Back to GetFilings.com
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 September 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 October 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.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet as of December 31, 2002
(restated) and September 30, 2003 (unaudited)..................... 2
Unaudited Consolidated Statement of Operations and
Comprehensive Income for the three months and nine months
ended September 30, 2002 (restated) and 2003...................... 3
Unaudited Consolidated Statement of Cash Flows for the nine
months ended September 30, 2002 (restated) and 2003............... 4
Unaudited Statement of Nonredeemable Stockholders' Equity
for the nine months ended September 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....................................................... 36
Item 4. Controls and Procedures........................................... 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 37
Item 5. Other Information................................................. 37
Item 6. Exhibits and Reports on Form 8-K.................................. 37
SIGNATURE...................................................................................... 38
1
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
2002 2003
(RESTATED) (UNAUDITED)
------------------------------
ASSETS (IN THOUSANDS OF DOLLARS)
Current assets:
Cash.............................................................................. $ 14,047 $ 20,107
Accounts receivable (less allowance for doubtful accounts of $2,025 for 2002 and
$1,922 for 2003)............................................................... 44,295 51,500
Inventories....................................................................... 61,937 58,379
Deferred income taxes............................................................. 4,222 3,747
Other current assets.............................................................. 8,164 6,045
---------- ----------
Total current assets......................................................... 132,665 139,778
Property and equipment, net.......................................................... 444,197 441,078
Goodwill............................................................................. 23,585 24,552
Deferred financing costs, net........................................................ 27,452 24,912
Deferred income taxes................................................................ 17,781 14,369
Other noncurrent assets.............................................................. 15,087 16,063
---------- ----------
Total assets................................................................. $ 660,767 $ 660,752
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................................. $ 3,460 $ 3,345
Accounts payable.................................................................. 58,512 65,567
Other accrued liabilities......................................................... 51,339 61,809
---------- ----------
Total current liabilities.................................................... 113,311 130,721
Commitments and contingencies........................................................
Long-term debt (net of unamortized discount)......................................... 523,934 495,805
Deferred income taxes................................................................ 2,107 2,094
Other noncurrent liabilities......................................................... 6,209 9,094
---------- ----------
645,561 637,714
Redeemable equity.................................................................... 681 648
Nonredeemable equity:
Common stock and other stockholders' equity....................................... 217,293 217,699
Accumulated deficit............................................................... (202,768) (195,309)
---------- ----------
Total nonredeemable equity................................................... 14,525 22,390
---------- ----------
Total liabilities, redeemable equity and nonredeemable stockholders' equity.. $ 660,767 $ 660,752
========== ==========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2002 2002
(RESTATED) 2003 (RESTATED) 2003
------------ ----------- ----------- ------------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Revenues:
Fuel..................................... $ 321,455 $ 373,842 $ 878,033 $ 1,148,291
Nonfuel.................................. 168,460 179,097 465,853 491,540
Rent and royalties....................... 3,891 3,154 11,879 10,169
------------ ------------ ------------ ------------
Total revenues..................... 493,806 556,093 1,355,765 1,650,000
Cost of goods sold (excluding depreciation):
Fuel..................................... 296,037 346,582 802,720 1,066,219
Nonfuel.................................. 70,284 74,484 192,377 202,694
------------ ------------ ------------ ------------
Total cost of goods sold (excluding
depreciation)................... 366,321 421,066 995,097 1,268,913
------------ ------------ ------------ ------------
Gross profit (excluding depreciation)....... 127,485 135,027 360,668 381,087
Operating expenses.......................... 85,431 91,330 248,500 260,680
Selling, general and administrative expenses 9,422 10,089 28,702 30,395
Depreciation and amortization expense....... 16,114 15,342 45,246 44,541
(Gain) loss on sales of property and
equipment................................ (949) (10) (963) (304)
------------ ------------ ------------ ------------
Income from operations................... 17,467 18,276 39,183 45,775
Interest and other financial costs, net..... (12,878) (11,213) (38,889) (34,502)
Equity in earnings of affiliate............. 250 224 561 847
------------ ------------ ------------ ------------
Income before income taxes and the
cumulative effect a of change in
accounting principle..................... 4,839 7,287 855 12,120
Provision for income taxes.................. 1,667 2,558 463 4,408
------------ ------------ ------------ ------------
Income before the cumulative effect of a
change in accounting principle........... 3,172 4,729 392 7,712
Cumulative effect of a change in accounting
principle, net of related taxes (Note 2). - - - (253)
------------ ------------ ------------ ------------
Net income............................... 3,172 4,729 392 7,459
Other comprehensive income (expense),
net of tax (Note 3):
Unrealized gain on derivative
instruments.............................. 547 - 1,448 -
Foreign currency translation adjustments - 7 - 625
------------ ------------ ------------ ------------
Comprehensive income (loss)................. $ 3,719 $ 4,736 $ 1,840 $ 8,084
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2002 2003
(RESTATED)
--------------- -------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 392 $ 7,459
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of a change in accounting principle.......................... - 253
Depreciation and amortization expense.......................................... 45,246 44,533
Amortization of deferred financing costs....................................... 2,250 2,540
Deferred income tax provision.................................................. 3,082 3,785
Provision for doubtful accounts................................................ 750 750
(Gain) on sales of property and equipment...................................... (963) (304)
Changes in assets and liabilities, adjusted for the effects of business
acquisitions:
Accounts receivable......................................................... (10,144) (8,676)
Inventories................................................................. 682 4,641
Other current assets........................................................ 1,285 2,149
Accounts payable and other accrued liabilities.............................. 28,225 18,761
Other, net..................................................................... (3,293) (1,200)
----------- -----------
Net cash provided by operating activities................................. 67,512 74,691
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions......................................................... (3,526) (9,035)
Proceeds from sales of property and equipment................................. 3,945 1,866
Capital expenditures.......................................................... (34,592) (32,057)
----------- -----------
Net cash used in investing activities..................................... (34,173) (39,226)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in checks drawn in excess of bank balances................ (7,976) (4)
Revolving loan borrowings (repayments), net................................... (20,900) (15,500)
Long-term debt repayments..................................................... (2,546) (13,851)
Repurchase of common stock.................................................... - (252)
Issuance of common stock...................................................... 116 -
Debt issuance costs........................................................... (300) -
Merger and recapitalization expenses paid..................................... (150) -
----------- -----------
Net cash used in financing activities..................................... (31,756) (29,607)
----------- -----------
Effect of exchange rate changes on cash................................... - 202
----------- -----------
Net increase (decrease) in cash........................................... 1,583 6,060
Cash at the beginning of the period.................................................. 19,888 14,047
----------- -----------
Cash at the end of the period........................................................ $ 21,471 $ 20,107
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
4
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2002 2003
(RESTATED)
----------- -----------
(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........ 1,448 -
Foreign currency translation adjustments, net of tax.......................... - 625
----------- -----------
Balance at end of period......................................................... $ (472) $ 625
=========== ===========
ACCUMULATED DEFICIT:
Balance at beginning of period.................................................... $ (204,039) $ (202,768)
Net income.................................................................... 392 7,459
----------- -----------
Balance at end of period.......................................................... $ (203,647) $ (195,309)
=========== ===========
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 September 30, 2003, our geographically
diverse nationwide network of full-service travel centers consisted of 152 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, 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. We also collect rents and franchise royalties from the franchisees
who operate the leased sites and franchisee-owned sites.
