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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of March 15, 2005, there were outstanding 6,937,003 shares of common stock,
par value $0.00001 per share. The outstanding shares of our common stock were
issued in transactions not involving a public offering. As a result, there is no
public market for our common stock.
INDEX
PART I
Item 1. Business....................................................................... 2
Item 2. Properties..................................................................... 15
Item 3. Legal Proceedings.............................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............................ 15
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters................... 15
Item 6. Selected Financial Data........................................................ 17
Item 7. Management's Discussion and Analysis........................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 36
Item 8. Financial Statements and Supplementary Data.................................... 38
Item 9. Changes in and Disagreements With Accountants.................................. 78
Item 9A. Controls and Procedures........................................................ 78
Item 9B. Other Information.............................................................. 78
PART III
Item 10. Our Directors and Executive Officers........................................... 78
Item 11. Executive Compensation......................................................... 78
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters....................................................... 79
Item 13. Certain Relationships and Related Transactions................................. 79
Item 14. Principal Accounting Fees and Services......................................... 79
PART IV
Item 15. Exhibits, Financial Statement Schedules........................................ 80
SIGNATURES................................................................................... 82
1
PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
We are a holding company which, through our wholly owned
subsidiaries, owns, operates and franchises travel centers along the North
American highway system to serve long-haul trucking fleets and their drivers,
independent truck drivers and general motorists. Our network is the largest, and
only nationwide, full-service travel center network in the United States. At
December 31, 2004, our geographically diverse network consisted of 160 sites
located in 41 states and the province of Ontario, Canada. Our operations are
conducted through three distinct types of travel centers:
- sites operated by us, which we refer to as company-operated
sites;
- sites owned by us and leased to independent
lessee-franchisees, which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we
refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S.
interstate highway system and in Canada, typically on 20- to 25-acre sites. Most
of our network properties were developed more than 20 years ago when prime real
estate locations along the interstate highway system were more readily available
than they are today, making a network such as ours difficult to replicate.
Operating under the "TravelCenters of America" and "TA" brand names, our
nationwide network provides an advantage to long-haul trucking fleets by
enabling them to reduce the number of their suppliers by routing their trucks
within our network from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, more than 20 different brands of fast food
restaurants, which we refer to as quick service restaurants, or QSRs, travel and
convenience stores and other driver amenities.
The U.S. travel center and truck stop industry in which we operate
consists of travel centers, truck stops, diesel fuel outlets and similar
facilities designed to meet the needs of long-haul trucking fleets and their
drivers, independent truck drivers and general motorists. According to the
National Association of Truck Stop Operators, or "NATSO," the travel center and
truck stop industry is highly fragmented, with in excess of 3,000 travel centers
and truck stops located on or near interstate highways nationwide. Further, only
eight chains in the United States have 25 or more travel center and truck stop
locations on the interstate highways, which we believe is the minimum number of
locations needed to provide even regional coverage to truck drivers and trucking
fleets.
HISTORY AND ORGANIZATION
We were formed in December 1992 by a group of institutional
investors. We were originally incorporated as National Auto/Truckstops Holdings
Corporation but changed our name to TravelCenters of America, Inc. in March
1997. We primarily have created our network through the following series of
acquisitions:
- In April 1993, we acquired the truckstop network assets of a
subsidiary of Unocal Corporation, which sites we refer to as
the "Unocal network." The Unocal network included a total of
139 facilities, of which 95 were leased sites, 42 were
franchisee-owned sites and two sites were company-operated
sites.
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- In December 1993, we acquired the truckstop network assets of
certain subsidiaries of The British Petroleum Company p.l.c.,
which assets we refer to as the "BP network." The BP network
included 38 company-operated sites and six franchisee-owned
sites.
- In December 1998, we acquired substantially all of the
truckstop network assets of Burns Bros., Inc. and certain of
its affiliates, which assets we refer to as the Burns Bros.
network. The Burns Bros. network included 17 company-operated
sites, located in nine western and northwestern states.
- In June 1999, we acquired the travel center and truck stop
network assets of Travel Ports of America, Inc. through the
acquisition of 100% of the stock of Travel Ports. The Travel
Ports network consisted of 16 company-operated sites in seven
states, primarily in the northeastern region of the United
States.
- In January 2003, we began operating in Canada through the
acquisition of a travel center located in Ontario.
- In December 2004, we acquired eleven company-operated travel
centers from Rip Griffin Truck Service Center, Inc., which
assets we refer to as the Rip Griffin network. These eleven
sites are located in seven states, primarily in the
southwestern region of the United States.
Historically, until 1997, the Unocal network operated principally as
a fuel wholesaler and franchisor, with relatively few company-operated sites. In
contrast to the Unocal network, the BP network operated principally as an
owner-operator of travel centers. In January 1997, we instituted a plan to
combine the Unocal network and the BP network, which had been previously managed
and financed separately, into a single network to be operated under the
"TravelCenters of America" and "TA" brand names under the leadership of a single
management team. Prior to combining the Unocal and BP networks, the Unocal
network was operated through National Auto/Truckstops, Inc. and the BP network
was operated through TA Operating Corporation, each of National Auto/Truckstops,
Inc. and TA Operating Corporation being a wholly owned subsidiary of ours. At
the time we approved the plan to combine our networks, there were 122 sites
operating in the Unocal network and 49 sites operating in the BP network. In
November 2000, National Auto/Truckstops, Inc. merged with and into TA Operating
Corporation.
In July 1999, we signed an agreement with Freightliner LLC to become
an authorized provider of express service, minor repair work and a specified
menu of warranty repairs to Freightliner's customers through the Freightliner
ServicePoint Program. Under the agreement, our truck repair facilities have been
added to Freightliner's 24-hour customer assistance center database as a major
referral point for emergency and roadside repairs and also have access to
Freightliner's parts distribution, service and technical information systems.
Freightliner, a DaimlerChrysler company, is a leading manufacturer of heavy
trucks in North America. Freightliner also acquired a minority ownership
interest in us at that time.
On May 31, 2000, we and shareholders owning a majority of our voting
stock entered into a recapitalization agreement and plan of merger, as amended,
with TCA Acquisition Corporation, a newly created corporation formed by Oak Hill
Capital Partners, L.P. and its affiliates ("Oak Hill"), under which TCA
Acquisition Corporation agreed to merge with and into us. This merger was
completed on November 14, 2000. Concurrent with the closing of the merger, we
completed a series of transactions to effect a recapitalization and a
refinancing that included the following:
- TCA Acquisition Corporation issued 6,456,698 shares of common
stock to Oak Hill and a group of other institutional
investors, which we refer to as the Other Investors, for
proceeds of $205.0 million and then merged TCA Acquisition
Corporation with and into us. At the time of the merger, the
Other Investors were Olympus Growth Fund III, L.P., Olympus
Executive Fund, L.P., Monitor Clipper Equity Partners, L.P.,
Monitor Clipper Equity Partners (Foreign), L.P., UBS Capital
Americas II, LLC, Credit Suisse First Boston LFG Holdings
2000, L.P. and Credit Suisse First Boston Corporation, each
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of whom is an affiliate of certain of our former shareholders.
Since that time, certain of these investors have sold their
shares to other investors, including affiliates of certain of
the Other Investors. Such sales of our shares are not frequent
but could occur in the future.
- We redeemed all shares of our common and preferred stock
outstanding prior to the closing of the merger, with the
exception of 473,064 shares of common stock with a market
value at that time of $15.0 million that were retained by
continuing stockholders, and cancelled all then outstanding
common stock options and warrants, for cash payments totaling
$263.2 million.
- We repaid all amounts outstanding under our then existing debt
agreements.
- We borrowed $328.3 million under a secured credit agreement
with a group of lenders and issued units consisting of Senior
Subordinated Notes due 2009 with a face amount of $190.0
million and initial warrants and contingent warrants that in
the aggregate could be exercised in exchange for 277,165
shares of our common stock.
- We merged National Auto/Truckstops, Inc. with and into TA
Operating Corporation.
Prior to the closing of the transactions described above, we issued
137,572 shares of common stock for cash proceeds of $3.7 million upon the
exercise of stock options held by existing shareholders, which shares remained
outstanding. After the transactions described above, Oak Hill owned 60.5% of our
outstanding common stock, the Other Investors owned, in the aggregate, 32.7% of
our outstanding common stock, Freightliner owned 4.3% of our outstanding common
stock and certain members of our management owned 2.5% of our outstanding common
stock. The total market value of our equity capitalization after these
transactions was $220.0 million.
At December 31, 2004, we had two wholly owned subsidiaries, TA
Operating Corporation, which is our primary travel center operating entity, and
TA Franchise Systems Inc, which maintains our franchise agreements and
relationships. TA Operating Corporation had the following direct or indirect
wholly owned subsidiaries:
- TA Licensing, Inc.
- TA Travel, L.L.C.
- 3073000 Nova Scotia Company
- TravelCentres Canada Inc.
- TravelCentres Canada Limited Partnership
NETWORK DEVELOPMENT
Due to historical competition between the Unocal and BP networks,
there were certain markets in which each of these networks had an existing site
at the time we instituted our plan to combine these two networks. Likewise,
there was competition in certain markets between our networks and the networks
of Burns Bros. and of Travel Ports. In addition, there were certain
franchisee-owned sites in the Unocal network that were not considered to be in
strategic locations. Further, there were, and continue to be, locations on the
interstate highway system that we consider to be strategic but in which we do
not have an adequate presence. As a result, since 1997 we have significantly
reshaped the composition of our network through the following:
- 17 company-operated sites were acquired from Burns Bros. in 1998;
- 16 company-operated sites in the Travel Ports network were acquired
in 1999;
- 11 company-operated sites were acquired from Rip Griffin in 2004;
- 48 leased sites were converted to company-operated sites, two during
2004, six during 2003, five during 2002, three during 2000, five
during 1998 and 27 during 1997;
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- one franchisee-owned site was converted to a company-operated site
during 2000;
- five new network sites were constructed, one in 2002, one in 2001,
one in 2000 and two in 1999;
- six sites were razed and rebuilt, two in 1999, two in 2000, one in
2001 and one in 2003;
- five company-operated sites were added to our network through
individual site acquisitions or management agreements, one during
2004, two during 2003 and two during 2000;
- franchise agreements covering 28 franchisee-owned sites were
terminated, one in 2000 and 27 in 1997;
- 36 sites we owned were sold, two during 2004, three during 2003,
three during 2002, four during 2001, two during 2000, five during
1999, two during 1998 and 15 during 1997;
- three franchisee-owned sites were added to our network, one in 2002,
one in 1999 and one in 1998; and
- three company-operated sites were closed, one during 2003 (for which
our selling effort continues), and two during 1999 (both of which
have been sold - one in 2004 and one in 2002).
