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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 September 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 [ ] No [X]
As of October 15, 2004, 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 September 30, 2004.................... 2
Unaudited Consolidated Statement of Operations and
Comprehensive Income for the three months and nine
months ended September 30, 2003 and 2004.................... 3
Unaudited Consolidated Statement of Cash Flows for
the nine months ended September 30, 2003 and 2004........... 4
Unaudited Consolidated Statement of Nonredeemable
Stockholders' Equity for the nine months ended
September 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......................... 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................. 33
Item 4. Controls and Procedures..................................... 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 33
Item 6. Exhibits and Reports on Form 8-K............................ 33
SIGNATURE....................................................................... 34
1
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
2003 2004
---- ----
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash.............................................................................. $ 15,005 $ 32,360
Accounts receivable (less allowance for doubtful accounts of $1,707 for 2003 and
$1,366 for 2004)............................................................... 42,987 63,767
Inventories....................................................................... 63,981 66,325
Deferred income taxes............................................................. 3,823 3,871
Other current assets.............................................................. 6,962 7,735
---------- ----------
Total current assets......................................................... 132,758 174,058
Property and equipment, net.......................................................... 438,133 434,315
Goodwill............................................................................. 25,584 25,905
Deferred financing costs, net........................................................ 24,012 21,162
Deferred income taxes................................................................ 14,519 8,025
Other noncurrent assets.............................................................. 15,561 12,634
---------- ----------
Total assets................................................................. $ 650,567 $ 676,099
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................................. $ 3,354 $ 3,132
Accounts payable.................................................................. 59,754 91,435
Other accrued liabilities......................................................... 50,020 60,022
---------- ----------
Total current liabilities.................................................... 113,128 154,589
Commitments and contingencies........................................................ - -
Long-term debt (net of unamortized discount)......................................... 502,033 465,779
Deferred income taxes................................................................ 2,137 2,198
Other noncurrent liabilities......................................................... 8,318 16,321
---------- ----------
625,616 638,887
Redeemable equity.................................................................... 1,909 2,133
Nonredeemable equity:
Common stock and other stockholders' equity....................................... 216,919 216,639
Accumulated deficit............................................................... (193,877) (181,560)
---------- ----------
Total nonredeemable equity................................................... 23,042 35,079
---------- ----------
Total liabilities, redeemable equity and nonredeemable stockholders' equity.. $ 650,567 $ 676,099
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
2
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2003 2004 2003 2004
------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Revenues:
Fuel...................................... $ 373,842 $ 506,401 $ 1,148,291 $ 1,359,176
Nonfuel................................... 179,097 190,437 491,540 530,248
Rent and royalties........................ 3,154 2,719 10,169 8,069
------------ ------------ ------------ ------------
Total revenues...................... 556,093 699,557 1,650,000 1,897,493
Cost of goods sold (excluding depreciation):
Fuel...................................... 346,582 483,031 1,066,219 1,288,553
Nonfuel................................... 74,484 77,958 202,694 216,571
------------ ------------ ------------ ------------
Total cost of goods sold (excluding
depreciation).................... 421,066 560,989 1,268,913 1,505,124
------------ ------------ ------------ ------------
Gross profit (excluding depreciation)........ 135,027 138,568 381,087 392,369
Operating expenses........................... 91,330 91,570 260,680 267,389
Selling, general and administrative expenses 10,089 10,417 30,395 31,124
Depreciation and amortization expense........ 15,342 13,971 44,541 43,945
(Gain) loss on asset sales................... (10) (1,689) (304) (1,678)
------------ ------------ ------------ ------------
Income from operations.................... 18,276 24,299 45,775 51,589
Equity in earnings of affiliate.............. 224 116 847 194
Gain on sale of investment................... - - - 1,491
Interest and other financial costs, net...... (11,213) (11,084) (34,502) (33,816)
------------ ------------ ------------ ------------
Income before income taxes and the
cumulative effect a of change in
accounting principle...................... 7,287 13,331 12,120 19,458
Provision for income taxes................... 2,558 4,888 4,408 7,141
------------ ------------ ------------ ------------
Income before the cumulative effect of a
change in accounting principle............ 4,729 8,443 7,712 12,317
Cumulative effect of a change in accounting
principle, net of related taxes (Note 2).. - - (253) -
------------ ------------ ------------ ------------
Net income................................ 4,729 8,443 7,459 12,317
Other comprehensive income (expense), net
of tax (Note 3):
Foreign currency translation adjustments 7 279 625 121
------------ ------------ ------------ ------------
Comprehensive income......................... $ 4,736 $ 8,722 $ 8,084 $ 12,438
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2004
----------- -----------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 7,459 $ 12,317
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.......................................... 44,533 43,945
Amortization of deferred financing costs....................................... 2,540 2,850
Deferred income tax provision.................................................. 3,785 6,464
Provision for doubtful accounts................................................ 750 25
(Gain) on asset sales.......................................................... (304) (3,169)
Changes in assets and liabilities, adjusted for the effects of business
acquisitions:
Accounts receivable......................................................... (8,676) (21,657)
Inventories................................................................. 4,641 (1,802)
Other current assets........................................................ 2,149 (771)
Accounts payable and other accrued liabilities.............................. 18,761 37,225
Other, net..................................................................... (1,200) 2,601
----------- -----------
Net cash provided by operating activities................................. 74,691 78,028
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions......................................................... (9,035) (588)
Proceeds from asset sales..................................................... 1,866 11,755
Capital expenditures.......................................................... (32,057) (37,623)
----------- -----------
Net cash used in investing activities..................................... (39,226) (26,456)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in checks drawn in excess of bank balances................ (4) 3,653
Revolving loan borrowings (repayments), net................................... (15,500) (13,600)
Long-term debt repayments..................................................... (13,851) (24,132)
Other......................................................................... (252) (158)
----------- -----------
Net cash used in financing activities..................................... (29,607) (34,237)
----------- -----------
Effect of exchange rate changes on cash................................... 202 20
----------- -----------
Net increase (decrease) in cash........................................... 6,060 17,355
Cash at the beginning of the period.................................................. 14,047 15,005
----------- -----------
Cash at the end of the period........................................................ $ 20,107 $ 32,360
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
4
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY
NINE MONTHS ENDED
SEPTEMBER 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) (401)
----------- -----------
Balance at end of period.......................................................... $ 217,071 $ 215,711
=========== ===========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of period.................................................... $ - $ 804
Foreign currency translation adjustments, net of tax.......................... 625 121
----------- -----------
Balance at end of period......................................................... $ 625 $ 925
=========== ===========
ACCUMULATED DEFICIT:
Balance at beginning of period.................................................... $ (202,768) $ (193,877)
Net income.................................................................... 7,459 12,317
----------- -----------
Balance at end of period.......................................................... $ (195,309) $ (181,560)
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
5
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. At September 30, 2004, our geographically
diverse nationwide network of full-service travel centers consisted of 149 sites
located in 41 states and the province of Ontario, Canada. Our operations are
conducted through three distinct types of travel centers: (1) sites owned or
leased and operated by us, which we refer to as company-operated sites; (2)
sites owned by us and leased to independent lessee-franchisees, which we refer
to as leased sites; and (3) sites owned and operated by independent franchisees,
which we refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system, typically on 20- to 25-acre sites. Operating under the
"TravelCenters of America" and "TA" brand names, our nationwide network provides
our customers with diesel fuel and gasoline as well as non-fuel products and
services such as truck repair and maintenance services, full-service
restaurants, more than 20 different brands of fast food restaurants, travel and
convenience stores with a selection of over 4,000 items and other driver
amenities. We also collect rents and franchise royalties from the franchisees
who operate the leased sites and franchisee-owned sites.