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 152 travel centers located in Canada, the
amounts of revenues and long-lived assets located in Canada are not material.
The accompanying unaudited, consolidated financial statements as of
September 30, 2003 and for the three- and nine-month periods ended September 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 September 30, 2003, our results of operations for the
three- and nine-month periods ended September 30, 2002 and 2003, and our changes
in nonredeemable stockholders' equity and cash flows for the nine-month periods
ended September 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 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 a deferred tax benefit of
$164,000). The pro forma effect for the three- and nine-month periods ended
September 30, 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 nine months ended September, 2003 was as follows (in thousands of
dollars):
Balance at January 1, 2002................................................ $ 589
Liabilities incurred...................................................... 11
Liabilities settled....................................................... (6)
Accretion expense......................................................... 58
Revisions to estimates.................................................... -
--------
$ 652
========
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 effective December
31, 2004. 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 are also
evaluating whether FIN 46 will require consolidation of our franchisees,
although we currently believe we will not be required to do so. 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, for companies such as ours that do not
have equity securities traded on an exchange, for fiscal periods beginning after
December 15, 2003. FAS 150 requires the balance of mandatorily redeemable stock
be presented as a liability instead of as an item between liabilities and
equity. FAS 150 also requires recognition as interest expense each quarter any
dividends paid with respect to the mandatorily redeemable shares and the change
during that quarter in the estimated amount of cash payments that would be
necessary to repurchase the mandatorily redeemable stock. We are currently
evaluating the effects of adopting FAS 150 given the specific circumstances of
our redeemable common stock. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2003 2002 2003
--------- --------- --------- ---------
(IN THOUSANDS OF DOLLARS)
Related to gain or loss on derivative instruments....... $ 281 $ - $ 746 $ -
Related to foreign currency translation adjustments..... - (3) - 253
--------- --------- --------- ---------
Total................................................. $ 281 $ (3) $ 746 $ 253
========= ========= ========= =========
7
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30,
2002 2003
-----------------------------
(IN THOUSANDS OF DOLLARS)
Nonfuel merchandise........................................................... $ 55,460 $ 52,672
Petroleum products............................................................ 6,477 5,707
------------ ------------
Total inventories......................................................... $ 61,937 $ 58,379
============ ============
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine-month
periods ended September 30, 2002 and 2003 were as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2003
-------------- -------------
(IN THOUSANDS OF DOLLARS)
Balance as of beginning of period............................................... $ 19,343 $ 23,585
Goodwill recorded during the period............................................. 4,242 967
----------- -----------
Balance as of end of period..................................................... $ 23,585 $ 24,552
=========== ===========
During the nine months ended September 30, 2002, we recorded $4,242,000
of goodwill as a result of the business acquisitions we completed in connection
with converting four leased sites to company-operated sites. During the nine
months ended September 30, 2003, we recorded $967,000 of goodwill as a result of
the business acquisitions we completed in connection with converting four 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, SEPTEMBER 30,
2002 2003
------------ -------------
(IN THOUSANDS OF DOLLARS)
Amortizable intangible assets:
Noncompetition agreements.................................................. $ 17,200 $ 17,350
Leasehold interest......................................................... 1,724 1,724
Other...................................................................... 849 866
------------ ------------
Total amortizable intangible assets.................................... 19,773 19,940
Less - accumulated amortization............................................ 18,848 19,487
------------ ------------
Net carrying value of amortizable intangible assets.................... 925 453
Net carrying value of trademarks.................................................. 1,398 1,398
------------ ------------
Intangible assets, net................................................. $ 2,323 $ 1,851
============ ============
Total amortization expense for our amortizable intangible assets for
the nine-month periods ended September 30, 2002 and 2003 were $1,422,000 and
$639,000, respectively. The estimated aggregate amortization expense for our
amortizable intangible assets for the year ending December 31, 2003 and each of
the five succeeding fiscal years are $691,000 for 2003; $191,000 for 2004;
$87,000 for 2005 and $10,000 in each of 2006, 2007 and 2008.
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) as if we had applied the fair value recognition provisions of FAS
123 to stock-based employee compensation.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002
(RESTATED) 2003
----------- ----------
(IN THOUSANDS OF DOLLARS)
Net income, as reported (2002 amount restated).................................. $ 392 $ 7,459
Add back - Stock-based employee compensation expense, net of related tax
effects, included in net income as reported................................. - -
Deduct - Total stock-based employee compensation expense determined under fair
value based methods for all awards, net of related tax effects.............. (527) (498)
---------- ---------
Pro forma net income (loss)..................................................... $ (135) $ 6,961
========== =========
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 and, in certain cases,
include escalation clauses and 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................................................................................... $ 4,405
2004................................................................................... 18,488
2005................................................................................... 17,793
2006................................................................................... 59,538
2007................................................................................... 9,175
Thereafter............................................................................. 73,097
-------------
$ 182,496
=============
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 December 31, 2004. 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.
10
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We have received notices of alleged violations of Environmental Laws,
or are aware of the need to undertake corrective actions to comply with
Environmental Laws, at company-owned travel centers in a number of
jurisdictions. We do not expect that any financial penalties associated with
these alleged violations, or compliance costs incurred in connection with these
violations or corrective actions, will be material to our results of operations
or financial condition. We are conducting investigatory and/or remedial actions
with respect to releases of Hazardous Substances that have occurred subsequent
to the acquisitions of the Unocal and BP networks and also regarding
contamination at certain of our other 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.