In 1997, we initiated a capital program to upgrade, rebrand and
re-image our travel centers and to build new travel centers. Through December
31, 2004, we had completed full re-image projects at 37 of our sites at an
average investment of $2.2 million per site. These full re-image projects
typically include expanding the square footage of the travel and convenience
store, adding a fast food court with two or three QSRs, upgrading showers and
restrooms and updating the full-service restaurant. We also had completed
smaller scale re-image projects at another 67 sites at an average cost of $0.3
million. In addition to improving our existing sites, we have identified several
new interstate areas available for our network's expansion. We have designed a
"prototype" facility and a smaller "protolite" facility to standardize our
travel centers and expand our network into new geographic markets while also
increasing our appeal to motorists. The prototype and protolite designs combine
an improved and efficient facility layout with nationally branded QSRs and
gasoline brands as well as expanded product and service offerings. Since May
1999, we have completed construction of eight prototype facilities and three
protolite facilities. Further, we are currently developing one prototype
facility, which we expect to open in 2006, and one protolite facility, which we
expect to open in 2006. Most of our future expansion will be with the protolite
format, which requires significantly less land and capital investment than the
prototype design and enables us to quickly and cost efficiently gain a presence
in smaller markets. We also intend to pursue strategic acquisitions and
additional franchisee-owned sites. Our franchisees will also continue to invest
additional amounts of their own capital for reimaging and other projects at the
sites they operate.
REFINANCINGS
2000 Refinancing. As part of the transactions we completed to
consummate our merger with TCA Acquisition Corporation and the related
recapitalization, we completed a refinancing of our indebtedness, which
refinancing transactions we refer to as the "2000 Refinancing." In the 2000
Refinancing, we issued $190 million of senior subordinated notes due 2009 and
borrowed $328.3 million under an amended and restated credit agreement (which we
refer to as the 2000 Credit Agreement) that consisted of a fully-drawn $328
million term loan facility and a $100 million revolving credit facility. The
proceeds from these borrowings, along with proceeds from the issuance of common
stock and other cash on hand, were used to:
- pay for the tender offer and consent solicitation for our 10 1/4%
Senior Subordinated Notes due 2007, including accrued interest,
premiums and a prepayment penalty;
- repay all amounts, including accrued interest, then outstanding
under our existing amended and restated credit agreement;
- redeem in full all of our then existing senior secured notes and pay
related accrued interest and prepayment penalties;
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- make cash payments to certain of our then current equity owners,
whose shares and unexercised stock options and warrants were
redeemed and cancelled pursuant to the recapitalization agreement
and plan of merger; and
- pay fees and expenses related to the financings and the merger and
recapitalization transactions.
The $190 million of Senior Subordinated Notes were issued as part of
units that also included warrants exercisable for 277,165 shares of our common
stock.
2004 Refinancing. On December 1, 2004, we completed a refinancing,
which we refer to as the "2004 Refinancing." In the 2004 Refinancing, we
borrowed $500 million under an Amended and Restated Credit Agreement that we
refer to as the 2004 Credit Agreement. The 2004 Credit Agreement included a
fully-drawn $475 million term loan facility and a $125 million revolving credit
facility under which $25 million was drawn at closing. The proceeds from these
borrowings were utilized to:
- repay all amounts, including accrued interest, outstanding under the
existing amended and restated credit agreement into which we had
entered in November 2000 and which we refer to as the 2000 Credit
Agreement;
- pay for the acquisition of the assets acquired from Rip Griffin;
- terminate the master lease facility under which since 1999 we built
eight travel centers on land we owned, thereby gaining ownership of
the improvements at those eight sites; and
- pay fees and expenses related to the financing and the acquisition
transactions.
See "Liquidity and Capital Resources" in Item 7 for further
discussion of our outstanding indebtedness.
OUR TRAVEL CENTERS
Our travel centers are designed to appeal to drivers seeking either
a quick stop or a more extended visit. Substantially all of our travel centers
are full-service facilities located on or near an interstate highway and offer
fuel and non-fuel products and services 24 hours per day, 365 days per year.
Property. The layouts of the travel centers we own vary from site to
site. The facilities we own are located on properties averaging 22 acres, of
which an average of approximately 19 acres are developed. The majority of the
developed acreage consists of truck and car fuel islands, separate truck and car
paved parking and the main building, which contains a full-service restaurant
and one or more QSRs, a travel and convenience store and driver amenities and a
truck maintenance and repair shop. The remaining developed acreage contains
landscaping and access roads.
Product and Service Offerings. We have developed an extensive and
diverse offering of products and services to complement our diesel fuel
business, which includes:
- Gasoline. We sell nationally recognized branded gasoline,
consistently offering one of the top three gasoline brands in each
geographic region. Of our 138 company-operated sites as of December
31, 2004, we offered branded gasoline at 105 sites and unbranded
gasoline at 21 sites. Twelve company-operated sites do not sell
gasoline.
- Full-Service and Fast Food Restaurants. Most of our travel centers
have both full-service restaurants and QSRs that offer customers a
wide variety of nationally recognized brand names and food choices.
Our full-service restaurants, branded under our "Country Pride,"
"Buckhorn Family Restaurants," "Country Fare" and "Fork in the Road"
proprietary brands, offer "home style" meals through menu table
service and buffets. We also offer more than 20 different brands of
QSRs, including Arby's, Burger King, Pizza Hut,
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Popeye's Chicken & Biscuits, Sbarro, Starbuck's Coffee, Subway and
Taco Bell. We generally attempt to locate QSRs within the main
travel center building, as opposed to constructing stand-alone
buildings. As of December 31, 2004, we had 172 QSRs in our
company-operated sites, and 108 of our network travel centers
offered at least one branded QSR.
- Truck Repair and Maintenance Shops. All but six of our network
travel centers have truck repair and maintenance shops. The typical
repair shop has between two and four service bays, a parts storage
room and trained mechanics. These shops, which generally operate 24
hours per day, 365 days per year, offer extensive maintenance and
emergency repair and road services, ranging from basic services such
as oil changes and tire repair to specialty services such as
diagnostics and repair of air conditioning, air brake and electrical
systems. Our work is backed by a warranty honored at all of our
repair and maintenance facilities. As of December 31, 2004, all but
nine of our network sites that have truck repair and maintenance
shops were participating in the Freightliner ServicePoint Program.
Each of these nine sites was acquired from Rip Griffin in December
2004 and is expected to be added to the Freightliner ServicePoint
Program during 2005.
- Travel and Convenience Stores. Each travel center has a travel and
convenience store that caters to truck drivers, motorists,
recreational vehicle operators and bus drivers and passengers. Each
travel and convenience store has a selection of over 4,000 items,
including food and snack items, beverages, non-prescription drug and
beauty aids, batteries, automobile accessories, and music and video
products. In addition to complete travel and convenience store
offerings, the stores sell items specifically designed for the truck
driver's on-the-road lifestyle, including laundry supplies and
clothing as well as truck accessories. Most stores also have a "to
go" snack bar installed as an additional food offering.
- Additional Driver Services. We believe that fleets can improve the
retention and recruitment of truck drivers by directing them to
visit high-quality, full-service travel centers. We strive to
provide a consistently high level of service and amenities to
drivers at all of our travel centers, making our network an
attractive choice for trucking fleets. Most of our travel centers
provide truck drivers with access to specialized business services,
including an information center where drivers can send and receive
faxes, overnight mail and other communications and a banking desk
where drivers can cash checks and receive fund transfers from fleet
operators. Most sites have installed telephone rooms with 15 to 20
pay telephones. The typical travel center also has a video game room
and designated "truck driver only" areas, including a television
room with a VCR and comfortable seating for drivers, a laundry area
with washers and dryers and an average of six to 12 private showers.
Additionally, we offer truck drivers a loyal fueler program, which
we call the RoadKing Club, that is similar to the frequent flyer
programs offered by airlines. Drivers receive a point for each
gallon of diesel fuel purchased and can redeem their points for
discounts on non-fuel products and services at any of our travel
centers.
- Motels. Twenty of our company-operated travel centers offer motels,
with an average capacity of 40 rooms. Seventeen of these motels are
operated under franchise grants from nationally branded motel
chains, including Days Inn, HoJo Inn, Knight's Inn, Rodeway and
Travelodge.
OPERATIONS
Fuel Supply. We purchase diesel fuel from various suppliers at rates
that fluctuate with market prices and generally are reset daily, and resell fuel
to our customers at prices that we establish daily. By establishing supply
relationships with an average of four to five alternate suppliers per location,
we have been able to effectively create competition for our purchases among
various diesel fuel suppliers on a daily basis. We believe that this positioning
with our suppliers will help our sites avoid product outages during times of
diesel fuel supply disruptions. We have a single source of supply for gasoline
at most of our sites that offer branded gasoline. Sites selling unbranded
gasoline do not have exclusive supply arrangements.
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Other than pipeline tenders, fuel purchases made by us are delivered
directly from suppliers' terminals to our travel centers. We do not contract to
purchase substantial quantities of fuel for our inventory and are therefore
susceptible to price increases and interruptions in supply. We hold less than
three days of diesel fuel inventory at our sites. We use pipeline tenders and
leased terminal space to mitigate the risk of supply disruptions. The
susceptibility to market price increases for diesel fuel is substantially
mitigated by the significant percentage of our total diesel fuel sales volume
that is sold under pricing formulae that are indexed to market prices, which
reset daily. We do not engage in any fixed-price contracts with customers. We
may engage, from time to time, in a minimal level of hedging of our fuel
purchases with futures and other derivative instruments that primarily are
traded on the New York Mercantile Exchange.
The Environmental Protection Agency has promulgated regulations to
decrease the sulfur content of diesel fuel by 2006. The enactment of these
regulations could reduce the supply and/or increase the cost of diesel fuel. A
material decrease in the volume of diesel fuel sold for an extended period of
time or instability in the prices of diesel fuel could have a material adverse
effect on us.
Non-fuel products supply. There are many sources for the large
variety of non-fuel products that we purchase and sell. We have developed
strategic relationships with several suppliers of key non-fuel products,
including Freightliner LLC for truck parts, Bridgestone/Firestone Tire Sales
Company for truck tires, and ExxonMobil for Mobil brand lubricants and oils. We
believe that our relationships with these and our other suppliers are
satisfactory and that supply of the non-fuel products we require is adequate.
Centralized Purchasing and Distribution. We maintain a distribution
and warehouse center that services our network. The distribution center is
located near Nashville, Tennessee and has approximately 85,000 square feet of
storage space. Approximately every two weeks, the distribution center delivers
products to our network sites using a combination of contract carriers and our
fleet of trucks and trailers. In 2004, the distribution center shipped
approximately $50.3 million of products. We believe the distribution center
provides us with cost savings by using its consolidated purchasing power to
negotiate volume discounts with third-party suppliers. The distribution center
is also able to obtain further price reductions from suppliers in the form of
reduced shipping charges, as suppliers need only deliver their products to the
distribution center warehouse, as opposed to each site individually.