The consolidated financial statements include the accounts of
TravelCenters of America, Inc. and its wholly owned subsidiaries, TA Operating
Corporation and TA Franchise Systems Inc., as well as TA Licensing, Inc., TA
Travel, L.L.C., TravelCenters Realty, L.L.C., TravelCenters Properties, L.P.,
3073000 Nova Scotia Company, TravelCentres Canada Inc., and TravelCentres Canada
Limited Partnership, which are all direct or indirect wholly owned subsidiaries
of TA Operating Corporation. Intercompany accounts and transactions have been
eliminated. With only one of our 149 travel centers located in Canada, the
amounts of revenues and long-lived assets located in Canada are not material.
The accompanying unaudited, consolidated financial statements as of
September 30, 2004 and for the three- and nine-month periods ended September 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 September 30, 2004, our results
of operations for the three- and nine-month periods ended September 30, 2003 and
2004, and our changes in nonredeemable stockholders' equity and cash flows for
the nine-month periods ended September 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 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
Upon adoption of FAS 143, we recorded a discounted liability of $589,000,
increased property and equipment by $172,000 and recognized a one-time
cumulative effect charge of $253,000 (net of a deferred tax benefit of
$164,000).
A reconciliation of our asset retirement obligation liability, which is
included within other noncurrent liabilities in our consolidated balance sheet,
for the nine months ended September 30, 2003 and 2004 was as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2003 2004
----------- -----------
(IN THOUSANDS OF DOLLARS)
Balance at January 1............................................................... $ 589 $ 663
Liabilities incurred............................................................... 11 -
Liabilities settled................................................................ (6) (17)
Accretion expense.................................................................. 58 62
Revisions to estimates............................................................. - -
----------- -----------
Balance at September 30............................................................ $ 652 $ 708
=========== ===========
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 I 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. As discussed in Note 11, we expect to terminate this
lease as part of a refinancing of our indebtedness. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2003 2004 2003 2004
--------- --------- --------- ---------
(IN THOUSANDS OF DOLLARS)
Related to foreign currency translation adjustments..... $ (3) $ 93 $ 253 $ 46
--------- --------- --------- ---------
Total................................................. $ (3) $ 93 $ 253 $ 46
========= ========= ========= =========
7
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30,
2003 2004
------------ ------------
(IN THOUSANDS OF DOLLARS)
Nonfuel merchandise..................... $ 57,881 $ 58,271
Petroleum products...................... 6,100 8,054
------------ ------------
Total inventories................... $ 63,981 $ 66,325
============ ============
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine-month periods
ended September 30, 2003 and 2004 were as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2003 2004
----------- -----------
(IN THOUSANDS OF DOLLARS)
Balance as of beginning of period.......... $ 23,585 $ 25,584
Goodwill recorded during the period........ 967 321
----------- -----------
Balance as of end of period................ $ 24,552 $ 25,905
=========== ===========
During the nine months ended September 30, 2003, we recorded $967,000 of
goodwill as a result of the business acquisitions we completed in connection
with converting four leased sites to company-operated sites. During the nine
months ended September 30, 2004, we recorded $321,000 of goodwill as a result of
the business acquisitions we completed in connection with converting two leased
sites to company-operated sites.
