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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
Commission file number 333-52442
----------------------------
TRAVELCENTERS OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3856519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24601 Center Ridge Road, Suite 200
Westlake, OH 44145-5639
(Address of principal executive offices, including zip code)
(440) 808-9100
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
As of July 31, 2003, there were outstanding 6,934,569 shares of our common
stock, par value $0.00001 per share. The outstanding shares of our common stock
were issued in transactions not involving a public offering. As a result, there
is no public market for our common stock.
TRAVELCENTERS OF AMERICA, INC.
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause our actual results to differ from future
performance suggested herein. In the context of forward-looking information
provided in this Form 10-Q and in other reports, please refer to the discussion
of risk factors detailed in, as well as the other information contained in, our
filings with the Securities and Exchange Commission.
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Balance Sheet as of December 31, 2003
and June 30, 2004................................................ 2
Unaudited Consolidated Statement of Operations and
Comprehensive Income for the three months and six months
ended June 30, 2003 and 2004..................................... 3
Unaudited Consolidated Statement of Cash Flows for the six
months ended June 30, 2003 and 2004.............................. 4
Unaudited Consolidated Statement of Nonredeemable
Stockholders' Equity for the six months ended June 30, 2003
and 2004......................................................... 5
Selected Notes to Unaudited Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................................... 30
Item 4. Controls and Procedures.......................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 31
Item 4. Submission of Matters to a Vote of Security Holders.............. 31
Item 6. Exhibits and Reports on Form 8-K................................. 31
SIGNATURE...................................................................... 32
1
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
DECEMBER 31, JUNE 30,
2003 2004
------------ ----------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash.............................................................................. $ 15,005 $ 20,059
Accounts receivable (less allowance for doubtful accounts of $1,707 for 2003 and
$1,454 for 2004)............................................................... 42,987 55,279
Inventories....................................................................... 63,981 62,441
Deferred income taxes............................................................. 3,823 3,871
Other current assets.............................................................. 6,962 5,247
---------- ----------
Total current assets......................................................... 132,758 146,897
Property and equipment, net.......................................................... 438,133 436,013
Goodwill............................................................................. 25,584 25,665
Deferred financing costs, net........................................................ 24,012 22,138
Deferred income taxes................................................................ 14,519 12,748
Other noncurrent assets.............................................................. 15,561 12,794
---------- ----------
Total assets................................................................. $ 650,567 $ 656,255
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................................. $ 3,354 $ 3,132
Accounts payable.................................................................. 59,754 85,003
Other accrued liabilities......................................................... 50,020 53,095
---------- ----------
Total current liabilities.................................................... 113,128 141,230
Commitments and contingencies........................................................ - -
Long-term debt (net of unamortized discount)......................................... 502,033 468,632
Deferred income taxes................................................................ 2,137 2,189
Other noncurrent liabilities......................................................... 8,318 15,536
---------- ----------
625,616 627,587
Redeemable equity.................................................................... 1,909 2,083
Nonredeemable equity:
Common stock and other stockholders' equity....................................... 216,919 216,588
Accumulated deficit............................................................... (193,877) (190,003)
---------- ----------
Total nonredeemable equity................................................... 23,042 26,585
---------- ----------
Total liabilities, redeemable equity and nonredeemable stockholders' equity.. $ 650,567 $ 656,255
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2003 2004 2003 2004
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Revenues:
Fuel............................................. $ 360,256 $ 455,365 $ 774,449 $ 852,776
Nonfuel.......................................... 166,460 180,507 312,443 339,811
Rent and royalties............................... 3,500 2,710 7,015 5,349
---------- ---------- ---------- ----------
Total revenues............................. 530,216 638,582 1,093,907 1,197,936
Cost of goods sold (excluding depreciation):
Fuel............................................. 330,975 429,695 719,637 805,522
Nonfuel.......................................... 68,673 74,229 128,210 138,613
---------- ---------- ---------- ----------
Total cost of goods sold (excluding
depreciation)........................... 399,648 503,924 847,847 944,135
---------- ---------- ---------- ----------
Gross profit (excluding depreciation)............... 130,568 134,658 246,060 253,801
Operating expenses.................................. 86,505 89,782 169,350 175,819
Selling, general and administrative expenses........ 10,215 10,303 20,305 20,707
Depreciation and amortization expense............... 14,626 15,897 29,200 29,974
(Gain) loss on asset sales.......................... (261) (1) (293) 11
---------- ---------- ----------- ----------
Income from operations.............................. 19,483 18,677 27,498 27,290
Equity in earnings of affiliate..................... 383 - 623 78
Gain on sale of investment.......................... - 1,491 - 1,491
Interest and other financial costs, net............. (11,525) (11,255) (23,288) (22,732)
---------- ---------- ---------- ----------
Income before income taxes and the cumulative
effect of a change in accounting principle....... 8,341 8,913 4,833 6,127
Provision for income taxes.......................... 3,080 3,267 1,850 2,253
---------- ---------- ---------- ----------
Income before the cumulative effect of a change in
accounting principle............................. 5,261 5,646 2,983 3,874
Cumulative effect of a change in accounting
principle, net of related taxes (Note 2)......... - - (253) -
---------- ---------- ---------- ----------
Net income.......................................... 5,261 5,646 2,730 3,874
Other comprehensive income (expense), net of tax
(Note 3):
Foreign currency translation adjustments........ 399 (106) 632 (158)
---------- ---------- ---------- ----------
Comprehensive income................................ $ 5,466 $ 5,540 $ 3,168 $ 3,716
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2004
------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 2,730 $ 3,874
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of a change in accounting principle.......................... 253 -
Depreciation and amortization expense.......................................... 29,200 29,974
Amortization of deferred financing costs....................................... 1,671 1,874
Deferred income tax provision.................................................. 1,345 1,791
Provision for doubtful accounts................................................ 500 175
(Gain) on sales of property and equipment...................................... (293) (1,480)
Changes in assets and liabilities, adjusted for the effects of business
acquisitions:
Accounts receivable......................................................... (12,711) (12,896)
Inventories................................................................. 5,116 1,702
Other current assets........................................................ 1,504 1,715
Accounts payable and other accrued liabilities.............................. 12,323 29,892
Other, net..................................................................... (952) 1,813
----------- -----------
Net cash provided by operating activities..................................... 40,686 58,434
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions......................................................... (8,302) (144)
Proceeds from asset sales..................................................... 1,378 9,078
Capital expenditures.......................................................... (21,236) (25,573)
------------ -----------
Net cash used in investing activities......................................... (28,160) (16,639)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in checks drawn in excess of bank balances................ 696 (2,290)
Revolving loan borrowings (repayments), net................................... 11,100 (11,100)
Long-term debt repayments..................................................... (13,014) (23,349)
Other......................................................................... (252) -
----------- -----------
Net cash used in financing activities......................................... (1,470) (36,739)
----------- -----------
Effect of exchange rate changes on cash....................................... 201 (2)
----------- -----------
Net increase (decrease) in cash........................................... 11,257 5,054
Cash at the beginning of the period.................................................. 14,047 15,005
----------- -----------
Cash at the end of the period........................................................ $ 25,304 $ 20,059
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY
SIX MONTHS ENDED
JUNE 30,
------------------------------
2003 2004
--------------- -----------
(IN THOUSANDS OF DOLLARS)
COMMON STOCK:
Balance at beginning and end of period............................................ $ 3 $ 3
=========== ===========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period.................................................... $ 217,290 $ 216,112
Accretion of redeemable equity................................................ (219) (173)
----------- -----------
Balance at end of period.......................................................... $ 217,071 $ 215,939
=========== ===========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of period.................................................... $ - $ 804
Foreign currency translation adjustments, net of tax.......................... 632 (158)
----------- -----------
Balance at end of period......................................................... $ 632 $ 646
=========== ===========
ACCUMULATED DEFICIT:
Balance at beginning of period.................................................... $ (202,768) $ (193,877)
Net income.................................................................... 2,730 3,874
----------- -----------
Balance at end of period.......................................................... $ (200,038) $ (190,003)
=========== ===========
5
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. At June 30, 2004, 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: (1) sites owned or
leased and operated by us, which we refer to as company-operated sites; (2)
sites owned by us and leased to independent lessee-franchisees, which we refer
to as leased sites; and (3) sites owned and operated by independent franchisees,
which we refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system, typically on 20- to 25-acre sites. Operating under the
"TravelCenters of America" and "TA" brand names, our nationwide network provides
our customers with diesel fuel and gasoline as well as non-fuel products and
services such as truck repair and maintenance services, full-service
restaurants, 20 different brands of fast food restaurants, travel and
convenience stores with a selection of over 4,000 items and other driver
amenities. We also collect rents and franchise royalties from the franchisees
who operate the leased sites and franchisee-owned sites and, as a franchisor,
assist our franchisees in providing service to long-haul trucking fleets and
their drivers, independent truck drivers and general motorists.