COMPETITION
The U.S. travel center and truck stop industry in which we operate
consists of travel centers, truck stops, diesel fuel outlets and similar
facilities designed to meet the needs of long-haul trucking fleets and their
drivers, independent truck drivers and general motorists. The travel center and
truck stop industry is highly competitive and fragmented. According to NATSO,
there are in excess of 3,000 travel center and truck stops located on or near
highways nationwide. Further, only eight chains in the United States have 25 or
more travel center and truck stop locations on the interstate highways, which we
believe is the minimum number of locations needed to provide even regional
coverage to truck drivers and trucking fleets. There are generally two types of
facilities designed to serve the trucking industry:
- full-service travel centers, such as those in our network, which
offer a broad range of products and services to long-haul trucking
fleets and their drivers, independent truck drivers and general
motorists, such as diesel fuel and gasoline; full-service and fast
food dining; truck repair and maintenance; travel and convenience
stores; secure parking areas and other driver amenities; and,
- pumper-only truck stops, which provide diesel fuel, typically at
discounted prices, with a more limited mix of additional services
than a full-service travel center.
Fuel and non-fuel products and services can be obtained by long-haul
truck drivers from a wide variety of sources other than us, including regional
full-service travel center and pumper-only truck stop chains, independently
owned and operated truck stops, some large service stations and fleet-operated
fueling terminals.
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We believe that we experience substantial competition from
pumper-only truck stop chains and that this competition is based principally on
diesel fuel prices. In the pumper-only truck stop segment, the largest networks,
based on the number of facilities, are Pilot Travel Centers LLC, with
approximately 250 sites, Flying J Inc., with approximately 165 sites, and Love's
Travel Stops & Country Stores, Inc., with approximately 100 sites. We experience
additional substantial competition from major full-service travel center
networks and independent chains, which is based principally on diesel fuel
prices, non-fuel product and service offerings and customer service. In the
full-service travel center segment, the only large network, other than ours, is
operated by Petro Stopping Centers, L.P., with approximately 61 sites. Our truck
repair and maintenance shops compete with regional full-service travel center
and truck stop chains, full-service independently owned and operated truck
stops, fleet maintenance terminals, independent garages, truck dealerships,
truck quick-lube facilities and auto parts service centers. We also compete with
a variety of establishments located within walking distance of our travel
centers, including full-service restaurants, QSRs, electronics stores,
drugstores and travel and convenience stores.
A significant portion of all intercity diesel fuel consumption by
trucking fleets and companies with their own trucking capability occurs through
self-fueling at both dedicated terminals and at fuel depots strategically
located across the country. These terminals often provide facilities for truck
repair and maintenance. Our pricing decisions for diesel fuel and truck repair
and maintenance services cannot be made without considering the existence of
these operations and their capacity for expansion. We believe that a long-term
trucking industry trend has been to reduce the use of these terminals and to
outsource fuel, repair and maintenance services to maximize the benefits of
competitive fuel pricing, superior driver amenities and reduced environmental
compliance expenditures. However, during the past few years of historically high
fuel prices, this long-term trend has been somewhat slowed, at least
temporarily, as trucking fleets have utilized their existing terminals to supply
an increased level of their fuel and repair service needs.
A potential additional source of competition in the future could
result from the possible commercialization of state-owned interstate rest areas.
Historically, these rest areas have been precluded from offering for sale fuel
and non-fuel products and services similar to that of a travel center. State
governments that want to earn additional revenues from these rest areas have
repeatedly requested that the federal government allow for commercialization.
Past attempts for such commercialization historically have been successfully
opposed by a group of opponents that includes NATSO, fast food restaurant
operators and others. If commercialized, these rest areas will increase the
number of outlets competing with us for the business of highway travelers. It is
possible we may have an opportunity to play a role in these commercialization
efforts, which would reduce any negative effects of such commercialization on
our travel center business. As of early 2005, language in the pending highway
reauthorization bill clearly sets forth a continued ban on commercialization of
state-owned interstate rest areas.
RELATIONSHIPS WITH THE OPERATORS AND FRANCHISEE-OWNERS
We enter into franchise agreements with operators and
franchisee-owners of travel centers through TA Franchise Systems, and TA
Franchise Systems collects franchise fees and royalties under these agreements.
TA Franchise System's assets consist primarily of the rights under the original
franchise agreements, the network franchise agreements and its trademark license
from TA Licensing. TA Franchise Systems has no tangible assets.
Network Franchise Agreement
As of December 31, 2004, there were 16 sites operating under network
franchise agreements. The more significant provisions of the network franchise
agreement are described in the following paragraphs.
Initial Franchise Fee. The initial franchise fee for a new franchise
is $100,000.
Term of Agreement. The initial term of the network franchise
agreement is ten years. The network franchise agreement provides for two
five-year renewals on the terms being offered to prospective franchisees at the
time of the franchisee's renewal. We reserve the right to decline renewal under
certain circumstances or if specified
9
terms and conditions are not satisfied by the franchisee. The average remaining
term of these agreements, including all renewal periods, is approximately 18
years. The initial terms of the current network franchise agreements expire in
July 2012 through October 2014.
Protected Territory. Subject to specified exceptions, including
existing operations, so long as the franchisee is not in default under the
network franchise agreement, we agree not to operate, or allow another person to
operate, a travel center or travel center business that uses the "TA" brand,
within 75 miles in either direction along the primary interstate on which the
franchised site is located.
Restrictive Covenants. Except for the continued operation of
specified businesses identified by the franchisee at the time of execution of
the network franchise agreement, the franchisee cannot, during the term of the
agreement, operate any travel center or truck stop-related business under a
franchise agreement, licensing agreement or marketing plan or system of another
person or entity. If the franchisee owns the franchised premises, the franchisee
may continue to operate a travel center at the franchised premises after
termination of the franchise agreement, but if the termination is for any reason
other than a default by TA Franchise System, the franchisee is restricted for a
two-year period from re-branding the facility with any other truck stop or
travel center company or other organization offering similar services and/or
fleet billing services.
Royalty Payments. Franchisees are required to pay us a continuing
services and royalty fee generally equal to 3.75% of all non-fuel revenues. If
branded fast food is sold from the franchised premises, the franchisee must pay
us 3% of all net revenues earned directly or indirectly in connection with those
sales after deduction of royalties paid to the fast food franchisor.
Advertising, Promotion and Image Enhancement. The network franchise
agreement requires the franchisees to contribute 0.6% of their non-fuel revenues
and net revenues from fast food sales to partially fund system-wide advertising,
marketing and promotional expenses we incur. We are required to match the
amounts of the franchisees' contributions.
Fuel Purchases and Sales. Under the network franchise agreement for
those franchisees operating leased sites, we agree to sell to franchisees, and
franchisees agree to buy from us, 100% of their requirements of diesel fuel.
Those franchisees operating franchisee-owned sites are not required to purchase
their diesel fuel from us. The franchisee agrees to purchase gasoline from only
those suppliers that we approve in writing. The franchisee generally must pay a
$0.03 per gallon royalty fee to us on all gallons of gasoline sold.
Non-fuel Product Offerings. Franchisees are required to operate
their sites in conformity with guidelines that we establish and offer any
products and services that we deem integral to the network.
Termination/Nonrenewal. We may terminate the network franchise
agreement for the following reasons, among others:
- the default of the franchisee;
- our withdrawal from the marketing of motor fuel in the state, county
or parish where the franchise is located; or
- the default or termination of the lease.
The foregoing reasons also constitute grounds for nonrenewal of the
network franchise agreement. In addition, we can decline to renew the network
franchise agreement for the following reasons, among others:
- we and the operator fail to agree to changes or additions to the
network franchise agreement;
- we make a good faith determination not to renew the network
franchise agreement because it would be uneconomical to us; or
10
- if we own the franchise premises, we make a good faith determination
to sell the premises or convert it to a use other than for a truck
stop or travel center.
If we do not renew the network franchise agreement due to any of the
three foregoing reasons, we may not enter into another network franchise
agreement relating to the same franchised premises with another party within 180
days of the expiration date on terms materially different from those offered to
the prior franchisee, unless the prior franchisee is offered the right, for a
period of 30 days, to accept a renewal of the network franchise agreement on
those different terms. If we do not renew the network franchise agreement
because we make a good faith determination to withdraw from the marketing of
fuel in the area of the franchised premises, we may not sell the franchised
premises or franchised business for 90 days following the expiration of the
network franchise agreement. The prior franchisee does not have a right of first
refusal on the sale of the franchised premises.
Network Lease Agreement
In addition to franchise fees, we also collect rent from those
franchisees that operate a travel center owned by us. As of December 31, 2004,
there were 12 leased sites. Each operator of a leased site that enters into a
network franchise agreement also must enter into a network lease agreement. The
more significant provisions of the network lease agreement are described in the
following paragraphs.
Term of Agreement. The lease agreements we have with our franchisees
have a term of ten years and allow for two renewals of five years each. We
reserve the right to decline renewal under certain circumstances or if specified
terms and conditions are not satisfied by the operator. The average remaining
term of these agreements, including all renewal periods, is approximately 18
years. The initial terms of the current network lease agreements expire in July
2012 through December 2012.
Rent. Under the network lease, an operator must pay annual fixed
rent equal to the sum of
- base rent agreed upon by the operator and us, plus
- improvement rent, if any, which is defined as an amount equal to 14%
of the cost of all capital improvements we fund that we and the
operator mutually agree will enhance the value of the leased
premises and which cost in excess of $2,500, plus
- an annual inflator equal to the percentage increase in the consumer
price index.
The base rent will not be increased by the improvement rent if the operator
elects to pay for the capital improvements. If we and the operator agree upon an
amortization schedule for a capital improvement funded by the operator, we will,
upon termination of the network lease, reimburse the operator for an amount
equal to the unamortized portion of the cost of the capital improvement. The
operator is responsible for the payment of all charges and expenses in
connection with the operation of the leased sites, including environmental
registration fees and certain maintenance costs.
Use of the Leased Site. The operator must operate the leased site as
a travel center in compliance with all laws, including all environmental laws.
The operator must submit to quality inspections that we request and appoint a
manager that we approve, who is responsible for the day-to-day operations at the
leased site.
Termination/Nonrenewal/Transferability/Right of First Refusal. The
network lease agreement contains terms and provisions regarding termination,
nonrenewal, transferability and our right of first refusal which are
substantially the same as the terms and provisions of the network franchise
agreement.
Original Franchise Agreement with BP Network Independent Franchisees
There are six sites that continue to operate under the franchise
agreements they had with TA Franchise Systems prior to the network franchise
agreement being revised to its current form in 2002. The terms of these
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franchise agreements are generally the same as the network franchise agreement,
but they do not require the franchises to purchase their diesel fuel from us and
their provisions vary. At the expiration of these agreements, the respective
franchisees may be offered an option to renew their franchises under a form of
our then-current franchise agreement for franchisee-owned sites.
Term of Agreement. In general, the initial terms of the original
franchise agreements are 10 years. The original franchise agreements provide for
one or two renewals for an aggregate of 10 years. The original franchise
agreements offer no assurance that the terms of the renewal will be the same as
those of the initial franchise agreements. We may decline renewal under some
circumstances or if specified terms and conditions are not satisfied by the
franchisee. The average remaining term of these agreements is approximately five
years.
Protected Territory. So long as the franchisee is not in default
under the franchise agreement, we agree not to operate, or allow another person
to operate, a travel center or travel center business that uses the "TA" brand,
within a specified area in either direction along one or more interstates at
which the franchised site is located.