The net carrying amount of intangible assets is included within other
noncurrent assets in our consolidated balance sheet. Intangible assets, net
consisted of the following:
DECEMBER 31, SEPTEMBER 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 2,475
------------ ------------
Net carrying value of amortizable intangible assets... 405 264
Net carrying value of trademarks................................. 1,398 1,398
------------ ------------
Intangible assets, net................................ $ 1,803 $ 1,662
============ ============
Total amortization expense for our amortizable intangible assets for the
nine-month periods ended September 30, 2003 and 2004 was $639,000 and $141,000,
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
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 as if we had applied the fair value recognition provisions of FAS 123 to
stock-based employee compensation.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2003 2004 2003 2004
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Net income, as reported................................... $ 4,729 $ 8,443 $ 7,459 $ 12,317
Add back - Stock-based employee compensation expense, net
of related tax effects, included in net income as
reported.............................................. - - - -
Deduct - Total stock-based employee compensation expense
determined under fair value based methods for all
awards, net of related tax effects.................... (171) (168) (498) (502)
---------- ---------- ---------- ----------
Pro forma net income...................................... $ 4,558 $ 8,275 $ 6,961 $ 11,815
========== ========== ========== ==========
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
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 September 30, 2004, we had a reserve for environmental matters of
$12,599,000, a receivable for expected recoveries of these estimated future
expenditures of $3,714,000 and $5,397,000 of cash in an escrow account to fund
certain of these estimated future expenditures, leaving an estimated $3,488,000
to be funded from future operating cash flows. In our consolidated balance
sheet, $4,673,000 of the reserve for environmental matters was included in the
accrued liabilities balance and $7,926,000 of the reserve was included in the
other noncurrent liabilities balance, $2,120,000 of the recoveries receivable
amount was included in the accounts receivable balance and $1,594,000 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 $2,294,000 in the remainder of 2004; $3,173,000 in 2005;
$2,437,000 in 2006; $1,914,000 in 2007; $1,389,000 in 2008 and $1,392,000
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
10
described above) and up to $40,000,000 for unknown environmental liabilities,
subject, in 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
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2004
---- ----
(IN THOUSANDS OF DOLLARS)
Revolving loan borrowings........................................ $ 370,600 $ 264,300
Revolving loan repayments........................................ (386,100) (277,900)
------------- -------------
Revolving loan borrowings (repayments), net.................... $ (15,500) $ (13,600)
============= =============
Cash paid during the period for:
Interest....................................................... $ 22,593 $ 24,064
Income taxes (net of refunds).................................. $ 635 $ 1,065
During the nine-month periods ended September 30, 2003 and 2004, we
acquired $735,000 and $635,000, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2004 2003 2004
---- ---- ---- ----
(IN THOUSANDS OF DOLLARS)
Interest and other financial costs consists of the following:
Cash interest expense........................................... $ (10,008) $ (9,854) $ (30,921) $ (29,931)
Cash interest income............................................ 24 176 66 221
Amortization of discount on debt................................ (360) (430) (1,107) (1,256)
Amortization of deferred financing costs........................ (869) (976) (2,540) (2,850)
------------ ------------ ------------ ------------
Interest and other financial costs, net......................... $ (11,213) $ (11,084) $ (34,502) $ (33,816)
============ ============ ============ ============
11
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 $1,486,000 at December 31, 2003 and September 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 were a Simons stockholder. During
the nine-month periods ended September 30, 2003 and 2004, diesel fuel provided
by Simons, accounted for $171,942,000 and $70,652,000, respectively, of our cost
of goods sold and we made sales of diesel fuel to Simons in the amounts of
$2,514,000 and $152,000, respectively. We also lease a travel center from
Simons. Rent paid with respect to this site for the nine-month periods ended
September 30, 2003 and 2004 was $306,000 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 $1,491,000 does not reflect these amounts.
11. SUBSEQUENT EVENT
On October 1, 2004, we entered into an asset purchase agreement (the
"Acquisition Agreement") with B.R.G., Inc. and Rip Griffin Truck Service Center,
Inc. (collectively "Rip Griffin") to acquire eleven travel center facilities
operated by Rip Griffin. The Acquisition Agreement provides for the acquisition
of the assets at the eleven travel center facilities operated by Rip Griffin on
interstate highways. The eleven travel centers to be acquired are located in
Arizona, Arkansas, California, Colorado, New Mexico, Texas and Wyoming. The
purchase price for the acquisition is $120,000,000 plus an additional amount for
site cash and inventories that will be determined at closing but is estimated to
be approximately $8,000,000. These amounts will be paid in cash. We will also
assume the environmental liability related to the acquired sites. The estimated
amount of the environmental liability is $1,100,000. The closing of the
acquisition is subject to certain conditions, including regulatory approval
under the Hart-Scott-Rodino Antitrust Improvements Act. We expect to consummate
the transaction before the end of 2004.
In order to consummate the acquisition, we expect to complete a
refinancing of our Senior Credit Facilities (the Refinancing). As amended and
restated, we expect that our Senior Credit Facilities will be composed of a
seven-year Term Loan of $475,000,000 and a five-year $100,000,000 Revolving
Credit Facility. The proceeds received will be used to refinance our current
Term Loan, fund the Rip Griffin acquisition, refinance our master lease facility
and for general corporate purposes. We believe the terms of the amended and
restated credit agreement will be substantially similar to those included in the
current credit agreement and consistent with current financing market
conditions. As a result of the Refinancing, we will incur a non-cash charge
against operating income of approximately $8,500,000 in connection with writing
off the unamortized amount of the deferred financing costs incurred in 2000 with
respect to the Senior Credit Facilities.
12
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance
sheet schedules as of December 31, 2003 and September 30, 2004, our condensed
consolidating statement of operations schedules for the three- and nine-month
periods ended September 30, 2003 and 2004 and our condensed consolidating
statement of cash flows schedules for the nine-month periods ended September 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 100% 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.
13
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:
DECEMBER 31, 2003
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash ............................................... $ - $ 14,746 $ 259 $ - $ 15,005
Accounts receivable, net ........................... - 43,489 1,056 (1,558) 42,987