In the quarter ended September 30, 2003, we recognized a charge of $1,335,000
for future costs related to the remediation of a diesel fuel release at our
Harrisburg, PA site. This site had been under remediation by BP, pursuant to the
terms of our environmental agreement with BP, for a previous diesel fuel
release. We believed that the costs of remediating all of the conditions at the
site should be borne by BP pursuant to the environmental agreement. BP disagreed
and our dispute with BP was submitted to arbitration. In July 2003, the
arbitrator ruled that we are required to reimburse BP $774,000 for a portion of
the remediation costs BP had already incurred and are responsible for the future
remediation activities at this site. In early November 2003, the Pennsylvania
Underground Storage Tank Insurance Fund ("USTIF") denied our claim for
reimbursement of our remediation costs related to this matter. We intend to
appeal this denial but cannot be assured of our success on appeal. Likewise, we
cannot be assured that our private insurance policies will provide for
reimbursement of our remediation costs. Accordingly, we have accrued our best
estimate of the future costs based on the data currently available to us. It is
reasonably possible that our estimate of the total future remediation costs will
change as we continue our investigation of the contamination of the site and the
remediation system BP has installed there. Further, future favorable
developments with respect to our appeal of USTIF's denial of our claim and/or
coverage by our private insurance could result in future reductions of our
environmental expense related to this matter. However, no assurance can be given
that we will be successful in pursuing either of these claims.
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 September 30, 2003, we had a reserve for these matters of $5,195,000 and a
receivable for estimated recoveries of these estimated future expenditures of
$1,477,000. We estimate that the cash outlays related to the matters for which
we have accrued this reserve will be approximately $1,923,000 in the remainder
of 2003; $1,805,000 in 2004; $735,000 in 2005; $269,000 in 2006; $239,000 in
2007 and $224,000 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.
11
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2002 2003
--------------- -----------
(IN THOUSANDS OF DOLLARS)
Revolving loan borrowings......................................................... $ 355,400 $ 370,600
Revolving loan repayments......................................................... (376,300) (386,100)
----------- -----------
Revolving loan borrowings (repayments), net..................................... $ (20,900) $ (15,500)
=========== ===========
Cash paid during the period for:
Interest........................................................................ $ 30,095 $ 22,593
Income taxes (net of refunds)................................................... $ (1,952) $ 635
During the nine-month period ended September 30, 2002, we acquired
$1,468,000 of inventory, property and equipment and goodwill in settlement of
accounts 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 nine-month period ended September 30, 2003, we acquired $735,000 of
inventory in settlement of accounts receivable as part of the conversions of
leased sites to company-operated sites.
9. OTHER INFORMATION
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2002 2002
(RESTATED) 2003 (RESTATED) 2003
---------------------------------------------------------
(IN THOUSANDS OF DOLLARS)
Interest and other financial costs consists of the following:
Cash interest expense.................................. $ (11,792) $ (10,008) $ (35,734) $ (30,921)
Cash interest income................................... 28 24 99 66
Amortization of discount on debt....................... (344) (360) (1,004) (1,107)
Amortization of deferred financing costs............... (770) (869) (2,250) (2,540)
---------- ---------- ---------- ----------
Interest and other financial costs, net................ $ (12,878) $ (11,213) $ (38,889) $ (34,502)
========== ========== ========== ==========
10. RELATED PARTY TRANSACTIONS
During the nine-month periods ended September 30, 2002 and 2003, we
made purchases of diesel fuel in the amount of $128,118,000 and $171,942,000,
respectively, from a company in which we have a minority investment and made
sales of diesel fuel in the amount of $2,360,000 and $2,514,000, respectively,
to this affiliate. We also lease a travel center from this affiliate. Rent paid
with respect to this site for the nine-month periods ended September 30, 2002
and 2003 was $306,000 and $306,000, respectively. At December 31, 2002 and
September 30, 2003, our receivables from this affiliate were $151,000 and
$114,000, respectively, while our payables to this affiliate were $357,000 and
$15,000, 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 $1,467,000 at December 31, 2002 and September 30, 2003,
respectively.
12
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. RESTATEMENT
The accompanying balance sheet as of December 31, 2002, the
accompanying statements of operations and comprehensive income for the three-and
nine-month periods ended September 30, 2002 and the accompanying statements of
cash flows and nonredeemable stockholders' equity for the nine-month period
ended September 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
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 of rent expense each year, resulting in an understatement of
noncurrent liabilities and an overstatement of nonredeemable stockholders'
equity. For the three- and nine-month periods ended September 30, 2002, the
adjustments to correct our operating lease expense accounting resulted in an
increase of $47,000 and a decrease of $194,000, 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 2003 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. For the three- and nine-month periods
ended September 30, 2002, the effect on interest expense of the adjustments to
correct our accounting were increases of $35,000 and $102,000, 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.
Equity in earnings of affiliate. We have reclassified the amounts of
equity earnings recognized each period from non-fuel revenues to a separate line
in the statement of operations after income from operations. The equity income
recognized in the three- and nine-month periods ended September 30, 2002 were
$250,000 and $561,000, respectively.