The consolidated financial statements include the accounts of
TravelCenters of America, Inc. and its wholly owned subsidiaries, TA Operating
Corporation and TA Franchise Systems Inc., as well as TA Licensing, Inc., TA
Travel, L.L.C., TravelCenters Realty, L.L.C., TravelCenters Properties, L.P.,
3073000 Nova Scotia Company, TravelCentres Canada Inc., and TravelCentres Canada
Limited Partnership, which are all direct or indirect wholly owned subsidiaries
of TA Operating Corporation. Intercompany accounts and transactions have been
eliminated. With only one of our 150 travel centers located in Canada, the
amounts of revenues and long-lived assets located in Canada are not material.
The accompanying unaudited, consolidated financial statements as of June
30, 2004 and for the three- and six-month periods ended June 30, 2003 and 2004
have been prepared in accordance with generally accepted accounting principles.
Accordingly, these statements should be read in conjunction with our audited
financial statements as of and for the year ended December 31, 2003. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, all of which were of a normal recurring
nature, necessary to present fairly, in all material respects, our consolidated
financial position at June 30, 2004, our results of operations for the three-
and six-month periods ended June 30, 2003 and 2004, and our changes in
nonredeemable stockholders' equity and cash flows for the six-month periods
ended June 30, 2003 and 2004, and are not necessarily indicative of the results
to be expected for the full year.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
FAS 143. As of January 1, 2003, we began recognizing the future costs to
remove our underground storage tanks over the estimated useful lives of each
tank in accordance with the provisions of Statement of Financial Accounting
Standards (FAS) No. 143, "Accounting for Asset Retirement Obligations." A
liability for the fair value of an asset retirement obligation with a
corresponding increase to the carrying value of the related long-lived asset is
recorded at the time an underground storage tank is installed. We will amortize
the amount added to property and equipment and recognize accretion expense in
connection with the discounted liability over the remaining life of the
respective underground storage tank. The estimated liability is based on
historical experiences in removing these tanks, estimated tank useful lives,
external estimates as to the cost to remove the tanks in the future and
regulatory requirements. The liability is a discounted liability using a
credit-adjusted risk-free rate of approximately 12.8%. Revisions to the
liability could occur due to changes in tank removal costs, tank useful lives or
if new regulations regarding the removal of such tanks are enacted.
6
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Upon adoption of FAS 143, we recorded a discounted liability of $589,000,
increased property and equipment by $172,000 and recognized a one-time
cumulative effect charge of $253,000 (net of deferred tax benefit of $164,000).
A reconciliation of our asset retirement obligation liability, which is
included within other noncurrent liabilities in our consolidated balance sheet,
for the six months ended June 30, 2003 and 2004, was as follows:
SIX MONTHS ENDED
JUNE 30,
2003 2004
------------- -----------
(IN THOUSANDS OF DOLLARS)
Balance at January 1,.............................................................. $ 589 $ 663
Liabilities incurred............................................................... 10 -
Liabilities settled................................................................ - (9)
Accretion expense.................................................................. 38 42
Revisions to estimates............................................................. - -
----------- -----------
Balance at June 30................................................................. $ 637 $ 696
=========== ===========
FIN 46. In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." FIN 46 was intended to provide
guidance in determining (1) whether consolidation is required under the
"controlling financial interest" model in existing authoritative guidance or,
alternatively, (2) whether the variable interest model under FIN 46 should be
used to account for existing and new entities. In December 2003, the FASB issued
a revised version of FIN 46 (FIN 46R) to clarify certain aspects of FIN 46 and
to provide certain entities with exemptions from the requirements of FIN 46. We
must adopt this accounting guidance in 2004 for any variable interest entities
created after December 15, 2003 (there have been none to date), and on January
1, 2005 for all entities created before December 15, 2003. Under FIN 46R, we
will be required to consolidate 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 still
evaluating the amounts by which our financial statements will be affected by
consolidating the lessor. 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.
3. COMPREHENSIVE INCOME
Income tax provision (benefit) related to other comprehensive income
(loss) consisted of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2004 2003 2004
---------- ----------- ---------- -----------
(IN THOUSANDS OF DOLLARS)
Related to foreign currency translation adjustments..... $ 100 $ (28) $ 256 $ (47)
---------- ---------- ---------- ----------
Total................................................. $ 100 $ (28) $ 256 $ (47)
========== ========== ========== ==========
7
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, JUNE 30,
2003 2004
----------- ----------
(IN THOUSANDS OF DOLLARS)
Nonfuel merchandise............................................................... $ 57,881 $ 55,639
Petroleum products................................................................ 6,100 6,802
---------- ----------
Total inventories............................................................. $ 63,981 $ 62,441
========== ==========
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the six-month periods
ended June 30, 2003 and 2004 were as follows:
SIX MONTHS ENDED
JUNE 30,
---------------------------
2003 2004
--------------- -----------
(IN THOUSANDS OF DOLLARS)
Balance as of beginning of period.................................................. $ 23,585 $ 25,584
Goodwill recorded during the period................................................ 651 81
----------- -----------
Balance as of end of period........................................................ $ 24,236 $ 25,665
=========== ===========
During the six months ended June 30, 2003 we recorded $651,000 of goodwill
as a result of the business acquisitions we completed in connection with
converting three leased sites to company-operated sites. During the six months
ended June 30, 2004 we recorded $81,000 of goodwill as a result of the business
acquisition we completed in connection with converting one leased site to a
company-operated site.
The net carrying amount of intangible assets is included within other
noncurrent assets in our consolidated balance sheet. Intangible assets, net
consisted of the following:
DECEMBER 31, JUNE 30,
2003 2004
------------- ------------
(IN THOUSANDS OF DOLLARS)
Amortizable intangible assets:
Leasehold interest........................................................... $ 1,724 $ 1,724
Other........................................................................ 1,015 1,015
------------ ------------
Total amortizable intangible assets...................................... 2,739 2,739
Less - accumulated amortization.............................................. 2,334 2,428
------------ ------------
Net carrying value of amortizable intangible assets...................... 405 311
Net carrying value of trademarks.................................................... 1,398 1,398
------------ ------------
Intangible assets, net................................................... $ 1,803 $ 1,709
============ ============
Total amortization expense for our amortizable intangible assets for the
six-month periods ended June 30, 2003 and 2004 was $590,000 and $94,000,
respectively. The estimated aggregate amortization expense for our amortizable
intangible assets for the year ending December 31, 2004 and each of the four
succeeding fiscal years are $191,000 for 2004; $87,000 for 2005 and $10,000 in
each of 2006, 2007 and 2008.
8
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK-BASED EMPLOYEE COMPENSATION
We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. For granted options
that vest over time, no compensation expense is reflected in net income, as all
of those options had an exercise price equal to or greater than the market value
of the underlying common stock at the date of grant. For granted options that
vest based on attaining certain measures of performance, compensation expense is
recognized when it becomes probable that the performance triggers for such
options will be achieved. The following table illustrates the effect on net
income if we had applied the fair value recognition provisions of FAS No. 123 to
stock-based employee compensation.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ----------------------
2003 2004 2003 2004
(IN THOUSANDS OF DOLLARS)
Net income, as reported......................... $ 5,261 $ 5,646 $ 2,730 $ 3,874
Add back - Stock-based employee compensation
expense, net of related tax effects,
included in net income (loss) as reported... - - - -
Deduct - Total stock-based employee
compensation expense determined under fair
value based methods for all awards, net of
related tax effects......................... (157) (166) (327) (334)
---------- -------- --------- --------
Pro forma net income............................ $ 5,104 $ 5,480 $ 2,403 $ 3,540
========== ======== ========= ========
The fair value of these options used to calculate the pro forma
compensation expense amounts was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: a risk-free interest rate of 5.5%, a dividend yield of 0.0%, a
volatility factor of 0.0001%, and an expected life of the options of ten years.
7. COMMITMENTS AND CONTINGENCIES
Guarantees
In the normal course of business we periodically enter into agreements
that incorporate indemnification provisions. While the maximum amount to which
we may be exposed under such agreements cannot be estimated, it is the opinion
of management that any potential indemnification is not expected to have a
material adverse effect on our consolidated financial position or results of
operations. We also offer a warranty of our workmanship in our truck maintenance
and repair shops, but the annual warranty expense and corresponding liability
are immaterial.