Inventories ........................................ - 63,771 210 - 63,981
Deferred income taxes .............................. - 3,820 3 - 3,823
Other current assets ............................... 620 6,598 4 (260) 6,962
--------- ------------ ------------ ------------ ------------
Total current assets ......................... 620 132,424 1,532 (1,818) 132,758
Property and equipment, net ............................ - 431,470 6,663 - 438,133
Goodwill ............................................... - 25,584 - - 25,584
Deferred financing costs, net .......................... 24,012 - - - 24,012
Deferred income taxes .................................. 21,002 (6,612) 129 - 14,519
Other noncurrent assets ................................ 896 18,949 - (4,284) 15,561
Investment in subsidiaries ............................. 266,844 1,702 - (268,546) -
--------- ------------ ------------ ------------ ------------
Total assets ................................. $ 313,374 $ 603,517 $ 8,324 $ (274,648) $ 650,567
========= ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............... $ 3,165 $ 189 $ - $ - $ 3,354
Accounts payable ................................... - 59,524 854 (624) 59,754
Other accrued liabilities .......................... 2,686 47,037 1,491 (1,194) 50,020
--------- ------------ ------------ ------------ ------------
Total current liabilities .................... 5,851 106,750 2,345 (1,818) 113,128
Long-term debt (net of unamortized discount) ........... 499,417 2,616 4,284 (4,284) 502,033
Deferred income taxes .................................. - 2,137 - - 2,137
Intercompany payable (receivable) ...................... (217,296) 222,964 (5,668) - -
Other noncurrent liabilities ........................... - 8,318 - - 8,318
--------- ------------ ------------ ------------ ------------
Total liabilities ............................ 287,972 342,785 961 (6,102) 625,616
Redeemable equity ...................................... 1,909 - - - 1,909
Nonredeemable stockholders' equity:
Common stock and other nonredeemable stockholders'
equity............................................. 217,370 186,155 2,125 (188,731) 216,919
Retained earnings (deficit) ....................... (193,877) 74,577 5,238 (79,815) (193,877)
--------- ------------ ------------ ------------ ------------
Total nonredeemable stockholders' equity ..... 23,493 260,732 7,363 (268,546) 23,042
--------- ------------ ------------ ------------ ------------
Total liabilities, redeemable equity and
nonredeemable stockholders' equity ........ $ 313,374 $ 603,517 $ 8,324 $ (274,648) $ 650,567
========= ============ ============ ============ ============
14
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash ......................................... $ - $ 31,926 $ 434 $ - $ 32,360
Accounts receivable, net ..................... - 65,240 996 (2,469) 63,767
Inventories .................................. - 65,942 383 - 66,325
Deferred income taxes ........................ - 3,821 50 - 3,871
Other current assets ......................... 715 7,536 12 (528) 7,735
--------- ------------ ------------ ------------ ------------
Total current assets ................... 715 174,465 1,875 (2,997) 174,058
Property and equipment, net ...................... - 426,931 7,384 - 434,315
Goodwill ......................................... - 25,905 - - 25,905
Deferred financing costs, net .................... 21,162 - - - 21,162
Deferred income taxes ............................ 15,836 (7,944) 133 - 8,025
Other noncurrent assets .......................... 824 16,212 - (4,402) 12,634
Investment in subsidiaries ....................... 290,958 1,576 - (292,534) -
--------- ------------ ------------ ------------ ------------
Total assets ........................... $ 329,495 $ 637,145 $ 9,392 $ (299,933) $ 676,099
========= ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ......... $ 2,943 $ 189 $ - $ - $ 3,132
Accounts payable ............................. - 91,135 1,733 (1,433) 91,435
Other accrued liabilities .................... 7,622 52,361 1,603 (1,564) 60,022
--------- ------------ ------------ ------------ ------------
Total current liabilities .............. 10,565 143,685 3,336 (2,997) 154,589
Long-term debt (net of unamortized discount) ..... 463,218 2,561 4,402 (4,402) 465,779
Deferred income taxes ............................ - 2,198 - - 2,198
Intercompany payable (receivable) ................ (181,830) 187,354 (5,524) - -
Other noncurrent liabilities ..................... - 16,321 - - 16,321
--------- ------------ ------------ ------------ ------------
Total liabilities ...................... 291,953 352,119 2,214 (7,399) 638,887
Redeemable equity ................................ 2,133 - - - 2,133
Nonredeemable stockholders' equity:
Common stock and other
stockholders' equity ...................... 216,969 186,227 2,175 (188,732) 216,639
Retained earnings
(accumulated deficit) ..................... (181,560) 98,799 5,003 (103,802) (181,560)
--------- ------------ ------------ ------------ ------------
Total nonredeemable stockholders' equity 35,409 285,026 7,178 (292,534) 35,079
--------- ------------ ------------ ------------ ------------
Total liabilities, redeemable equity and
nonredeemable stockholders' equity .. $ 329,495 $ 637,145 $ 9,392 $ (299,933) $ 676,099
========= ============ ============ ============ ============
15
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:
THREE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel........................................ $ - $ 370,724 $ 3,118 $ - $ 373,842
Nonfuel..................................... - 178,200 897 - 179,097
Rent and royalties.......................... - 2,832 1,399 (1,077) 3,154
------------- ------------- ------------- ------------- -------------
Total revenues.............................. - 551,756 5,414 (1,077) 556,093
Cost of goods sold (excluding depreciation)..... - 417,685 3,381 - 421,066
------------- ------------- ------------- ------------- -------------
Gross profit (excluding depreciation)........... - 134,071 2,033 (1,077) 135,027
Operating expenses.............................. - 90,780 1,627 (1,077) 91,330
Selling, general and
administrative expenses..................... 284 9,529 276 - 10,089
Depreciation and amortization expense........... - 15,209 133 - 15,342
(Gain) on asset sales........................... - (10) - - (10)
------------- ------------- ------------- ------------- -------------
Income (loss) from operations................... (284) 18,563 (3) - 18,276
Equity income (loss)............................ 8,829 117 - (8,722) 224
Interest and other financial costs, net......... (5,976) (5,164) (73) - (11,213)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes............... 2,569 13,516 (76) (8,722) 7,287
Provision (benefit) for income taxes............ (2,160) 4,707 11 - 2,558
------------- ------------- ------------- ------------- -------------
Net income (loss)............................... $ 4,729 $ 8,809 $ (87) $ (8,722) $ 4,729
============= ============= ============= ============= =============
16
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel........................................ $ - $ 501,036 $ 5,365 $ - $ 506,401
Nonfuel..................................... - 189,350 1,087 - 190,437
Rent and royalties.......................... - 2,459 1,296 (1,036) 2,719
------------ ------------ ------------ ------------- ------------
Total revenues.............................. - 692,845 7,748 (1,036) 699,557
Cost of goods sold (excluding depreciation)..... - 555,323 5,666 - 560,989
------------ ------------ ------------ ------------ ------------
Gross profit (excluding depreciation)........... - 137,522 2,082 (1,036) 138,568
Operating expenses.............................. - 90,913 1,693 (1,036) 91,570
Selling, general and administrative expenses.... 339 9,786 292 10,417
Depreciation and amortization expense........... - 13,834 137 - 13,971
