Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
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 March 15, 2004, there were outstanding 6,939,498 shares of 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.
INDEX
PART I
Item 1. Business................................................................. 2
Item 2. Properties............................................................... 15
Item 3. Legal Proceedings........................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders...................... 15
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters............. 15
Item 6. Selected Financial Data.................................................. 17
Item 7. Management's Discussion and Analysis..................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............... 36
Item 8. Financial Statements and Supplementary Data.............................. 37
Item 9. Changes in and Disagreements With Accountants............................ 78
Item 9A. Controls and Procedures.................................................. 78
PART III
Item 10. Our Directors and Executive Officers..................................... 78
Item 11. Executive Compensation................................................... 78
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 78
Item 13. Certain Relationships and Related Transactions........................... 78
Item 14. Principal Accounting Fees and Services................................... 78
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 79
SIGNATURES................................................................................. 81
1
PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. Our network is the largest, and only
nationwide, full-service travel center network in the United States. At December
31, 2003, our geographically diverse network consisted of 150 sites located in
41 states and the province of Ontario, Canada. In January 2003, we began
operating in Canada through the acquisition of a travel center located in
Woodstock, Ontario. Our operations are conducted through three distinct types of
travel centers:
- sites owned or leased and operated by us, which we refer to as
company-operated sites;
- sites owned by us and leased to independent lessee-franchisees, which
we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer to
as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system and in Canada, typically on 20- to 25-acre sites. 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
reduce the number of their suppliers by routing their trucks within our 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, which we refer to as quick service restaurants, or QSRs, travel and
convenience stores and other driver amenities.
The U.S. travel center and truck stop industry in which we operate consists
of travel centers, truck stops, diesel fuel outlets and similar facilities
designed to meet the needs of long-haul trucking fleets and their drivers,
independent truck drivers and general motorists. According to the National
Association of Truck Stop Operators, or "NATSO," the travel center and truck
stop industry is highly fragmented, with in excess of 3,000 travel centers and
truck stops located on or near interstate highways nationwide, of which we
consider approximately 500 to be full-service facilities. Further, only eight
chains in the United States have 25 or more travel center and truck stop
locations on the interstate highways, which we believe is the minimum number of
locations needed to provide even regional coverage to truck drivers and trucking
fleets.
HISTORY AND ORGANIZATION
We were formed in December 1992 by a group of institutional investors. We
were originally incorporated as National Auto/Truckstops Holdings Corporation
but changed our name to TravelCenters of America, Inc. in March 1997. We
primarily have created our network through the following series of acquisitions:
- In April 1993, we acquired the truckstop network assets of a
subsidiary of Unocal Corporation, which sites we refer to as the
"Unocal network." The Unocal network included a total of 139
facilities, of which 95 were leased sites, 42 were franchisee-owned
sites and two sites were company-operated sites.
2
- In December 1993, we acquired the truckstop network assets of
certain subsidiaries of The British Petroleum Company p.l.c., which
assets we refer to as the "BP network." The BP network included 38
company-operated sites and six franchisee-owned sites.
- In December 1998, we acquired substantially all of the truckstop
network assets of Burns Bros., Inc. and certain of its affiliates,
which assets we refer to as the Burns Bros. network. The Burns Bros.
network included 17 company-operated sites, located in nine western
and northwestern states.
- In June 1999, we acquired the travel center and truck stop network
assets of Travel Ports of America, Inc. through the acquisition of
100% of the stock of Travel Ports. The Travel Ports network
consisted of 16 company-operated sites in seven states, primarily in
the northeastern region of the United States.
Historically, until 1997, the Unocal network operated principally as a
fuel wholesaler and franchisor, with relatively few company-operated sites. In
contrast to the Unocal network, the BP network operated principally as an
owner-operator of travel centers. In January 1997, we instituted a plan to
combine the Unocal network and the BP network, which had been previously managed
and financed separately, into a single network to be operated under the
"TravelCenters of America" and "TA" brand names under the leadership of a single
management team. Prior to combining the Unocal and BP networks, the Unocal
network was operated through National Auto/Truckstops, Inc. and the BP network
was operated through TA Operating Corporation, each of National Auto/Truckstops,
Inc. and TA Operating Corporation being a wholly owned subsidiary of ours. At
the time we approved the plan to combine our networks, there were 122 sites
operating in the Unocal network and 49 sites operating in the BP network. In
November 2000, National Auto/Truckstops, Inc. merged with and into TA Operating
Corporation.
In July 1999, we signed an agreement with Freightliner LLC to become an
authorized provider of express service, minor repair work and a specified menu
of warranty repairs to Freightliner's customers through the Freightliner
ServicePoint Program. Under the agreement, our truck repair facilities have been
added to Freightliner's 24-hour customer assistance center database as a major
referral point for emergency and roadside repairs and also have access to
Freightliner's parts distribution, service and technical information systems.
Freightliner, a DaimlerChrysler company, is a leading manufacturer of heavy
trucks in North America. Freightliner also acquired a minority ownership
interest in us at that time.
On May 31, 2000, we and shareholders owning a majority of our voting stock
entered into a recapitalization agreement and plan of merger, as amended, with
TCA Acquisition Corporation, a newly created corporation formed by Oak Hill
Capital Partners, L.P. and its affiliates ("Oak Hill"), under which TCA
Acquisition Corporation agreed to merge with and into us. This merger was
completed on November 14, 2000. Concurrent with the closing of the merger, we
completed a series of transactions to effect a recapitalization and a
refinancing that included the following:
- TCA Acquisition Corporation issued 6,456,698 shares of common stock
to Oak Hill and a group of other institutional investors, which we
refer to as the Other Investors, for proceeds of $205.0 million and
then merged TCA Acquisition Corporation with and into us. At the
time of the merger, the Other Investors were Olympus Growth Fund
III, L.P., Olympus Executive Fund, L.P., Monitor Clipper Equity
Partners, L.P., Monitor Clipper Equity Partners (Foreign), L.P., UBS
Capital Americas II, LLC, Credit Suisse First Boston LFG Holdings
2000, L.P. and Credit Suisse First Boston Corporation, each of whom
is an affiliate of certain of our former shareholders. Since that
time, certain of these investors have sold their shares to other
investors, including affiliates of certain of the Other Investors.
Such sales of our shares are not frequent but could occur in the
future.
3
- We redeemed all shares of our common and preferred stock outstanding
prior to the closing of the merger, with the exception of 473,064
shares of common stock with a market value at that time of $15.0
million that were retained by continuing stockholders, and cancelled
all then outstanding common stock options and warrants, for cash
payments totaling $263.2 million.
- We repaid all amounts outstanding under our then existing debt
agreements.
- We borrowed $328.3 million under a secured credit agreement with a
group of lenders and issued units consisting of Senior Subordinated
Notes due 2009 with a face amount of $190.0 million and initial
warrants and contingent warrants that in the aggregate could be
exercised in exchange for 277,165 shares of our common stock.
- We merged National Auto/Truckstops, Inc. with and into TA Operating
Corporation.
Prior to the closing of the transactions described above, we issued
137,572 shares of common stock for cash proceeds of $3.7 million upon the
exercise of stock options held by existing shareholders, which shares remained
outstanding. After the transactions described above, Oak Hill owned 60.5% of our
outstanding common stock, the Other Investors owned, in the aggregate, 32.7% of
our outstanding common stock, Freightliner owned 4.3% of our outstanding common
stock and certain members of our management owned 2.5% of our outstanding common
stock. The total market value of our equity capitalization after these
transactions was $220.0 million.
At December 31, 2003, we had two wholly owned subsidiaries, TA Operating
Corporation, which is our primary travel center operating entity, and TA
Franchise Systems Inc, which maintains our franchise agreements and
relationships. TA Operating Corporation had the following direct or indirect
wholly owned subsidiaries:
- TA Licensing, Inc.
- TA Travel, L.L.C.
- TravelCenters Properties, L.P.
- TravelCenters Realty, L.L.C.
- 3073000 Nova Scotia Company
- TravelCentres Canada Inc.
- TravelCentres Canada Limited Partnership
NETWORK DEVELOPMENT
Due to historical competition between the Unocal and BP networks, there
were certain markets in which each of these networks had an existing site at the
time we instituted our plan to combine these two networks. Likewise, there was
competition in certain markets between our networks and the networks of Burns
Bros. and of Travel Ports. In addition, there were certain franchisee-owned
sites in the Unocal network that were not considered to be in strategic
locations. Further, there were, and continue to be, locations on the interstate
highway system that we consider to be strategic but in which we do not have an
adequate presence. As a result, since 1997 we have significantly reshaped the
composition of our network through the following:
- 17 company-operated sites were acquired from Burns Bros. in 1998;
- 16 company-operated sites in the Travel Ports network were acquired
in 1999;
- 46 leased sites were converted to company-operated sites, six during
2003, five during 2002, three during 2000, five during 1998 and 27
during 1997;
- one franchisee-owned site was converted to a company-operated site
during 2000;
4
- five new network sites were constructed, one in 2002, one in 2001,
one in 2000 and two in 1999;
- six sites were razed and rebuilt, two in 1999, two in 2000, one in
2001 and one in 2003;
- four company-operated sites were added to our network through
individual site acquisitions, two during 2003 and two during 2000;
- franchise agreements covering 28 franchisee-owned sites were
terminated, one in 2000 and 27 in 1997;
- 34 sites we owned were sold, three during 2003, three during 2002,
four during 2001, two during 2000, five during 1999, two during 1998
and 15 during 1997;
- three franchisee-owned sites were added to our network, one in 2002,
one in 1999 and one in 1998; and
- three company-operated sites were closed, one during 2003, and two
during 1999 (one was sold during 2002 and our selling efforts are
continuing for the other two).
In 1997, we initiated a capital program to upgrade, rebrand and re-image
our travel centers and to build new travel centers. This capital program was
substantially completed during 2002. Under this capital program, as revised as a
result of the Burns Bros. acquisition and the Travel Ports acquisition, we
invested approximately $465 million in our sites by the end of 2003. Through
December 31, 2003, we had completed full re-image projects at 38 of our sites at
an average investment of $2.2 million per site. These full re-image projects
typically include expanding the square footage of the travel and convenience
store, adding a fast food court with two or three QSRs, upgrading showers and
restrooms and updating the full-service restaurant. We also had completed
smaller scale re-image projects at another 57 sites at an average cost of $0.3
million. In addition to improving our existing sites, we have identified several
new interstate areas available for our network's expansion. We have designed a
"protoype" facility and a smaller "protolite" facility to standardize our travel
centers and expand our brand name into new geographic markets while also
increasing our appeal to motorists. The prototype and protolite designs combine
an improved and efficient facility layout with nationally branded QSRs and
gasoline brands as well as expanded product and service offerings. Since May
1999, we have completed construction of eight prototype facilities and three
protolite facilities. Further, we are currently developing one prototype
facility and one protolite facility, each of which we expect to open during
2005. Most of our future expansion will be with the protolite format, which
requires significantly less land and capital investment than the prototype
design and enables us to quickly and cost efficiently gain a presence in smaller
markets. We also intend to pursue strategic acquisitions and additional
franchisee-owned sites. Our franchisees will also continue to invest additional
amounts of their own capital for reimaging and other projects at the sites they
operate.
REFINANCING
As part of the transactions we completed to consummate our merger
with TCA Acquisition Corporation and the related recapitalization, we completed
a refinancing of our indebtedness, which refinancing transactions we refer to as
the "2000 Refinancing." In the 2000 Refinancing, we issued $190 million of
senior subordinated notes due 2009 and borrowed $328.3 million under our amended
and restated senior credit facility that consists of a fully-drawn $328 million
term loan facility and a $100 million revolving credit facility. The proceeds
from these borrowings, along with proceeds from the issuance of common stock and
other cash on hand, were used to:
- pay for the tender offer and consent solicitation for our 10 1/4%
Senior Subordinated Notes due 2007, including accrued interest,
premiums and a prepayment penalty;
- repay all amounts, including accrued interest, then outstanding
under our existing amended and restated credit agreement;
- redeem in full all of our then existing senior secured notes and pay
related accrued interest and prepayment penalties;
5
- make cash payments to certain of our then current equity owners,
whose shares and unexercised stock options and warrants were
redeemed and cancelled pursuant to the recapitalization agreement
and plan of merger; and
- pay fees and expenses related to the financings and the merger and
recapitalization transactions.
The $190 million of Senior Subordinated Notes were issued as part of units
that also included warrants exercisable for 277,165 shares of our common stock.
See "Liquidity and Capital Resources" in Item 7 for a further discussion of our
outstanding indebtedness.
OUR TRAVEL CENTERS
Our travel centers are designed to appeal to drivers seeking either a
quick stop or a more extended visit. Substantially all of our travel centers are
full-service facilities located on or near an interstate highway and offer fuel
and non-fuel products and services 24 hours per day, 365 days per year.
Property. The layouts of the travel centers we own vary from site to site.
The facilities we own are located on properties averaging 22 acres, of which an
average of approximately 19 acres are developed. The majority of the developed
acreage consists of truck and car fuel islands, separate truck and car paved
parking and the main building, which contains a full-service restaurant and one
or more QSRs, a travel and convenience store and driver amenities and a truck
maintenance and repair shop. The remaining developed acreage contains
landscaping and access roads.
Product and Service Offerings. We have developed an extensive and diverse
offering of products and services to complement our diesel fuel business, which
includes:
- Gasoline. We sell nationally recognized branded gasoline,
consistently offering one of the top three gasoline brands in each
geographic region. Of our 126 company-operated sites as of December
31, 2003, we offered branded gasoline at 98 sites and unbranded
gasoline at 17 sites. Eleven company-operated sites do not sell
gasoline.
- Full-Service and Fast Food Restaurants. Most of our travel centers
have both full-service restaurants and QSRs that offer customers a
wide variety of nationally recognized brand names and food choices.
Our full-service restaurants, branded under our "Country Pride,"
"Buckhorn Family Restaurants" and "Fork in the Road" proprietary
brands, offer "home style" meals through menu table service and
buffets. We also offer nationally branded QSRs such as Arby's,
Burger King, Pizza Hut, Popeye's Chicken & Biscuits, Sbarro,
Starbuck's Coffee, Subway, Taco Bell and 13 other brands. We
generally attempt to locate QSRs within the main travel center
building, as opposed to constructing stand-alone buildings. As of
December 31, 2003, we had 154 QSRs in our company-operated sites,
and 96 of our network travel centers offered at least one branded
QSR.
- Truck Repair and Maintenance Shops. All but eight of our network
travel centers have truck repair and maintenance shops. The typical
repair shop has between two and four service bays, a parts storage
room and trained mechanics on duty at all times. These shops, which
generally operate 24 hours per day, 365 days per year, offer
extensive maintenance and emergency repair and road services,
ranging from basic services such as oil changes and tire repair to
specialty services such as diagnostics and repair of air
conditioning, air brake and electrical systems. Our work is backed
by a warranty honored at all of our repair and maintenance
facilities. As of December 31, 2003, all but two of our network
sites that have truck repair and maintenance shops were
participating in the Freightliner ServicePoint Program.
- Travel and Convenience Stores. Each travel center has a travel and
convenience store that caters to truck drivers, motorists,
recreational vehicle operators and bus drivers and passengers. Each
travel and
6
convenience store has a selection of over 4,000 items, including
food and snack items, beverages, non-prescription drug and beauty
aids, batteries, automobile accessories, and music and video
products. In addition to complete travel and convenience store
offerings, the stores sell items specifically designed for the truck
driver's on-the-road lifestyle, including laundry supplies and
clothing as well as truck accessories. Most stores also have a "to
go" snack bar installed as an additional food offering.
- Additional Driver Services. We believe that fleets can improve the
retention and recruitment of truck drivers by directing them to
visit high-quality, full-service travel centers. We strive to
provide a consistently high level of service and amenities to
drivers at all of our travel centers, making our network an
attractive choice for trucking fleets. Most of our travel centers
provide truck drivers with access to specialized business services,
including an information center where drivers can send and receive
faxes, overnight mail and other communications and a banking desk
where drivers can cash checks and receive fund transfers from fleet
operators. Most sites have installed telephone rooms with 15 to 20
pay telephones. The typical travel center also has a video game room
and designated "truck driver only" areas, including a television
room with a VCR and comfortable seating for drivers, a laundry area
with washers and dryers and an average of six to 12 private showers.
Additionally, we offer truck drivers a loyal fueler program, which
we call the RoadKing Club, that is similar to the frequent flyer
programs offered by airlines. Drivers receive a point for each
gallon of diesel fuel purchased and can redeem their points for
discounts on non-fuel products and services at any of our travel
centers.
- Motels. Twenty of our company-operated travel centers offer motels,
with an average capacity of 40 rooms. Seventeen of these motels are
operated under franchise grants from nationally branded motel
chains, including Days Inn, HoJo Inn, Super 8, Rodeway and
Travelodge.
OPERATIONS
Fuel Supply. We purchase diesel fuel from various suppliers at rates that
fluctuate with market prices and generally are reset daily, and resell fuel to
our customers at prices that we establish daily. By establishing supply
relationships with an average of four to five alternate suppliers per location,
we have been able to effectively create competition for our purchases among
various diesel fuel suppliers on a daily basis. We believe that this positioning
with our suppliers will help our sites avoid product outages during times of
diesel fuel supply disruptions. We have a single source of supply for gasoline
at most of our sites that offer branded gasoline. Sites selling unbranded
gasoline do not have exclusive supply arrangements.
Other than pipeline tenders, fuel purchases made by us are delivered
directly from suppliers' terminals to our travel centers. We do not contract to
purchase substantial quantities of fuel for our inventory and are therefore
susceptible to price increases and interruptions in supply. We hold less than
three days of diesel fuel inventory at our sites. We use pipeline tenders and
leased terminal space to mitigate the risk of supply disruptions. The
susceptibility to market price increases for diesel fuel is substantially
mitigated by the significant percentage of our total diesel fuel sales volume
that is sold under pricing formulae that are indexed to market prices, which
reset daily. We do not engage in any fixed-price contracts with customers. We
may engage, from time to time, in a minimal level of hedging of our fuel
purchases with futures and other derivative instruments that primarily are
traded on the New York Mercantile Exchange.
The Environmental Protection Agency has promulgated regulations to
decrease the sulfur content of diesel fuel by 2006. The enactment of these
regulations could reduce the supply and/or increase the cost of diesel fuel. A
material decrease in the volume of diesel fuel sold for an extended period of
time or instability in the prices of diesel fuel could have a material adverse
effect on us.
Non-fuel products supply. There are many sources for the large variety of
non-fuel products that we purchase and sell. We have developed strategic
relationships with several suppliers of key non-fuel products, including
Freightliner LLC for truck parts, Bridgestone/Firestone Tire Sales Company for
truck tires, and
7
ExxonMobil for Mobil brand lubricants and oils. We believe that our
relationships with these and our other suppliers are satisfactory and that
supply of the non-fuel products we require is adequate.
Centralized Purchasing and Distribution. We maintain a distribution and
warehouse center that services our network. The distribution center is located
near Nashville, Tennessee and has approximately 85,000 square feet of storage
space. Approximately every two weeks, the distribution center delivers products
to our network sites using a combination of contract carriers and our fleet of
trucks and trailers. In 2003, the distribution center shipped approximately
$47.1 million of products. We believe the distribution center provides us with
cost savings by using its consolidated purchasing power to negotiate volume
discounts with third-party suppliers. The distribution center is also able to
obtain further price reductions from suppliers in the form of reduced shipping
charges, as suppliers need only deliver their products to the distribution
center warehouse, as opposed to each site individually.
COMPETITION
The U.S. travel center and truck stop industry in which we operate
consists of travel centers, truck stops, diesel fuel outlets and similar
facilities designed to meet the needs of long-haul trucking fleets and their
drivers, independent truck drivers and general motorists. The travel center and
truck stop industry is highly competitive and fragmented. According to NATSO,
there are in excess of 3,000 travel center and truck stops located on or near
highways nationwide, of which we consider approximately 500 to be full-service
facilities. Further, only eight chains in the United States have 25 or more
travel center and truck stop locations on the interstate highways, which we
believe is the minimum number of locations needed to provide even regional
coverage to truck drivers and trucking fleets. There are generally two types of
facilities designed to serve the trucking industry:
- full-service travel centers, such as those in our network, which
offer a broad range of products and services to long-haul trucking
fleets and their drivers, independent truck drivers and general
motorists, such as diesel fuel and gasoline; full-service and fast
food dining; truck repair and maintenance; travel and convenience
stores; secure parking areas and other driver amenities; and,
- pumper-only truck stops, which provide diesel fuel, typically at
discounted prices, with a more limited mix of additional services
than a full-service travel center.
Fuel and non-fuel products and services can be obtained by long-haul truck
drivers from a wide variety of sources other than us, including regional
full-service travel center and pumper-only truck stop chains, independently
owned and operated truck stops, some large service stations and fleet-operated
fueling terminals.
We believe that we experience substantial competition from pumper-only
truck stop chains and that this competition is based principally on diesel fuel
prices. In the pumper-only truck stop segment, the largest networks, based on
the number of facilities, are Pilot Travel Centers LLC, with approximately 270
sites, Flying J Inc., with approximately 157 sites, and Love's Travel Stops &
Country Stores, Inc., with approximately 96 sites. We experience additional
substantial competition from major full-service travel center networks and
independent chains, which is based principally on diesel fuel prices, non-fuel
product and service offerings and customer service. In the full-service travel
center segment, the only large network, other than ours, is operated by Petro
Stopping Centers, L.P., with approximately 60 sites. Our truck repair and
maintenance shops compete with regional full-service travel center and truck
stop chains, full-service independently owned and operated truck stops, fleet
maintenance terminals, independent garages, truck dealerships and auto parts
service centers. We also compete with a variety of establishments located within
walking distance of our travel centers, including full-service restaurants,
QSRs, electronics stores, drugstores and travel and convenience stores.
A significant portion of all intercity diesel fuel consumption by trucking
fleets and companies with their own trucking capability occurs through
self-fueling at both dedicated terminals and at fuel depots strategically
located across the country. These terminals often provide facilities for truck
repair and maintenance. Our pricing decisions for diesel fuel and truck repair
and maintenance services cannot be made without considering the existence of
these operations and their capacity for expansion. We believe that a long-term
trucking industry trend has been to
8
reduce the use of these terminals and to outsource fuel, repair and maintenance
services to maximize the benefits of competitive fuel pricing, superior driver
amenities and reduced environmental compliance expenditures. However, during the
past few years of a struggling United States economy and historically high fuel
prices, this long-term trend has been somewhat slowed, at least temporarily, as
trucking fleets have utilized their existing terminals to supply an increased
level of their fuel and repair service needs.
A potential additional source of competition in the future could result
from the possible commercialization of state-owned interstate rest areas.
Historically, these rest areas have been precluded from offering for sale fuel
and non-fuel products and services similar to that of a travel center. State
governments that want to earn additional revenues from these rest areas have
repeatedly requested that the federal government allow for commercialization.
Past attempts for such commercialization historically have been successfully
opposed by a group of opponents that includes NATSO, fast food restaurant
operators and others. If commercialized, these rest areas will increase the
number of outlets competing with us for the business of highway travelers. It is
possible we may have an opportunity to play a role in these commercialization
efforts, which would reduce any negative effects of such commercialization on
our travel center business. As of early 2004, language in the pending highway
reauthorization bill clearly sets forth a continued ban on commercialization of
state-owned interstate rest areas.
RELATIONSHIPS WITH THE OPERATORS AND FRANCHISEE-OWNERS
TA Licensing, Inc., a wholly owned subsidiary of TA Operating Corporation,
licenses its trademarks to TA Operating Corporation and TA Franchise Systems. We
enter into franchise agreements with operators and franchisee-owners of travel
centers through TA Franchise Systems, and TA Franchise Systems collects
franchise fees and royalties under these agreements. TA Franchise System's
assets consist primarily of the rights under the original franchise agreements,
the network franchise agreements and its trademark license from TA Licensing. TA
Franchise Systems has no tangible assets.
Network Franchise Agreement
As of December 31, 2003, there were 17 sites operating under network
franchise agreements. The more significant provisions of the network franchise
agreement are described in the following paragraphs.
Initial Franchise Fee. The initial franchise fee for a new franchise is
$100,000.