Environmental Matters
Our operations and properties are extensively regulated through
environmental laws and regulations ("Environmental Laws") that (i) govern
operations that may have adverse environmental effects, such as discharges to
air, soil and water, as well as the management of petroleum products and other
hazardous substances ("Hazardous Substances"), or (ii) impose liability for the
costs of cleaning up sites affected by, and for damages resulting from, disposal
or other releases of Hazardous Substances. We own and use underground storage
tanks and aboveground storage tanks to store petroleum products and waste at our
facilities. We must comply with requirements of Environmental Laws regarding
tank construction, integrity testing, leak detection and monitoring, overfill
and spill control, release reporting, financial assurance and corrective action
in case of a release from a storage tank into the environment. At some
locations, we must also comply with Environmental Laws relating to vapor
recovery and discharges to water. We believe that all of our travel centers are
in material compliance with applicable requirements of Environmental Laws.
9
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We have received notices of alleged violations of Environmental Laws, or
are aware of the need to undertake corrective actions to comply with
Environmental Laws, at company-owned travel centers in a number of
jurisdictions. We do not expect that any financial penalties associated with
these alleged violations, or compliance costs incurred in connection with these
violations or corrective actions, will be material to our results of operations
or financial condition. We are conducting investigatory and/or remedial actions
with respect to releases of Hazardous Substances at a number of our sites. While
we cannot precisely estimate the ultimate costs we will incur in connection with
the investigation and remediation of these properties, based on our current
knowledge, we do not expect that the costs to be incurred at these properties,
individually or in the aggregate, will be material to our results of operations
or financial condition. In March 2004, we received notification from the
Pennsylvania Underground Storage Tank Insurance Fund ("USTIF") that, as a result
of our appeal, USTIF had reversed its denial of our claim for reimbursement of
corrective action costs incurred or to be incurred to remediate a diesel fuel
release at our Harrisburg site. USTIF has agreed that our claim is eligible for
reimbursement. Accordingly, in March 2004, we recognized a $1,600,000 receivable
for the recovery of the related corrective action costs, with an offsetting
reduction of operating expenses. The expenses had been recognized by us in
previous years, primarily in September 2003 when we expensed $1,335,000 as a
result of USTIF's original denial of our claim.
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 be certain that additional contamination does not exist at these or
additional network properties, or that material liability will not be imposed in
the future. If additional environmental problems arise or are discovered, or if
additional environmental requirements are imposed by government agencies,
increased environmental compliance or remediation expenditures may be required,
which could have a material adverse effect on us.
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 $2,609,000 of cash, funded an escrow account with $5,415,000 to be drawn
on by us as we incur related remediation costs, and purchased insurance policies
that cap our total future expenditures for these matters at $9,648,000 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. Accordingly, we recognized
no income or expense as a result of entering into the Unocal Buy-Out Agreement.
Of the cash paid to us by Unocal, $1,000,000 was to reimburse us for the future
costs of administering the remediation projects assumed from Unocal and was
recorded as a deferred credit that will be recognized to offset our costs as the
related remediation activities are completed.
At June 30, 2004, we had a reserve for environmental matters of
$12,438,000, a receivable for expected recoveries of these estimated future
expenditures of $3,594,000 and $5,418,000 of cash in an escrow account to fund
certain of these estimated future expenditures. In our consolidated balance
sheet, $5,184,000 of the reserve for environmental matters was included in the
accrued liabilities balance and $7,254,000 of the reserve was included in the
other noncurrent liabilities balance, $2,132,000 of the recoveries receivable
amount was included in the accounts receivable balance and $1,462,000 of the
recoveries receivable amount and the escrow accounts were included in the other
noncurrent assets balance. We estimate that the gross amount of the cash outlays
related to the matters for which we have accrued this reserve will be
approximately $3,831,000 in the remainder of 2004; $2,706,000 in 2005;
$1,932,000 in 2006; $1,481,000 in 2007; $1,163,000 in 2008 and $1,325,000
thereafter. These cash expenditure amounts do not reflect any amounts for the
expected recoveries as we cannot accurately predict the timing of those cash
receipts. 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 obtained insurance of up to
$35,000,000 for known environmental liabilities (which includes the insurance
coverage purchased by Unocal as described above) and up to $40,000,000 for
unknown environmental liabilities, subject, in
10
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
each case, to certain limitations and deductibles. While it is not possible to
quantify with certainty the environmental exposure, in our opinion, the
potential liability, beyond that considered in the reserve, for all
environmental proceedings, based on information known to date, will not have a
material adverse effect on our financial condition, results of operations or
liquidity.
Pending Litigation
We are involved from time to time in various legal and administrative
proceedings and threatened legal and administrative proceedings incidental to
the ordinary course of our business. We believe that we are not now involved in
any litigation, individually, or in the aggregate, which could have a material
adverse affect on our business, financial condition, results of operations or
cash flows.
8. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED
JUNE 30,
----------------------------
2003 2004
----------- ------------
(IN THOUSANDS OF DOLLARS)
Revolving loan borrowings......................................................... $ 269,000 $ 213,700
Revolving loan repayments......................................................... (257,900) (224,800)
----------- -----------
Revolving loan borrowings (repayments), net..................................... $ 11,100 $ (11,100)
=========== ===========
Cash paid during the period for:
Interest........................................................................ $ 23,343 $ 21,264
Income taxes (net of refunds)................................................... $ 335 $ 634
During the six-month periods ended June 30, 2003 and 2004, we acquired
$419,000 and $328,000, respectively, of inventory and equipment in settlement of
accounts receivable as part of the conversions of leased sites to
company-operated sites.
9. OTHER INFORMATION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Interest and other financial costs
consists of the following:
Cash interest expense.................................. $ (10,271) $ (9,902) $ (20,912) $ (20,077)
Cash interest income................................... 23 22 42 45
Amortization of discount on debt....................... (381) (422) (747) (826)
Amortization of deferred financing costs............... (850) (953) (1,671) (1,874)
---------- ---------- ---------- ----------
Interest and other financial costs, net................ $ (11,525) $ (11,255) $ (23,288) $ (22,732)
========== ========== ========== ==========
11
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTY TRANSACTIONS
Certain members of our senior management have purchased common stock
pursuant to management subscription agreements. As a result of such purchases,
we have notes and related interest receivable from the management stockholders
totaling $1,490,000 and $1,525,174 at December 31, 2003 and June 30, 2004,
respectively.
We owned 21.5% of the voting stock of Simons Petroleum, Inc. until April
9, 2004 when we sold the Simons shares we owned. After that date, Simons was no
longer an equity investee of ours and, therefore, no longer a related party. The
following disclosures include transactions and balances related to our business
activities with Simons for the period while we were a stockholder. During the
six-month periods ended June 30, 2003 and 2004, diesel fuel provided by Simons
accounted for $118,504,000 and $70,652,000, respectively, of our cost of goods
sold and we made sales of diesel fuel to Simons in the amounts of $1,690,000 and
$152,000, respectively. We also lease a travel center from Simons. Rent paid
with respect to this site for the six-month periods ended June 30, 2003 and 2004
was $204,000 and $102,000, respectively. At December 31, 2003, our receivables
from Simons were $150,000 while our payables to Simons were $49,000.
We received proceeds from the sale of our Simons shares of $9,073,000.
This sale represented a prepayment event under our Senior Credit Facility and,
therefore, in April we made a mandatory prepayment of our term loan borrowings
in the amount of $9,073,000. The merger agreement pursuant to which we sold
these shares provides two opportunities for us to receive additional sales
proceeds in late 2005: we could receive an additional $921,000 based on Simons
achieving specified earnings targets, and we could receive $1,053,000 that was
paid into escrow at closing if certain conditions are met and certain
representations and warranties are maintained. Due to the uncertainty
surrounding the future realization of these receivables, the gain on sale we
recognized in the second quarter of 2004 of $1,491,000 does not reflect these
amounts.
11. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance
sheet schedules as of December 31, 2003 and June 30, 2004, our condensed
consolidating statement of operations schedules for the three- and six-month
periods ended June 30, 2003 and 2004 and our condensed consolidating statement
of cash flows schedules for the six-month periods ended June 30, 2003 and 2004.
