable from the management stockholders
totaling $1,497,000 and $1,450,000 at December 31, 2002 and June 30, 2003,
respectively.
11. RESTATEMENT
The accompanying balance sheet as of December 31, 2002, the
accompanying statements of operations and comprehensive income for the three-and
six-month periods ended June 30, 2002 and the accompanying statements of cash
flows and nonredeemable stockholders' equity for the six-month period ended June
30, 2002 have been restated. The adjustments related to the following:
Operating lease rent expense. We have revised our accounting for
certain of our operating leases that contain scheduled rent increases or for
which rent payments are based on a variable interest rate to recognize rent
expense on a straight-line basis over the lease term, regardless of the actual
rent payments we are required by the lease to make each period. We were not
properly accruing rent expense for such leases in accordance with FAS 13,
"Accounting for Leases," FAS 29, "Determining Contingent Rentals," and related
pronouncements. Under these pronouncements, we are required to recognize rent
expense on a straight-line basis over the lease term.
Of the operating leases covering 30 of our sites, our headquarters and
our distribution center, we have eight leases that contain scheduled rent
increases during the lease term and we have the master lease facility covering
eight sites for which a component of the rent payments is based on interest
rates that reset quarterly. For all of our leases, prior to 2003, we recognized
rent expense to the extent of the amounts actually payable each period, but
failed to record an increase or decrease in rent expense for the difference
between the straight-line amount for each lease and the amounts actually
payable. For the leases with scheduled rent increases, because the rent payments
increase over time, we underaccrued rent expense by not recognizing the effect
of future rent payment increases. For our master lease agreement, for which
quarterly rent payments are based on a variable interest rate that adjusts each
quarter and a declining balance on which the interest component of rent is
determined, we overaccrued rent expense by not recognizing the effect of future
rent payment decreases. The net effect of these misstatements was an
understatement
12
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
of rent expense each year, resulting in an understatement of noncurrent
liabilities and an overstatement of nonredeemable stockholders' equity. For the
three- and six-month periods ended June 30, 2002, the adjustments to correct our
operating lease expense accounting resulted in decreases in operating expenses
of $99,000 and $241,000, respectively. For the year ended December 31, 2002, the
adjustments increased operating expenses by $605,000. Our accounting for all of
our operating leases was brought into compliance with the applicable
pronouncements beginning with the first quarter of 2003 and, accordingly, no
adjustment to our first quarter results as a result of this matter is required.
Debt discount amortization. Each of the Subordinated Notes we issued in
November 2000 was accompanied by four warrants to purchase our common stock,
three initial warrants that were exercisable in November 2001 and one contingent
warrant that could become exercisable based on a maximum leverage ratio at
December 31, 2002. In accounting for the issuance of the Notes and warrants, we
did not originally allocate value to the contingent warrants. As a result, the
recorded amount of debt discount and additional paid-in capital were both
understated at the time of issuance by $1,450,000 and the interest expense
related to debt discount amortization was understated for each of the years
ended December 31, 2000, 2001 and 2002. We had previously recorded this
additional amount of debt discount in March 2003 when the contingent warrants
became exercisable. In March 2003, we also previously recorded an additional
$283,000 of debt discount amortization to bring the debt discount to its proper
balance as of March 31, 2003. For the three- and six-month periods ended June
30, 2002, the effect on interest expense of the adjustments to correct our
accounting were increases of $33,000 and $66,000, respectively. For the year
ended December 31, 2002, the adjustments increased interest expense by $137,000,
decreased long-term debt by $1,198,000, and increased additional paid-in capital
by $1,450,000. For the three-month period ended March 31, 2003, the adjustments
decreased interest expense by $283,000.
Other adjustments. In addition, we have made certain other restatement
adjustments, including adjustments to the tax provision, that had not been
recorded in the years in which they arose and which were determined to be
immaterial to our consolidated financial statements taken as a whole in those
prior years. These restatement adjustments generally reflect timing errors
between years and most of the adjustments had been recorded in the year
following the year they arose. Accordingly, the primary effect of these other
adjustments was to present the amounts in the proper year or quarter. As of
December 31, 2002, the net effect of reflecting these other restatement
adjustments in the proper periods was a $0.9 million net reduction in our
accumulated deficit and total nonredeemable stockholders' equity, all of which
effect was related to previously unrecorded depreciation expense-related
adjustments.
Summary of Restatement Adjustments. The following tables summarize the
effects of the restatement adjustments on certain of our previously issued
financial statements by type of adjustment and by the affected captions in our
statement of operations and comprehensive income. The various adjustments
recorded to prior years as part of the restatement have no effect on our cash
flows and liquidity and do not result in a violation of our debt covenants for
any period. However, our restated statement of cash flows data included herein
reflects a reclassification, from inclusion in operating cash flows to inclusion
in financing cash flows, of the effect on cash of the increase or decrease each
period of the amount of checks drawn in excess of bank balances.
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2002 DECEMBER 31, 2002
--------------------------------------------------------
(IN THOUSANDS OF DOLLARS)
Summary of restatement adjustments by type -
increase (decrease) to income (loss)
before income taxes:
Straight-line lease rent expense............ $ 99 $ 241 $ (605)
Debt discount amortization.................. (33) (66) (137)
Other matters............................... (117) (206) 456
------- -------- ------
Net effect of restatement adjustments
income (loss) before income taxes -
increase (decrease) in income (loss)
before income taxes....................... $ (51) $ (31) $ (286)
======= ======= ======
13
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2002 DECEMBER 31, 2002
------------------- ---------------- -----------------
(IN THOUSANDS OF DOLLARS)
Summary of restatement adjustments by
caption - increase (decrease) to income
(loss) before income taxes
Total revenues.............................. $ (108) $ (538) $ 1,141
Operating expenses.......................... (4) 34 (2,017)
Selling, general and administrative expenses (24) 303 255
Depreciation and amortization Expense....... 118 236 472
Interest and other financial Costs, net..... (33) (66) (137)
----------- ----------- ----------
Net effect of restatement adjustments on
income (loss) before income taxes -
increase (decrease) in income (loss)...... $ (51) $ (31) $ (286)
========== ========== ==========
Summary of Restated Financial Data. The following tables present a
summary of our balance sheet, statement of operations and statement of cash
flows data as previously reported and as restated as a result of the restatement
adjustments summarized above.