Restrictive Covenants. Although the restrictive covenants in the
original franchise agreements may vary slightly from franchise to franchise,
each franchisee is subject to restrictions that prohibit two or more of the
following during the term of the franchise agreement and for two years after its
expiration:
- operation of any other truck stop or travel center within its
protected territory;
- operation of the franchise location under any national brand other
than "TA";
- operation of the branded facility within a certain distance of any
other TA facility; and
- operation of any competitive business or a business that trades upon
the franchise within the area adjacent to the franchise location.
Royalty Payments. In general, we require franchisees to pay us a
continuing services and royalty fee generally equal to 4% of all revenues earned
directly or indirectly by the franchisee from any business conducted at or from
the franchised premises, excluding fuel sales and sales of branded fast food. As
part of the royalty fee, we generally require the franchisee to pay us $0.004
per gallon on all sales of qualified diesel fuel.
Advertising, Promotion and Image Enhancement. The network franchise
agreement requires the franchisees to contribute 0.25% of all revenues,
including revenues from fuel and fast food sales, to partially fund system-wide
advertising, marketing and promotional expenses we incur, and mandates certain
minimum franchisee expenditures on advertising. We are required to match the
amounts of the franchisees' contributions towards the system-wide expenses.
Fuel Purchases and Sales. We do not require franchisees to purchase
gasoline or diesel fuel from us. However, we charge royalty fees generally on
diesel fuel sales as described above.
Non-fuel Product Offerings. Franchisees are required to operate
their travel centers in conformity with our guidelines, participate in and
comply with all programs that we prescribe as mandatory and offer any products
and services we deem integral to the network.
Termination of an Original Franchise Agreement. We may terminate the
franchise agreement upon the occurrence of certain defaults, upon notice and
without affording the franchisee an opportunity to cure the defaults. When other
defaults occur, we may terminate the franchise agreement if, after receipt of a
notice of default, the franchisee has not cured the default within the
applicable cure period. The franchisee may terminate the franchise agreement
upon thirty days notice, if we are in material default under the franchise
agreement and we fail to cure or attempt to cure the default within a reasonable
period after notification.
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REGULATION
Franchise Regulation. State franchise laws apply to TA Franchise
Systems, and some of these laws require TA Franchise Systems to register with
the state before it may offer a franchise, require TA Franchise Systems to
deliver specified disclosure documentation to potential franchisees, and impose
special regulations upon petroleum franchises. Some state franchise laws also
impose restrictions on TA Franchise Systems' ability to terminate or not to
renew its respective franchises, and impose other limitations on the terms of
the franchise relationship or the conduct of the franchisor. Finally, a number
of states include, within the scope of their petroleum franchising statutes,
prohibitions against price discrimination and other allegedly anticompetitive
conduct. These provisions supplement applicable antitrust laws at the federal
and state levels.
The Federal Trade Commission, or the FTC, regulates us under their
rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising
and Business Opportunity Ventures." Under this rule, the FTC requires that
franchisors make extensive disclosure to prospective franchisees but does not
require registration. We believe that we are in compliance with this rule.
We cannot predict the effect of any future federal, state or local
legislation or regulation on our franchising operations.
Environmental Regulation. Our operations and properties are
extensively regulated by Environmental Laws that:
- govern operations that may have adverse environmental effects, such
as discharges to air, soil and water, as well as the management of
Hazardous Substances or
- impose liability for the costs of cleaning up sites affected by, and
for damages resulting from disposal or other releases of Hazardous
Substances.
We own and use underground storage tanks and aboveground storage
tanks to store petroleum products and waste at our facilities. These tanks must
comply with requirements of Environmental Laws regarding tank construction,
integrity testing, leak detection and monitoring, overfill and spill control,
release reporting, financial assurance and corrective action in case of a
release. At some locations, we must also comply with Environmental Laws relating
to vapor recovery and discharges to water. We have completed necessary upgrades
to underground storage tanks to comply with federal regulations that took effect
on December 22, 1998, and believe that all of our travel centers are in material
compliance with applicable requirements of Environmental Laws.
We have received notices of alleged violations of Environmental
Laws, or are otherwise aware of the need to undertake corrective actions to
comply with Environmental Laws, at travel centers owned by us in a number of
jurisdictions. We do not expect that any financial penalties associated with
these alleged violations, or instances of noncompliance, or compliance costs
incurred in connection with these violations or corrective actions, will be
material to our results of operations or financial condition. We are conducting
investigatory and/or remedial actions with respect to releases of Hazardous
Substances that have occurred subsequent to the acquisition of the BP network
and also regarding historical contamination at certain of the former Unocal,
Burns Bros., Travel Ports and Rip Griffin facilities. While we cannot precisely
estimate the ultimate costs we will incur in connection with the investigation
and remediation of these properties, based on our current knowledge, we do not
expect that the costs to be incurred at these properties, individually or in the
aggregate, will be material to our results of operations or financial condition.
While the matters discussed above are, to the best of our knowledge, the only
proceedings for which we are currently exposed to potential liability, we cannot
be certain that additional contamination does not exist at these or additional
network properties, or that material liability will not be imposed on us in the
future. If additional environmental problems arise or are discovered, or if
additional environmental requirements are imposed by government agencies,
increased environmental compliance or remediation expenditures may be required,
which could have a material adverse effect on us. We have estimated the current
ranges of remediation costs at currently active sites and what we believe will
be our ultimate share for those costs and, as of December 31, 2004, we had a
13
reserve of $13.2 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 $5.3 million of cash in an escrow account to
fund certain of these estimated expenditures, leaving an estimated net amount of
$4.1 million to be funded from future operating cash flows. In addition, we have
obtained environmental insurance of up to $35.0 million for unanticipated costs
regarding certain known environmental liabilities and for up to $40.0 million
regarding certain unknown environmental liabilities.
As part of the acquisition of the Unocal network, Phase I
environmental assessments were conducted at the 97 Unocal network properties
purchased by us. Under an environmental indemnification agreement with Unocal,
Phase II environmental assessments of all Unocal network properties were
completed by Unocal by December 31, 1998. Under the terms of this environmental
agreement, Unocal was responsible for all costs incurred for:
- remediation of environmental contamination, and
- otherwise bringing the properties into compliance with Environmental
Laws as in effect at the date of the acquisition of the Unocal
network,
with respect to the matters identified in the Phase I or Phase II environmental
assessments, which matters existed on or prior to the date of the acquisition of
the Unocal network. Under the terms of this agreement, Unocal also was required
to indemnify us against any other environmental liabilities that arise out of
conditions at, or ownership or operations of, the Unocal network prior to the
date of the acquisition of the Unocal network. In January 2004, a Buy-Out
Agreement between Unocal and us became effective and Unocal's obligations to us
under the April 1993 environmental agreement were terminated. In consideration
for releasing Unocal from its obligations under the environmental agreement,
Unocal paid us $2.6 million of cash, funded an escrow account with $5.4 million
to be drawn by us as we incur related remediation costs, and purchased insurance
policies that cap our total future expenditures and provide protection against
significant unidentified matters that existed prior to April 1993. We are now
responsible for all remediation at the former Unocal sites that we still own. We
estimated the costs of the remediation activities for which we assumed
responsibility from Unocal in January 2004 to be approximately $8.2 million at
that time, which amount we expect will be fully covered by the cash received
from Unocal and reimbursements from state tank funds.
Prior to the acquisition of the BP network, all of the 38
company-owned locations purchased by us were subject to Phase I and Phase II
environmental assessments, undertaken at BP's expense. The environmental
agreement with BP provides that, with respect to environmental contamination or
non-compliance with Environmental Laws identified in the Phase I or Phase II
environmental assessments, BP is responsible for:
- all costs incurred for remediation of the environmental
contamination, and
- for otherwise bringing the properties into compliance with
Environmental Laws as in effect at the date of the acquisition of
the BP network.
The remediation must achieve compliance with the Environmental Laws
in effect on the date the remedial action is completed. The environmental
agreement with BP requires BP to indemnify us against any other environmental
liabilities that arise out of conditions at, or ownership or operations of, the
BP network locations prior to the date of the acquisition of the BP network. The
time period for making new claims for indemnification from BP ended on December
11, 2004. BP must also indemnify us for liabilities relating to non-compliance
with Environmental Laws for which claims were made before December 11, 1996.
Except as described above, BP does not have any responsibility for any
environmental liabilities arising out of the ownership or operations of the BP
network after the date of the acquisition of the BP network. We cannot be
certain that BP, if additional environmental claims or liabilities were to arise
under the environmental agreement, would not dispute our claims for
indemnification.
14
As part of the Burns Bros. acquisition, Phase I environmental
assessments were conducted on all 17 sites acquired. Based on the results of
those assessments, Phase II environmental assessments were conducted on nine of
the sites. The purchase price paid to Burns Bros. was adjusted based on the
findings of the Phase I and Phase II environmental assessments. Under the asset
purchase agreement with Burns Bros., we released Burns Bros. from any
environmental liabilities that may have existed as of the Burns Bros.
acquisition date, other than specified non-waived environmental claims as
described in the agreement with Burns Bros. As part of the Travel Ports
acquisition, Phase I environmental assessments were conducted on all 16 sites
acquired. Based on the results of those assessments, Phase II environmental
assessments were conducted on five of these sites. As part of the Rip Griffin
acquisition, Phase I environmental assessments were conducted on all eleven
sites acquired. Under the asset purchase agreement with Rip Griffin we released
Rip Griffin from any environmental liabilities that may have existed as of the
Rip Griffin acquisition date, other than specified non-waived environmental
claims as described in the agreement with Rip Griffin.
EMPLOYEES
As of December 31, 2004, we employed 11,510 people on a full- or
part-time basis. Of this total, 11,094 were employees at our company-operated
sites, 362 performed managerial, operational or support services at our
headquarters or elsewhere and 54 employees staffed the distribution center.
Except for eleven employees at one site, all of our employees are non-union. We
believe that our relationship with our employees is satisfactory.
ITEM 2. PROPERTIES
Our principal executive offices are leased and are located at 24601
Center Ridge Road, Suite 200, Westlake, Ohio 44145-5639. Our distribution center
is a leased facility located at 1450 Gould Boulevard, LaVergne, Tennessee
37086-3535.
Of our 138 company-operated sites and 12 leased sites in operation
as of December 31, 2004, the land and improvements at 12 are leased, six sites
are subject to ground leases of the entire site, five sites are subject to
ground leases of portions of these sites, and one site is operated pursuant to a
management agreement. We consider our facilities suitable and adequate for the
purposes for which they are used. In addition to these 150 sites, we own two
sites that will be developed as travel centers and one site that is closed and
held for sale.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in various legal and
administrative proceedings and threatened legal and administrative proceedings
incidental to the ordinary course of our business. We believe we are currently
not involved in any litigation, individually or in the aggregate, which could
have a material adverse effect on our business, financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2004.
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market information. The outstanding shares of our common stock were
issued in transactions not involving a public offering. As a result, there is no
public market for our common stock.
Holders. As of December 31, 2004, the outstanding shares of our
common stock were held of record by 36 stockholders.