13
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2002
--------------- -------------
(IN THOUSANDS OF DOLLARS)
Summary of restatement adjustments by type - increase (decrease) to income
(loss) before income taxes:
Straight-line lease rent expense........................................... $ (47) $ 194
Debt discount amortization................................................. (35) (102)
Other matters.............................................................. (55) (258)
----------- -----------
Net effect of restatement adjustments income (loss) before
income taxes - increase (decrease) in income (loss) before income taxes.. $ (137) $ (166)
===========- ===========-
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2002
------------- -------------
Summary of restatement adjustments by caption - increase (decrease) to income
(loss) before income taxes
Total revenues............................................................. $ (296) $ (1,144)
Operating expenses......................................................... (151) (115)
Selling, general and administrative expenses............................... (23) 279
Depreciation and amortization expense...................................... 118 355
Interest and other financial costs, net.................................... (35) (102)
Equity in earnings of affiliate............................................ 250 561
----------- -----------
Net effect of restatement adjustments on income (loss) before income
taxes - increase (decrease) in income (loss)............................. $ (137) $ (166)
=========== ===========
14
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
-------------------------------- --------------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
-------------------------------- ---------------- ---------------
(IN THOUSANDS OF DOLLARS)
Statement of operations data:
Total revenues.................................... $ 494,102 $ 493,806 $ 1,356,909 $ 1,355,765
Cost of goods sold (excluding depreciation)....... 366,321 366,321 995,097 995,097
------------ ------------ ------------ ------------
Gross profit (excluding depreciation)............. 127,781 127,485 361,812 360,668
Operating expenses................................ 85,280 85,431 248,385 248,500
Selling, general and administrative expenses...... 9,399 9,422 28,981 28,702
Depreciation and amortization expense............. 16,232 16,114 45,601 45,246
(Gain) on sales of property and equipment......... (949) (949) (963) (963)
------------ ------------ ------------ ------------
Income from operations............................ 17,819 17,467 39,808 39,183
Interest and other financial costs, net........... (12,843) (12,878) (38,787) (38,889)
Equity in earnings of affiliate................... - 250 - 561
Provision (benefit) for income taxes.............. 1,724 1,667 530 463
------------ ------------ ------------ ------------
Net income (loss)................................. $ 3,252 $ 3,172 $ 491 $ 392
============ ============ ============ ============
Accumulated deficit at beginning of period........ $ (204,349) $ (206,819) $ (201,588) $ (204,039)
============ ============ ============ ============
NINE MONTHS ENDED
SEPTEMBER 30, 2002
--------------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
(IN THOUSANDS OF DOLLARS)
Statement of cash flows data:
Cash provided by operating activities...................................... $ 59,536 $ 67,512
Cash used in investing activities.......................................... (34,173) (34,173)
Cash provided by (used in) financing activities............................ (23,780) (31,756)
----------- -----------
Net increase (decrease) in cash............................................ $ 1,583 $ 1,583
=========== ===========
15
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED
DECEMBER 31, 2002
----------------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
-------------- ------------
(IN THOUSANDS OF DOLLARS)
Balance sheet data:
Cash......................................................................... $ 14,047 $ 14,047
Accounts receivable, net..................................................... 44,295 44,295
Inventories.................................................................. 61,937 61,937
Deferred income taxes........................................................ 4,221 4,222
Other current assets......................................................... 8,164 8,164
----------- -----------
Total current assets....................................................... 132,664 132,665
Property and equipment, net.................................................. 445,692 444,197
Goodwill..................................................................... 25,908 23,585
Deferred financing costs, net................................................ 27,452 27,452
Deferred income taxes........................................................ 16,069 17,781
Other noncurrent assets...................................................... 12,764 15,087
----------- -----------
Total assets............................................................... $ 660,549 $ 660,767
=========== ===========
Current maturities of long-term debt......................................... $ 3,460 $ 3,460
Accounts payable............................................................. 58,512 58,512
Other accrued liabilities.................................................... 51,440 51,339
----------- -----------
Total current liabilities.................................................. 113,412 113,311
Long-term debt (net of unamortized discount)................................. 525,131 523,934
Deferred income taxes........................................................ 2,364 2,107
Other noncurrent liabilities................................................. 3,696 6,209
----------- -----------
Total liabilities.......................................................... 644,603 645,561
Redeemable equity............................................................ 681 681
Common stock and other stockholders' equity.................................. 215,843 217,293
Accumulated deficit.......................................................... (200,578) (202,768)
----------- -----------
Total nonredeemable stockholders' equity................................... 15,265 14,525
----------- -----------
Total liabilities and equity............................................... $ 660,549 $ 660,767
=========== ===========
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance
sheet schedules as of December 31, 2002 (restated) and September 30, 2003, our
condensed consolidating statement of operations schedules for the three- and
nine-month periods ended September 30, 2002 (restated) and 2003 and our
condensed consolidating statement of cash flows schedules for the nine-month
periods ended September 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 CONSOLIDATE
------------ ------------- ------------ ------------- ------------
(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 1,140 (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 payable (receivable)............ (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.................................. 218,548 185,660 - (186,915) 217,293
Retained earnings (accumulated deficit)... (202,768) 49,634 4,966 (54,600) (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
SEPTEMBER 30, 2003
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------- ------------- -------------- -------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash.................................... $ - $ 20,004 $ 103 $ - $ 20,107
Accounts receivable, net................ - 51,722 905 (1,127) 51,500
Inventories............................. - 58,246 133 - 58,379
Deferred income taxes................... - 3,707 40 - 3,747
Other current assets.................... 676 5,528 32 (191) 6,045
---------- ---------- ---------- ---------- ----------
Total current assets............... 676 139,207 1,213 (1,318) 139,778
Property and equipment, net................ - 435,065 6,013 - 441,078
Goodwill................................... - 24,552 - - 24,552
Deferred financing costs, net.............. 24,912 - - - 24,912
Deferred income taxes...................... 19,916 (5,547) - - 14,369
Other noncurrent assets.................... 909 19,269 - (4,115) 16,063