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2002 DECEMBER 31, 2002
-------------------------- --------------------------- ------------------------
AS AS AS
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- ------------ ---------- -----------
(IN THOUSANDS OF DOLLARS)
Statement of operations data:
- ----------------------------
Total revenues................... $ 465,752 $ 465,644 $ 862,807 $ 862,269 $1,870,447 $1,871,588
Cost of goods sold (excluding
depreciation).................. 342,489 342,489 628,775 628,775 1,389,680 1,389,680
---------- ---------- ---------- ---------- ---------- ----------
Gross profit (excluding
depreciation).................. 123,263 123,155 234,032 233,494 480,767 481,908
Operating expenses............... 82,393 82,397 163,105 163,070 330,206 332,223
Selling, general and
administrative expenses........ 9,827 9,851 19,582 19,279 38,073 37,818
Depreciation and amortization
expense........................ 15,157 15,039 29,369 29,132 60,773 60,301
Gain on sales of property and
equipment...................... (21) (21) (14) (14) (1,089) (1,089)
---------- ---------- ---------- ---------- ---------- ----------
Income from operations........... 15,907 15,889 21,990 22,027 52,804 52,655
Interest and other financial
costs, net..................... (13,039) (13,072) (25,944) (26,012) (51,286) (51,423)
Provision (benefit) for income
taxes.......................... 869 850 (1,193) (1,205) 508 (39)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ 1,999 $ 1,967 $ (2,761) $ (2,780) $ 1,010 $ 1,271
========== ========== ========== ========== ========== ==========
Accumulated deficit at beginning
of period...................... $ (206,348) $ (208,786) $ (201,588) $ (204,039) $ (201,588) $ (204,039)
========== ========== ========== ========== ========== ==========
14
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2002
------------------------ ------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
---------- ----------- ---------- -----------
(IN THOUSANDS OF DOLLARS)
Statement of cash flows data:
- ----------------------------
Cash provided by operating activities...................... $ 41,512 $ 50,787 $ 61,512 $ 75,574
Cash used in investing activities.......................... (24,267) (24,267) (42,110) (42,110)
Cash provided by (used in) financing activities............ (11,574) (20,849) (25,243) (39,305)
-------- -------- --------- --------
Net increase (decrease) in cash............................ $ 5,671 $ 5,671 $ (5,841) $ (5,841)
======== ======== ========= =========
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2002
------------------------- -------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
---------- ----------- ---------- -----------
(IN THOUSANDS OF DOLLARS)
Balance sheet data:
- ------------------
Cash....................................................... $ 25,559 $ 25,559 $ 14,047 $ 14,047
Accounts receivable, net................................... 54,542 55,542 44,295 44,295
Inventories................................................ 55,296 55,296 61,937 61,937
Deferred income taxes...................................... 4,839 4,348 4,221 4,222
Other current assets....................................... 6,916 6,916 8,164 8,164
---------- ---------- ---------- ----------
Total current assets..................................... 147,152 147,661 132,664 132,665
Property and equipment, net................................ 455,154 453,423 445,692 444,197
Goodwill................................................... 26,267 22,997 25,908 23,585
Deferred financing costs, net.............................. 28,722 28,722 27,452 27,452
Deferred income taxes...................................... 21,172 20,738 16,069 17,781
Other noncurrent assets.................................... 11,868 15,138 12,764 15,087
---------- ---------- ---------- ----------
Total assets............................................. $ 690,335 $ 688,679 $ 660,549 $ 660,767
========== ========== ========== ==========
Current maturities of long-term debt....................... $ 3,451 $ 3,451 $ 3,460 $ 3,460
Accounts payable........................................... 73,685 73,685 58,512 58,512
Other accrued liabilities.................................. 55,052 54,706 51,440 51,339
---------- ---------- ---------- ----------
Total current liabilities................................ 132,188 132,842 113,412 113,311
Long-term debt (net of unamortized discount)............... 537,957 536,688 525,131 523,934
Deferred income taxes...................................... 2,843 2,455 2,364 2,107
Other noncurrent liabilities............................... 6,268 8,635 3,696 6,209
---------- ---------- ---------- ----------
Total liabilities........................................ 679,256 678,620 644,603 645,461
Redeemable equity.......................................... 604 604 681 681
Common stock and other stockholders' equity................ 214,824 216,274 215,843 217,293
Accumulated deficit........................................ (204,349) (206,819) (200,578) (202,768)
---------- ---------- ---------- ----------
Total nonredeemable stockholders' equity................. 10,475 9,455 15,265 14,525
---------- ---------- ---------- ----------
Total liabilities and equity............................. $ 690,335 $ 688,679 $ 660,549 $ 660,767
========== ========== ========== ==========
15
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance
sheet schedules as of December 31, 2002 (restated) and June 30, 2003, our
condensed consolidating statement of operations schedules for the three- and
six-month periods ended June 30, 2002 (restated) and 2003 and our condensed
consolidating statement of cash flows schedules for the six-month periods ended
June 30, 2002 (restated) 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.