15
Dividends. We have never paid or declared any cash dividends on our
common stock. We intend to retain our future earnings, if any, to fund the
development and growth of our business. Our future decisions concerning the
payment of dividends on the common stock will depend upon our results of
operations, financial condition and capital expenditure plans, as well as other
factors as the board of directors, in its sole discretion, may consider
relevant. In addition, our existing indebtedness restricts, and we anticipate
our future indebtedness may restrict, our ability to pay dividends.
Recent sales of unregistered securities. During 2002 and 2003, we
sold or issued the unregistered securities described below. None of the
following transactions involved any public offering. All sales were made in
reliance on Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), Rule 701 promulgated under the Securities Act and/or
Regulation D promulgated under the Securities Act. These sales were made without
general solicitation or advertising. The recipients in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to sell or for sale in connection with any distribution thereof.
In a series of sales to management, we sold the following:
- In 2002, we sold 7,302 shares at $31.75 per share. The proceeds from
these sales were used for general corporate purposes.
- In 2003, we sold 10,000 shares at $30.26 per share. These shares had
been purchased from the estate of a deceased former management
stockholder at this same price. The proceeds from these sales were
used to fund the related purchase.
Summary of Equity Compensation Plans. The following table sets forth
information about all our equity compensation plans in effect as of December 31,
2004, which consisted solely of the 2001 Stock Incentive Plan, which plan was
approved by our stockholders during 2001. All of our equity compensation plans
currently in effect have been approved by our stockholders.
Equity Compensation Plan Information
(C)
Number of
securities
(A) remaining
Number available for
securities to be (B) future issuance
issued upon Weighted-average of under equity
exercise of exercise price compensation
outstanding of outstanding plans (excluding
options, options, securities
warrants and warrants reflected in
Plan Category rights and rights column (A))
- ------------------------------- ------------------- ---------------- ------------------
Equity compensation
plans approved by
stockholders..................... 939,375 $ 31.75 -
Equity compensation plans
not approved by
stockholders................... - - -
------------------- ---------------- -------------------
Total............................ 939,375 $ 31.75 -
=================== ================ ===================
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial data for each of the last five fiscal years. Such data should also be
read in conjunction with "Management's Discussion and Analysis" and our audited
consolidated financial statements included elsewhere in this annual report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2000(1) 2001 2002(2) 2003 2004(3)(4)
------------ ----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT GALLONAGE AND SITE COUNT AMOUNTS)
INCOME STATEMENT DATA:
Revenues:
Fuel................................ $ 1,485,732 $ 1,331,807 $ 1,237,989 $ 1,513,648 $ 1,959,239
Non-fuel............................ 554,219 585,314 617,342 649,502 707,958
Rent and royalties.................. 18,822 17,491 15,539 13,080 10,667
------------ ----------- ----------- ----------- -----------
Total revenues.................... 2,058,773 1,934,612 1,870,870 2,176,230 2,677,864
Gross profit (excluding depreciation)... 447,853 466,859 481,190 501,464 530,837
Income from operations.................. (3,919) 39,949 51,937 59,977 69,285
Net income (loss)....................... (38,673) (10,054) 1,271 8,891 14,862
BALANCE SHEET DATA (END OF PERIOD):
Total assets............................ $ 736,301 $ 679,940 $ 660,767 $ 650,567 $ 897,729
Long-term debt (net of unamortized
discount)........................... 546,166 547,534 523,934 502,033 682,892
Redeemable equity....................... 527 565 681 1,909 1,864
Working capital......................... 38,093 27,366 19,354 19,630 47,784
OTHER FINANCIAL AND OPERATING DATA:
Total diesel fuel sold (in thousands of
gallons)............................ 1,384,759 1,369,251 1,349,741 1,341,125 1,338,020
Capital expenditures, excluding business
acquisitions........................ $ 68,107 $ 54,490 $ 42,640 $ 44,196 $ 122,919
Cash flows (used in) provided by:
Operating activities................ 65,106 30,381 75,574 77,324 97,146
Investing activities................ (77,115) (46,234) (42,110) (50,486) (235,220)
Financing activities................ 22,988 6,722 (39,305) (26,086) 168,918
Adjusted EBITDA(5)...................... 102,755 105,189 113,561 121,921 131,488
NUMBER OF SITES (END OF PERIOD):
Company-operated sites.................. 122 119 122 126 138
Leased sites............................ 26 25 20 14 12
Franchisee-owned sites.................. 9 9 10 10 10
------------ ----------- ----------- ----------- -----------
Total network sites............... 157 153 152 150 160
============ =========== =========== =========== ===========
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Notes to Selected Financial Data
(1) For the year ended December 31, 2000, income from operations was reduced
by $22,004,000 of merger and recapitalization expenses incurred in
connection with the transactions we completed to consummate our merger
with TCA Acquisition Corporation and related recapitalization and by
$20,910,000 of losses from the early extinguishment of debt related to the
recapitalization. Prior to 2003, the loss from the early extinguishment of
debt was classified, net of the related income tax benefits, as an
extraordinary loss in our statement of operations and comprehensive
income. Statement of Financial Accounting Standards No. 145, "Rescission
of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical
Corrections as of April 2002," which was issued in April 2002, required
the reclassification into income from operations of the amount previously
presented as an extraordinary loss.
(2) Beginning in 2002, as a result of adopting a new accounting pronouncement,
we ceased amortization of our goodwill and trademark intangible assets.
(3) Reflects the operating results of 11 sites we acquired from Rip Griffin on
December 1, 2004, beginning on the acquisition date.
(4) The capital expenditures amount for 2004 includes $65,162,000 invested to
acquire the improvements at eight sites we had been leasing under the
master lease facility we terminated in December 2004 in connection with
the 2004 Refinancing. The amounts of cash flows used in investing
activities and provided by financing activities for 2004 include the
effects of the 2004 Refinancing as well as the Rip Griffin acquisition and
the termination of the master lease facility.
(5) Adjusted EBITDA, as used here, is based on the definition of "EBITDA" in
our bank debt agreement and consists of net income plus the sum of (a)
income taxes, (b) interest expense, net, (c) depreciation, amortization
and other noncash charges, (d) transition expense, (e) extraordinary
losses and cumulative effects of accounting changes and (f) the costs of
the merger and recapitalization transactions. We have included this
information concerning Adjusted EBITDA because Adjusted EBITDA is a
primary component for calculating the two key financial ratio covenants in
our debt agreements, the interest coverage ratio and the leverage ratio.
See further discussion of our debt covenant compliance and a
reconciliation of net income (loss) to Adjusted EBITDA in the "Liquidity
and Capital Resources" section of Management's Discussion and Analysis
under the heading "Adjusted EBITDA and Debt Covenant Compliance." We also
use Adjusted EBITDA as a basis for determining bonus payments to our
corporate and site-level management employees and as a key component in
the formula for calculating the fair value of our redeemable common stock
and stock options. Adjusted EBITDA should not be considered in isolation
from, or as a substitute for, net income, income from operations, cash
flows from operating activities or other consolidated income or cash flow
statement data prepared in accordance with generally accepted accounting
principles. While the non-GAAP measures "EBITDA" and "Adjusted EBITDA" are
frequently used by other companies as measures of operations and/or
ability to meet debt service requirements, Adjusted EBITDA as we use the
term is not necessarily comparable to similarly titled captions of other
companies due to differences in methods of calculation. See further
discussion and disclosure concerning Adjusted EBITDA under the heading
"Adjusted EBITDA and Debt Covenant Compliance" in Item 7, Management's
Discussion and Analysis. For 2004, the Adjusted EBITDA amount for debt
covenant purposes was adjusted for the historical results of the sites
acquired from Rip Griffin and the termination of the master lease
agreement, each of which was funded through the 2004 Refinancing. The pro
forma Adjusted EBITDA amount used in this calculation for 2004 was
$153,802,000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial position and results of
operations is based upon, and should be read in conjunction with, our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. Management believes the
critical accounting policies and areas that require the most significant
judgments and estimates to be used in the preparation of our consolidated
financial statements are the allowance for doubtful accounts, asset impairment,
self-insured reserves, environmental liabilities, income tax accounting, and
recognition of stock compensation expense related to stock options and
redeemable common stock held by employees.
Allowances for doubtful accounts and notes receivable are maintained
based on historical payment patterns, aging of accounts receivable, periodic
review of our customers' financial condition, and actual write-off history. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
We record impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying value of those assets, and when the carrying value of a long-lived
asset to be disposed of exceeds the estimated fair value of the asset less the
estimated cost to sell the asset. The net carrying value of assets not
recoverable is then reduced to fair value. Our estimated cash flows are based on
historical results adjusted to reflect the best estimate of future market and
operating conditions. The estimates of fair value represent the best estimate
based on industry trends and reference to market rates and transactions. If
these estimates or their underlying assumptions change in the future, we may be
required to record additional impairment charges for these assets.
For purposes of assessing our goodwill for impairment, we have
determined that we are one reporting unit and that the estimated fair value of
that reporting unit, based on a discounted cash flow analysis, exceeded its
carrying value. With respect to our trademark intangible assets, the estimated
fair value, based on a discounted cash flow analysis, exceeded the carrying
value. Accordingly, we have not recognized an impairment charge with respect to
any of our intangible assets. A number of assumptions and methods are used in
preparing the valuations underlying these impairment tests, including estimates
of future cash flows and discount rates. Applying significantly different
assumptions or valuation methods could result in different results of these
impairment tests. Similarly, defining the reporting unit differently could lead
to a different result for goodwill. Our goodwill and trademark intangible assets
will be assessed for impairment annually as of January 1 of each year.
We are partially self-insured, paying our own general liability,
workers' compensation, and group health benefits claims, up to stop-loss amounts
ranging from $150,000 to $500,000 on a per-occurrence basis. Provisions
established under these partial self insurance programs are made for both
estimated losses on known claims and claims incurred but not reported, based on
claims history.
We establish an environmental contingency reserve when the
responsibility to remediate is probable and the amount of associated costs is
reasonably determinable. The estimates of these costs are based on our best
estimates of our future obligations given current and pending laws and the
currently available facts concerning each environmental incident, as well as our
estimate of amounts recoverable under indemnification agreements and/or state or
private insurance plans. Should the actual costs to remediate an incident differ
from our estimates, or should new facts come to light or laws become enacted
that modify the scope of our remediation projects, revisions to the estimated
environmental contingency reserve would be required.
19
As part of the process of preparing our consolidated financial
statements, we are required to estimate income taxes in each of the
jurisdictions in which we operate. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from
differing treatment of items for financial statement and tax purposes. These
timing differences result in deferred tax assets and liabilities, which are
included in our consolidated balance sheet. We are required to record a
valuation allowance to reduce our deferred tax assets if we are not able to
conclude that it is more likely than not they will be realized, although we have
not to date recognized such a valuation allowance as we believe realization of
our deferred tax assets is more likely than not. Increases in the valuation
allowance would result in additional expenses to be reflected within the tax
provision in the consolidated statement of operations. For further discussion
regarding the realization of our deferred tax assets, see the "Results of
Operations - Income Taxes" section of this "Management's Discussion and
Analysis."