(Gain) on asset sales........................... - (1,689) - - (1,689)
------------ ------------ ------------ ------------ ------------
Income (loss) from operations................... (339) 24,678 (40) - 24,299
Equity income (loss)............................ 12,285 40 - (12,209) 116
Interest and other financial costs, net......... (5,780) (5,227) (77) - (11,084)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes............... 6,166 19,491 (117) (12,209) 13,331
Provision (benefit) for income taxes............ (2,277) 7,182 (17) - 4,888
------------ ------------ ------------ ------------ ------------
Net income (loss)............................... $ 8,443 $ 12,309 $ (100) $ (12,209) $ 8,443
============ ============ ============ ============ ============
17
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel....................................... $ - $1,140,635 $ 7,656 $ - $1,148,291
Nonfuel.................................... - 489,165 2,375 - 491,540
Rent and royalties......................... - 9,072 4,239 (3,142) 10,169
---------- ---------- ---------- ---------- ----------
Total revenues............................. - 1,638,872 14,270 (3,142) 1,650,000
Cost of goods sold (excluding depreciation)... - 1,260,629 8,284 - 1,268,913
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)......... - 378,243 5,986 (3,142) 381,087
Operating expenses............................ - 259,182 4,640 (3,142) 260,680
Selling, general and administrative expenses.. 685 28,943 767 - 30,395
Depreciation and amortization expense......... - 44,212 329 - 44,541
(Gain) on asset sales......................... - (304) - - (304)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................. (685) 46,210 250 - 45,775
Equity income (loss).......................... 19,694 615 - (19,462) 847
Interest and other financial costs, net....... (17,852) (16,458) (192) - (34,502)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and the
cumulative effect of a change in
accounting principle....................... 1,157 30,367 58 (19,462) 12,120
Provision (benefit) for income taxes.......... (6,302) 10,611 99 - 4,408
---------- ---------- ---------- ---------- ----------
Income (loss) before the cumulative effect of
a change in accounting principle........ 7,459 19,756 (41) (19,462) 7,712
Cumulative effect of a change in accounting
principle, net of related taxes......... - (253) - - (253)
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $ 7,459 $ 19,503 $ (41) $ (19,462) $ 7,459
========== ========== ========== ========== ==========
18
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel....................................... $ - $ 1,345,116 $ 14,060 $ - $ 1,359,176
Nonfuel.................................... - 527,420 2,828 - 530,248
Rent and royalties......................... - 7,256 3,714 (2,901) 8,069
--------- ----------- --------- --------- -----------
Total revenues............................. - 1,879,792 20,602 (2,901) 1,897,493
Cost of goods sold (excluding depreciation)... - 1,490,368 14,756 - 1,505,124
--------- ----------- --------- --------- -----------
Gross profit (excluding depreciation)......... - 389,424 5,846 (2,901) 392,369
Operating expenses............................ - 265,679 4,611 (2,901) 267,389
Selling, general and administrative expenses.. 988 29,233 903 - 31,124
Depreciation and amortization expense......... - 43,538 407 - 43,945
(Gain) on asset sales......................... - (1,678) - - (1,678)
--------- ----------- --------- --------- -----------
Income (loss) from operations................. (988) 52,652 (75) - 51,589
Equity income (loss).......................... 24,114 67 - (23,987) 194
Gain on sale of investment.................... - (1,491) - - (1,491)
Interest and other financial costs, net....... (17,708) (15,883) (225) - (33,816)
--------- ----------- --------- --------- -----------
Income (loss) before income taxes............. 5,418 38,327 (300) (23,987) 19,458
Provision (benefit) for income taxes.......... (6,899) 14,105 (65) - 7,141
--------- ----------- --------- --------- -----------
Net income (loss)............................. $ 12,317 $ 24,222 $ (235) $ (23,987) $ 12,317
========= =========== ========= ========= ===========
19
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SCHEDULES:
NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ 906 $ 72,080 $ (111) $ 1,816 $ 74,691
---------- ----------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (3,768) (5,267) - (9,035)
Proceeds from asset sales.............. - 1,866 - - 1,866
Capital expenditures................... - (31,833) (224) - (32,057)
---------- ----------- ---------- ---------- -----------
Net cash used in investing
activities........................ - (33,735) (5,491) - (39,226)
---------- ----------- ---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - (4) - - (4)
Revolving loan borrowings
(repayments), net................... (15,500) - - - (15,500)
Long-term debt repayments.............. (13,717) (134) - - (13,851)
Other.................................. (252) - 1,816 (1,816) (252)
Intercompany advances.................. 28,563 (32,250) 3,687 - -
---------- ----------- ---------- ---------- -----------
Net cash provided by (used in)
financing activities.............. (906) (32,388) 5,503 (1,816) (29,607)
---------- ----------- ---------- ---------- -----------
Effect of exchange rate changes on
cash.............................. - - 202 - 202
---------- ----------- ---------- ---------- -----------
Net increase (decrease) in cash..... - 5,957 103 - 6,060
Cash at the beginning of the period....... - 14,047 - - 14,047
---------- ----------- ---------- ---------- -----------
Cash at the end of the period............. $ - $ 20,004 $ 103 $ - $ 20,107
========== =========== ========== ========== ===========
20
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ 2,283 $ 74,782 $ 963 $ - $ 78,028
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (588) - - (588)
Proceeds from asset sales.............. - 11,755 - - 11,755
Capital expenditures................... - (36,671) (952) - (37,623)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (25,504) (952) - (26,456)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - 3,653 - - 3,653
Revolving loan borrowings
(repayments), net................... (13,600) - - - (13,600)
Long-term debt repayments.............. (23,991) (141) - - (24,132)
Other.................................. (158) - - - (158)
Intercompany advances.................. 35,466 (35,610) 144 - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. (2,283) (32,098) 144 - (34,237)
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on
cash............................ - - 20 - 20
---------- ---------- ---------- ---------- ----------
Net increase in cash................ - 17,180 175 - 17,355
Cash at the beginning of the period....... - 14,746 259 - 15,005
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 31,926 $ 434 $ - $ 32,360
========== ========== ========== ========== ==========
21
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
September 30, 2004, our geographically diverse network consisted of 149 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-acres sites. Most of our network
properties were developed more than 20 years ago when prime real estate
locations along the interstate highway system were more readily available than
they are today, making a network such as ours difficult to replicate. Operating
under the "TravelCenters of America" and "TA" brand names, our nationwide
network provides an advantage to long-haul trucking fleets by enabling them to
route their trucks within a single network from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, more than 20 different brands of fast food
restaurants, travel and convenience stores with a selection of over 4,000 items
and other driver amenities.