In the following schedules, "Parent Company" refers to the unconsolidated
balances of TravelCenters of America, Inc., "Guarantor Subsidiaries" refers to
the consolidated balances of TA Operating Corporation and its domestic
subsidiaries, but excluding its three Canadian subsidiaries, and "Nonguarantor
Subsidiaries" refers to the combined balances of TA Franchise Systems Inc. and
our three Canadian subsidiaries. "Eliminations" represent the adjustments
necessary to (a) eliminate intercompany transactions and (b) eliminate
investments in subsidiaries.
The Guarantor Subsidiaries (TA Operating Corporation, TA Licensing, Inc.,
TA Travel, L.L.C., TravelCenters Realty, L.L.C. and TravelCenters Properties,
L.P.) are direct or indirect wholly-owned subsidiaries of ours and have fully
and unconditionally, jointly and severally, guaranteed the indebtedness of
TravelCenters of America, Inc., which consists of the Senior Credit Facility and
the Senior Subordinated Notes due 2009.
12
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:
DECEMBER 31, 2003
--------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY 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..................... 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 advances........................ (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............................ 1,909 - - - 1,909
Nonredeemable stockholders' equity:
Common stock and other stockholders'
equity.................................. 217,370 186,155 2,125 (188,731) 216,919
Retained earnings (accumulated 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
========== ========== ========== ========== ==========
13
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
-----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash..................................... $ - $ 19,862 $ 197 $ - $ 20,059
Accounts receivable, net................. - 55,931 945 (1,597) 55,279
Inventories.............................. - 62,261 180 - 62,441
Deferred income taxes.................... - 3,820 51 - 3,871
Other current assets..................... 270 5,389 1 (413) 5,247
---------- ---------- ---------- ---------- ----------
Total current assets................ 270 147,263 1,374 (2,010) 146,897
Property and equipment, net................. - 429,414 6,599 - 436,013
Goodwill.................................... - 25,665 - - 25,665
Deferred financing costs, net............... 22,138 - - - 22,138
Deferred income taxes....................... 20,509 (7,887) 126 - 12,748
Other noncurrent assets..................... 860 16,098 - (4,164) 12,794
Investment in subsidiaries.................. 278,673 1,650 - (280,323) -
---------- ---------- ---------- ---------- ----------
Total assets........................ $ 322,450 $ 612,203 $ 8,099 $ (286,497) $ 656,255
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..... $ 2,943 $ 189 $ - $ - $ 3,132
Accounts payable......................... - 84,783 827 (607) 85,003
Other accrued liabilities................ 1,068 51,720 1,710 (1,403) 53,095
---------- ---------- ---------- ---------- ----------
Total current liabilities........... 4,011 136,692 2,537 (2,010) 141,230
Long-term debt (net of unamortized discount) 466,052 2,580 4,164 (4,164) 468,632
Deferred income taxes....................... - 2,189 - - 2,189
Intercompany payable (receivable)........... (176,889) 182,663 (5,774) - -
Other noncurrent liabilities................ - 15,536 - - 15,536
---------- ---------- ---------- ---------- ----------
Total liabilities................... 293,174 339,660 927 (6,174) 627,587
Redeemable equity........................... 2,083 - - - 2,083
Nonredeemable stockholders' equity:
Common stock and other
stockholders' equity................... 217,196 186,053 2,069 (188,730) 216,588
Retained earnings
(accumulated deficit).................. (190,003) 86,490 5,103 (91,593) (190,003)
---------- ---------- ---------- ---------- ----------
Total nonredeemable stockholders'
equity........................... 27,193 272,543 7,172 (280,323) 26,585
---------- ---------- ---------- ---------- ----------
Total liabilities, redeemable
equity and nonredeemable
stockholders' equity............. $ 322,450 $ 612,203 $ 8,099 $ (286,497) $ 656,255
========== ========== ========== ========== ==========
14
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:
THREE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 357,783 $ 2,473 $ - $ 360,256
Nonfuel................................ - 165,595 865 - 166,460
Rent and royalties..................... - 3,120 1,481 (1,101) 3,500
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 526,498 4,819 (1,101) 530,216
Cost of goods sold (excluding depreciation) - 396,964 2,684 - 399,648
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 129,534 2,135 (1,101) 130,568
Operating expenses........................ - 85,936 1,670 (1,101) 86,505
Selling, general and
administrative expenses............... 201 9,775 239 - 10,215
Depreciation and amortization expense..... - 14,497 129 - 14,626
(Gain) on asset sales..................... - (261) - - (261)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (201) 19,587 97 - 19,483
Equity income (loss)...................... 9,383 279 - (9,279) 383
Interest and other financial costs, net... (6,017) (5,437) (71) - (11,525)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... 3,165 14,429 26 (9,279) 8,341
Provision (benefit) for income taxes...... (2,096) 5,132 44 - 3,080
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 5,261 $ 9,297 $ (18) $ (9,279) $ 5,261
========== ========== ========== ========== ==========
15
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel..................................... $ - $ 450,724 $ 4,641 $ - $ 455,365
Nonfuel.................................. - 179,611 896 - 180,507
Rent and royalties....................... - 2,456 1,244 (990) 2,710
---------- ---------- ---------- ---------- ----------
Total revenues........................... - 632,791 6,781 (990) 638,582
Cost of goods sold (excluding depreciation). - 499,075 4,849 - 503,924
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)....... - 133,716 1,932 (990) 134,658
Operating expenses.......................... - 89,265 1,507 (990) 89,782
Selling, general and
administrative expenses................. 332 9,671 300 - 10,303
Depreciation and amortization expense....... - 15,765 132 - 15,897
(Gain) on asset sales....................... - (1) - - (1)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............... (332) 19,016 (7) - 18,677
Equity income (loss)........................ 9,522 (29) - (9,493) -
Gain on sale of investment.................. - 1,491 - - 1,491
Interest and other financial costs, net..... (5,831) (5,351) (73) - (11,255)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes........... 3,359 15,127 (80) (9,493) 8,913
Provision (benefit) for income taxes........ (2,287) 5,573 (19) - 3,267
---------- ---------- ---------- ---------- ----------
Net income (loss)........................... $ 5,646 $ 9,554 $ (61) $ (9,493) $ 5,646
========== ========== ========== ========== ==========
16
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 769,911 $ 4,538 $ - $ 774,449
Nonfuel................................ - 310,964 1,479 - 312,443
Rent and royalties..................... - 6,241 2,839 (2,065) 7,015
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 1,087,116 8,856 (2,065) 1,093,907
Cost of goods sold (excluding depreciation) - 842,945 4,902 - 847,847
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 244,171 3,954 (2,065) 246,060
Operating expenses........................ - 168,402 3,013 (2,065) 169,350
Selling, general and
administrative expenses............... 401 19,413 491 - 20,305
Depreciation and amortization expense..... - 29,200 197 - 29,200
(Gain) on asset sales..................... - (293) - - (293)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (401) 27,646 253 - 27,498
Equity income (loss)...................... 10,865 498 - (10,740) 623
Interest and other financial costs, net... (11,876) (11,293) (119) - (23,288)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... (1,412) 16,851 134 (10,740) 4,833
Provision (benefit) for income taxes...... (4,142) 5,904 88 - 1,850
---------- ---------- ---------- ---------- ----------
Income (loss) before the cumulative effect
of a change in accounting principle. 2,730 10,947 46 (10,740) 2,983
Cumulative effect of a change in
accounting principle, net of related
taxes............................... - (253) - - (253)
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 2,730 $ 10,694 $ 46 $ (10,740) $ 2,730
========== ========== ========== ========== ==========
17
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 844,080 $ 8,696 $ - $ 852,776
Nonfuel................................ - 338,071 1,740 - 339,811
Rent and royalties..................... - 4,795 2,418 (1,864) 5,349
--------- --------- --------- --------- ---------
Total revenues......................... - 1,186,946 12,854 (1,864) 1,197,936
Cost of goods sold (excluding depreciation) - 935,044 9,091 - 944,135
--------- --------- --------- --------- ---------
Gross profit (excluding depreciation)..... - 251,902 3,763 (1,864) 253,801
Operating expenses........................ - 174,765 2,918 (1,864) 175,819
Selling, general and
administrative expenses............... 649 19,447 611 - 20,707
Depreciation and amortization expense..... - 29,705 269 - 29,974
(Gain) on asset sales..................... - 11 - - 11
--------- --------- --------- --------- ---------
Income (loss) from operations............. (649) 27,974 (35) - 27,290
Equity income (loss)...................... 11,830 26 - (11,778) 78
Gain on sale of investment................ - 1,491 - - 1,491
Interest and other financial costs, net... (11,929) (10,655) (148) - (22,732)
--------- --------- --------- --------- ---------
Income (loss) before income taxes......... (748) 18,836 (183) (11,778) 6,127
Provision (benefit) for income taxes...... (4,622) 6,923 (48) - 2,253
--------- --------- --------- --------- ---------
Net income (loss)......................... $ 3,874 $ 11,913 $ (135) $ (11,778) $ 3,874
========= ========= ========= ========= =========
18
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SCHEDULES:
SIX MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ (6,073) $ 44,702 $ 241 $ 1,816 $ 40,686
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (3,035) (5,267) - (8,302)
Proceeds from asset sales.............. - 1,378 - - 1,378
Capital expenditures................... - (21,060) (176) - (21,236)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (22,717) (5,443) - (28,160)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - 696 - - 696
Revolving loan borrowings
(repayments), net................... 11,100 - - - 11,100
Long-term debt repayments........... (12,925) (89) - - (13,014)
Other............................... (252) - 1,816 (1,816) (252)
Intercompany advances............... 8,150 (11,531) 3,381 - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 6,073 (10,924) 5,197 (1,816) (1,470)
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on
cash.............................. - - 201 - 201
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash..... - 11,061 196 - 11,257
---------- ---------- ---------- ---------- ----------
Cash at the beginning of the period....... - 14,047 - - 14,047
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 25,108 $ 196 $ - $ 25,304
========== ========== ========== ========== ==========
19
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ (6,051) $ 64,041 $ 444 $ - $ 58,434
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (144) - - (144)
Proceeds from asset sales.............. - 9,078 - - 9,078
Capital expenditures................... - (25,175) (398) - (25,573)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (16,241) (398) - (16,639)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - (2,290) - - (2,290)
Revolving loan borrowings
(repayments), net................... (11,100) - - - (11,100)
Long-term debt repayments........... (23,256) (93) - - (23,349)
Intercompany advances............... 40,407 (40,031) (106) - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 6,051 (42,684) (106) -
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash... - - (2) (2)
---------- ---------- ---------- ---------- ----------
Net increase in cash................ - 5,116 (62) - 5,004
Cash at the beginning of the period....... - 14,746 259 - 15,005
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 19,862 $ 197 $ - $ 20,059
========== ========== ========== ========== ==========
20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and selected notes to unaudited consolidated
financial statements included herein, and the audited financial statements and
the Management's Discussion and Analysis included with our Form 10-K for the
year ended December 31, 2003. Our results of operations for a particular quarter
may not be indicative of results expected during the other quarters or for the
entire year.