Investment in subsidiaries................. 261,210 1,583 - (262,793) -
---------- ---------- ---------- ---------- ----------
Total assets....................... $ 307,623 $ 614,129 $ 7,226 $ (268,226) $ 660,752
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.... $ 3,165 $ 180 $ - $ - $ 3,345
Accounts payable........................ - 65,465 150 (48) 65,567
Other accrued liabilities............... 8,923 53,020 1,136 (1,270) 61,809
---------- ---------- ---------- ---------- ----------
Total current liabilities.......... 12,088 118,665 1,286 (1,318) 130,721
Long-term debt (net of unamortized discount) 493,163 2,642 4,115 (4,115) 495,805
Deferred income taxes...................... - 2,094 - - 2,094
Intercompany payable (receivable).......... (221,296) 226,445 (5,149) - -
Other noncurrent liabilities............... - 9,094 - - 9,094
---------- ---------- ---------- ---------- ----------
Total liabilities.................. 283,955 358,940 252 (5,433) 637,714
Redeemable equity.......................... 648 - - - 648
Nonredeemable stockholders' equity:
Common stock and other stockholders'
equity............................... 218,329 186,052 2,049 (188,731) 217,699
Retained earnings
(accumulated deficit)................ (195,309) 69,137 4,925 (74,062) (195,309)
---------- ---------- ---------- ---------- ----------
Total nonredeemable stockholders'
equity.......................... 23,020 255,189 6,974 (262,793) 22,390
---------- ---------- ---------- ---------- ----------
Total liabilities, redeemable
equity and nonredeemable
stockholders' equity............ $ 307,623 $ 614,129 $ 7,226 $ (268,226) $ 660,752
========== ========== ========== ========== ==========
18
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:
THREE MONTHS ENDED SEPTEMBER 30, 2002 (RESTATED)
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ----------- ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel..................................... $ - $ 321,455 $ - $ - $ 321,455
Nonfuel.................................. - 168,460 - - 168,460
Rent and royalties....................... - 3,483 1,585 (1,177) 3,891
---------- ---------- ---------- ---------- ----------
Total revenues........................... - 493,398 1,585 (1,177) 493,806
Cost of goods sold (excluding depreciation). - 366,321 - - 366,321
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)....... - 127,077 1,585 (1,177) 127,485
Operating expenses.......................... - 85,415 1,193 (1,177) 85,431
Selling, general and
administrative expenses................. 215 8,846 361 - 9,422
Depreciation and amortization expense....... - 16,114 - - 16,114
(Gain) on sales of property and equipment... - (949) - - (949)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............... (215) 17,651 31 - 17,467
Interest and other financial costs, net..... (8,754) (4,124) - - (12,878)
Equity income (loss)........................ 10,556 250 - (10,556) 250
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes........... 1,587 13,777 31 (10,556) 4,839
Provision (benefit) for income taxes........ (1,585) 3,239 13 - 1,667
---------- ---------- ---------- ---------- ----------
Net income (loss)........................... $ 3,172 $ 10,538 $ 18 $ (10,556) $ 3,172
========== ========== ========== ========== ==========
19
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 370,724 $ 3,118 $ - $ 373,842
Nonfuel................................ - 178,200 897 - 179,097
Rent and royalties..................... - 2,832 1,399 (1,077) 3,154
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 551,756 5,414 (1,077) 556,093
Cost of goods sold (excluding depreciation) - 417,685 3,381 - 421,066
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 134,071 2,033 (1,077) 135,027
Operating expenses........................ - 90,780 1,627 (1,077) 91,330
Selling, general and
administrative expenses............... 284 9,529 276 - 10,089
Depreciation and amortization expense..... - 15,209 133 - 15,342
(Gain) on sales of property and equipment - (10) - - (10)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (284) 18,563 (3) - 18,276
Interest and other financial costs, net... (5,976) (5,164) (73) - (11,213)
Equity income (loss)...................... 8,829 117 - (8,722) 224
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... 2,569 13,516 (76) (8,722) 7,287
Provision (benefit) for income taxes...... (2,160) 4,707 11 - 2,558
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 4,729 $ 8,809 $ (87) $ (8,722) $ 4,729
========== ========== ========== ========== ==========
20
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 2002 (RESTATED)
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- - ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 878,033 $ - $ - $ 878,033
Nonfuel................................ - 465,853 - - 465,853
Rent and royalties..................... - 10,683 4,544 (3,348) 11,879
--------- --------- --------- --------- ---------
Total revenues......................... - 1,354,569 4,544 (3,348) 1,355,765
Cost of goods sold (excluding depreciation) - 995,097 - - 995,097
--------- --------- --------- --------- ---------
Gross profit (excluding depreciation)..... - 359,472 4,544 (3,348) 360,668
Operating expenses........................ - 248,456 3,392 (3,348) 248,500
Selling, general and
administrative expenses............... 604 26,976 1,122 - 28,702
Depreciation and amortization expense..... - 45,246 - - 45,246
(Gain) on sales of property and equipment - (963) - - (963)
--------- --------- --------- --------- ---------
Income (loss) from operations............. (604) 39,757 30 - 39,183
Interest and other financial costs, net... (25,723) (13,166) - - (38,889)
Equity income (loss)...................... 19,111 561 - (19,111) 561
--------- --------- --------- --------- ---------
Income (loss) before income taxes......... (7,216) 27,152 30 (19,111) 855
Provision (benefit) for income taxes...... (7,608) 8,058 13 - 463
--------- --------- --------- --------- ---------
Net income (loss)......................... $ 392 $ 19,094 $ 17 $ (19,111) $ 392
========= ========= ========= ========= =========
21
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel.................................... $ - $1,140,635 $ 7,656 $ - $1,148,291
Nonfuel................................. - 489,165 2,375 - 491,540
Rent and royalties...................... - 9,072 4,239 (3,142) 10,169
---------- ---------- ---------- ---------- ----------
Total revenues.......................... - 1,638,872 14,270 (3,142) 1,650,000
Cost of goods sold (excluding depreciation) - 1,260,629 8,284 - 1,268,913
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)...... - 378,243 5,986 (3,142) 381,087
Operating expenses......................... - 259,182 4,640 (3,142) 260,680
Selling, general and
administrative expenses.................. 685 28,943 767 - 30,395
Depreciation and amortization expense...... - 44,212 329 - 44,541
(Gain) on sales of property and equipment - (304) - - (304)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. (685) 46,210 250 - 45,775
Interest and other financial costs, net.... (17,852) (16,458) (192) - (34,502)
Equity income (loss)....................... 19,694 615 - (19,462) 847
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and the
cumulative effect of a change in
accounting principle..................... 1,157 30,367 58 (19,462) 12,120
Provision (benefit) for income taxes....... (6,302) 10,611 99 - 4,408
---------- ---------- ---------- ---------- ----------
Income (loss) before the cumulative effect
of a change in accounting principle..... 7,459 19,756 (41) (19,462) 7,712
Cumulative effect of a change in
accounting principle, net of related
taxes................................... - (253) - - (253)
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $ 7,459 $ 19,503 $ (41) $ (19,462) $ 7,459
========== ========== ========== ========== ==========
22
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SCHEDULES:
NINE MONTHS ENDED SEPTEMBER 30, 2002 (RESTATED)
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ (11,077) $ 78,725 $ (136) $ - $ 67,512
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (3,526) - - (3,526)
Proceeds from sales of property and
equipment........................... - 3,945 - - 3,945
Capital expenditures................... - (34,592) - - (34,592)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (34,173) - - (34,173)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - (7,976) - - (7,976)