16
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:
DECEMBER 31, 2002 (RESTATED)
-----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY 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..................... - 4,182 40 - 4,222
Other current assets...................... 445 7,719 - - 8,164
---------- ---------- ---------- ---------- ----------
Total current assets................. 445 132,314 897 (991) 132,665
Property and equipment, net.................. - 444,197 - - 444,197
Goodwill..................................... - 23,585 - - 23,585
Deferred financing costs..................... 27,452 - - - 27,452
Deferred income taxes........................ 23,696 (5,915) - - 17,781
Other noncurrent assets.................... 996 14,091 - - 15,087
Investment in subsidiaries................... 241,515 - - (241,515) -
---------- ---------- ---------- ---------- ----------
Total assets......................... $ 294,104 $ 608,272 $ 897 $ (242,506) $ 660,767
========== ========== ========== ========== ==========
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................. 2,979 48,211 1,141 (991) 51,339
---------- ---------- ---------- ---------- ----------
Total current liabilities............ 6,259 106,745 1,298 (991) 113,311
Long-term debt (net of unamortized discount). 521,243 2,691 - - 523,934
Deferred income taxes........................ - 2,107 - - 2,107
Intercompany advances........................ (249,859) 255,226 (5,367) - -
Other noncurrent liabilities................. - 6,209 - - 6,209
---------- ---------- ---------- ---------- ----------
Total liabilities.................... 277,643 372,978 (4,069) (991) 645,561
Redeemable equity............................ 681 - - - 681
Nonredeemable stockholders' equity:
Common stock and other stockholders'
equity.................................. 218,548 192,336 - (193,591) 217,293
Retained earnings (accumulated deficit)... (202,768) 42,958 4,966 (47,924) (202,768)
---------- ---------- ---------- ---------- ----------
Total nonredeemable stockholders'
equity............................ 15,780 235,294 4,966 (241,515) 14,525
---------- ---------- ---------- ---------- ----------
Total liabilities, redeemable equity
and nonredeemable stockholders'
equity............................ $ 294,104 $ 608,272 $ 897 $ (242,506) $ 660,767
========== ========== ========== ========== ==========
17
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
---------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash.................................... $ - $ 25,108 $ 196 $ - $ 25,304
Accounts receivable, net................ - 56,377 818 (1,101) 56,094
Inventories............................. - 57,414 133 - 57,547
Deferred income taxes................... - 3,688 40 - 3,728
Other current assets.................... 190 6,558 48 (119) 6,677
---------- ---------- ---------- ---------- ----------
Total current assets............... 190 149,145 1,235 (1,220) 149,350
Property and equipment, net................ - 439,233 6,105 - 445,338
Goodwill................................... - 24,236 - - 24,236
Deferred financing costs, net.............. 25,781 - - - 25,781
Deferred income taxes...................... 22,821 (5,941) - - 16,880
Other noncurrent assets.................... 928 18,532 - (4,122) 15,338
Investment in subsidiaries................. 252,382 1,689 - (254,071) -
---------- ---------- ---------- ---------- ----------
Total assets....................... $ 302,102 $ 626,894 $ 7,340 $ (259,413) $ 676,923
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.. $ 3,165 $ 180 $ - $ - $ 3,345
Accounts payable...................... - 66,659 184 - 66,843
Other accrued liabilities............. 1,485 53,122 1,425 (1,220) 54,812
---------- ---------- ---------- ---------- ----------
Total current liabilities........ 4,650 119,961 1,609 (1,220) 125,000
Long-term debt (net of unamortized discount) 520,222 2,659 4,122 (4,122) 522,881
Deferred income taxes.................... - 2,151 - - 2,151
Intercompany payable (receivable)........ (241,709) 247,164 (5,455) - -
Other noncurrent liabilities............. - 8,575 - - 8,575
---------- ---------- ---------- ---------- ----------
Total liabilities................ 283,163 380,510 276 (5,342) 658,607
Redeemable equity........................ 648 - - - 648
Nonredeemable stockholders' equity:
Common stock and other
stockholders' equity................. 218,329 192,732 2,052 (195,407) 217,706
Retained earnings
(accumulated deficit)................ (200,038) 53,652 5,012 (58,664) (200,038)
---------- ---------- ---------- ---------- -----------
Total nonredeemable stockholders'
equity........................ 18,291 246,384 7,064 (254,071) 17,668
---------- ---------- ---------- ---------- ----------
Total liabilities, redeemable
equity and nonredeemable
stockholders' equity.......... $ 302,102 $ 626,894 $ 7,340 $ (259,413) $ 676,923
========== ========== ========== ========== ==========
18
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:
THREE MONTHS ENDED JUNE 30, 2002 (RESTATED)
--------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 302,293 $ - $ - $ 302,293
Nonfuel................................ - 159,354 - - 159,354
Rent and royalties..................... - 3,610 1,534 (1,147) 3,997
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 465,257 1,534 (1,147) 465,644
Cost of goods sold (excluding depreciation) - 342,489 - - 342,489
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 122,768 1,534 (1,147) 123,155
Operating expenses........................ - 82,384 1,160 (1,147) 82,397
Selling, general and
administrative expenses............... 195 9,281 375 - 9,851
Depreciation and amortization expense..... - 15,039 - - 15,039
(Gain) on sales of property and equipment. - (21) - - (21)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (195) 16,085 (1) - 15,889
Interest and other financial costs, net... (8,540) (4,532) - - (13,072)
Equity income (loss)...................... 7,731 - - (7,731) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... (1,004) 11,553 (1) (7,731) 2,817
Provision (benefit) for income taxes...... (2,971) 3,821 - - 850
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 1,967 $ 7,732 $ (1) $ (7,731) $ 1,967
========== ========== ========== ========== ==========
19
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 357,783 $ 2,473 $ - $ 360,256
Nonfuel................................ - 165,978 865 - 166,843
Rent and royalties..................... - 3,120 1,481 (1,101) 3,500
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 526,881 4,819 (1,101) 530,599
Cost of goods sold (excluding depreciation) - 396,964 2,684 - 399,648
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 129,917 2,135 (1,101) 130,951