The non-fuel products and services we offer to our customers complement
our fuel business and provide us a means to increase our revenues and gross
profit despite price pressure on fuel as a result of competition and volatile
crude oil and petroleum product prices, particularly in times of historically
high prices. For the nine-month periods ended September 30, 2003 and 2004, our
revenues and gross profit were composed as follows:
22
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2003 2004
--------- ---------
Revenues:
Fuel............................................... 69.6% 71.6%
Non-fuel........................................... 29.8% 28.0%
Rent and royalties................................. 0.6% 0.4%
-------- --------
Total revenues............................... 100.0% 100.0%
======== ========
Gross profit (excluding depreciation):
Fuel............................................... 21.5% 18.0%
Non-fuel........................................... 75.8% 80.0%
Rent and royalties................................. 2.7% 2.0%
-------- --------
Total gross profit (excluding depreciation).. 100.0% 100.0%
======== ========
COMPOSITION OF OUR NETWORK
The changes in the number of sites within our network and in their
method of operation (company-operated, leased or franchisee-owned) are
significant factors influencing the changes in our results of operations. The
following table summarizes the changes in the composition of our network from
December 31, 2002 through September 30, 2004:
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
----- ------ ------ ------
Number of sites at December 31, 2002.................... 122 20 10 152
January - September 2003 Activity:
New sites............................................ 2 - - 2
Sales of sites....................................... (2) - - (2)
Conversions of leased sites to company-operated sites 4 (4) - -
---- ----- ----- -----
Number of sites at September 30, 2003................... 126 16 10 152
October - December 2003 Activity:
Sales of sites....................................... (1) - - (1)
Closed sites......................................... (1) - - (1)
Conversions of leased sites to company-operated sites 2 (2) - -
---- ----- ----- -----
Number of sites at December 31, 2003.................... 126 14 10 150
2004 Activity:
Sales of sites....................................... (1) - - (1)
Conversions of leased sites to company-operated sites 2 (2) - -
---- ----- ----- -----
Number of sites at September 30, 2004................... 127 12 10 149
==== ===== ===== =====
As of September 30, 2004, one of our company-operated sites was under
contract to be sold. This sale transaction is expected to close in 2004 and will
not have a material effect on continuing results of operation. In September
2004, we entered into an agreement pursuant to which we expect to acquire one of
the franchisee-owned sites and convert it to a company-operated site during the
fourth quarter of 2004.
On October 1, 2004, we entered into an agreement through which we
expect to acquire 11 company-operated sites before the end of 2004. See the
"Acquisition and Refinancing" section below for further description of the
acquisition.
23
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 like 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 REVENUES
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.
THREE-MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE-MONTHS ENDED
SEPTEMBER 30, 2003
Revenues. Our consolidated revenues for the quarter ended September 30,
2004 were $699.6 million, which represents an increase from the quarter ended
September 30, 2003 of $143.5 million, or 25.8%, that is primarily attributable
to an increase in fuel revenue.
Fuel revenue for the quarter ended September 30, 2004 increased by
$132.6 million, or 35.5%, 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 September 30, 2004 increased by 42.4% and 24.8%, 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, primarily in wholesale fuel sales. Diesel fuel
and gasoline sales volumes for the quarter ended September 30, 2004 decreased
1.6% and 10.2%, respectively, as compared to the same period in 2003. For the
quarter ended September 30, 2004, we sold 333.7 million gallons of diesel fuel
and 47.6 million gallons of gasoline, as compared to 339.3 million gallons of
diesel fuel and 53.0 million gallons of gasoline for the quarter ended September
30, 2003. The diesel fuel sales volume decrease of 5.6 million gallons resulted
from a decrease in wholesale diesel fuel sales volume that was partially offset
by a 0.6% increase in same-site diesel fuel sales volumes and a net increase in
sales volumes at sites we added to or eliminated from our network during 2003
and 2004. The gasoline sales volume decrease was primarily attributable to a
3.7% decrease in same-site gasoline sales volumes and a 3.9 million gallon
decrease in wholesale gasoline sales volumes. We believe the same-site diesel
fuel sales volume increase resulted from our aggressive trucking fleet pricing
strategy and our competitive street pricing posture during a period of intense
price competition and an improved freight market. These factors were offset by
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 high levels of, diesel prices in 2004. We believe the
same-site decrease in gasoline sales volume resulted primarily from the high
price levels as the cost of crude oil sharply increased during the quarter and
as compared to the prior year. 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 high level of commodity prices.
Non-fuel revenues for the quarter ended September 30, 2004 of $190.4
million reflected an increase of $11.3 million, or 6.3%, as compared to the same
period in 2003. The increase was primarily attributable to a 5.5% increase in
same-site non-fuel revenues and also was 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.
24
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Rent and royalty revenues for the quarter ended September 30, 2004
reflected a $0.4 million, or 13.8%, 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 four leased sites to company-operated sites since
September 30, 2003. This decrease was partially offset by a 3.1% increase in
same-site royalty revenue and a 4.3% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the quarter
ended September 30, 2004 was $138.6 million, compared to $135.0 million for the
same period in 2003, an increase of $3.5 million, or 2.6%. 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 diesel fuel sales volume, 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 $0.2 million, or 0.3%, to $91.6
million for the quarter ended September 30, 2004 compared to $91.3 million for
the same period in 2003. This increase was attributable to a $0.3 million, or
0.3% decrease on a same-site basis and a net increase resulting from
company-operated sites we added to our network or eliminated from our network
during 2003 and 2004. On a same-site basis, operating expenses as a percentage
of non-fuel revenues for 2004 were 47.8%, compared to 50.7% 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
September 30, 2004 were $10.4 million, which reflected a $0.3 million, or 3.3%
increase from the same period in 2003 that is primarily attributable to
personnel costs.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the quarter ended September 30, 2004 was $14.0 million, compared to
$15.3 million for the same period in 2003, a decrease of $1.4 million, or 8.9%,
that was primarily due to an impairment charge of $0.5 million recognized in
2003.
(Gain) loss on asset sales. For the quarter ended September 30, 2004,
the gain on asset sales of $1.7 million primarily was generated from the sale
of one company-operated site and of fractional shares of three aircraft.
Income from Operations. We generated income from operations of $24.3
million for the quarter ended September 30, 2004, compared to income from
operations of $18.3 million for the same period in 2003. This increase of $6.0
million, or 33.0%, 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.
Interest and Other Financial Costs--Net. Interest and other financial
costs, net, for the quarter ended September 30, 2004 decreased by $0.1 million,
or 1.2%, compared to the same period in 2003. This decrease resulted from our
reduced level of indebtedness in 2004 as compared to 2003 and was somewhat
offset by rising interest rates.
Income Taxes. Our effective income tax rates for the quarters ended
September 30, 2004 and 2003 were 36.7% and 35.1%, 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 increase from 2003 is primarily related to state income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2003
Revenues. Our consolidated revenues for the nine-month period ended
September 30, 2004 were $1,897.5 million, which represents an increase from the
nine-month period ended September 30, 2003 of $247.5 million, or 15.0%, that is
primarily attributable to an increase in fuel revenue.