CRITICAL ACCOUNTING POLICIES
We have no material changes to the disclosure on this matter made in our
annual report on Form 10-K for the year ended December 31, 2003.
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 June 30,
2004, our geographically diverse network consisted of 150 sites located in 41
states and Ontario, Canada. Our operations are conducted through three distinct
types of travel centers:
- sites owned or leased and operated by us, which we refer to as
company-operated sites;
- sites owned by us and leased to independent lessee-franchisees, which we
refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer to as
franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system, typically on 20- to 25-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
route their trucks within a single network from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, more than 20 different brands of fast food
restaurants, travel and convenience stores with a selection of over 4,000 items
and other driver amenities.
The non-fuel products and services we offer to our customers complement
our fuel business and provide us a means to increase our revenues and gross
profit despite price pressure on fuel as a result of competition and volatile
crude oil and petroleum product prices, particularly in times of historically
high prices. For the six-month periods ended June 30, 2003 and 2004, our
revenues and gross profit were composed as follows:
SIX MONTHS ENDED
JUNE 30,
-----------------
2003 2004
------ ------
Revenues:
Fuel........................................................ 70.8% 71.2%
Non-fuel.................................................... 28.6% 28.4%
Rent and royalties.......................................... 0.6% 0.4%
----- -----
Total revenues........................................ 100.0% 100.0%
===== =====
Gross profit (excluding depreciation):
Fuel........................................................ 22.2% 18.6%
Non-fuel.................................................... 74.9% 79.3%
Rent and royalties.......................................... 2.8% 2.1%
----- -----
Total gross profit (excluding depreciation)........... 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,
2002 through June 30, 2003:
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
-------- ------ ----------- -----
Number of sites at December 31, 2002...................... 122 20 10 152
January - June 2003 Activity:
New sites.............................................. 2 - - 2
Sales of sites......................................... (1) - - (1)
Conversions of leased sites to company-operated sites.. 2 (2) - -
------ ------ ------ -----
Number of sites at June 30, 2003.......................... 125 18 10 153
July - December 2003 Activity:
Sales of sites......................................... (2) - - (2)
Closed sites........................................... (1) - - (1)
Conversions of leased sites to company-operated sites.. 4 (4) - -
------ ------ ------ -----
Number of sites at December 31, 2003...................... 126 14 10 150
2004 Activity:
Conversions of leased sites to company-operated sites.. 1 (1) - -
------ ------ ------ -----
Number of sites at June 30, 2004.......................... 127 13 10 150
====== ====== ====== =====
As of June 30, 2004, three of our owned sites, including one closed site,
were under contract to be sold for total expected proceeds of approximately $3.2
million. These sales transactions are expected to close in 2004 and are not
expected to have a material effect on continuing results of operations.
RESULTS OF OPERATIONS
SAME-SITE RESULTS COMPARISONS
As part of our discussion and analysis of operating results we refer to
increases and/or decreases in results on a same-site basis. For purposes of
these comparisons, we include a site in the same-site comparisons if it was open
for business under the same method of operation (company-operated, leased or
franchisee-owned) for the entire period under discussion in both years being
compared. Sites are not excluded from the same-site comparisons as a result of
expansions in the square footage of the sites or in the amenities offered at the
sites.
RELEVANCE OF FUEL REVENUE
Due to the market pricing of commodity fuel products and the pricing
arrangements we have with our fuel customers, fuel revenue is not a reliable
metric for analyzing our relative results from period to period. As a result
solely of 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.
QUARTER ENDED JUNE 30, 2004 COMPARED TO THE QUARTER ENDED JUNE 30, 2003
Revenues. Our consolidated revenues for the quarter ended June 30, 2004
were $638.6 million, which represents an increase from the quarter ended June
30, 2003 of $108.4 million, or 20.4%, that is primarily attributable to an
increase in fuel revenue, but also resulted from increased non-fuel revenues.
22
Fuel revenue for the quarter ended June 30, 2004 increased by $95.1
million, or 26.4%, as compared to the same period in 2003. The increase was
attributable principally to increased average selling prices for both diesel
fuel and gasoline. Average diesel fuel and gasoline sales prices for the quarter
ended June 30, 2004 increased by 28.7% and 24.0%, respectively, as compared to
the same period in 2003, reflecting increases in commodity prices that were
attributable to higher crude oil costs due to increased worldwide demand,
refinery outages and other refined petroleum product supply disruptions. The
fuel revenue price variance increase was somewhat offset by decreases in diesel
fuel and gasoline sales volumes. Diesel fuel and gasoline sales volumes for the
quarter ended June 30, 2004 decreased 3.1% and 4.3%, respectively, as compared
to the same period in 2003. For the quarter ended June 30, 2004, we sold 325.2
million gallons of diesel fuel and 47.9 million gallons of gasoline, as compared
to 335.8 million gallons of diesel fuel and 50.0 million gallons of gasoline for
the quarter ended June 30, 2003. The diesel fuel sales volume decrease of 10.5
million gallons resulted from a 1.1% decrease in same-site diesel fuel sales
volumes, a net increase in sales volumes at sites we added to or eliminated from
our network during 2003 and a decrease in wholesale diesel fuel sales volume.
The gasoline sales volume decrease was primarily attributable to a 6.1 million
gallon decrease in wholesale gasoline sales volumes partially offset by a 5.3%
increase in same-site gasoline sales volumes. We believe the same-site diesel
fuel sales volume decrease resulted from intense price competition in
conjunction with an increase in the level of freight carried by train instead of
truck and an increase in trucking fleets' self-fueling at their own terminals
due to the wide fluctuations in, and relatively high levels of, diesel prices in
2004 as well as the timing of double-point loyalty program promotions (two
months in the 2003 second quarter and only one month in the 2004 second
quarter). These factors were partially offset by an improved freight market. We
believe the same-site increase in gasoline sales volume resulted primarily from
increased general motorist visits to our sites as a result of our more
aggressive retail gasoline pricing program as well as site improvements made as
part of our capital investment program. We believe the decreases in wholesale
sales volumes for both diesel and gasoline result from the sharp volatility in
commodity prices during 2004 coupled with the absolute high level of commodity
prices.