Operating expenses........................ - 85,936 1,670 (1,101) 86,505
Selling, general and
administrative expenses............... 201 9,775 239 - 10,215
Depreciation and amortization expense..... - 14,497 129 - 14,626
(Gain) on sales of property and equipment - (261) - - (261)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (201) 19,970 97 - 19,866
Interest and other financial costs, net... (6,017) (5,437) (71) - (11,525)
Equity income (loss)...................... 9,383 (104) - (9,279) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... 3,165 14,429 26 (9,279) 8,341
Provision (benefit) for income taxes...... (2,096) 5,132 44 - 3,080
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 5,261 $ 9,297 $ (18) $ (9,279) $ 5,261
========== ========== ========== ========== ==========
20
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 (RESTATED)
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 556,309 $ - $ - $ 556,309
Nonfuel................................ - 297,973 - - 297,973
Rent and royalties..................... - 7,199 2,959 (2,171) 7,987
--------- --------- --------- --------- ---------
Total revenues......................... - 861,481 2,959 (2,171) 862,269
Cost of goods sold (excluding depreciation) - 628,775 - - 628,775
--------- --------- --------- --------- ---------
Gross profit (excluding depreciation)..... - 232,706 2,959 (2,171) 233,494
Operating expenses........................ - 163,042 2,199 (2,171) 163,070
Selling, general and
administrative expenses............... 389 18,129 761 - 19,279
Depreciation and amortization expense..... - 29,132 - - 29,132
(Gain) on sales of property and equipment - (14) - - (14)
--------- --------- --------- --------- ---------
Income (loss) from operations............. (389) 22,417 (1) - 22,027
Interest and other financial costs, net... (16,969) (9,043) - - (26,012)
Equity income (loss)...................... 8,555 - - (8,555) -
--------- --------- --------- --------- ---------
Income (loss) before income taxes......... (8,803) 13,374 (1) (8,555) (3,985)
Provision (benefit) for income taxes...... (6,023) 4,818 - - (1,205)
---------- --------- --------- --------- ---------
Net income (loss)......................... $ (2,780) $ 8,556 $ (1) $ (8,555) $ (2,780)
========= ========= ========= ========= =========
21
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ----------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 769,911 $ 4,538 $ - $ 774,449
Nonfuel................................ - 311,587 1,479 - 313,066
Rent and royalties..................... - 6,241 2,839 (2,065) 7,015
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 1,087,739 8,856 (2,065) 1,094,530
Cost of goods sold (excluding depreciation) - 842,945 4,902 - 847,847
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 244,794 3,954 (2,065) 246,683
Operating expenses........................ - 168,402 3,013 (2,065) 169,350
Selling, general and
administrative expenses............... 401 19,413 491 - 20,305
Depreciation and amortization expense..... - 29,200 197 - 29,200
(Gain) on sales of property and equipment - (293) - - (293)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (401) 28,269 253 - 28,121
Interest and other financial costs, net... (11,876) (11,293) (119) - (23,288)
Equity income (loss)...................... 10,865 (125) - (10,740) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... (1,412) 16,851 134 (10,740) 4,833
Provision (benefit) for income taxes...... (4,142) 5,904 88 - 1,850
---------- ---------- ---------- ---------- ----------
Income (loss) before the cumulative effect
of a change in accounting principle. 2,730 10,947 46 (10,740) 2,983
Cumulative effect of a change in
accounting principle, net of related
taxes............................... - (253) - - (253)
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 2,730 $ 10,694 $ 46 $ (10,740) $ 2,730
========== ========== ========== ========== ==========
22
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SCHEDULES:
SIX MONTHS ENDED JUNE 30, 2002 (RESTATED)
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ (14,301) $ 65,015 $ 73 $ - $ 50,787
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (3,063) - - (3,063)
Proceeds from sales of property and
equipment........................... - 2,535 - - 2,535
Capital expenditures................... - (23,739) - - (23,739)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (24,267) - - (24,267)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - (9,275) - - (9,275)
Revolving loan borrowings
(repayments), net................... (10,600) - - - (10,600)
Long-term debt repayments........... (820) (43) - - (863)
Issuance of common stock............ 39 - - - 39
Merger and recapitalization
expenses paid.................... (150) - - - (150)
Intercompany advances............... 25,832 (25,759) (73) - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 14,301 (35,077) (73) - (20,849)
---------- ---------- ---------- ---------- ----------
Net increase in cash................ - 5,671 - - 5,671
Cash at the beginning of the period....... - 19,888 - - 19,888
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 25,559 $ - $ - $ 25,559
========== ========== ========== ========== ==========
23
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ (6,073) $ 44,702 $ 241 $ 1,816 $ 40,686
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (3,035) (5,267) - (8,302)
Proceeds from sales of property and
equipment........................... - 1,378 - - 1,378
Capital expenditures................... - (21,060) (176) - (21,236)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (22,717) (5,443) - (28,160)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - 696 - - 696
Revolving loan borrowings
(repayments), net................... 11,100 - - - 11,100
Long-term debt repayments.............. (12,925) (89) - - (13,014)
Issuance of common stock............... - - 1,816 (1,816) -
Repurchase of common stock............. (252) - - - (252)
Intercompany advances.................. 8,150 (11,531) 3,381 - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 6,073 (10,924) 5,197 (1,816) (1,470)
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on
cash.............................. - - 201 - 201
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash..... - 11,061 196 - 11,257
---------- ---------- ---------- ---------- ----------
Cash at the beginning of the period....... - 14,047 - - 14,047
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 25,108 $ 196 $ - $ 25,304
========== ========== ========== ========== ==========
24
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. Our results of operations for a
particular quarter may not be indicative of results expected during the other
quarters or for the entire year.