Certain members of our senior management have purchased shares of
our common stock pursuant to individual management subscription agreements. We
have the right to repurchase, and the employees have the right to require us to
repurchase, subject to certain limitations, at fair market value, these shares
of common stock upon termination of employment due to death, disability or a
scheduled retirement. These shares are classified as redeemable equity in our
consolidated balance sheet. Prior to an initial public offering of our common
stock, the fair market value is determined by a formula set forth in the
agreement that can be modified by the Board of Directors. At the point in time
that redemption of shares of redeemable common stock becomes probable, the fair
value of the shares will be accreted to their estimated redemption value by a
charge to nonredeemable stockholders' equity. Such a charge to nonredeemable
stockholders' equity will occur only if our value, and therefore the fair value
of our common stock, has increased. Our policy is to consider redemption of an
individual stockholder's shares probable at the time that the stockholder
provides notice of his or her intention to retire, dies or is declared disabled.
In addition to these redeemable shares of common stock purchased by management
employees, we have granted to certain of our executives non-qualified stock
options to purchase 944,881 shares of our common stock under a stock incentive
plan. Each option grant consists of 41.67% time options and 58.33% performance
options. Time options become exercisable with the passage of time, while
performance options become exercisable if certain investment return targets are
achieved. Time options generally vest 20% per year over a period of five years.
Performance options vest if Oak Hill achieves specified internal rates of return
on specified measurement dates. The time options are subject to fixed plan
accounting and, accordingly, no charge to earnings will be required with respect
to them since the exercise price equaled the fair value at the date of grant.
The performance options are subject to variable plan accounting and,
accordingly, a non-cash charge to earnings will be required when it becomes
probable that the performance triggers for such options will be achieved.
Because our common stock is privately held, determining its value is subject to
estimates and to factors, such as multiples being paid in the mergers and
acquisitions market at the time of the measurement and/or the state of the
capital markets at that time, that are not easily forecasted or controlled and
which may not have a direct relationship to our financial results or condition.
It is not possible to determine at this time, nor may it be possible until close
to the end of the five-year performance period, whether it will be probable that
we will achieve the performance triggers. It is not possible to predict whether
any such required non-cash charge will be material to our results for the period
in which the charge is recognized, as we expect that the performance triggers
can only be attained as a result of a significant increase in our results of
operations.
OVERVIEW
We are a holding company which, through our wholly owned
subsidiaries, owns, operates and franchises travel centers along the North
American highway system to serve long-haul trucking fleets and their drivers,
independent truck drivers and general motorists. Our network is the largest, and
only nationwide, full-service travel center network in the United States. At
December 31, 2004, our geographically diverse network consisted of 160 sites
located in 41 states in the United States and in the province of Ontario,
Canada. Our operations are conducted through three distinct types of travel
centers:
20
- sites operated by us, which we refer to as company-operated sites;
- sites owned by us and leased to independent lessee-franchisees,
which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer
to as franchisee-owned sites.
Our travel centers are located at key points along the U.S.
interstate highway system and in Canada, typically on 20- to 25-acres sites.
Most of our network properties were developed more than 22 years ago when prime
real estate locations along the interstate highway system were more readily
available than they are today, making a network such as ours difficult to
replicate. Operating under the "TravelCenters of America" and "TA" brand
names,
our nationwide network provides an advantage to long-haul trucking fleets by
enabling them to route their trucks within a single network from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, more than 20 different brands of fast food
restaurants, travel and convenience stores and other driver amenities.
The non-fuel products and services we offer to our customers
complement our fuel business and provide us a means to increase our revenues and
gross profit despite price pressure on fuel as a result of competition and
volatile crude oil and petroleum product prices. For the years ended December
31, 2002, 2003, and 2004, our revenues and gross profit were composed as
follows:
YEAR ENDED
DECEMBER 31,
---------------------------
2002 2003 2004
----- ----- -----
Revenues:
Fuel ................................................ 66.2% 69.5% 73.2%
Non-fuel ............................................ 33.0% 29.9% 26.4%
Rent and royalties .................................. 0.8% 0.6% 0.4%
----- ----- -----
Total revenues ................................ 100.0% 100.0% 100.0%
===== ===== =====
Gross profit (excluding depreciation):
Fuel ................................................ 21.1% 20.9% 19.2%
Non-fuel ............................................ 75.7% 76.5% 78.8%
Rent and royalties .................................. 3.2% 2.6% 2.0%
----- ----- -----
Total gross profit (excluding depreciation).... 100.0% 100.0% 100.0%
===== ===== =====
COMPOSITION OF OUR NETWORK
The changes in the number of sites within our network and in their
method of operation (company-operated, leased or franchisee-owned) are
significant factors influencing the changes in our results of operations. The
following table summarizes the changes in the composition of our network from
December 31, 2001 through December 31, 2004:
21
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
------- ------ ----------- -----
Number of sites at December 31, 2001 ..... 119 25 9 153
2002 Activity:
New Sites ............................. 1 - 1 2
Sales of sites ........................ (3) - - (3)
Conversions of leased sites to company-
operated sites ...................... 5 (5) - -
---- ---- ---- ----
Number of sites at December 31, 2002 ..... 122 20 10 152
---- ---- ---- ----
2003 Activity:
New sites ............................. 2 - - 2
Sales of sites ........................ (3) - - (3)
Closed sites .......................... (1) - - (1)
Conversions of leased sites to
company-operated sites .............. 6 (6) - -
---- ---- ---- ----
Number of sites at December 31, 2003 ..... 126 14 10 150
---- ---- ---- ----
2004 Activity:
New sites ............................. 12 - - 12
Sales of sites ........................ (2) - - (2)
Conversions of leased sites to
company-operated sites .............. 2 (2) - -
---- ---- ---- ----
Number of sites at December 31, 2004 ..... 138 12 10 160
==== ==== ==== ====
During 2004, we entered into a franchise agreement with a franchisee
under which we expect to add one franchisee-owned location to our network in the
second quarter of 2005. In February 2005, we sold one of our company-operated
sites. We expect to convert one leased site to a company-operated site on March
31, 2005 upon the termination of the lease and franchise agreements covering
that site.
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 only for the
period for which it was open for business under the same method of operation
(company-operated, leased or franchisee-owned) 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.
22
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Revenues. Our consolidated revenues for the year ended December 31,
2004 were $2,677.9 million, which represents an increase from the year ended
December 31, 2003 of $501.6 million, or 23.1%, that is primarily attributable to
an increase in fuel revenue but also resulted from increased non-fuel revenues.
Fuel revenue for the year ended December 31, 2004 increased by
$445.6 million, or 29.4%, as compared to the year ended December 31, 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 year ended December 31, 2004 increased by 31.1% and 26.4%, respectively, as
compared to the year ended December 31, 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 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 year ended December 31,
2004 decreased 0.2% and 4.3%, respectively, as compared to the year ended
December 31, 2003. For the year ended December 31, 2004, we sold 1,338.0 million
gallons of diesel fuel and 182.9 million gallons of gasoline, as compared to
1,341.1 million gallons of diesel fuel and 191.1 million gallons of gasoline for
the year ended December 31, 2003. The diesel fuel sales volume decrease of 3.1
million gallons primarily resulted from a 9.9 million gallon 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 of 8.2 million gallons was primarily attributable
to a 16.9 million gallon decrease in wholesale gasoline sales volumes that was
partially offset by a 2.0% increase in same-site gasoline sales volumes and a
net increase in gasoline volumes at company-operated sites we added to or
eliminated from our network during 2003 and 2004. We believe the same-site
diesel fuel sales volume increase resulted from an improved freight market in
2004 and our retail diesel fuel pricing in response to intense price
competition, which factors were somewhat 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 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 year ended December 31, 2004 of $708.0
million reflected an increase of $58.5 million, or 9.0%, as compared to the year
ended December 31, 2003. The increase was primarily attributable to a 6.0%
increase in same-site non-fuel revenues and also attributable to the net
increase in sales at the company-operated sites we added to or eliminated from
our network during 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 year ended December 31, 2004
reflected a $2.4 million, or 18.4%, decrease as compared to the year ended
December 31, 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 3.5% increase in same-site royalty revenue and a 3.9% increase in same-site
rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the year
ended December 31, 2004 was $530.8 million, compared to $501.5 million for the
year ended December 31, 2003, an increase of $29.4 million, or 5.9%. 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.
23
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 $19.5 million, or 5.7%, to
$361.5 million for the year ended December 31, 2004 compared to $342.0 million
for the year ended December 31, 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 and a 3.5% increase on a
same-site basis. On a same-site basis, operating expenses as a percentage of
non-fuel revenues for 2004 were 51.0%, compared to 52.3% for the year ended
December 31, 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 year ended
December 31, 2004 were $43.2 million, which reflected a $2.6 million, or 6.5%,
increase from the year ended December 31, 2003 that was primarily attributable
to personnel costs.
Transition Expense. Transition expense included the costs incurred
in converting the travel centers acquired from Rip Griffin to our operating
model and standards. In December 2004, we incurred $0.7 million of such costs,
primarily consisting of site training and deferred maintenance expenses. We
expect to incur an additional $1.3 million of transition expenses during 2005 in
connection with these sites.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 2004 was $58.8 million, compared to
$60.4 million for the year ended December 31, 2003, a decrease of $1.6 million,
or 2.7%, that was primarily due to an impairment charge of $0.9 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 year ended December 31, 2004,
the gain on asset sales of $2.5 million primarily was generated from the sale of
two company-operated sites, one closed site and our fractional shares of three
aircraft, while the gain on asset sales of $1.5 million for the year ended
December 31, 2003 primarily was generated from the sale of three
company-operated sites.
Income from Operations. We generated income from operations of $69.3
million for the year ended December 31, 2004, compared to income from operations
of $60.0 million for the year ended December 31, 2003. This increase of $9.3
million, or 15.5%, as compared to the 2003 period was primarily attributable to
the increased level of non-fuel revenues and gross margin which was partially
offset by the decreased level of diesel fuel sales volumes and fuel margins per
gallon.
Gain on sale of investment. The gain on sale of investment of $1.6
million for the year ended December 31, 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. We expect that these uncertainties will be resolved during 2005.
Interest and Other Financial Costs -- Net. Interest and other
financial costs, net, for the year ended December 31, 2004 decreased by $0.9
million, or 1.9%, compared to the year ended December 31, 2003. This decrease
primarily resulted from lower interest expense related to our Senior Credit
Facility that was somewhat offset by a $1.7 million charge to expense in
connection with the 2004 Refinancing. The reduction in interest expense related
to our Senior Credit Facility primarily resulted from our reduced level of
indebtedness for most of 2004 as compared to 2003 and was somewhat lessened by
rising interest rates throughout 2004. The charge
24
recognized in connection with the 2004 Refinancing was related to a portion of
the legal and other fees incurred in completing the 2004 Refinancing as well as
the write-off of a portion of the deferred financing costs incurred in
connection with the 2000 Refinancing. The increase in our debt level and
reduction in our interest rate spread as a result of the 2004 Refinancing
completed on December 1, 2004 had a slight favorable net effect on our interest
expense that would equate to approximately $1.0 million annually.