Term of Agreement. The initial term of the network franchise agreement is
ten years. The network franchise agreement provides for two five-year renewals
on the terms being offered to prospective franchisees at the time of the
franchisee's renewal. We reserve the right to decline renewal under certain
circumstances or if specified terms and conditions are not satisfied by the
franchisee. The average remaining term of these agreements, including all
renewal periods, is approximately 19 years. The initial terms of the current
network franchise agreements expire in July 2012 through July 2013.
Protected Territory. Subject to specified exceptions, including existing
operations, so long as the franchisee is not in default under the network
franchise agreement, we agree not to operate, or allow another person to
operate, a travel center or travel center business that uses the "TA" brand,
within 75 miles in either direction along the primary interstate on which the
franchised site is located.
Restrictive Covenants. Except for the continued operation of specified
businesses identified by the franchisee at the time of execution of the network
franchise agreement, the franchisee cannot, during the term of the agreement,
operate any travel center or truck stop-related business under a franchise
agreement, licensing agreement or marketing plan or system of its own or another
person or entity. If the franchisee owns the franchised premises, the franchisee
may continue to operate a travel center at the franchised premises after
termination of the franchise agreement, but if the termination is for any reason
other than a default by TA Franchise System, the franchisee is restricted for a
two-year period from re-branding the facility with any other truck stop or
travel center company or other organization offering similar services and/or
fleet billing services.
9
Royalty Payments. Franchisees are required to pay us a continuing services
and royalty fee generally equal to 3.75% of all non-fuel revenues. If branded
fast food is sold from the franchised premises, the franchisee must pay us 3% of
all net revenues earned directly or indirectly in connection with those sales
after deduction of royalties paid to the fast food franchisor.
Advertising, Promotion and Image Enhancement. The network franchise
agreement requires the franchisees to contribute 0.6% of their non-fuel revenues
and net revenues from fast food sales to partially fund system-wide advertising,
marketing and promotional expenses we incur. We are required to match the
amounts of the franchisees' contributions.
Fuel Purchases and Sales. Under the network franchise agreement for those
franchisees operating leased sites, we agree to sell to franchisees, and
franchisees agree to buy from us, 100% of their requirements of diesel fuel.
Those franchisees operating franchisee-owned sites are not required to purchase
their diesel fuel from us. The franchisee agrees to purchase gasoline from only
those suppliers that we approve in writing. The franchisee generally must pay a
$0.03 per gallon royalty fee to us on all gallons of gasoline sold.
Non-fuel Product Offerings. Franchisees are required to operate their
sites in conformity with guidelines that we establish and offer any products and
services that we deem integral to the network.
Termination/Nonrenewal. We may terminate the network franchise agreement
for the following reasons, among others:
- the default of the franchisee;
- our withdrawal from the marketing of motor fuel in the state, county
or parish where the franchise is located; or
- the default or termination of the lease.
The foregoing reasons also constitute grounds for nonrenewal of the
network franchise agreement. In addition, we can decline to renew the network
franchise agreement for the following reasons, among others:
- we and the operator fail to agree to changes or additions to the
network franchise agreement;
- we make a good faith determination not to renew the network
franchise agreement because it would be uneconomical to us; or
- if we own the franchise premises, we make a good faith determination
to sell the premises or convert it to a use other than for a truck
stop or travel center.
If we do not renew the network franchise agreement due to any of the three
foregoing reasons, we may not enter into another network franchise agreement
relating to the same franchised premises with another party within 180 days of
the expiration date on terms materially different from those offered to the
prior franchisee, unless the prior franchisee is offered the right, for a period
of 30 days, to accept a renewal of the network franchise agreement on those
different terms. If we do not renew the network franchise agreement because we
make a good faith determination to withdraw from the marketing of fuel in the
area of the franchised premises, we may not sell the franchised premises or
franchised business for 90 days following the expiration of the network
franchise agreement. The prior franchisee does not have a right of first refusal
on the sale of the franchised premises.
10
Network Lease Agreement
In addition to franchise fees, we also collect rent from those franchisees
that operate a travel center owned by us. As of December 31, 2003, there were 14
leased sites. Each operator of a leased site that enters into a network
franchise agreement also must enter into a network lease agreement. The more
significant provisions of the network lease agreement are described in the
following paragraphs.
Term of Agreement. The lease agreements we have with our franchisees have
a term of ten years and allow for two renewals of five years each. We reserve
the right to decline renewal under certain circumstances or if specified terms
and conditions are not satisfied by the operator. The average remaining term of
these agreements, including all renewal periods, is approximately 19 years. The
initial terms of the current network lease agreements expire in July 2012
through December 2012.
Rent. Under the network lease, an operator must pay annual fixed rent
equal to the sum of
- base rent agreed upon by the operator and us, plus
- improvement rent, if any, which is defined as an amount equal to 14%
of the cost of all capital improvements we fund that we and the
operator mutually agree will enhance the value of the leased
premises and which cost in excess of $2,500, plus
- an annual inflator equal to the percentage increase in the consumer
price index.
The base rent will not be increased by the improvement rent if the operator
elects to pay for the capital improvements. If we and the operator agree upon an
amortization schedule for a capital improvement funded by the operator, we will,
upon termination of the network lease, reimburse the operator for an amount
equal to the unamortized portion of the cost of the capital improvement. The
operator is responsible for the payment of all charges and expenses in
connection with the operation of the leased sites, including environmental
registration fees and certain maintenance costs.
Use of the Leased Site. The operator must operate the leased site as a
travel center in compliance with all laws, including all environmental laws. The
operator must submit to quality inspections that we request and appoint a
manager that we approve, who is responsible for the day-to-day operations at the
leased site.
Termination/Nonrenewal/Transferability/Right of First Refusal. The network
lease agreement contains terms and provisions regarding termination, nonrenewal,
transferability and our right of first refusal which are substantially the same
as the terms and provisions of the network franchise agreement.
Original Franchise Agreement with BP Network Independent Franchisees
There are seven sites that continue to operate under the franchise
agreements they had with TA Franchise Systems prior to the network franchise
agreement being revised to its current form in 2002. The terms of these
franchise agreements are generally the same as the network franchise agreement,
but they do not require the franchises to purchase their diesel fuel from us and
their provisions vary. At the expiration of these agreements, the respective
franchisees may be offered an option to renew their franchises under a form of
our then-current franchise agreement for franchisee-owned sites.
Term of Agreement. In general, the initial terms of the original franchise
agreements are 10 years. The original franchise agreements provide for one or
two renewals for an aggregate of 10 years. The original franchise agreements
offer no assurance that the terms of the renewal will be the same as those of
the initial franchise agreements. We may decline renewal under some
circumstances or if specified terms and conditions are not satisfied by the
franchisee. The average remaining term of these agreements is approximately five
years.
11
Protected Territory. So long as the franchisee is not in default under the
franchise agreement, we agree not to operate, or allow another person to
operate, a travel center or travel center business that uses the "TA" brand,
within a specified area in either direction along one or more interstates at
which the franchised site is located.
Restrictive Covenants. Although the restrictive covenants in the original
franchise agreements may vary slightly from franchise to franchise, each
franchisee is subject to restrictions that prohibit two or more of the following
during the term of the franchise agreement and for two years after its
expiration:
- operation of any other truck stop or travel center within its
protected territory;
- operation of the franchise location under any national brand other
than "TA";
- operation of the branded facility within a certain distance of any
other TA facility; and
- operation of any competitive business or a business that trades upon
the franchise within the area adjacent to the franchise location.
Royalty Payments. In general, we require franchisees to pay us a
continuing services and royalty fee generally equal to 4% of all revenues earned
directly or indirectly by the franchisee from any business conducted at or from
the franchised premises, excluding fuel sales and sales of branded fast food. As
part of the royalty fee, we generally require the franchisee to pay us $0.004
per gallon on all sales of qualified diesel fuel.
Advertising, Promotion and Image Enhancement. The network franchise
agreement requires the franchisees to contribute 0.25% of all revenues,
including revenues from fuel and fast food sales, to partially fund system-wide
advertising, marketing and promotional expenses we incur, and mandates certain
minimum franchisee expenditures on advertising. We are required to match the
amounts of the franchisees' contributions towards the system-wide expenses.
Fuel Purchases and Sales. We do not require franchisees to purchase
gasoline or diesel fuel from us. However, we charge royalty fees generally on
diesel fuel sales as described above.
Non-fuel Product Offerings. Franchisees are required to operate their
travel centers in conformity with our guidelines, participate in and comply with
all programs that we prescribe as mandatory and offer any products and services
we deem integral to the network.
Termination of an Original Franchise Agreement. We may terminate the
franchise agreement upon the occurrence of certain defaults, upon notice and
without affording the franchisee an opportunity to cure the defaults. When other
defaults occur, we may terminate the franchise agreement if, after receipt of a
notice of default, the franchisee has not cured the default within the
applicable cure period. The franchisee may terminate the franchise agreement
upon thirty days notice, if we are in material default under the franchise
agreement and we fail to cure or attempt to cure the default within a reasonable
period after notification.
REGULATION
Franchise Regulation. State franchise laws apply to TA Franchise Systems,
and some of these laws require TA Franchise Systems to register with the state
before it may offer a franchise, require TA Franchise Systems to deliver
specified disclosure documentation to potential franchisees, and impose special
regulations upon petroleum franchises. Some state franchise laws also impose
restrictions on TA Franchise Systems' ability to terminate or not to renew its
respective franchises, and impose other limitations on the terms of the
franchise relationship or the conduct of the franchisor. Finally, a number of
states include, within the scope of their petroleum franchising statutes,
prohibitions against price discrimination and other allegedly anticompetitive
conduct. These provisions supplement applicable antitrust laws at the federal
and state levels.
12
The Federal Trade Commission, or the FTC, regulates us under their rule
entitled "Disclosure Requirements and Prohibitions Concerning Franchising and
Business Opportunity Ventures." Under this rule, the FTC requires that
franchisors make extensive disclosure to prospective franchisees but does not
require registration. We believe that we are in compliance with this rule.
We cannot predict the effect of any future federal, state or local
legislation or regulation on our franchising operations.
Environmental Regulation. Our operations and properties are extensively
regulated by Environmental Laws that:
- govern operations that may have adverse environmental effects, such
as discharges to air, soil and water, as well as the management of
Hazardous Substances or
- 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. These tanks 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. At
some locations, we must also comply with Environmental Laws relating to vapor
recovery and discharges to water. We have completed necessary upgrades to
underground storage tanks to comply with federal regulations that took effect on
December 22, 1998, and believe that all of our travel centers are in material
compliance with applicable requirements of Environmental Laws.
We have received notices of alleged violations of Environmental Laws, or
are otherwise aware of the need to undertake corrective actions to comply with
Environmental Laws, at travel centers owned by us in a number of jurisdictions.
We do not expect that any financial penalties associated with these alleged
violations, or instances of noncompliance, 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 acquisition of the BP network and also regarding
historical contamination at certain of the former Unocal, Burns Bros. and Travel
Ports facilities. While we cannot precisely estimate the ultimate costs we will
incur in connection with the investigation and remediation of these properties,
based on our current knowledge, we do not expect that the costs to be incurred
at these properties, individually or in the aggregate, will be material to our
results of operations or financial condition. While the matters discussed above
are, to the best of our knowledge, the only proceedings for which we are
currently exposed to potential liability, we cannot assure you that additional
contamination does not exist at these or additional network properties, or that
material liability will not be imposed on us 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 December 31, 2003, we had a reserve for
those matters of $4.6 million. In addition, we have obtained environmental
insurance of up to $35.0 million for unanticipated costs regarding certain known
environmental liabilities and for up to $40.0 million regarding certain unknown
environmental liabilities.
As part of the acquisition of the Unocal network, Phase I environmental
assessments were conducted at the 97 Unocal network properties purchased by us.
Under an environmental indemnification agreement with Unocal, Phase II
environmental assessments of all Unocal network properties were completed by
Unocal by December 31, 1998. Under the terms of this environmental agreement,
Unocal was responsible for all costs incurred for:
- remediation of environmental contamination, and
- otherwise bringing the properties into compliance with Environmental
Laws as in effect at the date of the acquisition of the Unocal
network,
13
with respect to the matters identified in the Phase I or Phase II environmental
assessments, which matters existed on or prior to the date of the acquisition of
the Unocal network. Under the terms of this agreement, Unocal also was required
to indemnify us against any other environmental liabilities that arise out of
conditions at, or ownership or operations of, the Unocal network prior to the
date of the acquisition of the Unocal network. In January 2004, a Buy-Out
Agreement between Unocal and us became effective and Unocal's obligations to us
under the April 1993 environmental agreement were terminated. In consideration
for releasing Unocal from its obligations under the environmental agreement,
Unocal paid us $2.6 million of cash, funded an escrow account with $5.4 million
to be drawn by us as we incur related remediation costs, and purchased insurance
policies that cap our total future expenditures and provide protection against
significant unidentified matters that existed prior to April 1993. We are now
responsible for all remediation at the former Unocal sites that we still own. We
estimate the costs of the remediation activities for which we assumed
responsibility from Unocal in January 2004 to be approximately $8.2, which
amount we expect will be fully covered by the cash received from Unocal and
reimbursements from state tank funds. The liability we assumed was recorded in
2004. We estimate that the cash outlays related to the matters for which we
assumed responsibility in January 2004 will be approximately $1.1 million in
2004; $2.2 million in 2005; $1.5 million in 2006; $1.2 million in 2007; $0.9
million in 2008 and $1.3 million thereafter. These estimated future cash
disbursements are subject to change based on, among other things, changes in the
underlying remediation activities and changes in the regulatory environment. We
have just recently assumed responsibility for these matters and expect that our
knowledge of the specific facts, related costs and timing of payments for each
site will improve over time.
Prior to the acquisition of the BP network, all of the 38 company-owned
locations purchased by us were subject to Phase I and Phase II environmental
assessments, undertaken at BP's expense. The environmental agreement with BP
provides that, with respect to environmental contamination or non-compliance
with Environmental Laws identified in the Phase I or Phase II environmental
assessments, BP is responsible for:
- all costs incurred for remediation of the environmental
contamination, and
- for otherwise bringing the properties into compliance with
Environmental Laws as in effect at the date of the acquisition of
the BP network.
The remediation must achieve compliance with the Environmental Laws in
effect on the date the remedial action is completed. The environmental agreement
with BP requires BP to indemnify us against any other environmental liabilities
that arise out of conditions at, or ownership or operations of, the BP network
locations prior to the date of the acquisition of the BP network. We must make
claims for indemnification before December 11, 2004. BP must also indemnify us
for liabilities relating to non-compliance with Environmental Laws for which
claims were made before December 11, 1996. Except as described above, BP does
not have any responsibility for any environmental liabilities arising out of the
ownership or operations of the BP network after the date of the acquisition of
the BP network. We cannot be certain that BP, if additional environmental claims
or liabilities were to arise under the environmental agreement, would not
dispute our claims for indemnification.
As part of the Burns Bros. acquisition, Phase I environmental assessments
were conducted on all 17 sites acquired. Based on the results of those
assessments, Phase II environmental assessments were conducted on nine of the
sites. The purchase price paid to Burns Bros. was adjusted based on the findings
of the Phase I and Phase II environmental assessments. Under the asset purchase
agreement with Burns Bros., we released Burns Bros. from any environmental
liabilities that may have existed as of the Burns Bros. acquisition date, other
than specified non-waived environmental claims as described in the agreement
with Burns Bros.
As part of the Travel Ports acquisition, Phase I environmental assessments
were conducted on all 16 sites acquired. Based on the results of those
assessments, Phase II environmental assessments were conducted on five of these
sites. The results of these assessments were taken into account in recognizing
the related environmental contingency accrual for purchase accounting purposes.
14
EMPLOYEES
As of December 31, 2003, we employed approximately 10,500 people on a
full- or part-time basis. Of this total, approximately 10,110 were employees at
our company-operated sites, approximately 340 performed managerial, operational
or support services at our headquarters or elsewhere and approximately 50
employees staffed the distribution center. All but nine of our employees are
non-union. We believe that our relationship with our employees is satisfactory.
ITEM 2. PROPERTIES
Our principal executive offices are leased and are located at 24601 Center
Ridge Road, Suite 200, Westlake, Ohio 44145-5639. Our distribution center is a
leased facility located at 1450 Gould Boulevard, LaVergne, Tennessee 37086-3535.
Of our 140 owned sites in operation as of December 31, 2003, the land and
improvements at 13 are leased, the improvements but not the land at eight are
leased, four are subject to ground leases of the entire site and seven are
subject to ground leases of portions of these sites. We consider our facilities
suitable and adequate for the purposes for which they are used. In addition to
these 140 sites, we own two sites that will be developed as travel centers and
two sites that are closed and held for sale.
ITEM 3. 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 we are currently not involved in
any litigation, individually or in the aggregate, which could have a material
adverse effect on our business, financial condition, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market information. 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.
Holders. As of December 31, 2003, the outstanding shares of our common
stock were held of record by 37 stockholders.
Dividends. We have never paid or declared any cash dividends on our common
stock, and we do not anticipate paying any cash dividends in the foreseeable
future. We intend to retain our future earnings, if any, to fund the development
and growth of our business. Our future decisions concerning the payment of
dividends on the common stock will depend upon our results of operations,
financial condition and capital expenditure plans, as well as other factors as
the board of directors, in its sole discretion, may consider relevant. In
addition, our existing indebtedness restricts, and we anticipate our future
indebtedness may restrict, our ability to pay dividends.
15
Recent sales of unregistered securities. During 2001, 2002 and 2003, we
sold or issued the unregistered securities described below. None of the
following transactions involved any public offering. All sales were made in
reliance on Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), Rule 701 promulgated under the Securities Act and/or
Regulation D promulgated under the Securities Act. These sales were made without
general solicitation or advertising. The recipients in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to sell or for sale in connection with any distribution thereof.
(1) In a series of sales to management, we sold the following:
- In 2001, we sold 2,434 shares at $31.75 per share. The proceeds from
this sale were used for general corporate purposes.
- In 2002, we sold 7,302 shares at $31.75 per share. The proceeds from
these sales were used for general corporate purposes.
- In 2003, we sold 10,000 shares at $30.26 per share. These shares had
been purchased from the estate of a deceased former management
stockholder at this same price. The proceeds from these sales were
used to fund the related purchase.
Summary of Equity Compensation Plans. The following table sets forth
information about all our equity compensation plans in effect as of December 31,
2003, which consisted solely of the 2001 Stock Incentive Plan, which plan was
approved by our stockholders during 2001. All of our equity compensation plans
currently in effect have been approved by our stockholders.
Equity Compensation Plan Information
(C)
Number of
securities
remaining
(A) (B) available for
Number of Weighted- future issuance
securities to be average under equity
issued upon exercise price compensation
exercise of of outstanding plans (excluding
outstanding options securities
options, warrants warrants reflected in
Plan Category and rights and rights column (A))
------------- ---------- ---------- -----------
Equity compensation ..... 944,881 $31.75 --
plans approved by
stockholders
Equity compensation plans
not approved by
stockholders .......... -- -- --
------- ------ ----
Total ................... 944,811 $31.75 --
======= ====== ====
16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial data for each of the last five fiscal years. Such data should also be
read in conjunction with "Management's Discussion and Analysis" and our audited
consolidated financial statements included elsewhere in this annual report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999(1) 2000(2) 2001 2002(3) 2003
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT GALLONAGE AND SITE COUNT AMOUNTS)
INCOME STATEMENT DATA:
Revenues:
Fuel ............................. $ 955,105 $ 1,485,732 $ 1,331,807 $ 1,237,989 $ 1,513,648
Non-fuel ......................... 478,963 554,219 585,314 617,342 649,502
Rent and royalties ............... 20,460 18,822 17,491 15,539 13,080
----------- ----------- ----------- ----------- -----------
Total revenues .............. 1,454,528 2,058,773 1,934,612 1,870,870 2,176,230
Gross profit (excluding depreciation) .. 403,048 447,853 466,859 481,190 501,464
Income from operations ................. 37,964 (3,919) 39,949 51,937 59,977
Net income (loss) ...................... (653) (38,673) (10,054) 1,271 8,891
BALANCE SHEET DATA (END OF PERIOD):
Total assets ........................... $ 649,636 $ 736,301 $ 679,940 $ 660,767 $ 650,567
Long-term debt (net of unamortized
discount) ..................... 404,369 546,166 547,534 523,934 502,033
Mandatorily redeemable preferred
stock(4) ....................... 79,739 -- -- -- --
Working capital ........................ 35,447 38,093 27,366 19,354 19,630
OTHER FINANCIAL AND OPERATING DATA:
Total diesel fuel sold (in thousands of
gallons) ........................ 1,370,017 1,384,759 1,369,251 1,349,741 1,341,125
Capital expenditures, excluding business
acquisitions .................... $ 87,401 $ 68,107 $ 54,490 $ 42,640 $ 44,196
Cash flows (used in) provided by:
Operating activities ............. 44,648 65,106 30,381 75,574 77,324
Investing activities ............. (136,016) (77,115) (46,234) (42,110) (50,486)
Financing activities ............. 20,208 22,988 6,722 (39,305) (26,086)
Adjusted EBITDA(5) ..................... 100,712 102,755 105,189 113,561 121,921
NUMBER OF SITES (END OF PERIOD):
Company-operated sites ................. 118 122 119 122 126
Leased sites ........................... 29 26 25 20 14
Franchisee-owned sites ................. 11 9 9 10 10
----------- ----------- ----------- ----------- -----------
Total network sites .............. 158 157 153 152 150
=========== =========== =========== =========== ===========
17
Notes to Selected Financial Data
(1) Reflects the operating results of 16 sites we acquired as part of our
acquisition of Travel Ports on June 3, 1999, beginning on the acquisition
date.
(2) For the year ended December 31, 2000, income from operations was reduced
by $22,004,000 of merger and recapitalization expenses incurred in
connection with the transactions we completed to consummate our merger
with TCA Acquisition Corporation and related recapitalization and by
$20,910,000 of losses from the early extinguishment of debt related to the
recapitalization. Prior to 2003, the loss from the early extinguishment of
debt was classified, net of the related income tax benefits, as an
extraordinary loss in our statement of operations and comprehensive
income. Statement of Financial Accounting Standards No. 145, "Rescission
of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical
Corrections as of April 2002," which was issued in April 2002, required
the reclassification into income from operations of the amount previously
presented as an extraordinary loss.
(3) Beginning in 2002, as a result of adopting a new accounting pronouncement,
we ceased amortization of our goodwill and trademark intangible assets.
(4) "Mandatorily redeemable preferred stock" was comprised of two series of
convertible preferred stock that were redeemed as part of our merger and
recapitalization transactions in November 2000.
(5) Adjusted EBITDA, as used here, is based on the definition of "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 two key financial ratio covenants in
our debt agreements, the interest coverage ratio and the leverage ratio.
See further discussion of our debt covenant compliance and a
reconciliation of net income (loss) to Adjusted EBITDA in the "Liquidity
and Capital Resources" section of Management's Discussion and Analysis
under the heading "Adjusted EBITDA and Debt Covenant Compliance." 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. See further
discussion and disclosure concerning Adjusted EBITDA under the heading
"Adjusted EBITDA and Debt Covenant Compliance" in Item 7, Management's
Discussion and Analysis.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial position and results of
operations is based upon, and should be read in conjunction with, our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. Management believes the
critical accounting policies and areas that require the most significant
judgments and estimates to be used in the preparation of our consolidated
financial statements are the allowance for doubtful accounts, asset impairment,
environmental liabilities, income tax accounting, recognition of stock
compensation expense related to stock options and redeemable common stock held
by employees, and consolidation of special purpose entities.
Allowances for doubtful accounts and notes receivable are maintained based
on historical payment patterns, aging of accounts receivable, periodic review of
our customers' financial condition, and actual write-off history. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
We record impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying value of those assets, and when the carrying value of a long-lived
asset to be disposed of exceeds the estimated fair value of the asset less the
estimated cost to sell the asset. The net carrying value of assets not
recoverable is then reduced to fair value. Our estimated cash flows are based on
historical results adjusted to reflect the best estimate of future market and
operating conditions. The estimates of fair value represent the best estimate
based on industry trends and reference to market rates and transactions. If
these estimates or their underlying assumptions change in the future, we may be
required to record additional impairment charges for these assets or to reverse
previously recognized impairment charges.