Fuel revenue for the nine-month period ended September 30, 2004
increased by $210.9 million, or 18.4%, 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 nine-month period ended September 30, 2004 increased by 21.9% and 22.8%,
respectively, as compared to the same period in 2003, reflecting
25
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 revenues price variance increase was
somewhat offset by decreases in diesel fuel and gasoline sales volumes,
primarily in wholesale fuel sales. Diesel fuel and gasoline sales volumes for
the nine-month period ended September 30, 2004 decreased 2.6% and 5.1%,
respectively, as compared to the same period in 2003. For the nine-month period
ended September 30, 2004, we sold 985.3 million gallons of diesel fuel and 136.3
million gallons of gasoline, as compared to 1,011.6 million gallons of diesel
fuel and 143.6 million gallons of gasoline for the nine-month period ended
September 30, 2003. The diesel fuel sales volume decrease of 26.3 million
gallons resulted from a 1.4% 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 was primarily attributable to a
decrease in wholesale gasoline sales volumes that was partially offset by a 2.2%
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 high levels of, diesel prices in 2004.
These factors were somewhat offset by an improved freight market in 2004. 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 high level of commodity prices.
Non-fuel revenues for the nine-month period ended September 30, 2004 of
$530.2 million reflected an increase of $38.7 million, or 7.9%, as compared to
the same period in 2003. The increase was primarily attributable to a 4.7%
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 nine-month period ended September 30,
2004 reflected a $2.1 million, or 20.7%, 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 eight leased sites to company-operated sites
during 2003 and 2004. This decrease was partially offset by a 3.1% increase in
same-site royalty revenue and a 3.7% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the
nine-month period ended September 30, 2004 was $392.4 million, compared to
$381.1 million for the same period in 2003, an increase of $11.3 million, or
3.0%. 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 diesel fuel
sales volume, 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 $6.7 million, or 2.6%, to $267.4
million for the nine-month period ended September 30, 2004 compared to $260.7
million for the same period in 2003. This increase was primarily attributable to
a net increase resulting from company-operated sites we added to our network or
eliminated from our network during 2003 and 2004 that was partially offset by a
0.1% decrease on a same-site basis that primarily resulted from 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 2004 were 50.0%, compared to 52.3% 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 nine-month
period ended September 30, 2004 were $31.1 million, which reflected a $0.7
million, or 2.4%, increase from the same period in 2003 that is primarily
attributable to personnel costs.
26
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and Amortization Expense. Depreciation and amortization
expense for the nine-month period ended September 30, 2004 was $43.9 million,
compared to $44.5 million for the same period in 2003, a decrease of $0.6
million, or 1.3%, that was primarily due to an impairment charge of $0.5 million
recognized in 2003 and a $0.5 million decrease in amortization expense that
resulted from an intangible asset related to a noncompetition agreement becoming
fully amortized in April 2003.
(Gain) loss on asset sales. For the nine-month period ended September
30, 2004, the gain on asset sales of $1.7 million primarily was generated from
the sale of one company-operated site and of fractional shares of three
aircraft, while the gain on asset sales of $0.3 million for the nine-month
period ended September 30, 2003 primarily was generated from the sale of one
company-operated site.
Income from Operations. We generated income from operations of $51.6
million for the nine-month period ended September 30, 2004, compared to income
from operations of $45.8 million for the same period in 2003. This increase of
$5.8 million, or 12.7%, 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 diesel fuel sales volumes and
fuel margins per gallon.
Gain on sale of investment. The gain on sale of investment of $1.5
million for the nine-month period ended September 30, 2004 resulted from the
sale in April 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 nine-month period ended September 30, 2004 decreased by $0.7
million, or 2.0%, compared to the same period in 2003. This decrease resulted
from our reduced level of indebtedness in 2004 as compared to 2003 that was
somewhat offset by rising interest rates.
Income Taxes. Our effective income tax rates for the nine-month periods
ended September 30, 2004 and 2003 were 36.7% and 36.4%, respectively. These
rates differed from the federal statutory rate due primarily to state income
taxes and nondeductible expenses, partially offset by the benefit of certain tax
credits.
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 nine 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
27
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2004, a one-percentage point increase in interest rates
increases our annual cash outlays by approximately $3.5 million. A significant
increase in diesel fuel and gasoline prices increases our cash investment in
working capital and can also have a depressing effect on our sales volumes and
fuel margins per gallon. The primary risk we face with respect to the expected
availability of borrowing under our revolving credit facility are the
limitations imposed upon us by the covenants contained in our Senior Credit
Facility. Should our level of sales volume or interest rate and petroleum
products price levels vary adversely and significantly from expectations, it is
reasonably likely that we would need to reduce our capital expenditures or be
effectively barred from further revolving credit facility borrowings in order to
maintain compliance with our debt covenants, in the absence of a debt covenant
waiver or an amendment to the related agreement. We were in compliance with all
of our debt covenants throughout the first nine months of 2004 and as of
September 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 September 30, 2004, we had no outstanding revolving
credit facility borrowings and outstanding issued letters of credit of $26.9
million, leaving $73.1 million of our $100 million revolving credit facility
available for borrowings.
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 have no net 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.
ACQUISITION AND REFINANCING
On October 1, 2004, we entered into an asset purchase agreement (the
"Acquisition Agreement") with B.R.G., Inc. and Rip Griffin Truck Service Center,
Inc. (collectively "Rip Griffin") to acquire eleven travel center facilities
operated by Rip Griffin. Other than the Agreement, there is no material
relationship between us and Rip Griffin.
The Acquisition Agreement provides for the acquisition of the assets at
the eleven travel center facilities operated by Rip Griffin on interstate
highways. The eleven travel centers to be acquired are located in Arizona,
Arkansas, California, Colorado, New Mexico, Texas and Wyoming. The purchase
price for the acquisition is $120 million plus an additional amount for site
cash and inventories that will be determined at closing but is estimated to be
approximately $8 million. These amounts will be paid in cash. We will also
assume the environmental liability related to the acquired sites. The estimated
amount of the environmental liability is $1.1 million. The closing of the
acquisition is subject to certain conditions, including regulatory approval
under the Hart-Scott-Rodino Antitrust Improvements Act. We expect to consummate
the transaction before the end of 2004.