Revolving loan borrowings
(repayments), net................... (20,900) - - - (20,900)
Long-term debt repayments.............. (2,460) (86) - - (2,546)
Issuance of common stock............... 116 - - - 116
Debt issuance costs.................... (300) - - - (300)
Merger and recapitalization
expenses paid....................... (150) - - - (150)
Intercompany advances.................. 34,771 (34,907) 136 - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 11,077 (42,969) 136 - (31,756)
---------- ---------- ---------- ---------- ----------
Net increase in cash................ - 1,583 - - 1,583
Cash at the beginning of the period....... - 19,888 - - 19,888
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 21,471 $ - $ - $ 21,471
========== ========== ========== ========== ==========
23
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ 906 $ 72,080 $ (111) $ 1,816 $ 74,691
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (3,768) (5,267) - (9,035)
Proceeds from sales of property and
equipment........................... - 1,866 - - 1,866
Capital expenditures................... - (31,833) (224) - (32,057)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (33,735) (5,491) - (39,226)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - (4) - - (4)
Revolving loan borrowings
(repayments), net................... (15,500) - - - (15,500)
Long-term debt repayments........... (13,717) (134) - - (13,851)
Issuance of common stock............ - - 1,816 (1,816) -
Repurchase of common stock.......... (252) - - - (252)
Intercompany advances............... 28,563 (32,250) 3,687 - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. (906) (32,388) 5,503 (1,816) (29,607)
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on
cash.............................. - - 202 - 202
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash..... - 5,957 103 - 6,060
Cash at the beginning of the period....... - 14,047 - - 14,047
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 20,004 $ 103 $ - $ 20,107
========== ========== ========== ========== ==========
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 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 a 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 152 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 nine-month periods ended September 30, 2002 and 2003, our
revenues and gross profit were composed as follows:
25
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002
(RESTATED) 2003
----------- -----------
Revenues:
Fuel................................................................................ 64.7% 69.6%
Non-fuel............................................................................ 34.4% 29.8%
Rent and royalties.................................................................. 0.9% 0.6%
--------- ---------
Total revenues................................................................ 100.0% 100.0%
========= =========
Gross profit (excluding depreciation):
Fuel................................................................................ 20.8% 21.5%
Non-fuel............................................................................ 75.9% 75.8%
Rent and royalties.................................................................. 3.3% 2.7%
--------- ---------
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 September 30, 2003:
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
---------- ---------- ------------ ---------
Number of sites at December 31, 2001.................... 119 25 9 153
January - September 2002 Activity:
New sites............................................ 1 - - 1
Sales of sites....................................... (3) - - (3)
Conversions of leased sites to
company-operated sites............................. 4 (4) - -
------ ------ ------ ----
Number of sites at September 30, 2002................... 121 21 9 151
October - December 2002 Activity:
New sites............................................ - - 1 1
Conversions of leased sites to company-operated sites 1 (1) - -
------ ------ ------ ----
Number of sites at December 31, 2002.................... 122 20 10 152
2003 Activity:
New sites............................................ 2 - - 2
Sales of sites....................................... (2) - - (2)
Conversions of leased sites to
company-operated sites............................. 4 (4) - -
------ ------ ------ ----
Number of sites at September 30, 2003................... 126 16 10 152
====== ====== ====== =====
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.
THREE-MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE-MONTHS ENDED
SEPTEMBER 30, 2002
Revenues. Consolidated revenues for the three-months ended September
30, 2003 were $556.1 million, which represents an increase from the three months
ended September 30, 2002 of $62.3 million, or 12.6%, that was primarily
attributable to an increase in fuel revenue.
Fuel revenue for the three-months ended September 30, 2003 increased by
$52.4 million, or 16.3%, 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 three months ended September 30, 2003 increased by
8.4% and 19.3%, 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 atypically 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 three months ended
September 30, 2003 increased by 3.1% and 22.7%, respectively, as compared to the
same period in 2002. For the three months ended September 30, 2003, we sold
339.3 million gallons of diesel fuel and 53.0 million gallons of gasoline, as
compared to 329.0 million gallons of diesel fuel and 43.2 million gallons of
gasoline for the three months ended September 30, 2002. The diesel fuel sales
volume increase resulted from an increase in wholesale diesel fuel sales volume
that was partially offset by a 2.2% decline in same-site diesel fuel sales
volume. The gasoline sales volume increase was attributable to a 13.0% 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 third quarter of 2003 as compared to the third 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 that this same-site diesel fuel volume decrease is also due to an
increase in freight carried by train and an increase in trucking fleets'
self-fueling at their own terminals due to the wide fluctuation in diesel costs
this year and the absolute high level of diesel prices. 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 three months ended September 30, 2003 of
$179.1 million reflected an increase of $10.6 million, or 6.3%, 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 3.2% 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 gasoline pricing strategy.
Rent and royalty revenues for the quarter ended September 30, 2003
reflected a $0.7 million, or 18.9%, decrease as compared to the same period in
2002. This decrease was primarily attributable to the rent and royalty revenue
lost as a result of the conversions of leased sites to company-operated sites.
This decrease was partially offset by a 1.5% increase in same-site royalty
revenue and a 2.3% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the quarter
ended September 30, 2003 was $135.0 million, compared to $127.5 million for the
same period in 2002, an increase of $7.5 million, or 5.9%. 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 $5.9 million, or 6.9%, to $91.3
million for the quarter ended September 30, 2003 compared to $85.4 million for
the same period in 2002. This increase was primarily attributable to a 2.2%
increase on a same-site basis and a net increase resulting from company-operated
sites we added to our network or eliminated from our network during 2002 or
2003, and also resulted from a $1.3 million charge to recognize an environmental
remediation liability increase. On a same-site basis, operating expenses as a
percentage of non-fuel revenues for the third quarter of 2003 were 49.6%,
compared to 50.0% for the same period in 2002.
Our selling, general and administrative expenses for the quarter ended
September 30, 2003 were $10.1 million, which reflected a $0.7 million, or 7.1%,
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 quarter ended September 30, 2003 was $15.3 million, compared to
$16.1 million for 2002, a decrease of $0.8 million or 4.8%. This decrease is
primarily attributable to a $0.5 million decrease in amortization of intangible
assets.