For purposes of assessing our goodwill for impairment, we have determined
that we are one reporting unit and that the estimated fair value of that
reporting unit, based on a discounted cash flow analysis, exceeded its carrying
value. With respect to our trademark intangible assets, the estimated fair
value, based on a discounted cash flow analysis, exceeded the carrying value.
Accordingly, we have not recognized an impairment charge with respect to any of
our intangible assets. A number of assumptions and methods are used in preparing
the valuations underlying these impairment tests, including estimates of future
cash flows and discount rates. Applying significantly different assumptions or
valuation methods could result in different results of these impairment tests.
Similarly, defining the reporting unit differently could lead to a different
result for goodwill. Our goodwill and trademark intangible assets will be
assessed for impairment annually as of January 1 of each year.
We establish an environmental contingency reserve when the responsibility
to remediate is probable and the amount of associated costs is reasonably
determinable. The estimates of these costs are based on our best estimates of
our future obligations given current and pending laws and the currently
available facts concerning each environmental incident, as well as our estimate
of amounts recoverable under indemnification agreements and/or state or private
insurance plans. Should the actual costs to remediate an incident differ from
our estimates, or should new facts come to light or laws become enacted that
modify the scope of our remediation projects, revisions to the estimated
environmental contingency reserve would be required.
As part of the process of preparing our consolidated financial statements,
we are required to estimate income taxes in each of the jurisdictions in which
we operate. The process involves estimating actual current tax expense along
with assessing temporary differences resulting from differing treatment of items
for financial statement and tax purposes. These timing differences result in
deferred tax assets and liabilities, which are included
19
in our consolidated balance sheet. We are required to record a valuation
allowance to reduce our deferred tax assets if we are not able to conclude that
it is more likely than not they will be realized, although we have not to date
recognized such a valuation allowance as we believe realization of our deferred
tax assets is more likely than not. Increases in the valuation allowance would
result in additional expenses to be reflected within the tax provision in the
consolidated statement of operations. For further discussion regarding the
realization of our deferred tax assets, see the "Results of Operations - Income
Taxes" section of this "Management's Discussion and Analysis."
Certain members of our senior management have purchased shares of our
common stock pursuant to individual management subscription agreements. We have
the right to repurchase, and the employees have the right to require us to
repurchase, subject to certain limitations, at fair market value, these shares
of common stock upon termination of employment due to death, disability or a
scheduled retirement. These shares are classified as redeemable equity in our
consolidated balance sheet. Prior to an initial public offering of our common
stock, the fair market value is determined by a formula set forth in the
agreement that can be modified by the Board of Directors. At the point in time
that redemption of shares of redeemable common stock becomes probable, the fair
value of the shares will be accreted to their estimated redemption value by a
charge to nonredeemable stockholders' equity. Such a charge to nonredeemable
stockholders' equity will occur only if our value, and therefore the fair value
of our common stock, has increased. Our policy is to consider redemption of an
individual stockholder's shares probable at the time that the stockholder
provides notice of his or her intention to retire, dies or is declared disabled.
In addition to these redeemable shares of common stock purchased by management
employees, we have granted to certain of our executives non-qualified stock
options to purchase 944,881 shares of our common stock under a stock incentive
plan. Each option grant consists of 41.67% time options and 58.33% performance
options. Time options become exercisable with the passage of time, while
performance options become exercisable if certain investment return targets are
achieved. Time options generally vest 20% per year over a period of five years.
Performance options vest if Oak Hill achieves specified internal rates of return
on specified measurement dates. The time options are subject to fixed plan
accounting and, accordingly, no charge to earnings will be required with respect
to them since the exercise price equaled the fair value at the date of grant.
The performance options are subject to variable plan accounting and,
accordingly, a non-cash charge to earnings will be required when it becomes
probable that the performance triggers for such options will be achieved.
Because our common stock is privately held, determining its value is subject to
estimates and to factors, such as multiples being paid in the mergers and
acquisitions market at the time of the measurement and/or the state of the
capital markets at that time, that are not easily forecasted or controlled and
which may not have a direct relationship to our financial results or condition.
It is not possible to determine at this time, nor may it be possible until close
to the end of the five-year performance period, whether it will be probable that
we will achieve the performance triggers. It is not possible to predict whether
any such required non-cash charge will be material to our results for the period
in which the charge is recognized, as we expect that the performance triggers
can only be attained as a result of a significant increase in our results of
operations.
We have entered into lease transactions of travel centers with a special
purpose entity. These lease transactions are evaluated for lease classification
in accordance with Statement of Financial Accounting Standards (FAS) No. 13,
"Accounting for Leases." We do not consolidate the lessor entity so long as the
owners of the special purpose entity maintain a substantial residual equity
investment of at least three percent that is at risk during the entire term of
the lease, which has been the case to date. In December 2003, the FASB issued a
revised FASB Interpretation No. (FIN) 46R "Consolidation of Variable Interest
Entities." We must adopt this accounting guidance effective January 1, 2005.
Under FIN 46R, 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.
20
OVERVIEW
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. Our network is the largest, and only
nationwide, full-service travel center network in the United States. At December
31, 2003, our geographically diverse network consisted of 150 sites located in
41 states in the United States and in the province of Ontario, Canada. Our
operations are conducted through three distinct types of travel centers:
- sites owned or leased and operated by us, which we refer to as
company-operated sites;
- sites owned by us and leased to independent lessee-franchisees,
which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer
to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system and in Canada, typically on 20- to 25-acres sites. Most of our
network properties were developed more than 22 years ago when prime real estate
locations along the interstate highway system were more readily available than
they are today, making a network such as ours difficult to replicate. Operating
under the "TravelCenters of America" and "TA" brand names, our nationwide
network provides an advantage to long-haul trucking fleets by enabling them to
route their trucks within a single network from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, more than 20 different brands of fast food
restaurants, travel and convenience stores and other driver amenities.
The non-fuel products and services we offer to our customers complement
our fuel business and provide us a means to increase our revenues and gross
profit despite price pressure on fuel as a result of competition and volatile
crude oil and petroleum product prices. For the years ended December 31, 2001,
2002, and 2003, our revenues and gross profit were composed as follows:
YEAR ENDED
DECEMBER 31,
------------------------
2001 2002 2003
------ ------ ------
Revenues:
Fuel ........................................................ 68.8% 66.2% 69.5%
Non-fuel .................................................... 30.3% 33.0% 29.9%
Rent and royalties .......................................... 0.9% 0.8% 0.6%
----- ----- -----
Total revenues ...................................... 100.0% 100.0% 100.0%
===== ===== =====
Gross profit (excluding depreciation):
Fuel ........................................................ 22.1% 21.1% 20.9%
Non-fuel .................................................... 74.2% 75.7% 76.5%
Rent and royalties .......................................... 3.7% 3.2% 2.6%
----- ----- -----
Total gross profit (excluding depreciation) ......... 100.0% 100.0% 100.0%
===== ===== =====
21
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,
2000 through December 31, 2003:
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
----- ----- ----- -----
Number of sites at December 31, 2000(1) .. 122 26 9 157
2001 Activity:
Sales of sites ........................ (3) (1) -- (4)
---- --- -- ----
Number of sites at December 31, 2001 ..... 119 25 9 153
2002 Activity:
New Sites ............................. 1 -- 1 2
Sales of sites ........................ (3) -- -- (3)
Conversions of leased sites to company-
operated sites ..................... 5 (5) -- --
---- --- -- ----
Number of sites at December 31, 2002 ..... 122 20 10 152
---- --- -- ----
2003 Activity:
New sites ............................. 2 -- -- 2
Sales of sites ........................ (3) -- -- (3)
Closed sites .......................... (1) -- -- (1)
Conversions of leased sites to
company-operated sites ............. 6 (6) -- --
---- --- -- ----
Number of sites at December 31, 2003 ..... 126 14 10 150
==== === == ====
(1) Includes one company-operated site held for development until its
construction was completed during 2001.
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. Our consolidated revenues for the year ended December 31, 2003
were $2,176.2 million, which represents an increase from the year ended December
31, 2002 of $305.4 million, or 16.3%, that is primarily attributable to an
increase in fuel revenue. It is important to understand that fuel revenue, due
to the market pricing of these commodity products and the pricing arrangements
we have with our fuel customers, is not a reliable metric for analyzing our
relative results from period to period. Due to changes in crude oil and refined
products market prices, our fuel revenue balances may increase or decrease
significantly, in both absolute amounts and on a percentage basis, without a
comparable change in fuel sales volumes or in gross margin per gallon.
22
Fuel revenue for the year ended December 31, 2003 increased by $275.7
million, or 22.3%, as compared to the same period in 2002. The increase was
attributable principally to increases in diesel fuel and gasoline average
selling prices. Average diesel fuel and gasoline sales prices for the year ended
December 31, 2003 increased by 25.7% and 23.2%, respectively, as compared to the
same period in 2002, primarily reflecting increases in commodity prices. The
fuel revenue increase also resulted from an increase in our total fuel sales
volumes. Diesel fuel sales volumes decreased 8.6 million gallons, or 0.6%, while
gasoline sales volumes increased 30.5 million gallons, or 19.0%, as compared to
the same period in 2002. For the year ended December 31, 2003, we sold 1,341.1
million gallons of diesel fuel and 191.1 million gallons of gasoline, as
compared to 1,349.7 million gallons of diesel fuel and 160.6 million gallons of
gasoline for the year ended December 31, 2002. The diesel fuel sales volume
decrease resulted from a 4.6% decrease in same-site diesel fuel sales volumes,
partially offset by a net increase in sales volumes at company-operated sites we
added to or eliminated from our network during 2002 and 2003 of 24.0 million
gallons and an increase in our wholesale diesel fuel sales of 2.5 million
gallons, or 1.2%. The gasoline sales volume increase was primarily attributable
to a 9.3% increase in same-site gasoline sales volumes and also resulted from a
2.7 million gallon net increase in gasoline sales volume at company-operated
sites we added to or eliminated from our network during 2002 and 2003, as well
as an 11.6 million increase in wholesale gasoline sales volume. We believe the
same-site diesel fuel sales volume decrease resulted from a relatively flat
level of trucking activity in the United States in 2003 as compared to 2002, in
conjunction with an increase in the level of freight carried by train instead of
trucks 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 fuel 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 gasoline and QSR offering upgrades and additions under our
capital program, as well as our competitive retail gasoline pricing.
Non-fuel revenues for the year ended December 31, 2003 of $649.5 million
reflected an increase of $32.2 million, or 5.2%, from the same period in 2002.
The increase was primarily attributable to the net increase in sales at the
company-operated sites added to, or eliminated from, our network during 2002 and
2003, and also to an increase in non-fuel sales on a same-site basis of 2.3% for
the year ended December 31, 2003 versus the same period in 2002. We believe the
same-site increase reflected increased customer traffic resulting, in part, from
the significant capital improvements that we have made in the network under our
capital investment program to re-image, re-brand and upgrade our travel centers.
Rent and royalty revenues for the year ended December 31, 2003 reflected a
$2.5 million, or 15.8%, 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
2.5% increase in same-site royalty revenue that results from increased levels of
retail sales by our franchisees, and a 2.1% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the year ended
December 31, 2003 was $501.5 million, compared to $481.2 million for the same
period in 2002, an increase of $20.3 million, or 4.2%. The increase in our gross
profit was due to increased total fuel sales volumes, increased non-fuel sales,
increased average total fuel margin per gallon and higher non-fuel profit margin
percentage, partially offset by the decline in rent and royalty revenues. The
increase in average total fuel margin per gallon resulted from unusually high
margins in certain months in the first half of 2003 and is not indicative of an
expected trend. On the contrary, fuel margins declined in the second half of
2003 and we expect that trend to continue into 2004.
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 $9.8 million, or 3.0%, to $342.0
million for the year ended December 31, 2003 compared to $332.2 million for the
same period in 2002. This increase was attributable to an $8.8 million net
increase resulting from company-operated sites we added to our network or
eliminated from our network during 2002 and 2003, and a 1.2% increase in
operating expenses on a same-site basis. The increases in
23
operating expenses were partially offset by the recognition of a $3.75 million
cash receipt upon the settlement of a legal claim in the fourth quarter of 2003.
On a same-site basis, operating expenses as a percentage of non-fuel revenues
for the year ended December 31, 2003 were 52.5%, compared to 53.0% for the same
period in 2002, reflecting the results of our cost-control measures at our
sites.
Our selling, general and administrative expenses for the year ended
December 31, 2003 were $40.5 million, which reflected an increase of $2.7
million, or 7.2% from the same period in 2002. This increase is primarily
attributable to increased insurance premiums and increased legal and audit fees,
as well as higher personnel costs driven largely by increased benefit costs.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 2003 was $60.4 million, compared to
$60.3 million for the same period in 2002. This increase of $0.1 million, or
0.1%, was attributable to depreciation of an increased level of depreciable
assets as compared to 2002 and an increase of $0.4 million related to asset
retirement obligations, partially offset by a $1.2 million decrease in
amortization of intangible assets and a $0.6 million decrease in the amount of
impairment charges recognized in 2003 as compared to 2002.
Income from Operations. We generated income from operations of $60.0
million for the year ended December 31, 2003, compared to income from operations
of $51.9 million for the same period in 2002. This increase of $8.0 million, or
15.5%, was primarily attributable to the increase in gross profit that was
partially offset by the increase in operating expenses and selling, general and
administrative expenses. The $0.4 million increase in gains on sales of property
and equipment also contributed to the increase in operating income.
Interest and Other Financial Costs--Net. Interest and other financial
costs, net, for the year ended December 31, 2003 decreased by $4.5 million, or
8.8%, compared to 2002. This decrease resulted from the decline in interest
rates during 2002 and 2003 as well as from the decrease in our indebtedness.
Income Taxes. Our effective income tax rates for the years ended December
31, 2003 and 2002 were 34.0% and a 3.2% benefit, respectively. These rates
differed from the federal statutory rate due primarily to state income taxes and
nondeductible expenses, partially offset by the effect of certain tax credits.
The change between years in the effective tax rate was primarily the result of
the change from a relatively low level of pre-tax income earned in 2002, as well
as an adjustment in 2002 of estimated prior year tax liabilities, to a higher
level of taxable income in 2003. As a result of the relatively low level of
pre-tax earnings in 2002, permanent differences had a larger effect on the
effective rate in 2002 than in 2003. We have not recognized a valuation
allowance for our net deferred tax assets, as we believe we are more likely than
not to realize those assets. We need to generate $53.0 million of future taxable
income to fully realize our net deferred tax assets. The existing level of
pre-tax earnings generated in 2003 would be sufficient to generate enough future
taxable income to fully realize our net deferred tax assets. The following table
sets forth the historical relationship between pretax earnings for financial
reporting purposes and taxable income for income tax purposes.
YEAR ENDED DECEMBER 31,
-----------------------
2001 2002 2003
------ ------ ------
(IN MILLIONS OF DOLLARS)
Pretax earnings (loss) for financial
reporting purposes ........... $(17.6) $ 1.2 $13.5
State income tax expense ........... (1.6) (1.2) (1.1)
Accelerated tax depreciation ....... (11.4) (1.5) (5.3)
Benefit of tax credits ............. 0.9 0.6 0.6
Non-deductible expenses ............ 1.6 0.5 0.7
Temporary differences, net ......... (6.9) 5.1 (0.4)
------ ----- -----
Federal taxable income (loss) ...... $(35.0) $ 4.7 $ 8.0
====== ===== =====
24
Of our total net operating loss carryforwards at December 31, 2003 of
$65.0 million, the $37.0 million remaining carryforward generated in 2000
expires in 2020 and the $28.0 million carryforward generated in 2001 expires in
2021. United States tax law limits the amount of the $49.3 million net operating
loss carryforward we generated in 2000 that can be utilized each year to
approximately $12 million (unused limitation can be carried forward). As a total
of $12.7 million of the 2000 net operating loss has been utilized through 2003,
the usage of the net operating loss generated in 2000 will be limited to
approximately $35.3 million for 2004. We do not anticipate a need to use more
than this amount in our federal tax return for 2004. Use of the net operating
loss generated in 2001 is unlimited.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues. Our consolidated revenues for the year ended December 31, 2002
were $1,870.9 million, which represents a decrease from the year ended December
31, 2001 of $63.7 million, or 3.3%, that is primarily attributable to a decrease
in fuel revenue.
Fuel revenue for the year ended December 31, 2002 decreased by $93.8
million, or 7.0%, as compared to the same period in 2001. The decrease was
attributable principally to decreases in diesel fuel and gasoline average
selling prices. Average diesel fuel and gasoline sales prices for the year ended
December 31, 2002 decreased by 8.4% and 7.4%, respectively, as compared to the
same period in 2001, primarily reflecting decreases in commodity prices and also
reflecting our more competitive retail fuel pricing. The fuel revenue decline
also resulted from a decrease in our diesel fuel sales volumes that was
partially offset by an increase in gasoline sales volumes. Diesel fuel and
gasoline sales volumes for the year ended December 31, 2002 decreased 1.4% and
increased 27.5%, respectively, as compared to the same period in 2001. For the
year ended December 31, 2002, we sold 1,349.7 million gallons of diesel fuel and
160.6 million gallons of gasoline, as compared to 1,369.3 million gallons of
diesel fuel and 125.9 million gallons of gasoline for the year ended December
31, 2001. The diesel fuel sales volume decrease resulted from a 0.9% decrease in
same-site diesel fuel sales volumes and a net reduction in sales volumes at
sites we added to or eliminated from our network during 2001 and 2002 of 11.6
million gallons, partially offset by an increase in our wholesale diesel fuel
sales of 1.6 million gallons, or 2.7%. The gasoline sales volume increase was
primarily attributable to a 20.2% increase in same-site gasoline sales volumes
and also resulted from a 2.8 million net increase in gasoline sales volume at
company-operated sites we added to or eliminated from our network during 2001
and 2002, as well as an 8.2 million increase in wholesale gasoline sales volume.
We believe the same-site diesel fuel sales volume decrease resulted from a
decline in trucking activity in 2002 as compared to 2001, resulting from the
general condition of the United States economy, and occurred in spite of our
continued emphasis on competitively pricing our diesel fuel. The increased level
of wholesale diesel fuel sales volumes reflects our renewed efforts in this area
made possible by software and control process improvements we implemented during
2002. 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
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 year ended December 31, 2002 of $617.3 million
reflected an increase of $32.0 million, or 5.5% from the same period in 2001.
The increase was primarily attributable to an increase in non-fuel sales on a
same-site basis of 3.9% for the year ended December 31, 2002 versus the same
period in 2001. 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. The increase was also attributable to
the net increase in sales at the company-operated sites added to, or eliminated
from, our network during 2001 and 2002.
Rent and royalty revenues for the year ended December 31, 2002 reflected a
$2.0 million, or 11.2%, decrease from the same period in 2001. 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
2.0% increase in same-site royalty revenue that results from increased levels of
retail sales by our franchisees, and a 3.3% increase in same-site rent revenue.
25
Gross Profit (excluding depreciation). Our gross profit for the year ended
December 31, 2002 was $481.2 million, compared to $466.9 million for the same
period in 2001, an increase of $14.3 million, or 3.1%. The increase in our gross
profit was primarily due to increased margin resulting from the increased level
of non-fuel sales, partially offset by the decline in rent and royalty revenues
and a decline in fuel margin that resulted from decreased diesel fuel sales
volumes and a 2.6% decrease in fuel margin per gallon.
Operating and Selling, General and Administrative Expenses. Operating
expenses included the direct expenses of company-operated sites and the
ownership costs of leased sites. Selling, general and administrative expenses
included corporate overhead and administrative costs.
Our operating expenses increased by $6.6 million, or 2.0%, to $332.2
million for the year ended December 31, 2002 compared to $325.7 million for the
same period in 2001. This increase was attributable to a $4.4 million net
increase resulting from company-operated sites we added to our network or
eliminated from our network during 2001 or 2002, and a 0.6% increase in
operating expenses on a same-site basis. On a same-site basis, operating
expenses as a percentage of non-fuel revenues for the year ended December 31,
2002 were 53.1%, compared to 54.8% for the same period in 2001, reflecting
reduced utility costs and the results of our cost-control measures at our sites.
Our selling, general and administrative expenses for the year ended
December 31, 2002 were $37.8 million, which reflected a decrease of $0.9
million, or 2.2% from the same period in 2001.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 2002 was $60.3 million, compared to
$64.3 million for the same period in 2001. This decrease of $4.0 million, or
6.3%, was attributable to a $1.8 million decrease in amortization of intangible
assets, a $1.0 million decrease in the amount of impairment charges recognized
in 2002 as compared to 2001 and the change we made in depreciable lives of
certain assets effective April 1, 2001. During the year ended December 31, 2002
we recognized impairment charges aggregating $1.5 million with respect to
certain of the sites we were holding for sale as a result of reductions in the
estimated sales proceeds of certain of those sites. During 2002, we sold four of
the facilities that we were holding for sale as of December 31, 2001. On January
3, 2003, we sold the one remaining site held for sale that had been impaired.
The other three sites we had been holding for sale were not sold within the
one-year period required by FAS 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," and so were no longer accounted for as assets to be
disposed of but as assets held for use. In the fourth quarter of 2002, we
recognized a charge to depreciation expense of $0.2 million for the depreciation
expense related to these unsold sites that had not been recognized during 2002
when these sites were being accounted for as held for sale.
As a result of adopting FAS 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002, our goodwill and trademark intangible assets are no
longer amortized. Pursuant to FAS 142, intangible assets must be periodically
tested for impairment. During the first quarter of 2002, we completed our
transitional impairment review of our trademark intangible assets and determined
that there was no impairment. During the second quarter of 2002 we completed the
transitional impairment review of goodwill and determined that there was no
impairment. We also adopted FAS 144 effective January 1, 2002. The adoption of
FAS 144 did not have a material effect on our consolidated results of
operations.
Income from Operations. We generated income from operations of $51.9
million for the year ended December 31, 2002, compared to income from operations
of $39.9 million for the same period in 2001. This increase of $12.0 million, or
30.0%, was primarily attributable to the increase in gross profit that was
partially offset by the increase in operating expenses. The net decrease in
depreciation and amortization expense and in gains on sales of property and
equipment also contributed to the increase in operating income.
Interest and Other Financial Costs--Net. Interest and other financial
costs, net, for the year ended December 31, 2002 decreased by $6.5 million, or
11.2%, compared to 2001. This decrease resulted from the decline in interest
rates during 2001 and 2002 as well as from the decrease in our indebtedness.
26
Income Taxes. Our effective income tax benefit rates for the years ended
December 31, 2002 and 2001 were 3.2% and 42.8%, respectively. These rates
differed from the federal statutory rate due primarily to state income taxes and
nondeductible expenses, partially offset by the effect of certain tax credits.
The change between years in the effective tax rate was primarily the result of
the swing from a taxable loss incurred in 2001 as compared to a relatively low
level of pre-tax income earned in 2002, as well as an adjustment in 2002 of
estimated prior year tax liabilities. As a result of the relatively low level of
pre-tax earnings in 2002, permanent differences had a larger effect on the
effective rate in 2002 than in 2001.
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 of our customers for our products and
services, increases in crude oil and/or petroleum product prices and increases
in interest rates. It is reasonably likely that the United States economy could
either worsen, or make a slower recovery than expected. Similarly, it is
reasonably likely that interest rates and petroleum product prices will increase
during 2004 from levels that existed during 2003, possibly to levels greater
than that contemplated in our expectations. If the economy stagnates or worsens,
our customers could be adversely affected, which could further intensify
competition within our industry and reduce the level of cash we could generate
from our operations. A one-percentage point increase in interest rates increases
our annual cash outlays by approximately $3.9 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 2003 and as of December 31, 2003, and we expect to remain in
compliance with all of our debt covenants throughout 2004. See "Adjusted EBITDA
and Debt Covenant Compliance" below for further discussion.
We anticipate that we will be able to fund our 2004 working capital
requirements and capital expenditures primarily from funds generated from
operations, supplemented, to the extent necessary, from borrowings under our
revolving credit facility. Our long-term liquidity requirements, including
capital expenditures, are expected to be financed by a combination of internally
generated funds, borrowings and other sources of external financing as needed.
Our ability to fund our capital investment requirements, interest and principal
payment obligations and working capital requirements and to comply with all of
the financial covenants under our debt agreements depends on our future
operations, performance and cash flow. These are subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond our control.