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. Our
geographically diverse network consists of 153 sites located in 41 states and
Ontario, Canada. Our operations are conducted through three distinct types of
travel centers:
o sites owned or leased and operated by us, which we refer to as
company-operated sites;
o sites owned by us and leased to independent lessee-franchisees,
which we refer to as leased sites; and
o 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 with a selection of over 4,000 items
and other driver amenities.
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, particularly in times of historically
high prices. For the six-month periods ended June 30, 2002 and 2003, our
revenues and gross profit were composed as follows:
25
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2003
(RESTATED)
----------- ---------
Revenues:
Fuel................................................................................ 64.5% 70.8%
Non-fuel............................................................................ 34.6% 28.6%
Rent and royalties.................................................................. 0.9% 0.6%
--------- ---------
Total revenues................................................................ 100.0% 100.0%
========= =========
Gross profit (excluding depreciation):
Fuel................................................................................ 21.3% 22.2%
Non-fuel............................................................................ 75.3% 74.9%
Rent and royalties.................................................................. 3.4% 2.8%
--------- ---------
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 June 30, 2003:
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
-------- ------ ----------- -----
Number of sites at December 31, 2001.................... 119 25 9 153
January - June 2002 Activity:
Sales of sites....................................... (2) - - (2)
Conversions of leased sites to
company-operated sites............................. 3 (3) - -
---- ---- ---- ----
Number of sites at June 30, 2002........................ 120 22 9 151
July - December 2002 Activity:
New sites............................................ 1 - 1 2
Conversions of leased sites to company-operated sites 2 (2) - -
Sales of sites....................................... (1) - - (1)
---- ---- ---- ----
Number of sites at December 31, 2002.................... 122 20 10 152
2003 Activity:
New sites............................................ 2 - - 2
Sales of sites....................................... (1) - - (1)
Conversions of leased sites to
company-operated sites............................. 2 (2) - -
---- ---- ---- ----
Number of sites at June 30, 2003........................ 125 18 10 153
==== ==== ==== ====
The lease and franchise agreements covering an additional leased site
were mutually terminated in July 2003 and, as a result, this site was converted
into a company-operated site. In addition, the lease and franchise agreements
covering an additional leased site were recently terminated following a breach
of the agreements and we are in the process of obtaining possession of that site
and expect to convert it into a company-operated site.
26
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 JUNE 30, 2003 COMPARED TO THE QUARTER ENDED JUNE 30, 2002
Revenues. Consolidated revenues for the quarter ended June 30, 2003
were $530.6 million, which represents an increase from the quarter ended June
30, 2002 of $65.0 million, or 13.9%, that is primarily attributable to an
increase in fuel revenue.
Fuel revenue for the quarter ended June 30, 2003 increased by $58.0
million, or 19.2%, as compared to the same period in 2002. The increase was
attributable to increases in diesel fuel and gasoline average selling prices and
increases in diesel fuel and gasoline sales volumes. Average diesel fuel and
gasoline sales prices for the quarter ended June 30, 2003 increased by 16.2% and
14.0%, 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 and uncertainty concerning the world crude oil
supply. Diesel fuel and gasoline sales volumes for the quarter ended June 30,
2003 increased by 3.3% and 6.2%, respectively, as compared to the same period in
2002. For the quarter ended June 30, 2003, we sold 335.8 million gallons of
diesel fuel and 50.0 million gallons of gasoline, as compared to 332.4 million
gallons of diesel fuel and 43.8 million gallons of gasoline for the quarter
ended June 30, 2002. The diesel fuel sales volume increase resulted from a 4.2%
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 attributable to a 1.9% increase in same-site gasoline sales
volumes, a net increase in sales volumes at the company-operated sites we added
to or eliminated from our network in 2002 and 2003 and an 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 second quarter of
2003 as compared to the second 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 competitive retail gasoline
pricing program as well as site improvements made as part of our capital
investment program.
Non-fuel revenues for the quarter ended June 30, 2003 of $166.8 million
reflected an increase of $7.5 million, or 4.9%, as compared to the same period
in 2002. The increase was primarily attributable to the increased sales at the
company-operated sites added to our network in 2002 and 2003 and was also
attributable to a 1.7% increase in same-site non-fuel revenues. 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.
We believe the increase is also attributable, in part, to our fuel pricing
strategy.
Rent and royalty revenues for the quarter ended June 30, 2003 reflected
a $0.5 million, or 12.4%, 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 2.3% increase in same-site royalty revenue
and a 0.9% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the quarter
ended June 30, 2003 was $131.0 million, compared to $123.2 million for the same
period in 2002, an increase of $7.8 million, or 6.3%. The increase in our gross
profit was primarily due to the increased level of sales volume and margin per
gallon for both diesel fuel and gasoline, as well as the increase in non-fuel
sales.
27
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 $4.1 million, or 5.0%, to $86.5
million for the quarter ended June 30, 2003 compared to $82.4 million for the
same period in 2002. This increase was attributable to a 1.9%, increase on a
same-site basis and a $2.1 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 51.2%, compared to 51.1% for the same period in 2002.