Non-fuel revenues for the quarter ended June 30, 2004 of $180.5 million
reflected an increase of $14.0 million, or 8.4%, as compared to the same period
in 2003. The increase was primarily attributable to a 5.0% increase in same-site
non-fuel revenues and also attributable to the increased sales at the
company-operated sites added to our network in 2003 and 2004. 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 upgrade our travel centers, an improved freight
market and also from our fuel pricing strategy.
Rent and royalty revenues for the quarter ended June 30, 2004 reflected a
$0.8 million, or 22.6%, decrease as compared to the same period in 2003. This
decrease was attributable to the rent and royalty revenue lost as a result of
the conversions of five leased sites to company-operated sites since June 30,
2003. This decrease was partially offset by a 1.8% increase in same-site royalty
revenue and a 4.1% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the quarter
ended June 30, 2004 was $134.7 million, compared to $130.6 million for the same
period in 2003, an increase of $4.1 million, or 3.1%. The increase in our gross
profit was primarily due to the increase in non-fuel sales volume that was
partially offset by a decrease in fuel sales volumes, decreased fuel margin per
gallon and decreased rent and royalty revenue, as discussed above.
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 $3.3 million, or 3.8%, to $89.8
million for the quarter ended June 30, 2004 compared to $86.5 million for the
same period in 2003. This increase was attributable to a $1.3 million, or 1.5%,
increase on a same-site basis that is related to the increased level of non-fuel
sales, and a net increase resulting from company-operated sites we added to our
network or eliminated from our network during 2003 and 2004. On a same-site
basis, operating expenses as a percentage of non-fuel revenues for 2004 were
49.5%, compared to 51.1% for the same period in 2003, reflecting the results of
our cost-cutting measures at our sites and an increased level of non-fuel sales
relative to our fixed costs.
Our selling, general and administrative expenses for the quarter ended
June 30, 2004 were $10.3 million, which reflected a $0.1 million, or 0.9%
increase from the same period in 2003 that is primarily attributable to
personnel costs.
23
Depreciation and Amortization Expense. Depreciation and amortization
expense for 2004 was $15.9 million, compared to $14.6 million for 2003, an
increase of $1.3 million or 8.7%, that was primarily due to an increase in asset
adandonments somewhat offset by a decrease in amortization expense.
Income from Operations. We generated income from operations of $20.2
million for the quarter ended June 30, 2004, compared to income from operations
of $19.5 million for the same period in 2003. This increase of $0.7 million, or
3.5%, as compared to the 2003 period was primarily attributable to the increased
level of non-fuel revenues and gross margin which was partially offset by the
decreased level of diesel fuel sales volumes and fuel margins per gallon, as
discussed above.
Gain on sale of investment. The gain on sale of investment of $1.5 million
for the second quarter of 2004 resulted from the sale of our investment in
Simons Petroleum, Inc. for cash proceeds of $9.1 million. We could receive an
additional $2.0 million of proceeds if Simons achieves certain earnings targets
and certain other conditions are met and representations and warranties are
maintained. Due to the uncertainty surrounding the future realization of these
receivables, the gain on sale we recognized did not reflect these amounts.
Interest and Other Financial Costs--Net. Interest and other financial
costs, net, for the quarter ended June 30, 2004 decreased by $0.3 million, or
2.3%, compared to 2003. This decrease resulted from our reduced level of
indebtedness in 2004 as compared to 2003.
Income Taxes. Our effective income tax rates for the quarters ended June
30, 2004 and 2003 were 36.7% and 36.9%, respectively. These rates differed from
the federal statutory rate due primarily to state income taxes and nondeductible
expenses, partially offset by the benefit of certain tax credits.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
Revenues. Our consolidated revenues for the six-month period ended June
30, 2004 were $1,197.9 million, which represents an increase from the six-month
period ended June 30, 2003 of $104.0 million, or 9.5%, that is primarily
attributable to an increase in fuel revenue but also resulted from increased
non-fuel revenues.
Fuel revenue for the six-month period ended June 30, 2004 increased by
$78.3 million, or 10.1%, as compared to the same period in 2003. The increase
was attributable principally to increased average selling prices for both diesel
fuel and gasoline. Average diesel fuel and gasoline sales prices for the
six-month period ended June 30, 2004 increased by 12.2% and 21.8%, respectively,
as compared to the same period in 2003, reflecting increases in commodity prices
that were attributable to higher crude oil costs due to increased worldwide
demand, refinery outages and other refined petroleum product supply disruptions.
The fuel revenue price variance increase was somewhat offset by decreases in
diesel fuel and gasoline sales volumes. Diesel fuel and gasoline sales volumes
for the six-month period ended June 30, 2004 decreased 3.1% and 2.1%,
respectively, as compared to the same period in 2003. For the six-month period
ended June 30, 2004, we sold 651.5 million gallons of diesel fuel and 88.6
million gallons of gasoline, as compared to 672.3 million gallons of diesel fuel
and 90.6 million gallons of gasoline for the six-month period ended June 30,
2003. The diesel fuel sales volume decrease of 20.7 million gallons resulted
from a 1.9% decrease in same-site diesel fuel sales volumes, a net increase in
sales volumes at sites we added to or eliminated from our network during 2003
and 2004 and a decrease in wholesale diesel fuel sales volume. The gasoline
sales volume decrease of 1.9 million gallons was primarily attributable to a
10.5 million gallon decrease in wholesale gasoline sales volumes, which was
somewhat offset by increased sales volumes at company-operated sites added to or
eliminated from our network in 2003 and 2004 as well as a 6.6% increase in
same-site gasoline sales volumes. We believe the same-site diesel fuel sales
volume decrease resulted from intense price competition in conjunction with an
increase in the level of freight carried by train instead of truck and an
increase in trucking fleets' self-fueling at their own terminals due to the wide
fluctuations in, and relatively high levels of, diesel prices in 2004. These
factors were partially offset by an improved freight market. We believe the
same-site increase in gasoline sales volume resulted primarily from increased
general motorist visits to our sites as a result of our more aggressive retail
gasoline pricing program as well as site improvements made as part of our
capital investment program. We believe the decreases in wholesale sales volumes
for both diesel and gasoline result from the sharp volatility in commodity
prices during 2004 coupled with the absolute high level of commodity prices.
Non-fuel revenues for the six-month period ended June 30, 2004 of $339.8
million reflected an increase of $27.4 million, or 8.8%, as compared to the same
period in 2003. The increase was primarily attributable to a 4.8% increase in
same-site non-fuel revenues and also attributable to the increased sales at the
company-operated sites
24
added to our network in 2003. We believe the same-site increase reflected
increased customer traffic resulting, in part, from the significant capital
improvements that we have made in the network under our capital investment
program to upgrade our travel centers, an improved freight market and also from
our fuel pricing strategy.
Rent and royalty revenues for the six-month period ended June 30, 2004
reflected a $1.7 million, or 23.7%, decrease as compared to the same period in
2003. This decrease was attributable to the rent and royalty revenue lost as a
result of the conversions of seven leased sites to company-operated sites in
2003 and 2004. This decrease was partially offset by a 3.0% increase in
same-site royalty revenue and a 3.3% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the six-month
period ended June 30, 2004 was $253.8 million, compared to $246.1 million for
the same period in 2003, an increase of $7.7 million, or 3.1%. The increase in
our gross profit was primarily due to the increase in non-fuel sales volume that
was partially offset by a decrease in fuel sales volumes, decreased fuel margin
per gallon and decreased rent and royalty revenue, as discussed above.
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 $6.5 million, or 3.8%, to $175.8
million for the six-month period ended June 30, 2004 compared to $169.4 million
for the same period in 2003. This increase was attributable to a $0.8 million,
or 0.5%, increase on a same-site basis that is related to the increased level of
non-fuel sales, and a net increase resulting from company-operated sites we
added to our network or eliminated from our network during 2003 and 2004. These
increases were partially offset by a $1.6 million credit to environmental
expense related to remediation activities at a site (see further discussion in
the "Environmental Matters" section of this Management's Discussion and
Analysis). On a same-site basis, operating expenses as a percentage of non-fuel
revenues for the six-month period ended June 30, 2004 were 51.3%, compared to
53.5% for the same period in 2003, reflecting the results of our cost-cutting
measures at our sites and an increased level of non-fuel sales relative to our
fixed costs, as well as the $1.6 million environmental credit.
Our selling, general and administrative expenses for the six-month period
ended June 30, 2004 were $2.07 million, which reflected a $0.4 million, or 2.0%
increase from the same period in 2003 that is primarily attributable to
personnel costs.