The amounts we have invested for capital improvements have declined since
2000. 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 in
2000 through 2003. Our capital investment program to re-image, rebrand and
upgrade our network has been substantially completed. Since 1997, we have
invested approximately $465 million to maintain, re-image, rebrand, upgrade and
expand our network. We also invested $115 million to acquire the travel center
networks of Burns Bros. and Travel Ports during that period. We now are
positioned to spend approximately $15 million to $25 million annually for
sustaining capital projects and then to discriminately choose the growth-related
projects that will compose the remainder of our annual capital expenditure
plans. These growth-related projects include expenditures
27
to construct and/or acquire additional sites, re-image sites, add additional
non-fuel offerings, such as truck maintenance and repair shops and QSRs, at
existing sites, and purchase, install and upgrade our information systems. The
expected level of capital expenditures, including business acquisitions but net
of proceeds from asset sales, for 2004 is approximately $41 million. Given our
forecasted level of cash flows from operations for 2004 and our planned level of
capital expenditures and barring a downturn in the U.S. economy or a significant
event or series of events affecting petroleum supplies and/or prices, we expect
that during 2004 we will make our scheduled debt payments of $3.4 million, make
a mandatory term loan prepayment of $12.7 million and will also repay an
additional amount of outstanding borrowings under our term loan and revolving
credit facilities.
HISTORICAL CASH FLOWS
Net cash provided by operating activities totaled $77.3 million in 2003,
$75.6 million in 2002 and $30.4 million in 2001. The $1.7 million increase in
cash from operations in 2003 as compared to 2002 was primarily due to the $8.0
million increase in operating income and $4.6 million decrease in interest
expense, partially offset by a $7.1 million reduction in cash generated from
working capital changes. The $45.2 million increase in cash provided by
operations in 2002 as compared to 2001 primarily resulted from a $12.0 million
increase in operating income, a $6.5 million decrease in interest and other
financial costs and a $24.2 million increase in cash from working capital. In
2002, we generated $12.0 million of cash from working capital while in 2001 we
invested $12.2 million of cash in working capital.
Net cash used in investing activities for 2003 was $50.5 million, as
compared to $42.1 million in 2002 and $46.2 million in 2001. During 2003, we
invested $10.2 million to acquire two operating travel centers and to convert
six leased sites to company-operated sites. In 2003 we also generated proceeds
from asset sales of $3.9 million and invested $44.2 million of capital
expenditures in our network, including the purchase of a parcel of land on which
to construct a future travel center. During 2002, we made capital expenditures
of $42.6 million, invested $4.2 million to convert five leased sites to
company-operated sites and generated proceeds from the sales of assets of $4.8
million. During 2001, we invested $54.5 million of capital expenditures into our
network and generated $8.3 million of proceeds from sales of assets for net
capital expenditures of $46.2 million.
During 2003, we used $26.1 million of cash in financing activities,
primarily paying down our term loan and revolving loan facility by $23.3
million. We used $39.3 million of cash in financing activities during 2002,
primarily to reduce our debt. We made net repayments of outstanding borrowings
under our revolving credit facility of $21.5 million and made scheduled debt
payments of $3.4 million. We also reduced the amount of our outstanding checks
in excess of funds on deposit by $14.1 million. For the year ended December 31,
2001, cash flows provided by financing activities were $6.7 million, resulting
from an increase in the amount of our outstanding checks in excess of funds on
deposit. During 2001, we made net borrowings of $3.6 million under our revolving
credit facility, paid $3.3 million of costs of our merger and recapitalization
transactions of November 2000, and had net payments of $0.3 million for other
financing activities.
DESCRIPTION OF INDEBTEDNESS
The Senior Credit Facility provides senior secured financing of up to
$428.0 million, consisting of a $328.0 million term loan facility with a
maturity of eight years and a $100.0 million revolving credit facility with a
maturity of six years. We have pledged substantially all of our assets as
collateral under the Senior Credit Facility. At December 31, 2003, we had
outstanding borrowings and issued letters of credit of $13.6 million and $21.8
million, respectively, leaving $64.6 million of our $100 million revolving
credit facility available for borrowings. The term loan facility and the
revolving credit facility bear interest at a rate equal to:
- in the case of the revolving credit facility, Adjusted LIBOR plus a
margin of 2.75% or, at our election, the alternate base rate plus a
margin of 1.75%; or
- in the case of the term loan facility, Adjusted LIBOR plus a margin
of 3.25% or, at our election, the alternate base rate plus a margin
of 2.25%.
28
In addition to paying interest on outstanding principal under the Senior
Credit Facility, we are required to pay a commitment fee to the lenders under
the revolving credit facility equal to 0.50% per year of the unused commitments
thereunder.
The Senior Credit Facility obligates us to make annual mandatory
prepayments of term loan indebtedness equal to one-half of the Excess Cash Flow
amount (as defined in the agreement) generated in the previous year. For the
year ended December 31, 2003 we generated approximately $25.3 million of Excess
Cash Flow and, therefore, are obligated to prepay $12.7 million of the term loan
by April 15, 2004. We will use borrowings under our revolving credit facility to
fund this prepayment. This $12.7 million mandatory prepayment will reduce the
amounts otherwise scheduled to be repaid in each quarter after the prepayment,
on a pro rata basis. After giving effect to this prepayment, the term loan
facility will amortize each year in quarterly amounts in the following
approximate aggregate principal amounts for each year set forth below.
YEAR ENDED PRINCIPAL
DECEMBER 31, REPAYMENTS
------------ ----------
2004 ........................................ $ 15,724,000
2005 ........................................ 3,036,000
2006 ........................................ 3,036,000
2007 ........................................ 74,381,000
2008 ........................................ 214,035,000
------------
Total ....................................... $310,212,000
============
Principal amounts outstanding under the revolving credit facility are due
and payable in full at maturity in November 2006.
The Senior Credit Facility contains a number of covenants that, among
other things, restrict our ability to dispose of assets, incur additional
indebtedness, incur guarantee obligations, repay other indebtedness, make
certain restricted payments and dividends, create liens on assets, make
investments, loans or advances, make certain acquisitions, engage in mergers or
consolidations, engage in material businesses other than our current businesses,
make capital expenditures, enter into sale and leaseback transactions, or engage
in certain transactions with affiliates.
We have outstanding at December 31, 2003, Senior Subordinated Notes due in
2009 with an aggregate face amount of $190 million. The Senior Subordinated
Notes due 2009 were issued in November 2000. Our obligations under the notes are
junior in right of payment to all of our existing and future senior
indebtedness, including all indebtedness under the Senior Credit Facility. The
indenture restricts, among other things, our ability to incur additional
indebtedness, issue shares of disqualified stock and preferred stock, pay
dividends or make certain other restricted payments and enter into certain
transactions with affiliates, and prohibits certain restrictions on the ability
of our subsidiaries to pay dividends or make certain payments to us, and
contains certain restrictions on our ability to merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of our assets.
In the event of a change in control (as defined in the relevant
instruments) of the company, the total amount outstanding under the debt
agreements described above may be declared immediately due and payable.
As of December 31, 2003, $4.1 million was outstanding under a note payable
by us to a former operator of a site, which we refer to as the Santa Nella Note.
The note bears interest at an annual rate of 5%, requires quarterly principal
and interest payments of $98,000 through October 1, 2018 and is secured by the
real estate and improvements located at the site.
29
ADJUSTED EBITDA AND DEBT COVENANT COMPLIANCE
Adjusted EBITDA, as used here, is based on the definition of "EBITDA" in
our bank debt agreement and consists of net income plus the sum of (a) income
taxes, (b) interest expense, net, (c) depreciation, amortization and other
noncash charges, (d) transition expense, (e) extraordinary losses and cumulative
effects of accounting changes and (f) the costs of the merger and
recapitalization transactions. We have included this information concerning
Adjusted EBITDA because Adjusted EBITDA is a primary component for calculating
the financial ratio covenants in our debt agreements. We also use Adjusted
EBITDA as a basis for determining bonus payments to our corporate and site-level
management employees and as a key component in the formula for calculating the
fair value of our redeemable common stock and stock options. Adjusted EBITDA
should not be considered in isolation from, or as a substitute for, net income,
income from operations, cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles. While the non-GAAP measures "EBITDA"
and "Adjusted EBITDA" are frequently used by other companies as measures of
operations and/or ability to meet debt service requirements, Adjusted EBITDA as
we use the term is not necessarily comparable to similarly titled captions of
other companies due to differences in methods of calculation.
We consider our Senior Credit Facility to be a material agreement. A
majority of our outstanding indebtedness has been borrowed under the Senior
Credit Facility. Further, the Senior Credit Facility requires us to maintain
compliance with a variety of affirmative and negative covenants which primarily
act to limit the types of business activities we can undertake; limits the
amounts we can spend for items such as capital expenditures, dividends and
distributions, investments, operating leases, etc.; and limits the amount of
additional indebtedness we can incur and the liens that can be placed on our
assets. We have maintained compliance with all of these covenants for all
periods presented and expect to remain in compliance with all of the debt
covenants to which we are subject through 2004. 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, the more likely
consequence would be the negotiation of a waiver and/or amendment of the
covenants, which is reasonably likely to require us to pay a significant amount
of fees to the lenders and legal counsel and to further limit our ability to
make cash disbursements, such as for capital expenditures. The following table
sets forth the calculation of Adjusted EBITDA and information related to the
debt covenant financial ratios.
YEAR ENDED DECEMBER 31,
----------------------------------
2001 2002 2003
----------------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Net income (loss) ...................................................... $ (10,054) $ 1,271 $ 8,891
Adjustments to reconcile net income (loss) to Adjusted EBITDA:
Cumulative effect of a change in accounting principle .............. -- -- 253
Provision (benefit) for income taxes ............................... (7,521) (39) 4,719
Interest and other financial costs, net ............................ 57,924 51,423 46,878
Depreciation and amortization expense .............................. 64,347 60,301 60,375
Other non-cash charges (credits), net .............................. 493 605 805
--------- --------- --------
Adjusted EBITDA ........................................................ $ 105,189 $ 113,561 $121,921
========= ========= ========
30
YEAR ENDED DECEMBER 31,
2001 2002 2003
---- ---- ----
(IN THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Interest expense coverage ratio:
Actual ratio at period end ................................. 1.94x 2.42x 2.91x
Required ratio at period end (no less than) ................ 1.60x 1.80x 2.00x
Minimum amount of Adjusted EBITDA to meet required ratio $ 86,537 $ 84,625 $ 83,913
Leverage ratio:
Actual ratio at period end ................................. 5.09x 4.55x 4.04x
Required ratio at period end (no greater than) ............. 5.25x 4.65x 4.15x
Minimum amount of Adjusted EBITDA to meet required ratio.... $101,884 $111,192 $118,767
OFF-BALANCE SHEET ARRANGEMENTS
On September 9, 1999, we entered into a master lease program with a lessor
that has been used to finance the construction of eight travel centers on land
we own. The initial term of the lease expires on September 9, 2006, at which
time, if the lease is not renewed and extended, we have the option to purchase
the improvements for approximately $58.2 million. Alternatively, we could return
the travel centers to the lessor. In this case, we would be required to make a
residual value guarantee payment to the lessor of $44.1 million. However, the
lessor would be required to remit to us any portion of the payment which, when
combined with the net sale proceeds of the property, exceeded the lessor's $58.2
million investment in the property.
These lease transactions were evaluated for lease classification in
accordance with FAS 13. We have not consolidated the lessor because the owners
of the lessor have maintained a substantial residual equity investment of at
least three percent that is at risk during the entire term of the lease. In
December 2003, the FASB issued revised FIN 46R "Consolidation of Variable
Interest Entities." We must adopt this accounting guidance effective January 1,
2005. Under FIN 46R, 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.
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.
31
The following are additional amounts related to the master lease program
(all amounts are as of or for the year ended December 31, 2003):
- The lessor's total capitalization of $66.5 million consisted of
$64.1 million of a term loan secured by the related travel centers
assets and underlying leasehold interests, and $2.4 million of
general and limited partners' contributed capital.
- The historical cost of the lessor's assets related to the master
lease program consisted of $67.5 million of tangible fixed assets,
$1.7 million of capitalized interest and $2.9 million of deferred
financing costs.
- During 2003, we recognized lease rent expense under this master
lease program of $5.4 million. Excluding this rent expense, these
eight sites generated income of $11.4 million for the year ended
December 31, 2003.
- The depreciation expense and interest expense we would have
recognized with respect to these leased travel centers if we had
capitalized them and not leased them was approximately $5.1 million
and $3.9 million, respectively, for the year ended December 31,
2003.
SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our expected obligations to make future
required payments under various types of agreements.
PAYMENTS DUE BY PERIOD
------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005-2006 2007-2008 THEREAFTER
----------------------- ----- ---- --------- --------- ------------
(IN MILLIONS OF DOLLARS)
Long-term debt(1) ................ $517.9 $ 15.9 $ 20.1 $288.9 $193.0
Operating leases(2) .............. 198.3 20.2 79.8 16.4 81.9
Other long-term liabilities(3) ... 5.5 -- 2.5 1.0 2.0
------ ------ ------ ------ ------
Total contractual cash obligations $721.7 $ 36.1 $102.4 $306.3 $276.9
====== ====== ====== ====== ======
(1) Excludes interest.
(2) Assumes that the master lease facility is not renewed at the
expiration of the initial lease term 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 and no
amount for these payments is included in the table above. As of
December 31, 2003, the aggregate amount of these future redemption
payments, assuming our Board of Directors would not modify the
formula for calculating the fair market value per share, would be
approximately $5.3 million.
Our only commercial commitments of any significance as of December 31,
2003 were the $21.8 million of standby letters of credit we had outstanding.
LEVERAGED RECAPITALIZATION
On May 31, 2000, we and shareholders owning a majority of our voting stock
entered into a recapitalization agreement and plan of merger, as subsequently
amended, with TCA Acquisition Corporation, a newly created corporation formed by
Oak Hill Capital Partners, L.P. and its affiliates, under which TCA Acquisition
Corporation agreed to merge with and into us. This merger was completed on
November 14, 2000. Concurrent with the closing of the merger, we completed a
series of transactions to effect a recapitalization that included the following.
32
- TCA Acquisition Corporation issued 6,456,698 shares of common stock
to Oak Hill and the Other Investors for proceeds of $205.0 million
and then merged with and into us. We incurred $3.0 million of fees
and expenses related to the issuance of these shares of common
stock. These stock issuance costs were charged against additional
paid-in capital.
- We redeemed all shares of our common and preferred stock outstanding
prior to the closing of the merger, with the exception of 473,064
shares of common stock with a market value at that time of $15.0
million that were retained by continuing stockholders, and cancelled
all outstanding common stock options and warrants, for cash payments
totaling $263.2 million.
- All shares of treasury stock were cancelled.
After the transactions described above, Oak Hill owned 60.5% of our
outstanding common stock, the Other Investors owned, in the aggregate, 32.7% of
our outstanding common stock, Freightliner owned 4.3% of our outstanding common
stock and certain members of our management owned 2.5% of our outstanding common
stock. The total amount of our equity capitalization after these transactions,
given the $31.75 per share merger consideration that was paid in our merger and
recapitalization transactions, was $220.0 million. The transactions described
above, which resulted in a change of control of us, have been accounted for as a
leveraged recapitalization, as opposed to a purchase business combination, since
the change of control was effected through issuance of new shares to our new
control group in conjunction with a redemption of most of our then outstanding
equity securities. We followed leveraged recapitalization accounting because of
the significance of the ownership interest in us that was retained by continuing
stockholders. In accounting for our leveraged recapitalization, we retained the
historical cost bases of our assets and liabilities and consequently recorded
charges totaling $179.0 million to our equity accounts upon the redemption of
equity securities. This accounting treatment contrasts with that followed in a
purchase business combination, in which a company reflects the new basis in its
assets and liabilities of its new control group by increasing or decreasing its
historical balances based on the estimated fair values at that time and avoids
the charge to equity that accompanies the redemption of equity securities. Based
on a limited appraisal of our owned network sites performed in connection with
the merger and recapitalization transactions, the estimated fair value of our
sites at June 15, 2000 was approximately $1.05 billion.
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 December 31, 2003, we had a reserve of $4.6 million for unindemnified
environmental matters for which we are responsible and a receivable for
estimated recoveries of these estimated future expenditures of $0.9 million. We
estimate that the cash outlays related to the matters for which we have accrued
this reserve will be approximately $3.2 million in 2004; $0.7 million in 2005;
$0.3 million in 2006; $0.3 million in 2007; $0.1 million in 2008 and $0.1
million thereafter. Under the environmental agreement entered into as part of
the acquisition of the BP network, BP is required to provide indemnification
for, and conduct remediation of, certain pre-closing environmental conditions.
Until January 2004, Unocal similarly was required to provide indemnification
for, and conduct remediation of, certain environmental conditions that existed
prior to our April 1993 acquisition of the Unocal network. In January 2004, a
Buy-Out Agreement between Unocal and us became effective and Unocal's
obligations to us under the April 1993 environmental agreement were terminated.
In consideration for releasing Unocal from its obligations under the
environmental agreement, Unocal paid us $2.6 million of cash, funded an escrow
account with $5.4 million to be drawn by us as we incur related remediation
costs, and purchased insurance policies that cap our total future expenditures
and provide protection against significant unidentified matters that existed
prior to April 1993. We are now responsible for all remediation at the former
Unocal sites that we still own. We estimate the costs of the remediation
activities for which we assumed responsibility from Unocal in January 2004 to be
approximately $8.2 million, which amount we expect will be fully covered by the
cash received from Unocal and reimbursements from state tank funds. The
liability we assumed was recorded in 2004. We estimate that the cash outlays
related to the
33
matters for which we assumed responsibility in January 2004 will be
approximately $1.1 million in 2004; $2.2 million in 2005; $1.5 million in 2006;
$1.2 million in 2007; $0.9 million in 2008 and $1.3 thereafter. These estimated
future cash disbursements are subject to change based on, among other things,
changes in the underlying remediation activities and changes in the regulatory
environment. We have just recently assumed responsibility for these matters and
expect that our knowledge of the specific facts, related costs and timing of
payments for each site will improve over time. We have obtained insurance of up
to $35.0 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. For further discussion of environmental matters, see the "Business -
Regulation" section of this annual report and the footnotes to the audited
consolidated financial statements included elsewhere in this annual report.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 FAS 143, "Accounting for Asset Retirement
Obligations." A liability for the fair value of an asset retirement obligation
with a corresponding increase to the carrying value of the related long-lived
asset is recorded at the time an underground storage tank is installed. We will
amortize the amount added to property and equipment and recognize accretion
expense in connection with the discounted liability over the remaining life of
the respective underground storage tank. The estimated liability is based on
historical experiences in removing these tanks, estimated tank useful lives,
external estimates as to the cost to remove the tanks in the future and
regulatory requirements. The liability is a discounted liability using a
credit-adjusted risk-free rate of approximately 12.8%. Revisions to the
liability could occur due to changes in tank removal costs, tank useful lives or
if new regulations regarding the removal of such tanks are enacted. 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).
In December 2003, the FASB issued revised FIN 46R, "Consolidation of
Variable Interest Entities." We must adopt this accounting guidance effective
January 1, 2005. Under FIN 46R, we will be required to consolidate into our
consolidated financial statements the entity that is the lessor under our master
lease program 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 46R will require consolidation of our franchisees,
although we currently believe we will not be required to do so.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires that, at the inception of a guarantee,
the guarantor recognize a liability for the noncontingent portion of that
guarantee, initially measured at fair value. FIN 45 also requires certain
disclosures about guarantees. The initial recognition provisions of FIN 45 must
be applied only on a prospective basis for guarantees issued after December 31,
2002, while we are required to adhere, and have adhered, to the disclosure
requirements in our financial statements. While we offer a warranty of our
workmanship in our truck maintenance and repair shops, the annual warranty
expense and corresponding liability are immaterial. We do not issue or provide
guarantees and the initial recognition of FIN 45 did not have a material effect
on our results of operations or financial position. Adopting FIN 45 did not
affect our liquidity.
In June 2002, the FASB issued FAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This new accounting standard significantly
changes how entities account for exit and disposal activities, including
restructuring activities. The provisions of FAS 146 are effective for exit or
disposal activities initiated after December 31, 2002. Such activities, and the
related costs, have not been significant for us in previous years and we do not
expect them to be in future years.
34
In December 2002, the FASB issued FAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure (an amendment of FAS 123)." FAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation and also
amends the disclosure requirements of FAS 123 to require prominent disclosures
about the method of accounting for stock-based employee compensation and the
effect of the chosen method on reported results. We have not elected to change
to the fair value based method of accounting for stock-based employee
compensation and have made the required disclosures in our consolidated
financial statements. For further discussion of stock-based employee
compensation, see the footnotes to the consolidated financial statements
included elsewhere in this annual report.
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. Adopting FAS 150 will not affect
our cash payments or liquidity and is not expected to materially affect our
financial position or results of operation.
In May 2002, the FASB issued FAS 145, "Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS 13, and Technical Corrections as of April 2002." The
provisions of FAS 145 related to the rescission of FAS 4 are effective for
fiscal years beginning after May 15, 2002, while provisions related to FAS 13
are effective for transactions occurring after May 15, 2002, and all remaining
provisions of FAS 145 are effective for financial statements issued on or after
May 15, 2002. FAS 145 eliminates FAS 4, and as a result, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria of APB 30. FAS 145 also rescinded FAS 64, which was an
amendment to FAS 4. FAS 145 amends FAS 13, requiring lease modifications that
have economic effects similar to sale-leaseback transactions to be accounted for
in the same manner as sale-leaseback transactions. The adoption of the
applicable provisions of FAS 145 did not have an effect on our financial
statements, however, it led to the reclassification in 2003 of extraordinary
items related to the extinguishment of debt recorded in 2000.
FORWARD-LOOKING STATEMENTS
This annual 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 annual 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 annual
report to identify forward-looking statements. These forward-looking statements
are made based on our expectations and beliefs concerning future events
affecting us and are subject to uncertainties and factors relating to our
operations and business environment, all of which are difficult to predict and
many of which are beyond our control, that could cause our actual results to
differ materially from those matters expressed in or implied by forward-looking
statements. The following factors are among those that could cause our actual
results to differ materially from the forward-looking statements:
- competition from other travel center and truck stop operators,
including additional or improved services or facilities of
competitors, and from the potential commercialization of state-owned
interstate rest areas;
- the economic condition of the trucking industry, which in turn is
dependent on general economic factors;
- increased environmental regulation;
- changes in governmental regulation of the trucking industry,
including regulations relating to diesel fuel and gasoline;
35
- changes in interest rates;
- diesel fuel and gasoline pricing;
- availability of diesel fuel and gasoline supply; and
- availability of sufficient qualified personnel to staff
company-operated sites.
All of our forward-looking statements should be considered in light of
these factors and all other risks discussed from time to time in our filings
with the Securities and Exchange Commission. We do not undertake to update our
forward-looking statements or risk factors to reflect future events or
circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to commodity price risk and interest rate risk. Our fuel
purchase contracts provide for purchase prices based on average market prices
for diesel fuel and gasoline, exposing us to commodity price risk. We mitigate
this risk exposure in several ways, but primarily by holding less than three
days of diesel fuel inventory at our sites and selling a large portion of our
fuel volume on the basis of a daily industry index of average fuel costs plus a
pumping fee, which minimize the effect on our margins of sudden sharp changes in
commodity market prices. We manage the price exposure related to sales volumes
not covered by the daily industry index pricing formulae through the use, from
time to time, on a limited basis, of derivative instruments designated by
management as hedges of anticipated purchases. We had no open derivative
contracts at any point in time during the year ended December 31, 2003.
The interest rate risk faced by us results from our highly-leveraged
position and our level of variable rate indebtedness, the rates for which are
based on short-term lending rates, primarily the London Interbank Offered Rate.
From time to time, we may use interest rate protection agreements to reduce our
exposure to market risks from changes in interest rates by fixing interest rates
on variable rate debt and reducing certain exposures to interest rate
fluctuation. Amounts due to or from interest rate protection agreement
counterparties are recorded in interest expense in the period in which they
accrue. During 2003, we were involved in no interest rate protection agreements.