In order to consummate the acquisition, we expect to complete a
refinancing of our Senior Credit Facilities (the Refinancing). We have received
a fully underwritten commitment for an amended and restated credit facility that
is expected to close simultaneous with the closing of the acquisition. As
amended and restated, we expect that our Senior Credit Facilities will be
composed of a seven-year Term Loan C of $475 million and a five-year $100
million Revolving Credit Facility. The proceeds received will be used to
refinance our current Term Loan B, fund
28
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
the Rip Griffin acquisition, refinance our master lease facility and for general
corporate purposes. We believe the terms of the amended and restated credit
agreement will be substantially similar to those included in the current credit
agreement and consistent with current financing market conditions.
As a result of the Refinancing, we will incur a non-cash charge against
operating income of approximately $8.5 million in connection with writing off
the unamortized amount of the deferred financing costs incurred in 2000 with
respect to the Senior Credit Facilities.
HISTORICAL CASH FLOWS
Net cash provided by operating activities totaled $78.0 million for the
first nine months of 2004, compared to $74.7 million for the same period in the
prior year. The $3.3 million increase in cash from operations primarily resulted
from greater profitability in 2004. The increases in the accounts receivable
and accounts payable balances are attributable to the significant increase in
diesel fuel and gasoline commodity prices in the United States, primarily as a
result of the significant increases in crude oil costs.
Net cash used in investing activities was $26.5 million for the first
nine months of 2004, as compared to $39.2 million for the first nine months of
2003. During 2004, we received $11.8 million of proceeds from the sale of stock
of an equity investee and other property and equipment sales and invested $0.6
million to convert two leased sites to company-operated sites. During 2003, we
invested $9.0 million to acquire two new operating sites and convert four leased
sites to company-operated sites. We realized $1.9 million of proceeds from two
site sales in 2003.
Net cash used in financing activities was $34.2 million during the
first nine months of 2004 and $29.6 million during the first nine 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 $13.6 million. During 2003, we made net repayments of our revolving credit
facility indebtedness of $15.5 million, and also made repayments of long-term
loan indebtedness of $13.9 million, which includes an $11.3 million mandatory
prepayment in April 2003 resulting from excess cash flow we generated in 2002.
DESCRIPTION OF INDEBTEDNESS
We have no material changes to the disclosure on this matter made in
our annual report on Form 10-K for the year ended December 31, 2003, except that
at September 30, 2004, we had no outstanding revolving credit facility
borrowings and outstanding issued letters of credit of $26.9 million, leaving
$73.1 million of our $100 million revolving credit facility available for
borrowings.
The Refinancing is not expected to significantly change the terms of
our Senior Credit Facilities. However, as a result of the Refinancing, the total
amount of scheduled debt repayments in the next five years will be greatly
reduced as the repayment of the Term Loan borrowings will be heavily weighted to
the seventh year of the new agreement.
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.
29
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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, we believe, in such an instance, that we would be able to negotiate a
waiver and/or amendment of the covenants, which is reasonably likely to require
us to pay a significant amount of fees to the lenders and legal counsel and to
further limit our ability to make cash disbursements, such as for capital
expenditures. The following table sets forth the calculation of Adjusted EBITDA
and information related to the debt covenant financial ratios.
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2004
------------- -------------
(IN THOUSANDS OF DOLLARS,
EXCEPT RATIOS
Net income.......................................................................... $ 7,459 $ 12,317
Adjustments to reconcile net income to Adjusted EBITDA:
Cumulative effect of a change in accounting principle, net of related taxes...... 253 -
Provision (benefit) for income taxes............................................. 4,408 7,141
Interest and other financial costs, net.......................................... 34,502 33,816
Depreciation and amortization expense............................................ 44,541 43,945
Other non-cash charges (credits), net............................................ 628 412
------------- -------------
Adjusted EBITDA..................................................................... $ 91,791 $ 97,631
============= =============
Adjusted EBITDA for trailing 12-month ratio measurement period...................... $ 120,557 $ 127,760
============= =============
Interest expense coverage ratio:
Actual ratio at period end....................................................... 2.85x 3.13x
Required ratio at period end (no less than)...................................... 1.80x 2.00x
Minimum amount of Adjusted EBITDA to meet required ratio......................... $ 76,018 $ 81,624
Leverage ratio:
Actual ratio at period end....................................................... 3.99x 3.44x
Required ratio at period end (no greater than)................................... 4.65x 4.15x
Minimum amount of Adjusted EBITDA to meet required ratio......................... $ 103,558 $ 105,795
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, except
that, as part of the planned Refinancing, we intend to borrow the funds to
purchase the assets that we currently lease under our master lease facility. The
amount to be paid is expected to be approximately $65.1 million. The rent we
paid with respect to the master lease agreement was $5.7 million, $4.3 million
and $4.3 million for the year ended December 31, 2003 and the nine-month periods
ended September 30, 2003 and 2004, respectively.
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TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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, except that
(i) we have entered into an agreement to acquire one of our franchisee-owned
sites for approximately $10 million, and (ii) we have entered into the
Acquisition Agreement under which we expect to pay approximately $128 million to
acquire the travel center assets from Rip Griffin during the fourth quarter. See
the "Acquisition and Refinancing" section above for further description of the
acquisition.
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 September 30, 2004, we had a reserve of $12.6 million for unindemnified
environmental matters for which we are responsible, a receivable for estimated
recoveries of these estimated future expenditures of $3.7 million and $5.4
million of cash in an escrow account to fund certain of these estimated future
expenditures, leaving an estimated $3.5 million to be funded from future
operating cash flow. We estimate that the cash outlays related to the matters
for which we have accrued this reserve will be approximately $2.3 million in the
remainder of 2004; $3.2 million in 2005; $2.4 million in 2006; $1.9 million in
2007; $1.4 million in 2008 and $1.4 million thereafter. 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
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TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 expect to terminate this lease as part of the Refinancing discussed
above. 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.
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;
- availability of sufficient qualified personnel to staff
company-operated sites; and
- success of new business ventures, including the risks that the
business acquired and any other businesses or investments that we
have acquired or may acquire may not be successfully integrated into
our current business operations.
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.
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TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 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 third quarter of 2004.
On October 7, 2004, we filed a Form 8-K to report that we had signed an
agreement to acquire eleven travel centers from Rip Griffin.
On October 19, 2004, we filed a Form 8-K to report our financial data
for the interim periods ended September 30, 2004, and to provide data regarding
the travel centers being acquired from Rip Griffin and the related refinancing.
33
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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: October 22, 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)
34