Income from Operations. We generated income from operations of $18.3
million for the quarter ended September 30, 2003, compared to income from
operations of $17.5 million for the same period in 2002. This increase of $0.8
million, or 4.6%, 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 September 30, 2003 decreased by $1.7 million,
or 12.9%, 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 third quarter of 2002.
Income Taxes. Our effective income tax rates for the quarters ended
September 30, 2003 and 2002 were 35.1% and 34.4%, 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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2002
Revenues. Our consolidated revenues for the nine months ended September
30, 2003 were $1,650.0 which represents an increase over the nine months ended
September 30, 2002 of $294.2 million, or 21.7%, that is primarily attributable
to an increase in fuel revenue.
Fuel revenue for the nine months ended September 30, 2003 increased by
$270.3 million, or 30.8%, 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 nine months ended September 30, 2003 increased by
26.4% and 24.9%, respectively, as compared to the same period in 2002, primarily
reflecting increases in commodity prices due to atypically 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 nine months ended September 30, 2003 increased by 1.2% and
20.9%, respectively, as compared to the same period in 2002. For the nine months
ended September 30, 2003, we sold 1,011.6 million gallons of diesel fuel and
143.6 million gallons of gasoline, as compared to 999.2 million gallons of
diesel fuel and 118.7 million gallons of gasoline for the nine months ended
September 30, 2002. The diesel fuel sales volume increase resulted from an
increase in wholesale diesel fuel sales volumes that was partially offset by a
3.7% decline in same-site diesel fuel sales volume. The gasoline sales volume
increase was primarily attributable to a 8.1% 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 soft freight
environment 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 that this was further
exacerbated by an increase in freight carried by train and an increase in
trucking fleets' self-fueling at their own terminals due to the wide fluctuation
in diesel fuel costs this year and the absolute high level of diesel fuel
prices. We believe the same-site increase in gasoline sales volume resulted
primarily from
28
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 nine months ended September 30, 2003 of
$491.5 million reflected an increase of $25.7 million, or 5.5%, 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 to an increase in non-fuel sales on a same-site
basis of 2.6% for the nine months ended September 30, 2003 as compared to 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 gasoline pricing strategy.
Rent and royalty revenues for the nine months ended September 30, 2003
reflected a $1.7 million, or 14.4%, 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 3.1% increase in same-site royalty revenue and a 1.9% increase in
same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the nine
months ended September 30, 2003 was $381.1 million, compared to $360.7 million
for the same period in 2002, an increase of $20.4 million, or 5.7%. 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 $12.2 million, or 4.9%, to $260.7
million for the nine months ended September 30, 2003 compared to $248.5 million
for the same period in 2002. This increase was primarily attributable to a net
increase resulting from company-operated sites we added to our network or
eliminated from our network during 2002 or 2003 and a 1.7% increase in operating
expenses on a same-site basis, and also resulted from a $1.3 million charge to
recognize an environmental remediation liability increase. 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 nine months ended September 30, 2003
were 52.0%, compared to 52.5% for the same period in 2002.
Our selling, general and administrative expenses for the nine months
ended September 30, 2003 were $30.4 million, which reflected an increase of $1.7
million, or 5.9%, from the same period in 2002 that is primarily attributable to
increased insurance costs.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the nine months ended September 30, 2003 was $44.5 million, compared
to $45.2 million for the same period 2002. This decrease of $0.7 million, or
1.6%, was attributable to a $0.8 million decrease in amortization of intangible
assets and a $0.9 million decrease in impairment charges, partially offset by
increased depreciation charges related to our base of depreciable assets. During
the nine months ended September 30, 2002 and 2003, we recognized impairment
charges of $1.4 million and $0.5 million, respectively, with respect to certain
sites we were then holding for sale.
Income from Operations. We generated income from operations of $45.8
million for the nine months ended September 30, 2003, compared to income from
operations of $39.2 million for the same period in 2002. This increase of $6.6
million, or 16.8%, 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 nine months ended September 30, 2003 decreased by $4.4
million, or 11.3%, 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 third quarter of 2002.
29
Income Taxes. Our effective income tax rates for the nine-month periods
ended September 30, 2003 and 2002 were 36.4% and 54.2%, 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. The difference in the rates between the two periods resulted from the
relatively larger effect on the tax rate of state income taxes, nondeductible
expenses and tax credits in 2002 due to the relatively low level of income
before taxes for that period.
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 nine months ended September 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 possible 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 nine 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.
Based on our outstanding obligations as of September 30, 2003, a one-percentage
point increase in interest rates increases our annual cash outlays by
approximately $3.8 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 nine months of 2003 and as of September 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
30
financial, business and other factors, some of which are beyond our control. At
September 30, 2003, we had outstanding revolving credit facility borrowings of
$6.9 million and issued letters of credit of $21.6 million, leaving $71.5
million of our $100 million revolving credit facility available for borrowings.
The amounts we have invested for capital improvements have declined
each year from 2000 to 2002, and are expected to remain at a similar level in
2003. 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
from 2000 through 2003. Our capital investment program to re-image, rebrand and
upgrade our network has been substantially completed. The expected level of
capital expenditures, including business acquisition but net of proceeds from
asset sales, for 2003 is approximately $48 million.
HISTORICAL CASH FLOWS
Net cash provided by operating activities totaled $74.7 million for the
first nine months of 2003, compared to $67.5 million for the same period in the
prior year. The $7.2 million increase in cash from operations primarily resulted
from greater profitability in 2003, partially offset by a $1.1 million reduction
from the 2002 period in the cash generated from working capital reductions.
Net cash used in investing activities was $39.2 million for the first
nine months of 2003, as compared to $34.2 million for the first nine months of
2002. During 2003, we invested $9.0 million to acquire two new operating sites
and convert four leased sites to company-operated sites, while in 2002 we
invested $3.5 million to convert four leased sites to company-operated sites. We
realized $3.9 million of proceeds from three site sales in 2002 as compared to
two site sales in 2003 generating $1.9 million of proceeds.
Net cash used in financing activities was $29.6 million during the
first nine months of 2003 and $31.8 million during the first nine months of
2002. During 2003, we made net repayments of our revolving credit facility
indebtedness of $15.5 million, and also made repayments of long term loan
indebtedness of $13.9 million, which includes an $11.3 million mandatory
prepayment in April 2003 resulting from 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 September 30, 2003, we had outstanding revolving credit facility borrowings
and issued letters of credit of $6.9 million and $21.6 million, respectively,
leaving $71.5 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
31
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 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, we believe, in such an instance, that we would be able to negotiate 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.