Income Taxes. Our effective income tax rates for the years ended
December 31, 2004 and 2003 were 36.3% and 34.0%, respectively. These rates
differed from the federal statutory rate due primarily to state and foreign
income taxes and certain nondeductible expenses, partially offset by the benefit
of certain tax credits.
We have not recognized a valuation allowance for our net deferred
tax assets, as we believe we are more likely than not to realize those assets.
We need to generate $31.4 million of future taxable income to fully realize our
net deferred tax assets. The existing level of pre-tax earnings generated in
2004 would be sufficient to generate enough future taxable income to fully
realize our net deferred tax assets. The following table sets forth the
historical relationship between pretax earnings for financial reporting purposes
and taxable income for income tax purposes.
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2003 2004
--------- --------- ---------
(IN MILLIONS OF DOLLARS)
Pretax earnings for financial
reporting purposes.............................. $ 1.2 $ 13.5 $ 23.2
State income tax expense............................. (1.2) (1.1) (2.3)
Accelerated tax depreciation......................... (1.5) (5.3) (27.8)
Benefit of tax credits............................... 0.6 0.6 0.6
Non-deductible expenses.............................. 0.5 0.7 0.9
Temporary differences, net........................... 5.1 (0.4) 9.9
--------- ---------- ---------
Federal taxable income............................... $ 4.7 $ 8.0 $ 4.5
========= ========= =========
The following table sets forth the composition of our federal net
operating loss carryforwards by their expiration dates.
AMOUNT OF NET
YEAR OF EXPIRATION OPERATING LOSS
- -------------------------------------------- ----------------------
(IN MILLIONS OF DOLLARS)
2020........................................ $ 26.6
2021........................................ 27.9
2022........................................ 0.2
2023........................................ 0.1
2024........................................ 0.1
------------
Total net operating loss carryforward....... $ 54.9
============
Cumulative Effect of a Change in Accounting Principle. Effective
January 1, 2003, we adopted FAS 143, "Accounting for Asset Retirement
Obligations" and recognized a one-time cumulative effect charge of $0.3 million.
There was no similar accounting principle change during 2004.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. Our consolidated revenues for the year ended December 31,
2003 were $2,176.2 million, which represents an increase from the year ended
December 31, 2002 of $305.4 million, or 16.3%, that is primarily attributable to
an increase in fuel revenue.
25
Fuel revenue for the year ended December 31, 2003 increased by
$275.7 million, or 22.3%, as compared to the same period in 2002. The increase
was attributable principally to increases in diesel fuel and gasoline average
selling prices. Average diesel fuel and gasoline sales prices for the year ended
December 31, 2003 increased by 25.7% and 23.2%, respectively, as compared to the
same period in 2002, primarily reflecting increases in commodity prices. The
fuel revenue increase also resulted from an increase in our total fuel sales
volumes. Diesel fuel sales volumes decreased 8.6 million gallons, or 0.6%, while
gasoline sales volumes increased 30.5 million gallons, or 19.0%, as compared to
the same period in 2002. For the year ended December 31, 2003, we sold 1,341.1
million gallons of diesel fuel and 191.1 million gallons of gasoline, as
compared to 1,349.7 million gallons of diesel fuel and 160.6 million gallons of
gasoline for the year ended December 31, 2002. The diesel fuel sales volume
decrease resulted from a 4.5% decrease in same-site diesel fuel sales volumes,
partially offset by a net increase in sales volumes at company-operated sites we
added to or eliminated from our network during 2002 and 2003 of 24.0 million
gallons and an increase in our wholesale diesel fuel sales of 2.5 million
gallons, or 1.2%. The gasoline sales volume increase was primarily attributable
to a 9.6% increase in same-site gasoline sales volumes and also resulted from a
2.7 million gallon net increase in gasoline sales volume at company-operated
sites we added to or eliminated from our network during 2002 and 2003, as well
as an 11.6 million increase in wholesale gasoline sales volume. We believe the
same-site diesel fuel sales volume decrease resulted from a relatively flat
level of trucking activity in the United States in 2003 as compared to 2002, in
conjunction with an increase in the level of freight carried by train instead of
trucks and an increase in trucking fleets' self-fueling at their own terminals
due to the wide fluctuation in diesel costs this year and the absolute high
level of diesel fuel prices. We believe the same-site increase in gasoline sales
volume resulted primarily from increased general motorist visits to our sites as
a result of our gasoline and QSR offering upgrades and additions under our
capital program, as well as our competitive retail gasoline pricing.
Non-fuel revenues for the year ended December 31, 2003 of $649.5
million reflected an increase of $32.2 million, or 5.2%, from the same period in
2002. The increase was primarily attributable to the net increase in sales at
the company-operated sites added to, or eliminated from, our network during 2002
and 2003, and also to an increase in non-fuel sales on a same-site basis of 2.4%
for the year ended December 31, 2003 versus the same period in 2002. We believe
the same-site increase reflected increased customer traffic resulting, in part,
from the significant capital improvements that we have made in the network under
our capital investment program to re-image, re-brand and upgrade our travel
centers.
Rent and royalty revenues for the year ended December 31, 2003
reflected a $2.5 million, or 15.8%, decrease from the same period in 2002. This
decrease was primarily attributable to the rent and royalty revenue lost as a
result of the conversions of leased sites to company-operated sites, partially
offset by a 2.5% increase in same-site royalty revenue that results from
increased levels of retail sales by our franchisees, and a 2.1% increase in
same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the year
ended December 31, 2003 was $501.5 million, compared to $481.2 million for the
same period in 2002, an increase of $20.3 million, or 4.2%. The increase in our
gross profit was due to increased total fuel sales volumes, increased non-fuel
sales, increased average total fuel margin per gallon and higher non-fuel profit
margin percentage, partially offset by the decline in rent and royalty revenues.
The increase in average total fuel margin per gallon resulted from unusually
high margins in certain months in the first half of 2003 and is not indicative
of an expected trend. On the contrary, fuel margins declined in the second half
of 2003.
Operating and Selling, General and Administrative Expenses.
Operating expenses included the direct expenses of company-operated sites and
the ownership costs of leased sites. Selling, general and administrative
expenses included corporate overhead and administrative costs.
Our operating expenses increased by $9.8 million, or 3.0%, to $342.0
million for the year ended December 31, 2003 compared to $332.2 million for the
same period in 2002. This increase was attributable to an $8.8 million net
increase resulting from company-operated sites we added to our network or
eliminated from our network during 2002 and 2003, and a 0.7% increase in
operating expenses on a same-site basis. The increases in
26
operating expenses were partially offset by the recognition of a $3.75 million
cash receipt upon the settlement of a legal claim in the fourth quarter of 2003.
On a same-site basis, operating expenses as a percentage of non-fuel revenues
for the year ended December 31, 2003 were 52.4%, compared to 53.3% for the same
period in 2002, reflecting the results of our cost-control measures at our
sites.
Our selling, general and administrative expenses for the year ended
December 31, 2003 were $40.5 million, which reflected an increase of $2.7
million, or 7.2% from the same period in 2002. This increase is primarily
attributable to increased insurance premiums and increased legal and audit fees,
as well as higher personnel costs driven largely by increased benefit costs.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 2003 was $60.4 million, compared to
$60.3 million for the same period in 2002. This increase of $0.1 million, or
0.1%, was attributable to depreciation of an increased level of depreciable
assets as compared to 2002 and an increase of $0.4 million related to asset
retirement obligations, partially offset by a $1.2 million decrease in
amortization of intangible assets and a $0.6 million decrease in the amount of
impairment charges recognized in 2003 as compared to 2002.
Income from Operations. We generated income from operations of $60.0
million for the year ended December 31, 2003, compared to income from operations
of $51.9 million for the same period in 2002. This increase of $8.0 million, or
15.5%, was primarily attributable to the increase in gross profit that was
partially offset by the increase in operating expenses and selling, general and
administrative expenses. The $0.4 million increase in gains on sales of property
and equipment also contributed to the increase in operating income.
Interest and Other Financial Costs -- Net. Interest and other
financial costs, net, for the year ended December 31, 2003 decreased by $4.5
million, or 8.8%, compared to 2002. This decrease resulted from the decline in
interest rates during 2002 and 2003 as well as from the decrease in our
indebtedness.
Income Taxes. Our effective income tax rates for the years ended
December 31, 2003 and 2002 were 34.0% and a 3.2% benefit, respectively. These
rates differed from the federal statutory rate due primarily to state income
taxes and nondeductible expenses, partially offset by the effect of certain tax
credits. The change between years in the effective tax rate was primarily the
result of the change from a relatively low level of pre-tax income earned in
2002, as well as an adjustment in 2002 of estimated prior year tax liabilities,
to a higher level of taxable income in 2003. As a result of the relatively low
level of pre-tax earnings in 2002, permanent differences had a larger effect on
the effective rate in 2002 than in 2003.
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 $0.6 million,
increased property and equipment by $0.2 million and recognized a one-time
cumulative effect charge of $0.3 million (net of deferred tax benefit of $0.2
million).
27
RIP GRIFFIN ACQUISITION - PRO FORMA INFORMATION
On December 1, 2004, we acquired from Rip Griffin Truck Service Center,
Inc. the assets related to eleven travel centers. The results from these eleven
sites were included in our results, as discussed above, from that date. The
following unaudited pro forma information presents our results of operations as
if the acquisition of the Rip Griffin sites had taken place on January 1, 2003.
YEAR ENDED DECEMBER 31,
-------------------------------
2003 2004
------------ ------------
(IN MILLIONS OF DOLLARS)
Total revenue..................................................... $ 2,361.3 $ 2,880.0
Gross profit...................................................... $ 550.1 $ 577.9
Income before extraordinary item and accounting change............ $ 11.7 $ 18.1
Net income........................................................ $ 11.5 $ 18.1
These pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations that actually would have resulted had the acquisition occurred on
January 1, 2003, or that may result in the future.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
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 under the 2004 Credit
Agreement provides us a secondary source of liquidity, primarily to better match
the timing of cash expenditures to the timing of our cash receipts primarily due
to effects of changes in petroleum product prices, the uneven level of capital
expenditures throughout the year and the timing of debt and interest payments.
The primary risks we face with respect to the expected levels of
operating cash flows are a decrease in the demand of our customers for our
products and services, increases in crude oil and/or petroleum product prices
and increases in interest rates. It is reasonably likely that interest rates and
petroleum product prices will increase during 2005 from levels that existed
during 2004, possibly to levels greater than that contemplated in our
expectations. If the economy stagnates or worsens, our customers could be
adversely affected, which could further intensify competition within our
industry and reduce the level of cash we could generate from our operations. A
one-percentage point increase in interest rates increases our annual cash
outlays by approximately $5.0 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 the 2004 Credit Agreement. Should our
level of sales volume or interest rate and petroleum products price levels vary
adversely and very significantly from expectations, it is possible 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 2004 and as of December 31, 2004, and we expect to remain in
compliance with all of our debt covenants throughout 2005. See "Adjusted EBITDA
and Debt Covenant Compliance" below for further discussion.