The following table summarizes information about our financial instruments
that are subject to changes in interest rates:
DECEMBER 31, 2003
------------------------------------------------------
FIXED RATE VARIABLE RATE
INDEBTEDNESS INDEBTEDNESS
------------------------------------------------------
PRINCIPAL WEIGHTED PRINCIPAL WEIGHTED
PAYMENT AVERAGE PAYMENT AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
--------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
Year Ended December 31:
2004 ...................... $ 189 12.59% $ 15,724 4.39%
2005 ...................... 198 12.60% 3,036 4.39%
2006 ...................... 209 12.60% 16,636 4.39%
2007 ...................... 219 12.61% 74,381 4.39%
2008 ...................... 230 12.62% 214,035 4.39%
Thereafter ...................... 193,059 11.54% --
-------- --------
Total ........................... $194,104 12.49% $323,812 4.39%
======== ========
Fair value ...................... $221,304 $323,812
======== ========
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Data:
PAGE
----
Financial Statements:
Report of Independent Auditors ........................................................................................ 38
Consolidated Balance Sheet at December 31, 2002 and 2003 .............................................................. 39
Consolidated Statement of Operations and Comprehensive Income for each of the three years in the
period ended December 31, 2003 .................................................................................... 40
Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2003 ................ 41
Consolidated Statement of Nonredeemable Stockholders' Equity for each of the three years in the period ended
December 31, 2003 ................................................................................................. 42
Notes to the Consolidated Financial Statements ....................................................................... 43
Financial Statement Schedule:
II - Valuation and Qualifying Accounts ............................................................................... 79
37
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of TravelCenters of America, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of TravelCenters of America, Inc. and its subsidiaries at December 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 4, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
as of January 1, 2002.
As described in Note 3, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," as of January 1, 2003.
PricewaterhouseCoopers LLP
Cleveland, Ohio
March 23, 2004
38
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-----------------------
2002 2003
-----------------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash ............................................................................................ $ 14,047 $ 15,005
Accounts receivable (less allowance for doubtful accounts of $2,025 for 2002
and $1,707 for 2003) ......................................................................... 44,295 42,987
Inventories ..................................................................................... 61,937 63,981
Deferred income taxes ........................................................................... 4,222 3,823
Other current assets ............................................................................ 8,164 6,962
--------- ---------
Total current assets ..................................................................... 132,665 132,758
Property and equipment, net ......................................................................... 444,197 438,133
Goodwill ............................................................................................ 23,585 25,584
Deferred financing costs, net ....................................................................... 27,452 24,012
Deferred income taxes ............................................................................... 17,781 14,519
Other noncurrent assets ............................................................................. 15,087 15,561
--------- ---------
Total assets ............................................................................. $ 660,767 $ 650,567
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................................................ $ 3,460 $ 3,354
Accounts payable ................................................................................ 58,512 59,754
Other accrued liabilities ....................................................................... 51,339 50,020
--------- ---------
Total current liabilities ................................................................ 113,311 113,128
Commitments and contingencies ....................................................................... -- --
Long-term debt (net of unamortized discount) ........................................................ 523,934 502,033
Deferred income taxes ............................................................................... 2,107 2,137
Other noncurrent liabilities ........................................................................ 6,209 8,318
--------- ---------
645,561 625,616
Redeemable equity ................................................................................... 681 1,909
Nonredeemable stockholders' equity:
Common stock and other nonredeemable stockholders' equity ....................................... 217,293 216,919
Accumulated deficit (Note 15) ................................................................... (202,768) (193,877)
--------- ---------
Total nonredeemable stockholders' equity .................................................... 14,525 23,042
--------- ---------
Total liabilities, redeemable equity and nonredeemable stockholders' equity ................. $ 660,767 $ 650,567
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
39
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2002 2003
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel ............................................................................ $ 1,331,807 $ 1,237,989 $ 1,513,648
Non-fuel ........................................................................ 585,314 617,342 649,502
Rent and royalties .............................................................. 17,491 15,539 13,080
----------- ----------- -----------
Total revenues ............................................................ 1,934,612 1,870,870 2,176,230
Cost of goods sold (excluding depreciation):
Fuel ............................................................................ 1,228,544 1,136,368 1,408,728
Non-fuel ........................................................................ 239,209 253,312 266,038
----------- ----------- -----------
Total cost of goods sold (excluding depreciation) ......................... 1,467,753 1,389,680 1,674,766
----------- ----------- -----------
Gross profit (excluding depreciation) ............................................... 466,859 481,190 501,464
Operating expenses .................................................................. 325,668 332,223 342,045
Selling, general and administrative expenses ........................................ 38,683 37,818 40,543
Depreciation and amortization expense ............................................... 64,347 60,301 60,375
(Gain) on sales of property and equipment ........................................... (1,788) (1,089) (1,476)
----------- ----------- -----------
Income from operations .......................................................... 39,949 51,937 59,977
Equity in earnings of affiliate ..................................................... 400 718 764
Interest and other financial costs, net ............................................. (57,924) (51,423) (46,878)
----------- ----------- -----------
Income (loss) before income taxes and the cumulative effect of a change in accounting
principle ....................................................................... (17,575) 1,232 13,863
Provision (benefit) for income taxes ................................................ (7,521) (39) 4,719
----------- ----------- -----------
Income (loss) before the cumulative effect of a change in accounting principle ...... (10,054) 1,271 9,144
Cumulative effect of a change in accounting, net of related taxes (Note 3) .......... -- -- (253)
----------- ----------- -----------
Net income (loss) ...................................................... (10,054) 1,271 8,891
Other comprehensive income (expense), net of tax (Note 5):
Change of accounting principle ................................................. (343) -- --
Unrealized (loss) gain on derivative instruments ............................... (1,577) 1,920 --
Foreign currency translation adjustments ....................................... -- -- 804
----------- ----------- -----------
Comprehensive income (loss) ............................................. $ (11,974) $ 3,191 $ 9,695
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
40
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2002 2003
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................................... $(10,054) $ 1,271 $ 8,891
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of a change in accounting principle, net of related tax ........... -- -- 253
Depreciation and amortization ....................................................... 64,347 60,301 60,375
Amortization of deferred financing costs ............................................ 2,620 3,050 3,440
Deferred income tax provision ....................................................... (9,084) 2,690 3,535
Provision for doubtful accounts ..................................................... -- 1,100 1,180
(Gain) on sales of property and equipment ........................................... (1,788) (1,089) (1,476)
Changes in assets and liabilities, adjusted for the effects of business acquisitions:
Accounts receivable .............................................................. 34,444 (2,194) (1,360)
Inventories ...................................................................... 4,353 (3,819) (361)
Other current assets ............................................................. 4,103 (282) 1,233
Accounts payable and other accrued liabilities ................................... (55,149) 18,282 3,646
Other, net .......................................................................... (3,411) (3,736) (2,032)
-------- -------- --------
Net cash provided by operating activities ........................................... 30,381 75,574 77,324
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions ................................................................... -- (4,243) (10,190)
Proceeds from sales of property and equipment ........................................... 8,256 4,773 3,900
Capital expenditures .................................................................... (54,490) (42,640) (44,196)
-------- -------- --------
Net cash used in investing activities ............................................... (46,234) (42,110) (50,486)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in excess of bank balances .......................... 6,725 (14,062) (2,598)
Revolving loan borrowings (repayments), net ............................................. 3,600 (21,500) (8,800)
Long-term debt repayments ............................................................... (165) (3,409) (14,688)
Premiums paid on debt extinguishment .................................................... (899) -- --
Merger and recapitalization expenses paid ............................................... (2,417) (150) --
Other ................................................................................... (122) (184) --
-------- -------- --------
Net cash provided by (used in) financing activities ................................. 6,722 (39,305) (26,086)
-------- -------- --------
Effect of exchange rate changes on cash ............................................. -- -- 206
-------- -------- --------
Net increase (decrease) in cash ..................................................... (9,131) (5,841) 958
Cash at the beginning of the year ........................................................... 29,019 19,888 14,047
-------- -------- --------
Cash at the end of the year ................................................................. $ 19,888 $ 14,047 $ 15,005
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
41
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2002 2003
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
COMMON STOCK:
Balance at beginning and end of year ............................. $ 3 $ 3 $ 3
========= ========= =========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year ..................................... $ 217,290 $ 217,290 $ 217,290
Accretion of redeemable equity .......................... -- -- (1,178)
--------- --------- ---------
Balance at end of year ........................................... $ 217,290 $ 217,290 $ 216,112
========= ========= =========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year ..................................... $ -- $ (1,920) $ --
Change in accounting principle, net of tax .............. (343) -- --
Change in fair value of interest rate swap agreement, net
of tax .............................................. (1,577) 1,920 --
Foreign currency translation adjustments, net of tax .... -- -- 804
--------- --------- ---------
Balance at end of year ........................................... $ (1,920) $ -- $ 804
========= ========= =========
ACCUMULATED DEFICIT:
Balance at beginning of year ..................................... $(193,985) $(204,039) $(202,768)
Net income (loss) ....................................... (10,054) 1,271 8,891
--------- --------- ---------
Balance at end of year ........................................... $(204,039) $(202,768) $(193,877)
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
42
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE 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 December 31, 2003, our geographically
diverse nationwide network of full-service travel centers consisted of 150 sites
located in 41 states and the province of Ontario, Canada. Our operations are
conducted through three distinct types of travel centers:
- sites owned or leased and operated by us, which we refer to as
company-operated sites;
- sites owned by us and leased to independent lessee-franchisees,
which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer
to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system and in Canada, typically on 20- to 25-acre sites. Operating under
the "TravelCenters of America" and "TA" brand names, our nationwide network
provides our customers with diesel fuel and gasoline as well as non-fuel
products and services such as truck repair and maintenance services,
full-service restaurants, fast food restaurants, travel and convenience stores
and other driver amenities. We also collect rents and franchise royalties from
the franchisees who operate the leased sites and franchisee-owned sites and, as
a franchisor, assist our franchisees in providing service to long-haul trucking
fleets and their drivers, independent truck drivers and general motorists.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
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.
We have entered into lease transactions of travel centers with a special
purpose entity. These lease transactions are evaluated for lease classification
in accordance with Statement of Financial Accounting Standards (FAS) No. 13,
"Accounting for Leases." We do not consolidate the special purpose entity so
long as the owners of the special purpose entity maintain a substantial residual
equity investment of at least three percent that is at risk during the entire
term of the lease, which has been the case to date (see Note 13).
Revenue Recognition
Sales revenues and related costs are recognized at the time of delivery of
motor fuel to customers at either the terminal or the customer's facility for
wholesale fuel sales and at the time of final sale to consumers at our
company-operated sites for retail fuel and non-fuel sales. The estimated cost to
us of the redemption by customers of our loyalty program points is recorded as a
discount against gross sales in determining the net sales amount presented in
our consolidated statement of operations.
43
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For those travel centers that we own but lease to a franchisee, rent
revenue is recognized based on the rent payment due for each period. These
leases specify rent increases each year based on inflation rates for the
respective periods or capital improvements we make at the site. As the rent
increases related to these factors are contingent upon future events, the
related rent revenue is not recognized until it becomes accruable.
Initial franchise fee revenues are recognized at the point when the
franchisee opens for business under our brand name, which is when we have
fulfilled all of our initial obligations under the related agreements. Franchise
royalty revenues are collected and recognized monthly and are determined as a
percentage of the franchisees' revenues.
Cash
For purposes of the statement of cash flows, we consider all highly liquid
investments with an initial maturity of three months or less to be cash.
Inventories
Inventories are stated at the lower of cost or market value, cost being
determined principally on the weighted average cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the following estimated useful lives of the assets:
Buildings and site improvements ....................... 15-20 years
Pumps and underground storage tanks ................... 5-20 years
Machinery and equipment ............................... 3-15 years
Furniture and fixtures ................................ 5-10 years
Repair and maintenance costs are charged to expense as incurred, while
major renewals and betterments are capitalized. The cost and related accumulated
depreciation of property and equipment sold, replaced or otherwise disposed of
are removed from the accounts. Any resulting gains or losses are recognized in
operations.
Intangible Assets
Acquired intangible assets, other than goodwill, are initially recognized
based on their fair value. Those intangible assets acquired in a business
combination are initially recognized in accordance with FAS 141, "Business
Combinations." FAS 141 requires an allocation of purchase price to all assets
and liabilities acquired, including those intangible assets that arise from
contractual or other legal rights or are otherwise capable of being separated or
divided from the acquired entity (but excluding goodwill), based on the relative
fair values of the acquired assets and liabilities. Any excess of acquisition
cost over the fair value of the acquired net assets is recorded as goodwill.
Costs of internally developing, maintaining, or restoring intangible assets that
are not specifically identifiable, that have indeterminate lives or that are
inherent in a continuing business and related to the entity as a whole are
expensed as incurred. Intangible assets with finite lives are amortized on a
straight-line basis over their estimated lives, principally the terms of the
related contractual agreements giving rise to them. Until December 31, 2001
goodwill and intangible assets with indefinite lives were amortized. Effective
January 1, 2002, we adopted the provisions of FAS 142, "Goodwill and Other
Intangible Assets." Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for
44
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
impairment. Accordingly, effective January 1, 2002, we stopped amortizing our
goodwill and our trademarks, which have indefinite lives. All of our intangible
assets with indefinite lives are subject to the impairment tests required by FAS
142, which include an annual test completed as of January 1 of each year and
tests throughout the year if circumstances indicate that the intangible assets
may be impaired (see Note 9).
Internal-Use Software Costs
During the application development stage of an internal-use computer
software project, we capitalize (i) the external direct costs of materials and
services consumed in developing or obtaining the internal-use computer software,
(ii) to the extent of time spent directly on the project, payroll costs of
employees directly associated with and who devote time to the project, and (iii)
related interest costs incurred. Internal and external costs incurred in the
preliminary project stage and post-implementation stage, such as for exploring
alternative technologies, vendor selection and maintenance, are expensed as
incurred, as are all training costs. The costs of significant upgrades and
enhancements that result in additional functionality are accounted for in the
same manner as similar costs for new software projects. The costs of all other
upgrades and enhancements are expensed as incurred.
Impairment of Long-Lived Assets
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 supersedes FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." FAS 144 addresses financial reporting for the impairment or
disposal of long-lived assets. We adopted FAS 144 effective January 1, 2002.
Under FAS 144, impairment charges are recognized when the carrying value of a
long-lived asset to be held and used in the business is not recoverable and
exceeds its fair value, and when the carrying value of a long-lived asset to be
disposed of exceeds the estimated fair value of the asset less the estimated
cost to sell the asset. Such impairment charges are recognized in the period
during which the circumstances surrounding an asset to be held and used have
changed such that the carrying value is no longer recoverable, or during which a
commitment to a plan to dispose of the asset is made. Such tests are performed
at the individual travel center level. In addition, intangible assets are
subjected to further evaluation and impairment charges are recognized when
events and circumstances indicate the carrying value of the intangible asset
exceeds the fair market value of the asset. Impairment charges are included in
depreciation and amortization expense in our consolidated statement of
operations.
Deferred Financing Costs
Deferred financing costs were incurred in conjunction with issuing
long-term debt and are amortized into interest expense over the lives of the
related debt instruments using the effective interest method (see Note 12).
Classification of Costs and Expenses
Cost of goods sold (excluding depreciation) represents the costs of fuels
and other products sold, including freight. Operating expenses principally
represent costs incurred in operating our sites, consisting primarily of labor,
maintenance, supplies, utilities and occupancy costs. Costs of advertising are
expensed as incurred.
45
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Operating Lease Expense
Generally, rental on operating leases is charged to expense over the lease
term as it becomes payable. 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.
Stock-Based Employee Compensation
We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. For granted options
that vest over time, no compensation expense is reflected in net income, as all
of those options had an exercise price equal to or greater than the market value
of the underlying common stock at the date of grant. For granted options that
vest based on attaining certain measures of performance, compensation expense is
recognized when it becomes probable that the performance triggers for such
options will be achieved. The following table illustrates the effect on net
income (loss) if we had applied the fair value recognition provisions of FAS No.
123 to stock-based employee compensation.
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2002 2003
-------- ------- -------
(IN THOUSANDS OF DOLLARS)
Net income (loss), as reported .................................... $(10,054) $ 1,271 $ 8,891
Add back - Stock-based employee compensation expense (benefit),
net of related tax effects, included in net income (loss) as
reported ..................................................... -- -- --
Deduct: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related
tax effects .................................................. (637) (703) (698)
-------- ------- -------
Pro forma net income (loss) ....................................... $(10,691) $ 568 $ 8,193
======== ======= =======
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.
Environmental Remediation
We provide for remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is reasonably
determinable. Generally, the timing of remediation accruals coincides with
completion of a feasibility study or the commitment to a formal plan of action.
If recoveries of remediation costs from third parties are probable, a receivable
is recorded. Accruals are not recorded for the costs of remediation activities
undertaken on our behalf by BP, at BP's sole expense (see Note 19). In our
consolidated balance sheet, the accrual for environmental matters is included in
other noncurrent liabilities, with the amount estimated to be expended within
the subsequent year reported as a current liability within the other accrued
liabilities balance.
Defined Contribution Plan
We sponsor a 401(k) defined contribution plan to provide eligible
employees with additional income upon retirement. Our contributions to the plans
are based on employee contributions and compensation and are recognized in
operating expenses in the period incurred.
46
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Asset Retirement Obligations
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 FAS 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. 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. See Note 3.
Income Taxes
Deferred income tax assets and liabilities are established to reflect the
future tax consequences of differences between the tax bases and financial
statement bases of assets and liabilities. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance.
Concentration of Credit Risk
We grant credit to our customers and may require letters of credit or
other collateral.
Derivative Instruments
We recognize derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the derivative and
the resulting designation. We designate our derivatives based upon criteria
established by FAS 133, "Accounting for Derivative Instruments and Hedging
Activities." For a derivative designated as a fair value hedge, the change in
fair value is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributed to the risk being hedged.
For a derivative designated as a cash flow hedge, the effective portion of the
derivative's gain or loss is initially reported as a component of accumulated
other comprehensive income (loss) and subsequently reclassified into earnings
when the hedged exposure affects earnings. The ineffective portion of the gain
or loss is reported in earnings immediately. We use derivatives to manage risk
arising from changes in interest rates. Our objectives for holding derivatives
are to decrease the volatility of earnings and cash flows associated with
changes in interest rates. See Note 20.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which estimation is practicable: the
fair values of financial instruments classified as current assets or liabilities
approximate the carrying values due to the short-term maturity of the
instruments; the fair value of our fixed-rate indebtedness that is publicly
traded is estimated based on the quoted price for those notes. The fair value of
our fixed-rate indebtedness that is not publicly traded is estimated based on
the current borrowing rates available to us for financings with similar terms
and maturities (see Note 12); and the fair values of our interest rate
protection agreements are based on bank-quoted market prices.
47
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. CHANGE IN ACCOUNTING PRINCIPLE
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.
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 effects for the years December 31, 2001 and 2002,
assuming the adoption of FAS 143 as of January 1, 2001, were not material.
A reconciliation of our asset retirement obligation liability, which is
included within other noncurrent liabilities in our consolidated balance sheet,
for the year ended December 31, 2003 was as follows (in thousands of dollars):
Balance at January 1, 2003 ..................... $ 589
Liabilities incurred ........................... 10
Liabilities settled ............................ (13)
Accretion expense .............................. 77
Revisions to estimates ......................... --
-----
Balance at December 31, 2003 ................... $ 663
=====
4. RECENTLY ISSUED ACCOUNTING STANDARDS
FAS 142. Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards (FAS) No. 142, "Goodwill and Other Intangible Assets."
Under FAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have indefinite lives continue to be amortized over their useful
lives. Our trademark intangible assets have been deemed to have indefinite
lives. During the first quarter of 2002 we completed the transitional impairment
test for our trademarks and determined that the estimated fair values of these
intangible assets exceeded their respective carrying amounts. Accordingly, we
did not recognize an impairment loss with respect to our trademark intangible
assets. For purposes of testing goodwill for impairment under the transitional
accounting provisions of FAS 142, goodwill must first be allocated to reporting
units. FAS 142 requires us to compare the fair value of the reporting unit to
its carrying value to determine if there is potential impairment. If the fair
value of the reporting unit is less than its carrying value, an impairment loss
would be recognized to the extent that the fair value of the goodwill within the
reporting unit is less than the carrying value. For purposes of applying the
provisions of FAS 142, we have determined that we are one reporting unit. The
fair value of the reporting unit exceeded the carrying value of the reporting
unit at January 1, 2002. Accordingly, we did not recognize an impairment loss
with respect to our goodwill.
48
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of the prior-year periods'
reported net income (loss) to adjusted net income (loss) had FAS 142 been
applied as of the beginning of 2001.
YEAR ENDED
DECEMBER 31, 2001
-------------------------
(IN THOUSANDS OF DOLLARS)
Reported net income (loss) ............................ $(10,054)
Add back amortization (net of tax):
Goodwill ........................................... 1,266
Trademarks ......................................... 127
--------
Adjusted net income (loss) ............................ $ (8,661)
========
FIN 46R. In December 2003, the Financial Accounting Standards Board (FASB)
issued revised FASB Interpretation No. (FIN) 46R, "Consolidation of Variable
Interest Entities." We must adopt this accounting guidance effective January 1,
2005. Under FIN 46R, we will be required to consolidate into our consolidated
financial statements the entity that is the lessor under our master lease
program (see Note 13) 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 46R 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 46R in our consolidated financial
statements.
FIN 45. In November 2002, the FASB issued FIN 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires that, at the inception of a guarantee,
the guarantor recognize a liability for the noncontingent portion of that
guarantee, initially measured at fair value. FIN 45 also requires certain
disclosures about guarantees. The initial recognition provisions of FIN 45 must
be applied only on a prospective basis for guarantees issued after December 31,
2002, while we are required to adhere, and have adhered, to the disclosure
requirements in our consolidated financial statements. While we offer a warranty
of our workmanship in our truck maintenance and repair shops, the annual
warranty expense and corresponding liability are immaterial. We do not issue or
provide guarantees and the initial recognition of FIN 45 did not have a material
effect on our results of operations or financial position. Adopting FIN 45 did
not affect our liquidity.
FAS 146. In June 2002, the FASB issued FAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This new accounting standard
significantly changes how entities account for exit and disposal activities,
including restructuring activities. The provisions of FAS 146 are effective for
exit or disposal activities initiated after December 31, 2002. Such activities,
and the related costs, have not been significant for us in previous years and we
do not expect them to be in future years.
FAS 148. In December 2002, the FASB issued FAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure (an amendment of FAS 123)."
FAS 148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation and
also amends the disclosure requirements of FAS 123 to require prominent
disclosures about the method of accounting for stock-based employee compensation
and the effect of the chosen method on reported results. We have not elected to
change to the fair value based method of accounting for stock-based employee
compensation and have made the required disclosures in our consolidated
financial statements.
49
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 any 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 any 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. Adopting FAS 150 will
not affect our cash payments or liquidity and is not expected to materially
affect our financial position or results of operations.
5. COMPREHENSIVE INCOME
Income tax provision (benefit) related to other comprehensive income
(loss) consisted of the following:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2002 2003
----- ---- ----
(IN THOUSANDS OF DOLLARS)
Related to gain or loss on derivative instruments ........... $(814) $990 $ --
Related to change in accounting principle ................... (176) -- --
Related to foreign currency translation adjustments ......... -- -- 320
----- ---- ----
Total .................................................... $(990) $990 $320
===== ==== ====
6. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
-----------------
2002 2003
------- -------
(IN THOUSANDS OF DOLLARS)
Non-fuel merchandise ....................... $55,460 $57,881
Petroleum products ......................... 6,477 6,100
------- -------
Total inventories ................... $61,937 $63,981
======= =======
7. NOTES RECEIVABLE
We have notes receivable agreements with certain parties that financed a
portion of the purchases of travel center sites we have sold. The notes have
original terms ranging from five to ten years and principally accrue interest at
a variable rate of the prime lending rate plus 1% to 2%.
We also have full recourse notes receivable from management stockholders
received as partial consideration for purchases of common stock (see Note 18).
These notes accrue interest at fixed rates between 4.86% and 7.0%, compounded
semi-annually. Accrued and unpaid interest together with unpaid principal, if
not sooner paid, is due and payable on the earliest of:
- the date of cessation of employment of the employee;
- the date the employee is no longer the owner of the related shares
of common stock; or
- generally, 14 1/2 years from the issuance date of the note.