Our selling, general and administrative expenses for the quarter ended
June 30, 2003 were $10.2 million, which reflected a $0.4 million, or 3.7%,
increase from the same period in 2002 that is primarily attributable to
increased insurance costs.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the second quarter of 2003 was $14.6 million, compared to $15.0
million for 2002, a decrease of $0.4 million or 2.7%. This decrease is primarily
attributable to a $0.4 million decrease in amortization of intangible assets and
a decrease in impairment charges, partially offset by increased depreciation
expense on our base of depreciable assets. During the quarter ended June 30,
2002 we recognized an impairment charge of $0.8 million with respect to certain
sites we were then holding for sale, but have recognized no such charges during
2003.
Income from Operations. We generated income from operations of $19.9
million for the quarter ended June 30, 2003, compared to income from operations
of $15.9 million for the same period in 2002. This increase of $4.0 million, or
25.0%, was primarily attributable to the increase in gross profit that was
partially offset by the increase in operating expenses.
Interest and Other Financial Costs - Net. Interest and other financial
costs, net, for the quarter ended June 30, 2003 decreased by $1.5 million, or
11.8%, 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 rates for the quarters ended
June 30, 2003 and 2002 were 36.9% 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.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
Revenues. Our consolidated revenues for the six months ended June 30,
2003 were $1,094.5 million, which represents an increase over the six months
ended June 30, 2002 of $232.3 million, or 26.9%, that is primarily attributable
to an increase in fuel revenue.
Fuel revenue for the six months ended June 30, 2003 increased by $218.1
million, or 39.2%, as compared to the same period in 2002. The increase was
attributable to increases in diesel fuel and gasoline average selling prices and
increases in diesel fuel and gasoline sales volumes. Average diesel fuel and
gasoline sales prices for the six months ended June 30, 2003 increased by 36.7%
and 28.4%, respectively, as compared to the same period in 2002, primarily
reflecting increases in commodity prices due to historically low refined
petroleum products inventories in the United States, the exceptionally cold
weather throughout much of the United States in the first quarter of 2003 and
uncertainty concerning the world crude oil supply. Diesel fuel and gasoline
sales volumes for the six months ended June 30, 2003 increased by 0.3% and
20.0%, respectively, as compared to the same period in 2002. For the six months
ended June 30, 2003, we sold 672.3 million gallons of diesel fuel and 90.6
million gallons of gasoline, as compared to 670.2 million gallons of diesel fuel
and 75.5 million gallons of gasoline for the six months ended June 30, 2002. The
diesel fuel sales volume increase resulted from a 4.3% 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 increased wholesale
diesel fuel sales volumes. The gasoline sales volume increase was primarily
attributable to a 5.5% increase in same-site gasoline sales volumes and an
increase in wholesale gasoline sales volume. We believe the same-site diesel
fuel sales volume decrease resulted from a decline in trucking activity in 2003
as compared to 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
28
sales volume resulted primarily from increased general motorist visits to our
sites as a result of our gasoline and QSR offering upgrades and additions under
our capital program, as well as our more competitive retail gasoline pricing.
Non-fuel revenues for the six months ended June 30, 2003 of $313.1
million reflected an increase of $15.1 million, or 5.1%, from the same period in
2002. The increase was primarily attributable to a net increase in sales revenue
at company-operated sites we have added to or eliminated from our network in
2002 and 2003, and also was attributable to an increase in non-fuel sales on a
same-site basis of 2.4% for the six months ended June 30, 2003 versus the same
period in 2002. 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. We believe the increase is also
attributable, in part, to our fuel pricing strategy.
Rent and royalty revenues for the six months ended June 30, 2003
reflected a $1.0 million, or 12.2%, decrease from 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, partially
offset by a 3.8% increase in same-site royalty revenue and a 1.8% increase in
same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the six
months ended June 30, 2003 was $246.7 million, compared to $233.5 million for
the same period in 2002, an increase of $13.2 million, or 5.6%. The increase in
our gross profit was primarily due to the increased level of sales volume and
margin per gallon for both diesel fuel and gasoline, as well as the increase in
non-fuel sales.
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 $6.3 million, or 3.9%, to $169.4
million for the six months ended June 30, 2003 compared to $163.1 million for
the same period in 2002. This increase was attributable to a 1.4%, increase in
operating expenses on a same-site basis and a $3.8 million net increase
resulting from company-operated sites we added to our network or eliminated from
our network during 2002 or 2003. The same-site increase reflected cost increases
in operating expenses related to the increased level of non-fuel sales. On a
same-site basis, operating expenses as a percentage of non-fuel revenues for the
six months ended June 30, 2003 were 53.6%, compared to 54.1% for the same period
in 2002.
Our selling, general and administrative expenses for the six months
ended June 30, 2003 were $20.3 million, which reflected an increase of $1.0
million, or 5.3%, from the same period in 2002 that is primarily attributable to
increased insurance costs.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the six months ended June 30, 2003 was $29.2 million, compared to
$29.1 million for the same period 2002. This increase of $0.1 million, or 0.2%,
was attributable to increased depreciation expense on our base of depreciable
assets that was partially offset by a $0.4 million decrease in amortization of
intangible assets and a decrease in impairment charges. During the six months
ended June 30, 2003 we recognized impairment charges of $1.1 million with
respect to certain sites we were then holding for sale, but have recognized no
such charges during 2003.
Income from Operations. We generated income from operations of $28.1
million for the six months ended June 30, 2003, compared to income from
operations of $22.0 million for the same period in 2002. This increase of $6.1
million, or 27.7%, was primarily attributable to the increase in gross profit
that was partially offset by the increase in operating expenses.