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------------
2002 2002
(RESTATED) (RESTATED 2003
------------- ------------- -------------
(IN THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Net income......................................................... $ 1,271 $ 392 $ 7,459
Adjustments to reconcile net income to Adjusted EBITDA:
Cumulative effect of a change in accounting principle, net of - - 253
related taxes...............................................
Provision (benefit) for income taxes........................... (39) 463 4,408
Interest and other financial costs, net........................ 51,423 38,889 34,502
Depreciation and amortization expense.......................... 60,301 45,246 44,541
Other non-cash charges (credits), net.......................... 605 (194) 628
------------- ------------- -------------
Adjusted EBITDA.................................................... $ 113,561 $ 84,796 $ 91,791
============= ============= =============
Adjusted EBITDA for ratio measurement period....................... $ 113,561 $ 109,574 $ 120,557
============= ============= =============
Interest expense coverage ratio:
Actual ratio at period end..................................... 2.42x 2.28x 2.85x
Required ratio at period end................................... 1.80x 1.60x 1.80x
Minimum amount of Adjusted EBITDA to meet required ratio....... $ 84,625 $ 76,893 $ 76,018
Leverage ratio:
Actual ratio at period end..................................... 4.55x 4.66x 3.99x
Required ratio at period end................................... 4.65x 5.25x 4.65x
Minimum amount of Adjusted EBITDA to meet required ratio....... $ 111,192 $ 97,288 $ 103,558
The effects on Adjusted EBITDA of the restatement adjustments
(described in the notes to the unaudited consolidated financial statements) for
the three months ended September 30, 2002, and the nine months ended September
30, 2002 were decreases, relative to the amounts previously reported, of
$173,000, and $614,000, 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.
32
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 December 31, 2004. 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.
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 September 30, 2003 or for the nine months ended
September 30, 2003):
o The lessor's total capitalization of $67.0 million consisted of $64.6
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 nine months ended September 30, 2003, we recognized lease
rent expense under this master lease program of $4.3 million. Excluding
this rent expense, the eight leased sites generated income of $8.6
million for the nine months ended September 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 $3.8 million and $2.9 million,
respectively, for the nine months ended September 30, 2003.
33
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)................... $ 538.7 $ 0.9 $ 6.7 $ 114.6 $ 416.5
Operating leases(2)................. 182.5 4.4 36.3 68.7 73.1
Other long-term liabilities(3)...... 6.4 - 3.0 1.3 2.1
--------- -------- --------- --------- ---------
Total contractual cash obligations.. $ 727.6 $ 5.3 $ 46.0 $ 184.6 $ 491.7
========= ========= ========= ========= =========
(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 September 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 $5.4 million.
Our only commercial commitments of any significance are the $21.6
million of standby letters of credit we had outstanding as of September 30,
2003.
ENVIRONMENTAL MATTERS
We own and operate underground storage tanks and aboveground storage
tanks at company-operated sites and leased sites that must comply with
Environmental Laws. We have estimated the current ranges of remediation costs at
currently active sites and what we believe will be our ultimate share for those
costs and, as of September 30, 2003, we had a reserve of $5.2 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 $1.9 million in the remainder
of 2003; $1.8 million in 2004; $0.7 million in 2005; $0.3 million in 2006; $0.2
million in 2007 and $0.2 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.
In the quarter ended September 30, 2003, we recognized a charge of $1.3
million for future costs related to the remediation of a diesel fuel release at
our Harrisburg, PA site. This site had been under remediation by BP, pursuant to
the terms of our environmental agreement with BP, for a previous diesel fuel
release. We believed that the costs of remediating all of the conditions at the
site should be borne by BP pursuant to the environmental agreement. BP disagreed
and our dispute with BP was submitted to arbitration. In July 2003, the
arbitrator ruled that we are required to reimburse BP $0.8 million for a portion
of the remediation costs BP had already incurred and are responsible for the
future remediation activities at this site. In early November 2003, the
Pennsylvania Underground Storage Tank Insurance Fund ("USTIF") denied our claim
for reimbursement of our remediation costs related to this matter. We intend to
appeal this denial but cannot be assured of our success on appeal. Likewise, we
cannot be assured that our private insurance policies will provide for
reimbursement of our remediation costs. Accordingly, we have accrued our best
estimate of the future costs based on the data currently available to us. It is
reasonably possible that our estimate of the total future remediation costs will
change as we continue our investigation of the contamination of the site and the
remediation system BP has installed there. Further, future favorable
developments with respect to our appeal of USTIF's denial of our claim and/or
coverage by our private insurance could result in future reductions of our
environmental expense related to this matter. However, no assurance can be given
that we will be successful in pursuing either of these claims.
34
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." We must adopt this accounting guidance effective December
31, 2004. 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. We are also evaluating
whether FIN 46 will require consolidation of our franchisees, although we
currently believe we will not be required to do so.
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, for companies such as ours that do not have equity
securities traded on an exchange, for fiscal periods beginning after December
15, 2003. FAS 150 requires the balance of mandatorily redeemable stock be
presented as a liability instead of as an item between liabilities and equity.
FAS 150 also requires recognition as interest expense each quarter any dividends
paid with respect to the mandatorily redeemable shares and the change during
that quarter in the estimated amount of cash payments that would be necessary to
repurchase the mandatorily redeemable stock. We are currently evaluating the
effects of adopting FAS 150 given the specific circumstances of our redeemable
common stock. 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;
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.
35
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.
36
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 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. On August 14, 2003, we filed a current report on
Form 8-K that included the details of the restatement adjustments and the
restated financial statement amounts for the years ended December 31, 2000, 2001
and 2002. On August 29, 2003 we received a further comment letter from the SEC
requesting that we present our equity in the earnings of an affiliate outside of
income from operations. We have agreed to do so and have done so within the
financial statements included in this quarterly report. Currently, we are in the
process of preparing an amendment to our Form 10-K for 2002. 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
On August 14, 2003, we filed a Current Report on Form 8-K, disclosing
our intent to restate certain of our previously issued financial statements and
setting forth the details of the restatement adjustments and the financial
statement amounts that are expected to be restated.
37
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: November 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)
38