50
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Notes receivable consisted of the following:
DECEMBER 31,
--------------------------
2002 2003
-------- --------
(IN THOUSANDS OF DOLLARS)
Principal amount of notes receivable outstanding .. $ 1,636 $ 1,379
Less: amount due for stock purchases .............. 1,072 1,022
Less: allowance for doubtful notes ................ 384 289
-------- --------
180 68
Less: amounts due within one year, net of allowance 44 68
-------- --------
Notes receivable, net ............................. $ 136 $ --
======== ========
The amount due within one year is included within other current assets in
our balance sheet and the amount of notes receivable, net is included within
other assets in our balance sheet. The amount due for stock purchases is
included as a reduction to the redeemable equity balance in our balance sheet
(see Note 14).
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
--------------------------
2002 2003
-------- --------
(IN THOUSANDS OF DOLLARS)
Land ............................... $ 68,253 $ 69,130
Buildings and improvements ......... 391,896 424,102
Machinery, equipment and furniture . 246,584 275,642
Construction in progress ........... 34,373 14,644
-------- --------
Total cost ................... 741,106 783,518
Less: accumulated depreciation ..... 296,909 345,385
-------- --------
Property and equipment, net .. $444,197 $438,133
======== ========
At December 31, 2001, we were holding for sale eight facilities, two of
which had been closed during 1999. Based on the estimated sales proceeds and
costs of selling these sites, impairment charges of $1,475,000 were recognized
during the year ended December 31, 2002. These charges were included in
depreciation and amortization expense in our consolidated statement of
operations and our consolidated statement of cash flows. During 2002, we sold
four of these facilities, including one of the closed locations, and in January
2003 we sold another of these facilities. The other three sites for which we had
been accounting as assets held for sale were not sold within the one-year period
required by FAS 144. Accordingly, since the fourth quarter of 2002, we no longer
account for these sites as assets held for sale. A charge of $231,000 was
recorded in the fourth quarter to recognize the depreciation expense related to
those sites that had not been depreciated throughout the year while these sites
were being accounted for as held for sale.
Effective April 1, 2001, we changed our accounting estimates related to
depreciation. Based upon our evaluation of our assets, our estimates of the
useful lives for certain types of property and equipment were extended five
years. These changes reduced depreciation expense by $8,514,000 and net loss by
$5,142,000 for the year ended December 31, 2001.
51
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. GOODWILL AND INTANGIBLE ASSETS
Goodwill. Goodwill results from our business acquisitions and represents
the excess of amounts paid to the sellers over the fair values of the tangible
assets acquired and was being amortized until our adoption of FAS 142 on January
1, 2002 (see Note 4). For the years ended December 31, 2001, 2002 and 2003, we
recorded goodwill of $145,000, $4,242,000 and $1,999,000, respectively, in
connection with converting leased sites to company-operated sites. The changes
in the carrying amount of goodwill for the years ended December 31, 2001, 2002
and 2003 were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2002 2003
-------- ------- -------
(IN THOUSANDS OF DOLLARS)
Balance as of beginning of period ........ $ 20,790 $19,343 $23,585
Goodwill recorded during the period ...... 145 4,242 1,999
Amortization recorded during the period .. (1,592) -- --
-------- ------- -------
Balance as of end of period .............. $ 19,343 $23,585 $25,584
======== ======= =======
Intangible Assets. As part of acquisition of the Unocal network, we
entered into a noncompetition agreement with Unocal pursuant to which Unocal
agreed to refrain from re-entering the truckstop business for a period of ten
years from the acquisition date. The intangible asset related to this
noncompetition agreement represents the present value, at the time of the
acquisition of the Unocal network, of the estimated cash flows we would lose due
to competition resulting from re-entry of Unocal into the travel center market
were they not constrained from doing so. The Unocal noncompetition agreement was
being amortized over its ten year life, which expired in April 2003.
Leasehold interest represents the value, obtained through the BP
acquisition, of favorable lease provisions at one location, the lease for which
extended 11 1/2 years from the date of the BP acquisition. The leasehold
interest is being amortized over the 11 1/2 year period.
Trademarks relate primarily to our purchase of the trademarks, service
marks, trade names and commercial symbols from BP and Travel Ports. The
trademarks were being amortized until our adoption of FAS 142 on January 1, 2002
(See Note 4).
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,
--------------------------
2002 2003
---------- -----------
(IN THOUSANDS OF DOLLARS)
Amortizable intangible assets:
Noncompetition agreements ............................................. $ 17,200 $ 17,350
Leasehold interest .................................................... 1,724 1,724
Other ................................................................. 849 865
-------- --------
Total amortizable intangible assets ............................. 19,773 19,939
Less - accumulated amortization ................................................ 18,848 19,534
-------- --------
Net carrying value of amortizable intangible assets ............. 925 405
Net carrying value of trademarks ............................................... 1,398 1,398
-------- --------
Intangible assets, net .......................................... $ 2,323 $ 1,803
======== ========
52
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Total amortization expense for our amortizable intangible assets for
the years ended December 31, 2001, 2002 and 2003 was $1,896,000, $1,896,000 and
$686,000, respectively. The estimated aggregate amortization expense for our
amortizable intangible assets for each of the five succeeding fiscal years are
$191,000 for 2004; $87,000 for 2005; $10,000 for 2006; $10,000 for 2007; and
$10,000 for 2008.
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
DECEMBER 31,
------------------------
2002 2003
--------- ---------
(IN THOUSANDS OF DOLLARS)
Taxes payable, other than income taxes ........... $ 17,864 $ 16,785
Accrued wages and benefits ....................... 17,058 13,193
Interest payable ................................. 4,640 6,952
Other accrued liabilities ........................ 11,777 13,090
--------- ---------
Total other accrued liabilities .................. $ 51,339 $ 50,020
========= =========
11. REVOLVING LOAN
As part of our Senior Credit Facility, we have available a revolving loan
facility of $100,000,000 (see Note 12). The interest rate for borrowings under
this revolving loan facility is based on either a prime rate-based alternate
base rate plus 1.75% or an adjusted London Interbank Offered Rate (LIBOR) plus
2.75%. Commitment fees are calculated as 0.5% of the daily average unused amount
of the revolving loan commitment. At December 31, 2002 and 2003, there were
outstanding borrowings under our revolving credit facilities of $22,400,000 and
$13,600,000, respectively. There were $21,815,000 of available borrowings
reserved for letters of credit at December 31, 2003. The revolving loan facility
matures in November 2006.
12. LONG-TERM DEBT
In November 2000, we completed a refinancing, which we refer to as the
"2000 Refinancing." In the 2000 Refinancing, we issued $190,000,000 of senior
subordinated notes due 2009 and borrowed $328,300,000 under our amended and
restated senior credit facility that consisted of a fully-drawn $328,000,000
term loan facility and a $100,000,000 revolving credit facility.
53
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt (net of unamortized discount) consisted of the following:
DECEMBER 31,
----------------------
INTEREST
RATE MATURITY 2002 2003
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
Senior Credit Facility - Term Loan (a) ........... (b) 2008 $324,720 $310,212
Senior Credit Facility - Revolver (a) ............ (c) 2006 22,400 13,600
Senior Subordinated Notes due 2009 (d) ........... 12.75% 2009 190,000 190,000
Note payable (e) ................................. 5.00% 2018 4,284 4,104
-------- --------
Total ...................................... 541,404 517,916
Less: amounts due within one year ................ 3,460 3,354
Less: unamortized discount ....................... 14,010 12,529
-------- --------
Long-term debt (net of unamortized discount) $523,934 $502,033
======== ========
- --------------
(a) On November 14, 2000, in connection with the 2000 Refinancing, we entered
into a $428,000,000 Amended and Restated Credit Agreement with a group of
lenders, which borrowing we refer to as our Senior Credit Facility. The
Senior Credit Facility consists of a $328,000,000 term loan facility,
which was fully drawn at closing, and a $100,000,000 revolving credit
facility (see Note 11). Term loan principal payments are due at each
quarter end. The term loan facility matures in November 2008.
(b) Interest accrues at variable rates based on either adjusted LIBOR plus
3.25% or, at our election, a prime rate-based alternate base rate plus
2.25%. We have the option to select which rate will be applied at the
beginning of each loan period, the term of which, for LIBOR borrowings,
varies, at our election, from one to six months and, for alternate base
rate borrowings, extends until we elect to convert to LIBOR borrowings. At
December 31, 2003, the term loan was comprised of borrowings at an average
rate of 4.38% for various 30-day periods ending in January 2004. Interest
payments are due at each quarter end for interest related to alternate
base rate borrowings and at the end of each loan period, but not less
frequently than quarterly, for LIBOR borrowings.
(c) Interest accrues at variable rates based on either adjusted LIBOR plus
2.75% or, at our election, a prime rate-based alternate base rate plus
1.75%. We have the option to select which rate will be applied at the
beginning of each loan period, the term of which, for LIBOR borrowings,
varies, at our election, from one to six months and, for alternate base
rate borrowings, extends until we elect to convert to LIBOR borrowings. At
December 31, 2003 we had $8,000,000 of LIBOR borrowings at an average rate
of 3.9375% for various 30-day periods ending in January 2004 and
$5,600,000 of alternate base rate borrowings at 5.75%. Interest payments
are due at each quarter end for interest related to alternate base rate
borrowings and at the end of each loan period, but not less frequently
than quarterly, for LIBOR borrowings.
(d) On November 14, 2000, in connection with the 2000 Refinancing, we issued
Senior Subordinated Notes with an aggregate face amount of $190,000,000.
These notes were issued at a discount of 3.704% and each $1,000 note was
accompanied by detachable warrants (see Note 15). The warrants had an
aggregate fair value at issuance of $8,360,000. Based on the relative fair
values of the notes and the warrants at the time of issuance, $8,050,000
has been recognized as unamortized debt discount in our balance sheet, as
has been the original issue discount of the notes. The debt discount is
being amortized into interest expense using the effective interest method
over the life of the notes. Interest payments on these notes are due
semiannually on May 1 and November 1. Optional prepayments are allowed
under certain circumstances, any such payments reducing the required
payment of $190,000,000 due on May 1, 2009.
54
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(e) On September 1, 1998, in connection with the purchase of the operating
assets of a leased site, we issued a note payable to the former operator
of the site for $4,919,000. The note bears interest at 5% and requires
quarterly payments of principal and interest of $98,000 through October 1,
2018. The note was recorded net of a discount of $1,875,000. This note is
collateralized by a mortgage interest in the related travel center.
Pledged Assets. The borrowings under the Senior Credit Facility are
collateralized by mortgages on substantially all of our property and equipment,
liens on all of our accounts receivable and inventories and security agreements
related to our cash balances and significant operating contracts.
Change of Control. In the event of a change in control (as defined
in the relevant instruments) of the company, the total amount outstanding under
the debt agreements described above may be declared immediately due and payable.
Mandatory Prepayments. The Senior Credit Facility obligates us to
make annual mandatory prepayments of term loan indebtedness equal to one-half of
the Excess Cash Flow (as defined in the agreement) amount generated in the
previous year. We generated no Excess Cash Flow during the year ended December
31, 2001. For the year ended December 31, 2002 we generated approximately
$22,627,000 of Excess Cash Flow and, therefore, prepaid $11,314,000 of the term
loan in April 2003. For the year ended December 31, 2003, we generated
approximately $25,312,000 of Excess Cash Flow and, therefore, are obligated to
prepay $12,656,000 of the term loan by April 15, 2004. These mandatory
prepayments reduce our scheduled future quarterly payments on a pro rata basis.
Debt Covenants. Under the terms of the Senior Credit Facility, we
are required to maintain certain affirmative and negative covenants, that, among
other things, limit the amount of indebtedness we can incur, limit the amount of
lease payments we can make, limit the amount of dividend payments and debt
prepayments we can make, limit the amount of capital expenditures we can make
and require us to maintain a minimum interest coverage ratio and a maximum
leverage ratio. We were in compliance with the covenants throughout 2003 and at
December 31, 2003.
Under the terms of the Indenture for the Senior Subordinated Notes
due 2009, we are required to maintain certain affirmative and negative covenants
that, among other things, limit our ability to incur indebtedness, pay
dividends, redeem stock or sell assets or subsidiaries. We were in compliance
with the covenants throughout 2003 and at December 31, 2003.
Future Payments. Scheduled payments of long-term debt in the next
five years, including the mandatory prepayment based on Excess Cash Flow
generated in the year ended December 31, 2003, are $15,913,000 in 2004;
$3,234,000 in 2005; $16,845,000 in 2006; $74,600,000 in 2007 and $214,265,000 in
2008. Although we are obligated to make a $12,656,000 mandatory prepayment of
the term loan, based on our intent and ability to finance this short-term
obligation with borrowings under the revolving credit facility that does not
mature until 2006, we have continued to classify this $12,656,000 within the
long-term debt balance in our consolidated balance sheet as of December 31,
2003.
Fair Value. Based on the borrowing rates currently available to us
for bank loans and other indebtedness with similar terms and average maturities
and the year-end quoted market price of the Senior Subordinated Notes due 2009,
the fair value of long-term debt at December 31, 2002 and 2003 was $551,391,000
and $545,116,000, respectively.
55
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. LEASING TRANSACTIONS
As a lessee. 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, they include escalation clauses and purchase options. Future
minimum lease payments required under operating leases that had remaining
noncancelable lease terms in excess of one year, as of December 31, 2003, were
as follows:
YEAR ENDING MINIMUM LEASE
DECEMBER 31, PAYMENTS
- ------------ --------------------------
(IN THOUSANDS OF DOLLARS)
2004.................................................... $ 20,248
2005.................................................... 19,254
2006.................................................... 60,503
2007.................................................... 8,694
2008.................................................... 7,722
Thereafter.............................................. 81,863
------------------
$ 198,284
==================
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
December 2003, the FASB issued revised FIN 46R, "Consolidation of Variable
Interest Entities." We must adopt this accounting guidance effective January 1,
2005. Under FIN 46R, 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.
Rent expense under our operating leases is included in both operating
expenses and selling, general and administrative expenses in our consolidated
statement of operations and comprehensive income and consisted of the following:
56
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2002 2003
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Minimum rent ................ $ 22,286 $ 23,623 $ 24,061
Contingent rent ............. (596) (2,201) (2,690)
-------- -------- --------
Total rent expense ....... $ 21,690 $ 21,422 $ 21,371
======== ======== ========
Contingent rent represents the increases or decreases in lease payments
that result from changes after the inception of the lease in the factors on
which the lease payments are based. For us, contingent rent relates to those
leases that provide for increases in rent payments based on changes in the
consumer price index, increases in rent payments based on the level of sales
and/or operating results of the leased site, and changes in rent payments based
on changes in interest rates, specifically LIBOR.
As a lessor. Twenty of the travel centers we owned during the year ended
December 31, 2003 were leased to franchisees under operating lease agreements.
During 2003, six of these leases were mutually terminated, and, as a result,
these sites were converted to company-operated sites. At December 31, 2003, we
had such lease arrangements in place at 14 of our sites. Our lease agreements
provide for initial terms of ten years with two renewal terms of five years
each. These leases include rent escalations that are contingent on future
events, namely inflation or capital improvements. Rent revenue from such
operating lease arrangements totaled $10,981,000, $9,488,000 and $7,564,000 for
the years ended December 31, 2001, 2002 and 2003, respectively. At December 31,
2003, the cost and accumulated depreciation of the assets covered by these lease
agreements was $30,298,000 and $12,912,000, respectively.
14. REDEEMABLE EQUITY
At each of December 31, 2002 and 2003, there were 182,800 shares of our
common stock owned by certain of our management employees. We refer to these
shares of common stock as management shares. For the purchase of management
shares, each of the management employees who entered into the management
subscription agreement received financing from us for no more than one-half of
the purchase price of the management shares. In connection with this financing
each management employee executed a note in our favor and a pledge agreement. At
December 31, 2002 and 2003, the aggregate principal amount of such notes due us
from the management employees was $1,072,000 and $1,022,000, respectively (see
Note 7), and is reflected as a reduction to the redeemable common stock balance.
Under the terms of the management subscription agreements and other
agreements governing the management shares, the management employees have rights
to require us to repurchase the management shares at fair market value upon the
employee's termination of employment due to death, disability or scheduled
retirement. Repurchase will generally be for cash at the fair market value on
the date of termination if termination is due to death or disability or
scheduled retirement at or after age 62, or for cash in installments over a
period of years at fair market value each year if termination is due to
scheduled retirement prior to age 62. Prior to an initial public offering of our
common stock, the fair market value is determined by a formula set forth in the
agreement that can be modified by the Board of Directors. The formula to
calculate the fair market value is (A) the product of (1) a multiplier
(currently 6.5) and (2) EBITDA (as defined in our bank debt agreement) for the
most recent four consecutive full fiscal quarters, plus (B) consolidated cash
and cash equivalents in excess of $10,000,000, minus (C) consolidated
indebtedness, divided by (D) the total number of shares of common stock
outstanding on a fully diluted basis assuming full conversion and exercise of
all common stock equivalents and similar stock rights.
57
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
If there is a change of control of us which involves the sale by
stockholders of their equity interest to a third party during the time that
installments are being paid to the management employees, we will accelerate the
installment payments at the time of the close of the change of control. In other
cases of termination, we will have call rights at fair market value that
generally will be exercised for cash, although in limited circumstances the call
rights may be exercised by promissory note. In all cases, repurchase rights are
restricted under law, credit agreements, financing documents and other
contracts, and our board's good faith determination that repurchases would not
cause undue financial strain on us. The Senior Credit Facility and the Senior
Subordinated Notes limit our ability to repurchase the management shares. The
amount paid upon repurchase of any management shares will be reduced by the
principal balance of and unpaid accrued interest on the related notes
receivable. At the point in time that redemption of shares of redeemable common
stock becomes probable, the fair value of the shares will be accreted to their
estimated redemption value by a charge to nonredeemable stockholders' equity.
Such a charge to nonredeemable stockholders' equity will occur only if our
value, and therefore the fair value of our common stock, has increased. Our
policy is to consider redemption of an individual stockholder's shares probable
at the time that the stockholder provides notice of his or her intention to
retire, dies or is declared disabled.
15. NONREDEEMABLE STOCKHOLDERS' EQUITY
Common stock and other nonredeemable stockholders' equity consisted of the
following:
DECEMBER 31,
---------------------------
2002 2003
-------- --------
(IN THOUSANDS OF DOLLARS)
Common Stock - 20,000,000 shares authorized, $0.00001 par value,
6,939,498 shares outstanding at December 31, 2002 and 2003 .. $ 3 $ 3
Accumulated other comprehensive income ......................... -- 804
Additional paid-in capital ..................................... 217,290 217,071
-------- --------
Total ........................................... $217,293 $217,878
======== ========
The numbers of outstanding shares of common stock in the table include the
redeemable shares owned by certain of our management employees as discussed in
Note 14.
MERGER AND RECAPITALIZATION
On May 31, 2000, we and shareholders owning a majority of our voting stock
entered into a recapitalization agreement and plan of merger, as subsequently
amended, with TCA Acquisition Corporation, a newly created corporation formed by
Oak Hill Capital Partners, L.P. and its affiliates, under which TCA Acquisition
Corporation agreed to merge with and into us. This merger was completed on
November 14, 2000. Concurrent with the closing of the merger, we completed a
series of transactions to effect a recapitalization that included the following.
- TCA Acquisition Corporation issued 6,456,698 shares of common stock
to Oak Hill and other institutional investors for proceeds of
$205,000,000 and then merged with and into us. We incurred
$3,015,000 of fees and expenses related to the issuance of these
shares of common stock. These stock issuance costs were charged
against additional paid-in capital.
- We redeemed all shares of our common and preferred stock outstanding
prior to the closing of the merger, with the exception of 473,064
shares of common stock with a market value at that time of
$15,020,000 that were retained by continuing stockholders, and
cancelled all outstanding common stock options and warrants, for
cash payments totaling $263,153,000.
- All shares of treasury stock were cancelled.
58
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
After the transactions described above, Oak Hill owned 60.5% of our
outstanding common stock, the Other Investors owned, in the aggregate, 32.7% of
our outstanding common stock, Freightliner owned 4.3% of our outstanding common
stock and certain members of our management owned 2.5% of our outstanding common
stock. The total amount of our equity capitalization after these transactions,
given the $31.75 per share merger consideration that was paid in our merger and
recapitalization transactions, was $220,020,000. The transactions described
above, which resulted in a change of control over us, have been accounted for as
a leveraged recapitalization, as opposed to a purchase business combination,
since the change of control was effected through issuance of new shares to our
new control group in conjunction with a redemption of most of our then
outstanding equity securities. We followed leveraged recapitalization accounting
because of the significance of the ownership interest in us that was retained by
continuing stockholders. In accounting for our leveraged recapitalization, we
retained the historical cost bases of our assets and liabilities and
consequently recorded charges totaling $178,965,000 to our equity accounts upon
the redemption of equity securities. This accounting treatment contrasts with
that followed in a purchase business combination, in which a company reflects
the new basis in its assets and liabilities of its new control group by
increasing or decreasing its historical balances based on the estimated fair
values at that time and avoids the charge to equity that accompanies the
redemption of equity securities.
OTHER COMMON STOCK ISSUANCES
During the years ended December 31, 2001 and 2002, we issued 2,434 and
7,302 respectively, shares of common stock to certain members of management for
cash and notes receivable (see Notes 7, 14 and 18) aggregating $77,000 and
$232,000, respectively.
PREFERRED STOCK
The board of directors has the authority to issue preferred stock in one
or more classes or series and to fix the designations, powers, preferences and
dividend rates, conversion rights, terms of redemption, and liquidation
preferences and the number of shares constituting each class or series. Our
authorized capital stock includes 5,000,000 shares of preferred stock with a par
value of $0.00001.
COMMON STOCK
Voting Rights. Each share of common stock entitles the holder to one vote
on all matters submitted to a vote of our stockholders.
Dividends. Holders of common stock are entitled to receive dividends if,
as and when declared by our board of directors out of funds legally available.
Our debt agreements limit the amount of dividends we are able to pay.
Liquidation Rights and Other Rights. Upon our liquidation, dissolution or
winding up, the holders of our common stock will be entitled to share pro rata
in the distribution of all of our assets remaining after satisfaction of all of
our liabilities and the payment of the liquidation preference of any outstanding
preferred stock. The holders of our common stock do not have any conversion,
redemption or preemptive rights.
Repurchase Rights. Certain members of our senior management have purchased
shares of our common stock pursuant to individual management subscription
agreements. We have the right to repurchase, and the employees have the right to
require us to repurchase, subject to certain limitations, at fair market value,
these shares of common stock upon termination of employment due to death,
disability or a scheduled retirement. These shares are classified as redeemable
equity in our consolidated balance sheet (see Note 14).
59
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
REGISTRATION RIGHTS
Under a stockholders' agreement to which all of our stockholders are
party, certain of our stockholders have the right, under certain circumstances,
to require us to register under the Securities Act of 1933 shares of our common
stock held by them and allow them to include shares of common stock held by them
in a registration under the Securities Act commenced by us.
COMMON STOCK WARRANTS
In connection with the issuance of our Senior Subordinated Notes due 2009
as part of our merger and recapitalization transactions, we issued warrants
exercisable for shares of our common stock. The warrants were issued under a
warrant agreement between us and State Street Bank and Trust Company, as warrant
agent. We originally issued initial warrants in connection with a private
placement of 190,000 units, each unit consisting of one Senior Subordinated Note
due 2009, three initial warrants and one contingent warrant. Each warrant,
whether initial or contingent, entitles its holder to purchase 0.36469 shares of
our common stock at an exercise price of $0.001 per share, subject to
anti-dilution adjustments under some circumstances. At the time of their
issuance in November 2000, each warrant had a fair value of $11.579, or $31.75
per share for each share issuable upon the exercise of the warrants (subject to
an estimated 20% discount for the contingent warrants). The fair value of the
warrants was initially recognized as unamortized debt discount and is being
amortized into interest expense using the effective interest method over the
life of our Senior Subordinated Notes. We have no warrants outstanding other
than the 570,000 initial warrants and the 190,000 contingent warrants.
Initial Warrants. The initial warrants entitle the holders to purchase
207,874 shares of our common stock at an exercise price of $0.001 per share.
Contingent Warrants. The contingent warrants entitle the holders to
purchase 69,291 shares of common stock at an exercise price of $0.001 per share.