Interest and Other Financial Costs - Net. Interest and other financial
costs, net, for the six months ended June 30, 2003 decreased by $2.7 million, or
10.5%, 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 second quarter of 2002.
Income Taxes. Our effective income tax rates for the six-month periods
ended June 30, 2003 and 2002 were 38.3% and a 30.2% benefit, 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.
29
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 six months ended June 30, 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 six months 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 stagnant 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 six months of 2003 and as of June 30, 2003, on a restated
basis, and we expect to remain in compliance with all of our debt covenants
throughout 2003. See "Adjusted EBITDA and Debt Covenant Compliance" below for
further discussion.
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 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 June 30, 2003, we had outstanding revolving credit
facility borrowings of $33.5 million and issued letters of credit of $21.7
million, leaving $44.8 million of our $100 million revolving credit facility
available for borrowings.
30
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 expected level of capital expenditures, including business
acquisitions but net of proceeds from asset sales, for 2003 is approximately
$45 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 some other factor that leads to significantly
increased petroleum product prices, we expect that during the remainder of 2003
we will make our remaining scheduled debt payments of approximately $1.7
million and will also repay an additional amount of outstanding borrowings
under our revolving credit facilities.
HISTORICAL CASH FLOWS
Net cash provided by operating activities totaled $40.7 million for the
first six months of 2003, compared to $50.8 million for the same period in the
prior year. The decrease in cash from operations primarily results from a $20.0
million reduction from the 2002 period in the cash generated from working
capital reductions, partially offset by greater profitability in 2003.
Net cash used in investing activities was $28.2 million for the first
six months of 2003, as compared to $24.3 million for the first six months of
2002. During 2003, we invested $8.3 million to acquire two new operating sites
and convert two leased sites to company-operated sites, while in 2002 we
invested $3.1 million to convert three leased sites to company-operated sites.
We realized $2.5 million of proceeds from two site sales in 2002 as compared to
one site sale in 2003 generating $1.4 million of proceeds.
Net cash used in financing activities was $1.5 million during the first
six months of 2003 and $20.8 million during the first six months of 2002. During
2003, we had net borrowings under our revolving credit facility that were
primarily used to fund business acquisitions and an $11.3 million mandatory term
loan prepayment that was paid in April 2003 as a result of the excess cash flow
we generated in 2002.
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 June 30, 2003, we had outstanding revolving credit facility borrowings and
issued letters of credit of $33.5 million and $21.7 million, respectively,
leaving $44.8 million of our $100 million revolving credit facility available
for borrowings.
ADJUSTED EBITDA AND DEBT COVENANT COMPLIANCE
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, (d) transition expense, (e) extraordinary losses and cumulative
effects of accounting changes and (f) the costs of the merger and
recapitalization transactions. We have included this information concerning
Adjusted EBITDA because Adjusted EBITDA is a primary component for calculating
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.
We consider our Senior Credit Facility to be a material agreement. A
majority of our outstanding indebtedness has been borrowed under the Senior
Credit Facility. Further, the Senior Credit Facility requires us to maintain
compliance with a variety of affirmative and negative covenants which primarily
act to limit the types of business activities we can undertake; limits the
amounts we can spend for items such as capital expenditures, dividends and
distributions, investments, operating leases, etc.; and limits the amount of
additional indebtedness we can incur and the liens that can be placed on our
assets. We have maintained compliance with all of these covenants for all
periods presented and expect to remain in compliance with all of the debt
covenants to which we are subject through the remainder of 2003. Of the many
debt covenants to which we are subject, there are two primary financial ratio
31
covenants against which our quarterly results are compared. These two key debt
covenant financial ratios are (a) an interest expense coverage ratio and (b) a
leverage ratio. The interest expense coverage ratio is calculated by dividing
Adjusted EBITDA for the trailing four quarters by interest expense (excluding
the interest expense related to the amortization of debt discount and deferred
financing costs) for the trailing four quarters. The leverage ratio is
calculated by dividing net debt by Adjusted EBITDA for the trailing four
quarters. Net debt is calculated by subtracting from total debt the cash balance
in excess of $2.5 million. Failure to meet either of the financial ratio debt
covenants could result in the lenders under our Senior Credit Facility declaring
our indebtedness under the Senior Credit Facility immediately due and payable.
However, the more likely consequence would be the negotiation of a waiver and/or
amendment of the covenants, which is reasonably likely to require us to pay a
significant amount of fees to the lenders and legal counsel and to further limit
our ability to make cash disbursements, such as for capital expenditures. The
following table sets forth the calculation of Adjusted EBITDA and information
related to the debt covenant financial ratios.
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------------------------
2002 2002 2003
(RESTATED) (RESTATED)
---------------------------------- -----------------
(IN THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Net income (loss)................................................. $ 1,271 $ (2,780) $ 2,730
Adjustments to reconcile net income (loss) to Adjusted EBITDA:
Cumulative effect of a change in accounting principle, net of
related taxes............................................... - - 253
Provision (benefit) for income taxes........................... (39) (1,205) 1,850
Interest and other financial costs, net........................ 51,423 26,012 23,288
Depreciation and amortization expense.......................... 60,301 29,132 29,200
Other non-cash charges (credits), net.......................... 605 (241) 482
------------- ------------- -------------
Adjusted EBITDA................................................... $ 113,561 $ 50,918 $ 57,803
============= ============= =============
Adjusted EBITDA for ratio measurement period...................... $ 113,561 $ 107,343 $ 120,447
============= ============= =============
Interest expense coverage ratio:
Actual ratio at period end..................................... 2.42x 2.17x 2.74x
Required ratio at period end................................... 1.80x 1.60x 1.80x
Minimum amount of Adjusted EBITDA to meet required ratio....... $ 84,625 $ 79,132 $ 79,223
Leverage ratio:
Actual ratio at period end..................................... 4.55x 4.83x 4.18x
Required ratio at period end................................... 4.65x 5.25x 4.65x
Minimum amount of Adjusted EBITDA to meet required ratio....... $ 111,192 $ 98,733 $ 108,190
The effects on Adjusted EBITDA of the restatement adjustments
(described in the notes to the unaudited consolidated financial statements) for
the three months ended June 30, 2002, the six months ended June 30, 2002 and the
year ended December 31, 2002 were decreases, relative to the amounts previously
reported, of $235,000, $442,000 and $16,000, respectively.