Depreciation and Amortization Expense. Depreciation and amortization
expense for 2004 was $30.0 million, compared to $29.2 million for 2003, an
increase of $0.8 million or 2.7%, that was primarily due to an increase in asset
abandonments expense that was partially offset by a decrease in amortization
expense that resulted from an intangible asset related to a noncompetition
agreement becoming fully amortized in April 2003.
Income from Operations. We generated income from operations of $28.8
million for the six-month period ended June 30, 2004, compared to income from
operations of $27.5 million for the same period in 2003. This increase of $1.3
million, or 4.7%, as compared to the 2003 period was primarily attributable to
the increased level of non-fuel revenues and gross margin which was partially
offset by the decreased level of fuel sales volumes and fuel margins per gallon,
as discussed above.
Gain on sale of investment. The gain on sale of investment of $1.5 million
for the six-month period ended June 30, 2004 resulted from the sale of our
investment in Simons Petroleum, Inc. for cash proceeds of $9.1 million. We could
receive an additional $2.0 million of proceeds if Simons achieves certain
earnings targets and certain other conditions are met and representations and
warranties are maintained. Due to the uncertainty surrounding the future
realization of these receivables, the gain on sale we recognized did not reflect
these amounts.
Interest and Other Financial Costs--Net. Interest and other financial
costs, net, for the six-month period ended June 30, 2004 decreased by $0.6
million, or 2.4%, compared to 2003. This decrease resulted from our reduced
level of indebtedness in 2004 as compared to 2003.
Income Taxes. Our effective income tax benefit rates for the six-month
periods ended June 30, 2004 and 2003 were 36.8% and 38.3%, respectively. These
rates differed from the federal statutory rate due primarily to state income
taxes and nondeductible expenses, partially offset by the benefit of certain tax
credits. The decrease from 2003 is primarily related to state income taxes.
25
Cumulative Effect of a Change in Accounting Principle. Effective January
1, 2003, we adopted FAS 143, "Accounting for Asset Retirement Obligations." As
of January 1, 2003, we recognize the future cost to remove an underground
storage tank over the estimated useful life of the storage tank. A liability for
the fair value of an asset retirement obligation with a corresponding increase
to the carrying value of the related long-lived asset is recorded at the time an
underground storage tank is installed. We will amortize the amount added to
property and equipment and recognize accretion expense in connection with the
discounted liability over the remaining life of the respective underground
storage tank. The estimated liability is based on historical experiences in
removing these tanks, estimated tank useful lives, external estimates as to the
cost to remove the tanks in the future and regulatory requirements. The
liability is a discounted liability using a credit-adjusted risk-free rate of
approximately 12.8%. Revisions to the liability could occur due to changes in
tank removal costs, tank useful lives or if new regulations regarding the
removal of such tanks are enacted. Upon adoption of FAS 143, we recorded a
discounted liability of $589,000, increased property and equipment by $172,000
and recognized a one-time cumulative effect charge of $253,000 (net of deferred
tax benefit of $164,000).
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements are to meet our working capital and
capital expenditure needs, including expenditures for acquisitions and
expansion, and to service the payments of principal and interest on outstanding
indebtedness. Our principal source of liquidity to meet these requirements is
operating cash flows. The revolving credit facility of our Senior Credit
Facility provides us a secondary source of liquidity, primarily to better match
the timing of cash expenditures to the timing of our cash receipts primarily due
to effects of changes in petroleum product prices, the uneven level of capital
expenditures throughout the year and the timing of debt and interest payments.
The primary risks we face with respect to the expected levels of operating cash
flows are a decrease in the demand by our customers for our products and
services, increases in crude oil and/or petroleum product prices and increases
in interest rates. It is reasonably likely that the United States economy could
either worsen, or reflect slower growth than expected during the remainder of
2004. Similarly, it is reasonably likely that interest rates and petroleum
product prices will increase further during the remainder of 2004 from levels
that existed during 2003 and the first six months of 2004, possibly to levels
greater than that contemplated in our expectations. The uncertainty surrounding
each of the economy, interest rates and petroleum product prices is exacerbated
by the political and military situation in Iraq, crude oil production issues in
various countries and the intentions and actions of OPEC member nations. If the
United States economy worsens, our customers could be adversely affected, which
could further intensify competition within our industry and reduce the level of
cash we could generate from our operations. Based on our outstanding obligations
as of June 30, 2004, a one-percentage point increase in interest rates increases
our annual cash outlays by approximately $3.6 million. A significant increase in
diesel fuel and gasoline prices increases our cash investment in working capital
and can also have a depressing effect on our sales volumes and fuel margins per
gallon. The primary risk we face with respect to the expected availability of
borrowing under our revolving credit facility are the limitations imposed upon
us by the covenants contained in our Senior Credit Facility. Should our level of
sales volume or interest rate and petroleum products price levels vary adversely
and significantly from expectations, it is reasonably likely that we would need
to reduce our capital expenditures or be effectively barred from further
revolving credit facility borrowings in order to maintain compliance with our
debt covenants, in the absence of a debt covenant waiver or an amendment to the
related agreement. We were in compliance with all of our debt covenants
throughout the first six months of 2004 and as of June 30, 2004, 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. At June 30, 2004, we had outstanding revolving credit
facility borrowings of $2.5 million and issued letters of credit of $26.9
million, leaving $70.6 million of our $100 million revolving credit facility
available for borrowings.
26
The forecasted level of capital expenditures for 2004 is approximately $49
million. Given our forecasted level of cash flows from operations for 2004 and
our planned level of capital expenditures, and barring an event or series of
events that leads to significantly increased petroleum product prices, we expect
that during the remainder of 2004 we will make our scheduled debt payments and
will also repay an additional amount of outstanding borrowings under our
revolving credit facilities. In April 2004, we made mandatory prepayments of
term loan borrowings of $21.8 million. These prepayments consisted of $12.7
million related to Excess Cash Flow generated during the year ended December 31,
2003, and $9.1 million related to the net cash proceeds generated from the sale
of our investment in an equity investee. Further, we expect that during 2004 we
will generate an amount of excess cash flow that would require a mandatory
prepayment of term loan borrowings in 2005.
HISTORICAL CASH FLOWS
Net cash provided by operating activities totaled $58.4 million for the
first six months of 2004, compared to $40.7 million for the same period in the
prior year. The increase in cash from operations primarily results from a $16.9
million increase from the 2003 period in the cash generated from working capital
reductions, as well as from greater profitability and reduced interest payments
in 2004.
Net cash used in investing activities was $16.6 million for the first six
months of 2004, as compared to $28.2 million for the first six months of 2003.
During the first six months of 2004, we received $9.1 million of proceeds upon
the sale of stock of an equity investee and invested $0.1 million of cash to
convert one leased site to a company-operated site. During the first six months
of 2003, we invested $8.3 million to acquire two new operating sites and convert
two leased sites to company-operated sites.
Net cash used in financing activities was $36.7 million during the first
six months of 2004 and $1.5 million during the first six months of 2003. During
2004, we made mandatory term loan prepayments of $21.8 million as a result of
Excess Cash generated in 2003 and the sale of our investment in an equity
investee. We also made net repayments under our revolving credit facility of
$11.1 million. During 2003, we had net borrowings under our revolving credit
facility that were primarily used to fund business acquisitions and an $11.3
million mandatory term loan prepayment as a result of the excess cash flow we
generated in 2002.
DESCRIPTION OF INDEBTEDNESS
We have no material changes to the disclosure on this matter made in our
annual report on Form 10-K for the year ended December 31, 2003, except that at
June 30, 2004, we had outstanding revolving credit facility borrowings and
issued letters of credit of $2.5 million and $26.9 million, respectively,
leaving $70.6 million of our $100 million revolving credit facility available
for borrowings.
In April 2004, we made two mandatory prepayments of our term loan
indebtedness. We repaid $12.7 million as a result of the Excess Cash Flow we
generated in 2003 and we repaid $9.1 million as a result of the sale of our
investment in Simons Petroleum Inc.