From the time of consummation of the private placement in November 2000, the
contingent warrants were held in escrow under an escrow agreement between us and
State Street Bank and Trust Company, as escrow agent and, subject to some
conditions that have been met, were to be released from escrow and distributed
to holders of the initial warrants on March 31, 2003, the contingent warrant
release date. The contingent warrants were to be released from escrow and
delivered to us for cancellation only if, as of December 31, 2002:
- the Consolidated Leverage Ratio, as defined in the indenture
governing the notes, is equal to or less than 4.5 to 1.0 and our
chief financial officer delivers a certificate to that effect to the
escrow agent prior to the contingent warrant release date, or
- all of the notes have been repaid, redeemed or repurchased by us.
As neither of these conditions were met on the contingent warrant release date,
the contingent warrants were distributed pro rata to all the registered holders
of initial warrants determined as of the contingent warrant release date.
Exercise of Warrants. The initial warrants may be exercised at any time on
or after November 14, 2001, and the contingent warrants may be exercised at any
time after the contingent warrant release date. However, holders of warrants
will be able to exercise their warrants only if the shelf registration statement
is effective or the exercise of the warrants is exempt from the requirements of
the Securities Act and only if the shares of common stock are qualified for sale
or exempt from qualification under the applicable securities laws of the states
or other jurisdiction in which the holders reside. Unless earlier exercised, the
warrants will expire on May 1, 2009.
60
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At our option, fractional shares of common stock may not be issued upon
exercise of the warrants. If any fraction of a share of common stock would,
except for the foregoing provision, be issuable upon the exercise of any
warrants, we will pay an amount in cash equal to the current market value per
share of common stock, as determined on the day immediately preceding the date
the warrant is presented for exercise, multiplied by the fraction, computed to
the nearest whole cent. The exercise price and the number of shares of common
stock issuable upon exercise of a warrant are both subject to adjustment in
certain cases.
No Rights as Stockholders. The holders of unexercised warrants are not
entitled, as such, to receive dividends, to vote, to consent, to exercise any
preemptive rights or to receive notice as our stockholders of any stockholders
meeting for the election of our directors or any other purpose, or to exercise
any other rights whatsoever as our stockholders.
STOCK AWARD AND OPTION PLAN
2001 Stock Plan. During 2001, we granted to certain of our executives
non-qualified stock options to purchase 944,881 shares of our common stock under
a stock incentive plan our board of directors adopted in November 2000 and which
was approved by a vote of our stockholders in 2001. All of the options have a
term of 10 years from the date of grant, although the options will be terminated
earlier if certain customary events occur. For example, if an executive's
employment is terminated by us without cause or by the executive for good reason
or due to death, disability or scheduled retirement, all vested options will
expire 60 days following termination of employment. Under certain circumstances,
the executive will be allowed to hold a limited portion of his unvested options
for a longer period of time following termination of employment for further
vesting. Each option grant consists of 41.67% time options and 58.33%
performance options. Time options become exercisable with the passage of time,
while performance options become exercisable if certain investment return
targets are achieved. Time options generally vest 20% per year over a period of
five years. Performance options vest if Oak Hill achieves specified internal
rates of return on specified measurement dates. In general, the number of
performance options that will vest is based upon Oak Hill achieving internal
rates of return between 22.5% and 30.0% on a measurement date. A measurement
date is generally defined as the earliest of (1) five years from the closing of
the merger and recapitalization transactions (November 14, 2000), (2) specified
dates following an initial public offering of our stock, depending on the date
the initial public offering occurs, or (3) the date that at least 30% of our
shares owned by Oak Hill are distributed to its limited partners or sold, except
that a subsequent measurement date may occur if less than 100% of our shares
owned by Oak Hill are so sold or distributed. Vesting is partially accelerated
for time options following termination of employment due to death, disability or
scheduled retirement. If a change of control occurs, the vesting of time options
will fully accelerate. Option holders will have rights to require us to
repurchase shares obtained upon the exercise of vested options upon a
termination of employment due to disability, death or, subject to a six-month
holding period, scheduled retirement, and, in certain limited cases, upon a
change of control. In connection with our initial grant of options under this
plan, we established and granted a discretionary pool of options that will be
allocated periodically, first to new members of management who become option
holders after the date of the initial grant, and then to other members on a pro
rata basis. The total number of shares underlying the initial grant of options
will not increase as a result. The time options are subject to fixed plan
accounting and, accordingly, no charge to earnings will be required with respect
to them since the exercise price equaled the fair value at the date of grant.
The performance options are subject to variable plan accounting and,
accordingly, a non-cash charge to earnings will be required when it becomes
probable that the performance triggers for such options will be achieved. It is
not possible to determine at this time, nor may it be possible until close to
the end of the five-year performance period, whether it will be probable that we
will achieve the performance triggers. It is not possible to predict whether any
such required non-cash charge will be material to our results for the period in
which the charge is recognized, as we expect that the performance triggers can
only be attained as a result of a significant increase in our results of
operations. The options granted to future participants in the option plan under
the discretionary pool, including time options, also may be subject to a
compensation charge.
61
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Status Summary. The following table reflects the status and
activity of options under our stock plans:
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2002 2003
--------- --------- ---------
Options outstanding, beginning of year ............................ -- 944,881 944,881
Granted ........................................................... 944,881 -- --
Exercised ......................................................... -- -- --
Cancelled ......................................................... -- -- --
--------- --------- ---------
Options outstanding, end of year .................................. 944,881 944,881 944,881
========= ========= =========
Options exercisable, end of year .................................. 78,740 157,480 236,220
Options available for grant, end of year .......................... -- -- --
Weighted-average remaining contractual life of options outstanding,
in years ...................................................... 9 8 7
The weighted-average exercise price was $31.75 per share for those options
granted during 2001 and for all outstanding options as of December 31, 2001,
2002 and 2003.
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 the years ended
December 31, 2001, 2002 and 2003, no stock-based employee compensation cost is
reflected in net income, as all time options granted under those plans had an
excise price equal to the market value of the underlying common stock on the
date of grant and the vesting of the performance options is not considered to be
probable.
16. INCOME TAXES
The (benefit) provision for income taxes was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2002 2003
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Current:
Federal ....................... $ (44) $ (3,956) $ 56
State ......................... 1,607 1,227 1,065
Foreign ....................... -- -- 63
-------- -------- --------
1,563 (2,729) 1,184
-------- -------- --------
Deferred:
Federal ....................... (8,847) 3,494 3,587
State ......................... (237) (804) 76
Foreign ....................... -- -- (128)
-------- -------- --------
(9,084) 2,690 3,535
-------- -------- --------
Total .................. $ (7,521) $ (39) $ 4,719
======== ======== ========
62
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The difference between taxes calculated at the U. S. federal statutory tax
rate of 35% and our total income tax provision is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2002 2003
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
U.S. federal statutory rate applied to income before taxes and
extraordinary items ........................................ $ (6,152) $ 431 $ 4,852
State income taxes, net of federal income tax benefit ........ 808 (6) 768
Non-deductible meals and entertainment expenses .............. 172 165 187
Non-deductible amortization .................................. 240 -- --
Merger and recapitalization expenses ......................... (2,212) -- --
Other non-deductible expenses ................................ -- 142 26
Benefit of tax credits ....................................... (569) (358) (358)
Adjustment of estimated prior year tax liabilities ........... -- (400) (650)
Other - net .................................................. 192 (13) (106)
-------- -------- --------
Total ............................................. $ (7,521) $ (39) $ 4,719
======== ======== ========
For 2003, income tax benefits of $164,000 allocated to the cumulative
effect of a change in accounting principle of $417,000 differ from the amount
calculated at the federal statutory rate of 35% by $18. This difference is due
to state taxes and graduated tax rates.
Deferred income tax assets and liabilities resulted from the following:
DECEMBER 31,
-----------------------
2002 2003
-------- --------
(IN THOUSANDS OF DOLLARS)
Deferred tax assets:
Accounts receivable ................................ $ 1,340 $ 784
Inventory .......................................... 357 444
Intangible assets .................................. 8,231 7,577
Deferred revenues .................................. 334 180
Minimum tax credit ................................. 3,001 3,086
Net operating loss carryforward (expiring 2020-2022) 24,669 22,024
General business credits (expiring 2009-2023) ...... 4,576 5,128
Other accrued liabilities .......................... 7,245 8,212
-------- --------
Total deferred tax assets ................... 49,753 47,435
-------- --------
Deferred tax liabilities:
Property and equipment ............................. (29,857) (30,910)
Other comprehensive income ......................... -- (320)
-------- --------
Total deferred tax liabilities .............. (29,857) (31,230)
-------- --------
Net deferred tax assets ..................... $ 19,896 $ 16,205
======== ========
63
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2003, we had available to us a net operating loss
carryforward of approximately $65,022,000 that consisted of $36,962,000
remaining carryforward generated in 2000 that expires in 2020, $27,999,000
carryforward generated in 2001 that expires in 2021, and $61,000 carryforward
generated in 2002 that expires in 2022. Internal Revenue Code Section 382
restricts our ability to utilize in the future the net operating loss that we
generated in 2000 because of the change of control we experienced as a result of
our merger and recapitalization transaction in November 2000. The amount of net
operating loss we can utilize will be limited to approximately $12,000,000 per
year and unused amounts of the annual Section 382 limitation can be carried
forward to subsequent years within the carryforward period. As $12,735,000 of
the 2000 net operating loss has been utilized through 2003, usage of the net
operating loss generated in 2000 will be limited to approximately $35,315,000
for 2004. Usage of the net operating losses generated in 2001 and 2002 is
unlimited. Realization of our net deferred tax assets is dependent on future
taxable income. We believe it is more likely than not such net deferred tax
assets will be realized and, accordingly, we have not recognized a valuation
allowance with respect to our net deferred tax assets. Most of our net operating
loss carryforwards were generated as a result of our merger and recapitalization
transactions in November 2000. The remainder of our net operating loss
carryforwards result largely from depreciation and interest deductions and the
trends for these items relative to operating income are expected to decline,
enabling us to generate sufficient taxable income to utilize net operating loss
carryforwards. The level of tax depreciation on our significant capital
investments in 1993 and 1997 through 1999 began to diminish in 2001 and our
level of capital investment in 2001 through 2003 and future years as compared to
prior years has been, and will be, reduced. The relative level of interest
expense to operating income should diminish as the capital projects completed in
1999 through 2003 continue to mature and produce greater amounts of taxable
income while our debt levels decrease or hold relatively steady, enabling us to
keep our interest expense relatively constant or growing at a slower rate than
operating income. Further, we could complete a sale/leaseback of certain of our
travel centers. Although we would not ordinarily execute this tax planning
strategy, we would do so to prevent our net operating loss carryforwards from
expiring unused. The sale/leaseback would be expected to generate a sufficient
taxable gain in the year consummated to fully utilize any expiring unused net
operating loss carryforwards and could be expected to increase our taxable
income in subsequent years as lower interest expense and depreciation deductions
would, in all likelihood, more than offset the additional operating lease
expense. However, ultimate realization of our net deferred tax assets could be
negatively affected by market conditions and other variables not known or
anticipated at this time.
Our federal income tax returns for 2001 through 2003 are subject to
examination by the Internal Revenue Service and certain of our state income tax
returns for various states for various years from 1996 through 2003 are subject
to examination by the respective state tax authorities. We believe we have made
adequate provision for income taxes and interest that may become payable for
years not yet examined.
17. EQUITY INVESTMENT
We own a 21.5% voting interest in Simons Petroleum, Inc. (Simons), a
privately-held company that is a diversified marketer of diesel fuel and other
petroleum products to trucking fleets and other customers in the energy-related
and trucking industries. The carrying value of this investment, which is
included in other noncurrent assets in our consolidated balance sheet, as of
December 31, 2002 and 2003 was $6,698,000 and $7,462,000, respectively. The
equity income earned from this investment for the years ended December 31, 2001,
2002 and 2003 was $400,000, $718,000, and $764,000, respectively. The sale to a
new investor group of 100% of the stock of Simons, including those shares that
we own, is expected to close in early April 2004. Accordingly, after that sale,
we will cease recognition of equity income in the earnings of Simons. We expect
our gain on the sale to be approximately $1,000,000, but the final details of
the transaction are still to be determined. Summarized condensed financial
information of this investee follows:
64
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2002 2003
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Income statement data:
Total revenues .................. $456,077 $413,243 $523,027
Gross profit .................... 21,752 23,292 25,483
Income from continuing operations 1,991 3,727 2,665
Net income ...................... 1,976 3,727 2,665
DECEMBER 31,
-----------------------
2002 2003
-------- --------
(IN THOUSANDS OF DOLLARS)
Balance sheet data:
Current assets ............................... $ 44,175 $ 47,626
Noncurrent assets ............................ 9,334 7,482
Current liabilities .......................... 27,741 27,529
Noncurrent liabilities ....................... 9,324 3,674
Convertible redeemable preferred stock ....... 5,000 5,000
During the years ended December 31, 2001, 2002 and 2003, diesel fuel
provided by Simons accounted for $201,291,000, $183,217,000 and $228,827,000,
respectively, of our cost of goods sold. We made sales of diesel fuel to Simons
in the amounts of $12,742,000, $2,888,000, and 3,328,000, respectively, for the
years ended December 31, 2001, 2002 and 2003. We also lease a travel center from
Simons and the rent expense related to this site for the years ended December
31, 2001, 2002 and 2003 was $408,000 each year. At December 31, 2002 and 2003,
our receivables from Simons were $151,000 and $150,000, respectively, while our
payables to Simons were $357,000 and $49,000, respectively.
18. RELATED PARTY TRANSACTIONS
Certain members of our senior management have purchased common stock
pursuant to management subscription agreements (see Note 15 - Repurchase
Rights). As a result of such purchases, we have notes and related interest
receivable from the management stockholders totaling $1,497,000 and $1,490,000
at December 31, 2002 and 2003, respectively.
19. COMMITMENTS AND CONTINGENCIES
GUARANTEES
In the normal course of business we periodically enter into agreements
that incorporate indemnification provisions. While the maximum amount to which
we may be exposed under such agreements cannot be estimated, it is the opinion
of management that these indemnifications are not expected to have a material
adverse effect on our consolidated financial position or result of operations.
We also offer a warranty of our workmanship in our truck maintenance and repair
shops, but the annual warranty expense and corresponding liability are
immaterial.
65
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ENVIRONMENTAL MATTERS
Our operations and properties are extensively regulated through
environmental laws and regulations ("Environmental Laws") that (1) 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 (2) 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. While the costs of compliance for
these matters have not had a material adverse impact on us, it is impossible to
predict accurately the ultimate effect changing laws and regulations may have on
us in the future. We incurred capital expenditures, maintenance, remediation and
other environmental related costs of approximately $3,222,000, $3,947,000 and
$4,750,000 in 2001, 2002 and 2003, respectively.
We have received notices of alleged violations of Environmental Laws, or
are otherwise 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 instances of noncompliance, or compliance costs
incurred in connection therewith, will be material to our results of operation
or financial condition. We are conducting investigatory and/or remedial actions
with respect to releases and/or spills of Hazardous Substances at a number of
sites. While we cannot precisely estimate the ultimate costs we will incur in
connection with the investigation and remediation of these matters, based on our
current knowledge, we do not expect that the costs to be incurred for these
matters, individually or in the aggregate, will be material to our results of
operation or financial condition. While the aforementioned matters are, to the
best of our knowledge, the only proceedings for which we are currently exposed
to potential liability, there can be no assurance that additional contamination
does not exist at these or other of our 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 December 31, 2003, we had a reserve for these matters of $4,640,000 and a
receivable for estimated recoveries of these estimated future expenditures of
$884,000. We estimate that the cash outlays related to the matters for which we
have accrued this reserve will be approximately $3,185,000 in 2004; $683,000 in
2005; $289,000 in 2006; $259,000 in 2007; $108,000 in 2008 and $116,000
thereafter. These estimated future cash disbursements are subject to change
based on, among other things, changes in the underlying remediation activities
and changes in the regulatory environment. 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 proceedings, based on
information known to date, will not have a material adverse effect on our
financial condition, results of operations or liquidity. However, it is
reasonably possible that a material change in estimate will occur in the near
term as new matters, or new facts regarding established matters, are identified
and/or as Environmental Laws and other requirements of government agencies
continue to evolve.
In connection with the acquisition of the Unocal network, Phase I
environmental assessments were conducted of the 97 Unocal network properties
purchased by us. Pursuant to an environmental indemnification agreement with
Unocal, Phase II environmental assessments of all Unocal network properties were
completed by Unocal by December 31, 1998. Under the terms of this agreement,
Unocal was responsible for all costs incurred for (a) remediation of
environmental contamination, and (b) otherwise bringing the properties into
compliance with Environmental Laws as in effect at the date of the acquisition
of the Unocal network, with respect to the matters
66
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
identified in the Phase I or Phase II environmental assessments, which matters
existed on or prior to the date of the acquisition of the Unocal network. Under
the terms of this agreement, Unocal was also required to indemnify us against
any other environmental liabilities that arise out of conditions at, or
ownership or operations of, the Unocal network prior to the date of the
acquisition of the Unocal network. In January 2004, a Buy-Out Agreement between
Unocal and us became effective and Unocal's obligations to us under the April
1993 environmental agreement were terminated. In consideration for releasing
Unocal from its obligations under the environmental agreement, Unocal paid us
$2.6 million of cash, funded an escrow account with $5.4 million to be drawn by
us as we incur related remediation costs, and purchased insurance policies that
cap our total future expenditures and provide protection against significant
unidentified matters that existed prior to April 1993. We are now responsible
for all remediation at the former Unocal sites that we still own. We estimate
the costs of the remediation activities for which we assumed responsibility from
Unocal in January 2004 to be approximately $8,248,000, which amount we expect
will be fully covered by the cash received from Unocal and reimbursements from
state tank funds. The liability we assumed was recorded in 2004. We estimate
that the cash outlays related to the matters for which we assumed responsibility
in January 2004 will be approximately $1,140,000 in 2004; $2,205,000 in 2005;
$1,483,000 in 2006; $1,186,000 in 2007; $923,000 in 2008 and $1,311,000
thereafter. These estimated future cash disbursements are subject to change
based on, among other things, changes in the underlying remediation activities
and changes in the regulatory environment. We have just recently assumed
responsibility for these matters and expect that our knowledge of the specific
facts, related costs and timing of payments for each site will improve over
time.
Prior to the acquisition of the BP network, all of the 38 company-owned
locations purchased by us were subject to Phase I and Phase II environmental
assessments, undertaken at BP's expense. The environmental agreement with BP
provides that, with respect to environmental contamination or noncompliance with
Environmental Laws identified in the Phase I or Phase II environmental
assessments, BP is responsible for (a) all costs incurred for remediation of
such environmental contamination, and (b) for otherwise bringing the properties
into compliance with Environmental Laws as in effect at the date of the
acquisition of the BP network.
The remediation must achieve compliance with the Environmental Laws in
effect on the date the remedial action is completed. The environmental agreement
with BP requires BP to indemnify us against any other environmental liabilities
that arise out of conditions at, or ownership or operations of, the BP network
locations prior to the date of the acquisitions of the BP network. We must make
such claims for indemnification before December 11, 2004. BP must also indemnify
us for liabilities relating to non-compliance with Environmental Laws for which
claims were made before December 11, 1996. Except as described above, BP does
not have any responsibility for any environmental liabilities arising out of the
ownership or operations of the BP network after the date of the acquisition of
the BP network. We cannot be certain that BP, if additional environmental claims
or liabilities were to arise under the environmental agreement with BP, would
not dispute our claims for indemnification thereunder.
In connection with the Burns Bros. acquisition, all of the 17 sites
acquired were subject to Phase I environmental assessments, and, based on the
results of those assessments, nine of the sites were subject to Phase II
environmental assessments. The purchase price paid to Burns was adjusted based
on the findings of the Phase I and Phase II environmental assessments. Under the
asset purchase agreement with Burns Bros., we released Burns Bros. from any
environmental liabilities that may have existed as of the Burns Bros.
acquisition date, other than specified non-waived environmental claims as
described in the agreement with Burns Bros.
In connection with the Travel Ports acquisition, all of the 16 sites
acquired were subject to Phase I environmental assessments, and, based on the
results of those assessments, five of the sites were subject to Phase II
environmental assessments. The results of these assessments were taken into
account in recognizing the related environmental contingency accrual for
purchase accounting purposes.
67
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 we are currently not involved in
any litigation, individually or in the aggregate, which could have a material
adverse effect on our business, financial condition, results of operations or
cash flows.
20. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
We attempt to manage the risk arising from changes in interest rates by
using derivative financial instruments such as interest rate swaps. On November
14, 2000, we entered into an interest rate swap agreement with a notional
principal amount of $80,000,000 to exchange our variable rate of LIBOR plus
3.25% with a fixed interest rate of 6.0875%. The swap agreement matured on
December 15, 2002. We had no swap agreements in place throughout 2003 and as of
December 31, 2003.
To qualify for hedge accounting, derivative contracts must meet defined
correlation and effectiveness criteria, be designated as hedges and result in
cash flows and financial statement effects which substantially offset those of
the position being hedged. Amounts receivable or payable under derivative
financial instrument contracts, when recognized, are reported in our
consolidated balance sheet. Pursuant to the provisions of FAS 133, we determined
that the interest rate swap agreement was 100% effective and qualified for cash
flow hedge accounting.
The fair value of the interest rate swap at the time of transition
resulted in a reduction of accumulated other comprehensive income of $343,000
(net of tax), which was recorded as the cumulative effect of an accounting
change in the first quarter of 2001. The decline in the fair value of the swap
agreement for the year ended December 31, 2001, based on bank-quoted market
prices, resulted in the recognition of a further decrease in other comprehensive
income of $1,577,000 (net of tax), and a liability of $2,911,000 as of December
31, 2001. During the year ended December 31, 2002, the fair value of the swap
agreement increased until its maturity on December 15, 2002, resulting in the
recognition of an increase in other comprehensive income of $1,920,000 (net of
tax).
21. OTHER INFORMATION
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2002 2003
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Operating expenses and Selling, general and administrative expenses included the
following:
Repairs and maintenance expenses ........................................... $ 12,596 $ 12,055 $ 13,430
Advertising expenses ....................................................... $ 6,676 $ 7,047 $ 4,715
Taxes other than payroll and income taxes .................................. $ 6,722 $ 7,598 $ 8,611
401(k) plan contribution expense ........................................... $ 1,818 $ 1,779 $ 1,707
Interest and other financial costs consisted of the following:
Cash interest expense ...................................................... $(54,206) $(47,170) $(42,053)
Cash interest income ....................................................... 120 157 96
Amortization of discount on debt ........................................... (1,218) (1,360) (1,481)
Amortization of deferred financing costs ................................... (2,620) (3,050) (3,440)
-------- -------- --------
Interest and other financial costs, net .................................... $(57,924) $(51,423) $(46,878)
======== ======== ========
68
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2002 2003
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
Revolving loan borrowings ................................. $ 669,600 $ 473,800 $ 458,100
Revolving loan repayments ................................. (666,000) (495,300) (466,900)
--------- --------- ---------
Revolving loan borrowings (repayments), net ........... $ 3,600 $ (21,500) $ (8,800)
========= ========= =========
Cash paid during the year for:
Interest .............................................. $ 57,830 $ 47,480 $ 39,645
Income taxes (net of refunds) ......................... $ (4,356) $ (2,559) $ 635
Inventory, property and equipment, and goodwill received in
liquidation of trade accounts and notes receivable .... $ -- $ 2,060 $ 1,226
Notes received from sales of property and equipment ....... $ -- $ 250 $ --
Notes received upon common stock issuance ................. $ 39 $ 116 $ --
23. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance
sheet schedules as of December 31, 2002 and 2003 and our condensed consolidating
statement of operations schedules and condensed consolidating statement of cash
flows schedules for the years ended December 31, 2001, 2002 and 2003. In the
following schedules, "Parent Company" refers to the unconsolidated balances of
TravelCenters of America, Inc., "Guarantor Subsidiaries" refers to the combined
unconsolidated balances of TA Operating Corporation and its domestic
subsidiaries, and "Nonguarantor Subsidiary" refers to the combined balances of
TA Franchise Systems Inc. and our Canadian subsidiaries that are included only
since their formation in January 2003. "Eliminations" represent the adjustments
necessary to (a) eliminate intercompany transactions and (b) eliminate our
investments in our 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
Senior Subordinated Notes due 2009 (see Note 12).