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. 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 make a residual value guarantee payment to the lessor of $44.1
million. 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 $58.2 million investment in the property.
These lease transactions were evaluated for lease classification in
accordance with FAS 13. We have not consolidated the lessor because the owners
of the lessor have maintained a substantial residual equity investment of at
least three percent that is at risk during the entire term of the lease. 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,
we will be required to consolidate the lessor in our consolidated financial
statements. Consolidating the lessor would affect our consolidated balance sheet
by increasing property and equipment, other assets and long-term debt
32
and would affect our consolidated statement of operations by reducing operating
expenses, increasing depreciation expense and increasing interest expense.
Consolidating the lessor will not result in a violation of our debt covenants.
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 June 30, 2003 or for the six months ended June
30, 2003):
o The lessor's total capitalization of $67.5 million consisted of $65.1
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.
o 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.
o During the six months ended June 30, 2003, we recognized lease rent
expense under this master lease program of $2.8 million. Excluding this
rent expense, the eight leased sites generated income of $5.5 million
for the six months ended June 30, 2003.
o 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 $2.5 million and $2.0 million,
respectively, for the six months ended June 30, 2003.
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)................... $ 539.5 $ 1.7 $ 6.7 $ 114.6 $ 416.5
Operating leases(2)................. 189.4 8.8 36.3 68.7 75.6
Other long-term liabilities(3)...... 5.8 - 3.2 1.0 1.6
--------- -------- --------- --------- ---------
Total contractual cash obligations.. $ 734.7 $ 10.5 $ 46.2 $ 184.3 $ 493.7
========= ========= ========= ========= =========
(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 June 30, 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 $4.6 million.
Our only commercial commitments of any significance are the $21.7
million of standby letters of credit we had outstanding as of June 30, 2003.
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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 June 30, 2003, we had a reserve of $3.5 million for
unindemnified environmental matters for which we are responsible and a
receivable for estimated recoveries of these estimated future expenditures of
$1.5 million. We estimate that the cash outlays related to the matters for which
we have accrued this reserve will be approximately $1.8 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, 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, we will be required to consolidate the lessor in our consolidated
financial statements. 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 will not result in a violation of our debt
covenants or have an effect on our liquidity
In May 2003, the FASB issued FAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." FAS 150 was
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, which for us is the third quarter ending
September 30, 2003. Under FAS 150, we will be required to present the balance of
our redeemable common stock as a liability instead of as an item between
liabilities and equity as we have historically presented it. We are currently
evaluating the other effects of adopting FAS 150. Adopting FAS 150 may require
us to recognize as interest expense each quarter any dividends paid with respect
to the redeemable shares and the change during that quarter in the estimated
amount of cash payments that would be necessary to repurchase the redeemable
stock. However, adopting FAS 150 will not affect our cash payments or liquidity.
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 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:
o competition from other travel center and truck stop operators,
including additional or improved services or facilities of competitors;
o the economic condition of the trucking industry, which in turn is
dependent on general economic factors;
o increased environmental governmental regulation;
o changes in governmental regulation of the trucking industry, including
regulations relating to diesel fuel and gasoline;
o changes in accounting standards generally accepted in the
United States;
34
o changes in interest rates;
o diesel fuel and gasoline pricing;
o availability of diesel fuel and gasoline supply; and
o 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 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 the end of the period covered by 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.
35
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
Our annual meeting of stockholders was held on May 20, 2003 for the
purpose of electing a board of directors. The nominees for director, Robert J.
Branson, Michael Greene, Steven B. Gruber, Edwin P. Kuhn, Louis J. Mischianti
and Rowan G. P. Taylor, were elected by the following vote:
Shares voted "for" 6,687,528
Shares voted "against" 0
ITEM 5. OTHER MATTERS
Our annual report on the 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 6, 2006. The SEC's comment
letter also requested that we make additional disclosures in future filings and
provide them with 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 disclosures
that we undertake to include in our future filings. After reviewing our response
letter, the SEC issued additional comments in their letter dated May, 27, 2003.
That comment letter requested that we restate our financial statements
specifically with respect to our recognition of rent expense for certain
operating leases and for debt discount recognition and amortization. Over a
period of several weeks, we engaged the staff of the SEC in a dialogue
regarding, and provided the staff of the SEC additional information pertaining
to, our specific facts and circumstances with respect to the request to restate.
After reviewing all of the information presented throughout this process, the
Company concluded that it was appropriate to restate certain of its previously
issued financial statements. Consequently, we are in the process of effecting
the restatement. To the extent applicable, we have included such restated
amounts 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
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
(b) Reports on Form 8-K
We filed no reports on Form 8-K during the second quarter of 2003.
36
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: August 14, 2003 By: /s/ James W. George
---------------------------------------
Name: James W. George
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
37