ADJUSTED EBITDA AND DEBT COVENANT COMPLIANCE
Adjusted EBITDA, as used here, is based on the definition for "EBITDA" in
our bank debt agreement and consists of net income plus the sum of (a) income
taxes, (b) interest expense, net, (c) depreciation, amortization and other
noncash charges, (d) transition expense, (e) extraordinary losses and cumulative
effects of accounting changes and (f) the costs of the merger and
recapitalization transactions. We have included this information concerning
Adjusted EBITDA because Adjusted EBITDA is a primary component for calculating
the financial ratio covenants in our debt agreements. We also use Adjusted
EBITDA as a basis for determining bonus payments to our corporate and site-level
management employees and as a key component in the formula for calculating the
fair value of our redeemable common stock and stock options. Adjusted EBITDA
should not be considered in isolation from, or as a substitute for, net income,
income from operations, cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles. While the non-GAAP measures "EBITDA"
and "Adjusted EBITDA" are frequently used by other companies as measures of
operations and/or ability to meet debt service requirements, Adjusted EBITDA as
we use the term is not necessarily comparable to similarly titled captions of
other companies due to differences in methods of calculation.
27
We consider our Senior Credit Facility to be a material agreement. A
majority of our outstanding indebtedness has been borrowed under the Senior
Credit Facility. Further, the Senior Credit Facility requires us to maintain
compliance with a variety of affirmative and negative covenants which primarily
act to limit the types of business activities we can undertake; limits the
amounts we can spend for items such as capital expenditures, dividends and
distributions, investments, operating leases, etc.; and limits the amount of
additional indebtedness we can incur and the liens that can be placed on our
assets. We have maintained compliance with all of these covenants for all
periods presented and expect to remain in compliance with all of the debt
covenants to which we are subject through the remainder of 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.
SIX MONTHS ENDED
JUNE 30,
------------------------------
2003 2004
----------- ------------
(IN THOUSANDS OF DOLLARS,
EXCEPT RATIOS)
Net income..................................................................... $ 2,730 $ 3,874
Adjustments to reconcile net income to Adjusted EBITDA:
Cumulative effect of a change in accounting principle, net of related taxes. 253 -
Provision for income taxes.................................................. 1,850 2,253
Interest and other financial costs, net..................................... 23,288 22,732
Depreciation and amortization expense....................................... 29,200 29,974
Other non-cash charges (credits), net....................................... 482 227
----------- -----------
Adjusted EBITDA................................................................ $ 57,803 $ 59,060
=========== ===========
Adjusted EBITDA for trailing 12-month ratio measurement period................. $ 120,447 $ 123,177
----------- -----------
Interest expense coverage ratio:
Actual ratio at period end.................................................. 2.74x 3.00x
Required ratio at period end (no less than)................................. 1.80x 2.00x
Minimum amount of Adjusted EBITDA to meet required ratio.................... $ 79,223 $ 82,236
Leverage ratio:
Actual ratio at period end.................................................. 4.18x 3.69x
Required ratio at period end (no greater than).............................. 4.65x 4.15x
Minimum amount of Adjusted EBITDA to meet required ratio.................... $ 108,190 $ 109,447
OFF-BALANCE SHEET ARRANGEMENTS
We have no material changes to the disclosure on this matter made in our
annual report on Form 10-K for the year ended December 31, 2003.
SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We have no material changes to the disclosure on this matter made in our
annual report on Form 10-K for the year ended December 31, 2003.
28
ENVIRONMENTAL MATTERS
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 on by us as we incur related remediation costs, and purchased insurance
policies that cap our total future expenditures for these matters at $9.6
million 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. Accordingly,
we recognized no income or expense as a result of entering into the Unocal
Buy-Out Agreement. Of the cash paid to us by Unocal $1,000,000 was to reimburse
us for the future costs of administering the remediation projects assumed from
Unocal and was recorded as a deferred credit that will be recognized to offset
our costs as the related remediation activities are completed.
In March 2004, we received notification from the Pennsylvania Underground
Storage Tank Insurance Fund ("USTIF") that, as a result of our appeal, USTIF had
reversed its denial of our claim for reimbursement of corrective action costs
incurred or to be incurred to remediate a diesel fuel release at our Harrisburg
site. USTIF has agreed that our claim is eligible for reimbursement.
Accordingly, in March 2004, we recognized a $1.6 million receivable for the
recovery of the related corrective action costs, with an offsetting reduction of
operating expenses. The expenses had been recognized by us in previous years,
primarily in September 2003 when we expensed $1.3 million as a result of USTIF's
original denial of our claim.
We have estimated the current ranges of remediation costs at currently
active sites and what we believe will be our ultimate share for those costs and,
as of June 30, 2004, we had a reserve of $12.4 million for unindemnified
environmental matters for which we are responsible, a receivable for estimated
recoveries of these estimated future expenditures of $3.6 million and $5.4
million of cash in an escrow account to fund certain of these estimated future
expenditures. We estimate that the gross cash outlays related to the matters for
which we have accrued this reserve will be approximately $3.8 million in the
remainder of 2004; $2.7 million in 2005; $1.9 million in 2006; $1.5 million in
2007; $1.2 million in 2008 and $1.3 million thereafter. In addition, 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." FIN 46 was intended to provide
guidance in determining (1) whether consolidation is required under the
"controlling financial interest" model in existing authoritative guidance or,
alternatively, (2) whether the variable interest model under FIN 46 should be
used to account for existing and new entities. In December 2003, the FASB issued
a revised version of FIN 46 (FIN 46R) to clarify certain aspects of FIN 46 and
to provide certain entities with exemptions from the requirements of FIN 46. We
must adopt this accounting guidance in 2004 for any variable interest entities
created after December 15, 2003 (there have been none to date), and on January
1, 2005 for all entities created before December 15, 2003. Under FIN 46R, we
will be required to consolidate 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 still
evaluating the amounts by which our financial statements will be affected by
consolidating the lessor. 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.
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FORWARD-LOOKING STATEMENTS
This quarterly report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to our future prospects, developments and business strategies.
The statements contained in this quarterly report that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. We have used the words "may," "will," "expect,"
"anticipate," "believe," "estimate," "plan," "intend" and similar expressions in
this report to identify forward-looking statements. These forward-looking
statements are made based on our expectations and beliefs concerning future
events affecting us and are subject to uncertainties and factors relating to our
operations and business environment, all of which are difficult to predict and
many of which are beyond our control, that could cause our actual results to
differ materially from those matters expressed in or implied by forward-looking
statements. The following factors are among those that could cause our actual
results to differ materially from the forward-looking statements:
- competition from other travel center and truck stop operators, including
additional or improved services or facilities of competitors;
- the economic condition of the trucking industry, which in turn is
dependent on general economic factors;
- increased environmental governmental regulation;
- changes in governmental regulation of the trucking industry, including
regulations relating to diesel fuel and gasoline;
- changes in the highway infrastructure;
- changes in accounting standards generally accepted in the United States;
- changes in interest rates;
- diesel fuel and gasoline pricing;
- availability of diesel fuel and gasoline supply; and
- availability of sufficient qualified personnel to staff company-operated
sites.
All of our forward-looking statements should be considered in light of
these factors and all other risks discussed from time to time in our
filings with the Securities and Exchange Commission. We do not undertake
to update our forward-looking statements to reflect future events or
circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosure on this matter made in our
annual report on Form 10-K for the year ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer, after conducting an evaluation,
together with other members of our management, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the
end of the period covered by this report, have concluded that our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-14
(c)) were effective to ensure that information required to be disclosed by
us in our reports filed or submitted under the Securities Exchange Act of
1934 (the "Exchange Act") is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the Securities
and Exchange Commission (the "SEC").
(b) Changes in internal controls. There were no changes in our internal
controls over financial reporting that occurred during the most recent
fiscal quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in various legal and administrative
proceedings and threatened legal and administrative proceedings incidental to
the ordinary course of our business. We believe that we are not now involved in
any litigation, individually, or in the aggregate, which could have a material
adverse affect on our business, financial condition, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held on April 29, 2004 for the
purpose of electing a board of directors and ratifying the appointment of
PricewaterhouseCoopers LLP as independent auditor for the year ending December
31, 2004. The nominees for director, Robert J. Branson, Michael Greene, Steven
B. Gruber, Edwin P. Kuhn, Louis J. Mischianti and Rowan G. P. Taylor, were
elected by the following vote:
Shares voted "for" 6,679,087
Shares voted "against" 0
Abstentions 0
Not voted 260,411
The appointment of PricewaterhouseCoopers LLP as independent auditors for
the year ending December 31, 2004 was ratified and approved by the following
vote:
Shares voted "for" 6,676,653
Shares voted "against" 0
Abstentions 2,434
Not voted 260,411
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
(b) Reports on Form 8-K
We filed no reports on Form 8-K during the second quarter of 2004.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRAVELCENTERS OF AMERICA, INC.
(Registrant)
Date: August 13, 2004 By: /s/ James W. George
------------------------------------------
Name: James W. George
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
32