69
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:
DECEMBER 31, 2002
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash .......................................... $ -- $ 14,047 $ -- $ -- $ 14,047
Accounts receivable, net ...................... -- 44,429 857 (991) 44,295
Inventories ................................... -- 61,937 -- -- 61,937
Deferred income taxes ......................... -- 4,182 40 -- 4,222
Other current assets .......................... 445 7,719 -- -- 8,164
------------ ------------ ------------ ------------ ------------
Total current assets ................... 445 132,314 897 (991) 132,665
Property and equipment, net ....................... -- 444,197 -- -- 444,197
Goodwill .......................................... -- 23,585 -- -- 23,585
Deferred financing costs .......................... 27,452 -- -- -- 27,452
Deferred income taxes ............................. 23,696 (5,915) -- -- 17,781
Other noncurrent assets ........................... 996 14,091 -- -- 15,087
Investment in subsidiaries ........................ 241,515 -- -- (241,515) --
------------ ------------ ------------ ------------ ------------
Total assets ........................... $ 294,104 $ 608,272 $ 897 $ (242,506) $ 660,767
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......... $ 3,280 $ 180 $ -- $ -- $ 3,460
Accounts payable .............................. -- 58,354 158 -- 58,512
Other accrued liabilities ..................... 2,979 48,211 1,140 (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 advances ............................. (249,859) 255,226 (5,367) -- --
Other noncurrent liabilities ...................... -- 6,209 -- -- 6,209
------------ ------------ ------------ ------------ ------------
Total liabilities ...................... 277,643 372,978 (4,069) (991) 645,561
Redeemable equity ................................. 681 -- -- -- 681
Nonredeemable stockholders' equity:
Common stock and other stockholders'
equity ..................................... 218,548 185,660 -- (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
============ ============ ============ ============ ============
70
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash .......................................... $ -- $ 14,746 $ 259 $ -- $ 15,005
Accounts receivable, net ...................... -- 43,489 1,056 (1,558) 42,987
Inventories ................................... -- 63,771 210 -- 63,981
Deferred income taxes ......................... -- 3,820 3 -- 3,823
Other current assets .......................... 620 6,598 4 (260) 6,962
------------ ------------ ------------ ------------ ------------
Total current assets ................... 620 132,424 1,532 (1,818) 132,758
Property and equipment, net ....................... -- 431,470 6,663 -- 438,133
Goodwill .......................................... -- 25,584 -- -- 25,584
Deferred financing costs, net ..................... 24,012 -- -- -- 24,012
Deferred income taxes ............................. 21,002 (6,612) 129 -- 14,519
Other noncurrent assets ........................... 896 18,949 -- (4,284) 15,561
Investment in subsidiaries ........................ 266,844 1,702 -- (268,546) --
------------ ------------ ------------ ------------ ------------
Total assets ........................... $ 313,374 $ 603,517 $ 8,324 $ (274,648) $ 650,567
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......... $ 3,165 $ 189 $ -- $ -- $ 3,354
Accounts payable .............................. -- 59,524 854 (624) 59,754
Other accrued liabilities ..................... 2,686 47,037 1,491 (1,194) 50,020
------------ ------------ ------------ ------------ ------------
Total current liabilities .............. 5,851 106,750 2,345 (1,818) 113,128
Long-term debt (net of unamortized discount) ...... 499,417 2,616 4,284 (4,284) 502,033
Deferred income taxes ............................. -- 2,137 -- -- 2,137
Intercompany payable (receivable) ................. (217,296) 222,964 (5,668) -- --
Other noncurrent liabilities ...................... -- 8,318 -- -- 8,318
------------ ------------ ------------ ------------ ------------
Total liabilities ...................... 287,972 342,785 961 (6,102) 625,616
Redeemable equity ................................. 1,919 -- -- -- 1,919
Nonredeemable stockholders' equity:
Common stock and other nonredeemable
stockholders' equity ....................... 217,370 186,155 2,125 (188,731) 216,919
Retained earnings (deficit) ................ (193,877) 74,577 5,238 (79,815) (193,877)
------------ ------------ ------------ ------------ ------------
Total nonredeemable stockholders' equity 23,493 260,732 7,363 (268,546) 23,042
------------ ------------ ------------ ------------ ------------
Total liabilities, redeemable equity and
nonredeemable stockholders' equity . $ 313,374 $ 603,517 $ 8,324 $ (274,648) $ 650,567
============ ============ ============ ============ ============
71
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:
YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel .......................................... $ -- $ 1,331,807 $ -- $ -- $ 1,331,807
Non-fuel ...................................... -- 585,314 -- -- 585,314
Rent and royalties ............................ -- 15,395 6,510 (4,414) 17,491
------------ ------------ ------------ ------------ ------------
Total revenues ................................ -- 1,932,516 6,510 (4,414) 1,934,612
Cost of goods sold (excluding depreciation) ....... -- 1,467,753 -- -- 1,467,753
------------ ------------ ------------ ------------ ------------
Gross profit (excluding depreciation) ............. -- 464,763 6,510 (4,414) 466,859
Operating expenses ................................ -- 325,608 4,474 (4,414) 325,668
Selling, general and
administrative expenses ....................... 958 35,343 2,382 -- 38,683
Depreciation and amortization expense ............. -- 64,347 -- -- 64,347
(Gain) loss on sale of property and equipment ..... -- (1,788) -- -- (1,788)
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ..................... (958) 41,253 (346) -- 39,949
Equity income (loss) .............................. 6,194 400 -- (6,194) 400
Interest and other financial costs, net ........... (25,444) (32,480) -- -- (57,924)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes ................. (20,208) 9,173 (346) (6,194) (17,575)
Provision (benefit) for income taxes .............. (10,154) 2,788 (155) -- (7,521)
------------ ------------ ------------ ------------ ------------
Net income (loss) ................................. $ (10,054) $ 6,385 $ (191) $ (6,194) $ (10,054)
============ ============ ============ ============ ============
72
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel .......................................... $ -- $ 1,237,989 $ -- $ -- $ 1,237,989
Non-fuel ...................................... -- 617,342 -- -- 617,342
Rent and royalties ............................ -- 13,842 6,036 (4,339) 15,539
------------ ------------ ------------ ------------ ------------
Total revenues ................................ -- 1,869,173 6,036 (4,339) 1,870,870
Cost of goods sold (excluding depreciation) ...... -- 1,389,680 -- -- 1,389,680
------------ ------------ ------------ ------------ ------------
Gross profit (excluding depreciation) ............. -- 479,493 6,036 (4,339) 481,190
Operating expenses ................................ -- 332,159 4,403 (4,339) 332,223
Selling, general and
administrative expenses ....................... 813 35,524 1,481 -- 37,818
Depreciation and amortization expense ............. -- 60,301 -- -- 60,301
(Gain) loss on sale of property and equipment ..... -- (1,089) -- -- (1,089)
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ..................... (813) 52,598 152 -- 51,937
Equity income (loss) .............................. 16,976 718 -- (16,976) 718
Interest and other financial costs, net ........... (22,409) (29,014) -- -- (51,423)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes ................. (6,246) 24,302 152 (16,976) 1,232
Provision (benefit) for income taxes .............. (7,517) 7,420 58 -- (39)
------------ ------------ ------------ ------------ ------------
Net income loss ................................... $ 1,271 $ 16,882 $ 94 $ (16,976) $ 1,271
============ ============ ============ ============ ============
73
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel .......................................... $ -- $ 1,502,268 $ 11,380 $ -- $ 1,513,648
Non-fuel ...................................... -- 646,244 3,258 -- 649,502
Rent and royalties ............................ -- 11,623 5,516 (4,059) 13,080
------------ ------------ ------------ ------------ ------------
Total revenues ................................ -- 2,160,135 20,154 (4,059) 2,176,230
Cost of goods sold (excluding depreciation) ...... -- 1,662,643 12,123 -- 1,674,766
------------ ------------ ------------ ------------ ------------
Gross profit (excluding depreciation) ............. -- 497,492 8,031 (4,059) 501,464
Operating expenses ................................ -- 340,008 6,096 (4,059) 342,045
Selling, general and administrative
expenses ...................................... 1,023 38,615 905 -- 40,543
Depreciation and amortization expense ............. -- 59,909 466 -- 60,375
(Gain) loss on sale of property and
equipment ...................................... -- (1,476) -- -- (1,476)
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ..................... (1,023) 60,436 564 -- 59,977
Equity income (loss) .............................. 25,328 651 -- (25,215) 764
Interest and other financial costs, net ........... (23,803) (22,806) (269) -- (46,878)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item ............................. 502 38,281 295 (25,215) 13,863
Provision (benefit) for income taxes .............. (8,389) 13,085 23 -- 4,719
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item ........... 8,891 25,196 272 (25,215) 9,144
Extraordinary loss (less applicable income
tax benefit) ................................... -- (253) -- -- (253)
------------ ------------ ------------ ------------ ------------
Net income (loss) ................................. $ 8,891 $ 24,943 $ 272 $ (25,215) $ 8,891
============ ============ ============ ============ ============
74
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SCHEDULES:
YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES: .......................... $ (24,614) $ 54,809 $ 186 $ -- $ 30,381
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and
equipment ................................. -- 8,256 -- -- 8,256
Capital expenditures .......................... -- (54,490) -- -- (54,490)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ..... -- (46,234) -- -- (46,234)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances ................... -- 6,725 -- -- 6,725
Revolving loan borrowings (repayments, net) ... 3,600 -- -- -- 3,600
Long-term debt repayments ..................... -- (165) -- -- (165)
Premiums paid on debt extinguishment .......... (899) -- -- -- (899)
Merger and recapitalization expenses paid ..... (2,417) -- -- -- (2,417)
Other ......................................... (122) -- -- -- (122)
Intercompany advances ......................... 24,452 (24,266) 186 -- --
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
financing activities ................... 24,614 (17,706) 186 -- 6,722
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash ........ -- (9,131) -- -- (9,131)
Cash at the beginning of the year ................. -- 29,019 -- -- 29,019
------------ ------------ ------------ ------------ ------------
Cash at the end of the year ....................... $ -- $ 19,888 $ -- $ -- $ 19,888
============ ============ ============ ============ ============
75
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES: ......................... $ (7,105) $ 82,379 $ 300 $ -- $ 75,574
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions ......................... -- (4,243) -- -- (4,243)
Proceeds from sales of property and
equipment ................................. -- 4,773 -- -- 4,773
Capital expenditures .......................... -- (42,640) -- -- (42,640)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ..... -- (42,110) -- -- (42,110)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances ................... -- (14,062) -- -- (14,062)
Revolving loan borrowings (repayments, net) ... (21,500) -- -- -- (21,500)
Long-term debt repayments ..................... (3,280) (129) -- -- (3,409)
Merger and recapitalization expenses paid ..... (150) -- -- -- (150)
Other ......................................... (184) -- -- -- (184)
Intercompany advances ......................... 32,219 (31,919) (300) -- --
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
financing activities ................... 7,105 (46,110) (300) -- (39,305)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash ........ -- (5,841) -- -- (5,841)
Cash at the beginning of the year ................. -- 19,888 -- -- 19,888
------------ ------------ ------------ ------------ ------------
Cash at the end of the year ....................... $ -- $ 14,047 $ -- $ -- $ 14,047
============ ============ ============ ============ ============
76
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES: ....................... $ (9,255) $ 83,697 $ 1,066 $ 1,816 $ 77,324
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions ....................... -- (4,923) (5,267) -- (10,190)
Proceeds from sales of property and
equipment ............................... -- 3,900 -- -- 3,900
Capital expenditures ........................ -- (43,466) (730) -- (44,196)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ... -- (44,489) (5,997) -- (50,486)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances ................. -- (2,598) -- -- (2,598)
Revolving loan borrowings (repayments), net . (8,800) -- -- -- (8,800)
Long-term debt repayments ................... (14,508) (180) -- -- (14,688)
Other ....................................... -- -- 1,816 (1,816) --
Intercompany advances ....................... 32,563 (35,731) 3,168 -- --
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
financing activities ................. 9,255 (38,509) 4,984 -- (26,086)
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash . -- -- 206 -- 206
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash ...... -- 699 259 -- 958
Cash at the beginning of the year ............... -- 14,047 -- -- 14,047
------------ ------------ ------------ ------------ ------------
Cash at the end of the year ..................... $ -- $ 14,746 $ 259 $ -- $ 15,005
============ ============ ============ ============ ============
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 9A. 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors and executive officers required by
this item is incorporated by reference to the material appearing under the
headings "Our Directors and Officers," "Code of Ethics," and "Committees of the
Board of Directors" in Exhibit 99.1 to this annual report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation required by this item is
incorporated by reference to the material appearing under the heading "Executive
Compensation" in Exhibit 99.1 to this annual report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain of our beneficial
owners and management required by this item is incorporated by reference to the
material appearing under the heading "Security Ownership of Certain Beneficial
Owners and Management" in Exhibit 99.1 to this annual report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
required by this item is incorporated by reference to the material appearing
under the heading "Certain Relationships and Related Transactions" in Exhibit
99.1 to this annual report.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accounting fees and services required by
this item is incorporated by reference to the material appearing under the
heading "Principal Accounting Fees and Services" in Exhibit 99.1 to this annual
report.
78
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Documents filed as part of this report:
1. Financial Statements
Financial statements filed as part of this report are listed in the Index
to Consolidated Financial Statements and Supplementary Data on page 37 of
this annual report.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Balance at Charged Charged Deductions Balance at
Beginning of (Credited) to Other from End of
Period To Income Accounts Reserves Period
------ --------- -------- -------- ------
(In Thousands of Dollars)
Year Ended December 31, 2001:
Deducted from accounts and notes
receivable for doubtful accounts ................. $ 5,218 $ -- $ -- $ (2,833)(a) $ 2,385
Year Ended December 31, 2002:
Deducted from accounts and notes
receivable for doubtful accounts ................. $ 2,385 $ 1,100 $ -- $ (1,076)(a) $ 2,409
Year Ended December 31, 2003:
Deducted from accounts and notes
receivable for doubtful accounts ................. $ 2,409 $ 1,180 $ -- $ (1,593)(a) $ 1,996
(a) Uncollectible accounts and notes receivable charged off, net of
amounts recovered.
All other schedules are omitted because they are not applicable, not
material or the required information is shown in the financial statements
listed above.
3. Exhibits
Reference is made to the Exhibit Index set forth at page 82 of this annual
report.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 2003.
79
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934
No annual report or proxy statement has been furnished to our security
holders. We shall furnish to the Securities and Exchange Commission for its
information, at the time copies of such material are furnished to our security
holders, four copies of every proxy statement, form of proxy or other proxy
soliciting material sent to more than ten of our security holders with respect
to our annual meeting. The foregoing material shall not be deemed to be "filed"
with the Securities and Exchange Commission or otherwise subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934, except to the
extent that we specifically incorporate it in this Form 10-K by reference.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRAVELCENTERS OF AMERICA, INC.
By: /s/ James W. George
----------------------------------
Name: James W. George
March 30, 2004 Title: Executive Vice President,
----------------------------- Chief Financial Officer and Secretary
(Date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the date indicated.
Signature Title Date
--------- ----- ----
Chairman of the Board of Directors March 30, 2004
/s/ Edwin P. Kuhn and Chief Executive Officer
------------------------------------------ (Principal Executive Officer)
Edwin P. Kuhn
Executive Vice President, Chief Financial March 30, 2004
/s/ James W. George Officer and Secretary (Principal
------------------------------------------ Financial Officer and Principal
James W. George Accounting Officer)
/s/ Robert J. Branson Director March 30, 2004
------------------------------------------
Robert J. Branson
/s/ Michael Greene Director March 30, 2004
------------------------------------------
Michael Greene
/s/ Steven B. Gruber Director March 30, 2004
------------------------------------------
Steven B. Gruber
/s/ Louis J. Mischianti Director March 30, 2004
------------------------------------------
Louis J. Mischianti
/s/ Rowan G. P. Taylor
------------------------------------------ Director March 30, 2004
Rowan G. P. Taylor
81
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
2.1 Recapitalization Agreement and Plan of Merger dated as of May 31, 2000 ................ (d)
2.2 Amendment No. 1 to Recapitalization Agreement and Plan of Merger dated as of
October 2, 2000 ........................................................................ (e)
3.1 Amended and Restated Certificate of Incorporation of TravelCenters of America, Inc. ... (e)
3.2 Amended and Restated By-laws of TravelCenters of America, Inc. ........................ (g)
3.3 Restated Certificate of Incorporation of TA Operating Corporation ..................... (a)
3.4 Amended and Restated By-laws of TA Operating Corporation .............................. (a)
3.5 Amended and Restated Certificate of Incorporation of TA Licensing, Inc. ............... (e)
3.6 By-laws of TA Licensing, Inc. ......................................................... (e)
3.7 Certificate of Limited Partnership of TravelCenters Properties, L.P. .................. (e)
3.8 Agreement of Limited Partnership of TravelCenters Properties, L.P. .................... (e)
3.9 Certificate of Conversion from a Corporation to a Limited Liability Company of
TravelCenters Realty, Inc. ............................................................ (i)
3.10 Certificate of Formation of TravelCenters Realty, L.L.C ............................... (i)
3.11 Operating Agreement of TravelCenters Realty, L.L.C .................................... (i)
3.12 Certificate of Formation of TA Travel, L.L.C .......................................... (e)
3.13 Operating Agreement of TA Travel, L.L.C ............................................... (e)
4.1 Indenture, dated as of November 14, 2000 by and among TravelCenters of America, Inc., .
TA Operating Corporation, TA Travel, L.L.C., TA Licensing, Inc., TravelCenters
Properties, L.P., TravelCenters Realty, Inc. and State Street Bank and Trust Company (e)
4.2 Form of 12 3/4% Senior Subordinated Note due 2009 (included in Exhibit 4.1) ........... (e)
4.3 Exchange and Registration Rights Agreement, dated as of November 14, 2000 by and among
TravelCenters of America, Inc., TA Operating Corporation, TA Travel, L.L.C., TA
Licensing, Inc., TravelCenters Properties, L.P., TravelCenters Realty, Inc., Credit
Suisse First Boston Corporation, Chase Securities Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation ................................................................ (e)
4.4 Form of Warrant Certificate (included in Exhibit 10.21) ............................... (e)
4.5 Form of Common Stock Certificate ...................................................... (f)
10.1 Amended and Restated Credit Agreement dated as of November 14, 2000 ................... (e)
10.2 Amendment and Waiver dated as of January 23, 2004 to the Amended and Restated Credit
Agreement dated as of November 14, 2000 ............................................... +
10.3 Stockholders' Agreement among TravelCenters of America, Inc., Oak Hill Capital
Partners, L.P., Oak Hill Capital Management Partners, L.P., Olympus Growth Fund III,
L.P., Olympus Executive Fund, L.P., Monitor Clipper Equity Partners, L.P., Monitor
Clipper Equity Partners (Foreign), L.P., UBS Capital America II, LLC, Credit Suisse
First Boston LFG Holdings 2000, LLC and Freightliner LLC dated as of November 14, 2000 (e)
10.4 Operating Agreement of Freightliner Corporation and TA Operating Corporation dated as
of July 21, 1999 ...................................................................... (c)
10.5 Amendment No. 1 to Operating Agreement of Freightliner LLC and TA Operating Corporation
dated as of November 9, 2000 .......................................................... (e)
82
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
10.6 Agreement for Lease, dated as of September 9, 1999, among TA Operating Corporation,
National Auto/Truckstops, Inc. and TCA Network Funding, LP. ........................... (c)
10.7 Lease Agreement, dated as of September 9, 1999, among TA Operating Corporation,
National Auto/Truckstops, Inc. and TCA Network Funding, LP ............................ (c)
10.8 Amendment No. 2, dated as of November 27, 2001, to Agreement for Lease among TCA
Network Funding, LP and TA Operating Corporation....................................... (h)
10.9* Employment Agreement, dated as of January 1, 2000, by and among TA Operating
Corporation, TravelCenters of America, Inc. and Timothy L. Doane ...................... (e)
10.10* Employment Agreement, dated as of January 1, 2000, by and among TA Operating
Corporation, TravelCenters of America, Inc. and James W. George ....................... (e)
10.11* Employment Agreement, dated as of January 1, 2000, by and among TA Operating
Corporation, TravelCenters of America, Inc. and Michael H. Hinderliter ................ (e)
10.12* Employment Agreement, dated as of January 1, 2000, by and among TA Operating
Corporation, TravelCenters of America, Inc. and Edwin P. Kuhn ......................... (e)
10.13* Amendment No. 1 to Employment Agreement dated as of May 26, 2000, by and among TA
Operating Corporation, TravelCenters of America, Inc. and Timothy L. Doane ............ (e)
10.14* Amendment No. 1 to Employment Agreement dated as of May 26, 2000, by and among TA
Operating Corporation, TravelCenters of America, Inc. and James W. George ............. (e)
10.15* Amendment No. 1 to Employment Agreement dated as of May 26, 2000, by and among TA
Operating Corporation, TravelCenters of America, Inc. and Michael H. Hinderliter ...... (e)
10.16* Amendment No. 1 to Employment Agreement dated as of May 26, 2000, by and among TA
Operating Corporation, TravelCenters of America, Inc. and Edwin P. Kuhn ............... (e)
10.17* Employment Agreement, dated as of January 1, 2002, by and among TA Operating
Corporation, TravelCenters of America, Inc. and Steven C. Lee ......................... (i)
10.18* Amendment No. 2 to Employment Agreement, dated as of December 31, 2002, by and among TA
Operating Corporation, TravelCenters of America, Inc. and Edwin P. Kuhn ............... (i)
10.19 Warrant Agreement dated as of November 14, 2000 between TravelCenters of America, Inc.
and State Street Bank and Trust Company, as warrant agent ............................. (e)
10.20 Contingent Warrant Escrow Agreement dated as of November 14, 2000 between TravelCenters
of America, Inc. and State Street Bank and Trust Company, as warrant escrow agent ..... (e)
10.21* Form of Management Subscription Agreement ............................................. (a)
10.22* Schedule of Management Subscription Agreements omitted pursuant to Instruction 2 to
Item 601 of Regulation S-K ............................................................ (b)
10.23* Form of Management Note ............................................................... (b)
10.24* Schedule of Management Notes omitted pursuant to Instruction 2 to Item 601 of
Regulation S-K ........................................................................ (b)
10.25* 2001 Stock Incentive Plan of TravelCenters of America, Inc. ........................... (h)
10.26* Form of 2001 Stock Incentive Plan - Nonqualified Stock Option Agreement ............... (h)
10.27* Amendment to Management Subscription Agreement with Edwin P. Kuhn ..................... +
10.28* Form of Amendment to Management Subscription Agreement ................................ +
83
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
10.29* Schedule of Amendments to Management Subscription Agreements omitted pursuant to ...... +
Instruction 2 to Item 601 of Regulation S-K
10.30 Buy-out Agreement of Unocal and the Company dated as of December 31, 2003 ............. +
21.1 List of Subsidiaries of TravelCenters of America, Inc. ................................ (i)
23.1 Consent of PricewaterhouseCoopers LLP ................................................. +
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 .................................. +
99.1 Information Required by Part III of Form 10-K ......................................... +
(a) Incorporated by reference to exhibits filed with our Annual Report on Form
10-K for the year ended December 31, 1997.
(b) Incorporated herein by reference to exhibits filed with our Annual Report
on Form 10-K for the year ended December 31, 1998.
(c) Incorporated herein by reference to exhibits filed with our Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
(d) Incorporated herein by reference to exhibits filed with our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000.
(e) Incorporated herein by reference to exhibits filed with our Registration
Statement on Form S-4 filed on December 21, 2000.
(f) Incorporated herein by reference to exhibits filed with our Pre-Effective
Amendment No. 1 to our Registration Statement on Form S-4 filed on January
18, 2001.
(g) Incorporated herein by reference to exhibits filed with our Annual Report
on Form 10-K for the year ended December 31, 2000.
(h) Incorporated herein by reference to exhibits filed with our Annual Report
on Form 10-K for the year ended December 31, 2001.
(i) Incorporated by reference to exhibits filed with our Annual Report on Form
10-K for the year ended December 31, 2002, that was filed on March 26,
2003.
+ Filed herewith
* Executive compensation plans.
84