28
We anticipate that we will be able to fund our 2005 working capital
requirements and capital expenditures primarily from funds generated from
operations, supplemented, to the extent necessary, from borrowings under our
revolving credit facility. Our long-term liquidity requirements, including
capital expenditures, are expected to be financed by a combination of internally
generated funds, borrowings and other sources of external financing as needed.
Our ability to fund our capital investment requirements, interest and principal
payment obligations and working capital requirements and to comply with all of
the financial covenants under our debt agreements depends on our future
operations, performance and cash flow. These are subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond our control. The expected level of capital expenditures, including
business acquisitions but net of proceeds from asset sales, for 2005 is
approximately $80 million. The 2005 capital investment plan is largely composed
of growth-related projects such as expanding our truck repair and maintenance
facilities, site re-image projects, adding QSRs, upgrading retail stores and
restaurants, and building one new prototype travel center. The plan also
includes approximately $9 million to rebrand and re-image the Rip Griffin sites
acquired in December 2004. Given our forecasted level of cash flows from
operations for 2005 and our planned level of capital expenditures, we expect
that during 2005 we will make our scheduled debt repayments of $0.2 million and
we will also repay the $25.0 million of outstanding borrowings under our
revolving credit facilities. We also expect to refinance our Senior Subordinated
Notes due 2009 no later than November 2005, at which time they are callable at
106.375% of their face value.
2004 REFINANCING
On December 1, 2004, we completed a refinancing, which we refer to
as the "2004 Refinancing." In the 2004 Refinancing, we borrowed $500 million
under an Amended and Restated Credit Agreement that we refer to as the 2004
Credit Agreement. The 2004 Credit Agreement included a fully-drawn $475 million
term loan facility and a $125 million revolving credit facility under which $25
million was drawn at closing. The proceeds from these borrowings were utilized
to:
- repay all amounts, including accrued interest, outstanding under the
existing amended and restated credit agreement into which we had
entered in November 2000 and which we refer to as the 2000 Credit
Agreement;
- pay for the acquisition of the assets acquired from Rip Griffin;
- terminate the master lease facility under which since 1999 we built
eight travel centers on land we owned, thereby gaining ownership of
the improvements at those eight sites; and
- pay fees and expenses related to the financing and the acquisition
transactions.
HISTORICAL CASH FLOWS
Net cash provided by operating activities totaled $97.1 million in
2004, $77.3 million in 2003 and $75.6 million in 2002. The $19.8 million
increase in cash provided by operations for 2004 as compared to 2003 was
primarily attributable to an increase in our operating profitability and a $14.8
million increase in cash generated from changes in working capital. The
increases in the accounts receivable, inventories, and accounts payable balances
for 2004 as compared to 2003 were attributable to the significant increases in
diesel fuel and gasoline commodity prices in the United States that primarily
resulted from significant increases in world crude oil prices. The $1.7 million
increase in cash from operations in 2003 as compared to 2002 was primarily due
to the $8.0 million increase in operating income and $4.6 million decrease in
interest expense, partially offset by a $7.1 million reduction in cash generated
from working capital changes.
Net cash used in investing activities for 2004 was $235.2 million,
as compared to $50.5 million in 2003 and $42.1 million in 2002. During 2004, we
invested $125.5 million to acquire eleven operating travel centers from Rip
Griffin and another $0.6 million to convert two leased sites to company-operated
sites. We also generated proceeds of $13.8 million during 2004 from asset sales,
including the sale of our stake in an equity investee. During 2004, we invested
$65.2 million to acquire the improvements at eight company-operated sites that
we had been leasing under
29
our master lease facility that we terminated as part of the 2004 Refinancing,
and also invested another $57.7 million of capital expenditures across our
network. During 2003, we invested $10.2 million to acquire two operating travel
centers and to convert six leased sites to company-operated sites. In 2003 we
also generated proceeds from asset sales of $3.9 million and invested $44.2
million of capital expenditures, including the purchase of a parcel of land on
which to construct a future travel center. During 2002, we made capital
expenditures of $42.6 million, invested $4.2 million to convert five leased
sites to company-operated sites and generated proceeds from the sales of assets
of $4.8 million.
During 2004, financing activities provided us $168.9 million of cash,
primarily as a result of the 2004 Refinancing, which provided a net cash inflow
of $203.9 million that primarily was used to acquire the Rip Griffin sites and
to terminate the master lease facility (see the description of our indebtedness
below). Prior to the 2004 Refinancing, during 2004 we had repaid $24.0 million
and $13.6 million, respectively, of our term loan and revolving credit facility
borrowings, including $21.8 million of mandatory term loan prepayments resulting
from Excess Cash Flows generated in 2003 and from our sale of our investment in
an equity investee. During 2003, we used $26.1 million of cash in financing
activities, primarily paying down our term loan and revolving loan facility by
$23.3 million. We used $39.3 million of cash in financing activities during
2002, primarily to reduce our debt. We made net repayments of outstanding
borrowings under our revolving credit facility of $21.5 million and made
scheduled debt payments of $3.4 million. We also reduced the amount of our
outstanding checks in excess of funds on deposit by $14.1 million.
DESCRIPTION OF INDEBTEDNESS
The 2004 Credit Agreement provides senior secured financing of up to
$600.0 million, consisting of a $475.0 million term loan facility that matures
in December 2011 and a $125.0 million revolving credit facility that matures in
December 2009, provided that both the term loan facility and the revolving
credit facility will mature in October 2008 if we do not refinance our Senior
Subordinated Notes due 2009 with qualified indebtedness prior to that time. We
have pledged substantially all of our assets as collateral under the 2004 Credit
Agreement. At December 31, 2004, we had outstanding revolving loan borrowings
and issued letters of credit of $25.0 million and $27.7 million, respectively,
leaving $72.3 million of our $125 million revolving credit facility available
for borrowings. The term loan facility and the revolving credit facility bear
interest at a rate equal to:
- in the case of the term loan facility, Adjusted LIBOR plus a spread
of 1.75% or, at our election, the alternate base rate plus a spread
of 0.75%; or
- in the case of the revolving credit facility, Adjusted LIBOR plus a
spread that ranges from 2.25% down to 1.75% or, at our election, the
alternate base rate plus a spread that ranges from 1.25% down to
0.75%. The spread in effect is based on our Leverage Ratio (as
defined in the 2004 Credit Agreement) according to the following
grid:
ABR LIBOR
Leverage Ratio Spread Spread
-------------- ------ ------
Equal to or greater than 4.0 to 1.0..................................... 1.25% 2.25%
Less than 4.0 to 1.0 but equal to or greater than 3.5 to 1.0............ 1.00% 2.00%
Less than 3.5 to 1.0.................................................... 0.75% 1.75%
In addition to paying interest on outstanding principal under the 2004
Credit Agreement, we are required to pay a commitment fee to the lenders under
the revolving credit facility equal to 0.50% per year of the unused commitments
thereunder.
30
The 2004 Credit Agreement obligates us to make annual mandatory
prepayments of term loan indebtedness equal to one-half of the Excess Cash Flow
amount (as defined in the 2004 Credit Agreement) generated in the previous year.
Before giving effect to any such prepayments that may be required in the future,
and assuming our Senior Subordinated Notes due 2009 are appropriately refinanced
prior to October 2008, the term loan facility will amortize each year in
quarterly amounts, beginning on March 31, 2006, in the following aggregate
principal amounts for each year set forth below.
YEAR ENDED PRINCIPAL
DECEMBER 31, REPAYMENTS
------------ ----------
2005................................................ $ -
2006................................................ 4,750,000
2007................................................ 4,750,000
2008................................................ 4,750,000
2009................................................ 4,750,000
2010................................................ 4,750,000
2011................................................ 451,250,000
---------------
Total............................................... $ 475,000,000
===============
Principal amounts outstanding under the revolving credit facility are due
and payable in full at maturity in December 2009, provided however that if we
have not refinanced our Senior Subordinated Notes due 2009 prior to October 1,
2008, the revolving credit facility will mature on October 1, 2008 and all
outstanding principal amounts will be due and payable in full.
The 2004 Credit Agreement contains a number of covenants that, among other
things, restrict our ability to dispose of assets, incur additional
indebtedness, incur guarantee obligations, repay other indebtedness, make
certain restricted payments and dividends, create liens on assets, make
investments, loans or advances, make certain acquisitions, engage in mergers or
consolidations, engage in material businesses other than our current businesses,
make capital expenditures, enter into sale and leaseback transactions, or engage
in certain transactions with affiliates.
We have outstanding at December 31, 2004, Senior Subordinated Notes due in
2009 with an aggregate face amount of $190 million. The Senior Subordinated
Notes due 2009 were issued in November 2000. Our obligations under the notes are
junior in right of payment to all of our existing and future senior
indebtedness, including all indebtedness under the Senior Credit Facility. The
indenture restricts, among other things, our ability to incur additional
indebtedness, issue shares of disqualified stock and preferred stock, pay
dividends or make certain other restricted payments and enter into certain
transactions with affiliates, and prohibits certain restrictions on the ability
of our subsidiaries to pay dividends or make certain payments to us, and
contains certain restrictions on our ability to merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of our assets.
In the event of a change in control (as defined in the relevant
instruments) of the company, the total amount outstanding under the debt
agreements described above may be declared immediately due and payable.
As of December 31, 2004, $3.9 million was outstanding under a note payable
by us to a former operator of a site, which we refer to as the Santa Nella Note.
The note bears interest at an annual rate of 5%, requires quarterly principal
and interest payments of $98,000 through October 1, 2018 and is collateralized
by the real estate and improvements located at the site.
ADJUSTED EBITDA AND DEBT COVENANT COMPLIANCE
Adjusted EBITDA, as used here, is based on the definition of "EBITDA" in
our bank debt agreement and consists of net income plus the sum of (a) income
taxes, (b) interest expense, net, (c) depreciation, amortization and other
noncash charges, (d) transition expense, (e) extraordinary losses and cumulative
effects of accounting changes
31
and (f) the costs of the merger and recapitalization transactions. We have
included this information concerning Adjusted EBITDA because Adjusted EBITDA is
a primary component for calculating the financial ratio covenants in our debt
agreements. We also use Adjusted EBITDA as a basis for determining bonus
payments to our corporate and site-level management employees and as a key
component in the formula for calculating the fair value of our redeemable common
stock and stock options. Adjusted EBITDA should not be considered in isolation
from, or as a substitute for, net income, income from operations, cash flows
from operating activities or other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles. While
the non-GAAP measures "EBITDA" and "Adjusted EBITDA" are frequently used by
other companies as measures of operations and/or ability to meet debt service
requirements, Adjusted EBITDA as we use the term is not necessarily comparable
to similarly titled captions of other companies due to differences in methods of
calculation.
We consider the 2004 Credit Agreement to be a material agreement. A
majority of our outstanding indebtedness has been borrowed under the 2004 Credit
Agreement. Further, the 2004 Credit Agreement 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 2005. 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
the 2004 Credit Agreement declaring our indebtedness under the 2004 Credit
Agreement immediately due and payable. However, we believe the more likely
consequence would be the negotiation of a waiver and/or amendment of the
covenants, which is reasonably likely to require us to pay a significant amount
of fees to the lenders and legal counsel and to further limit our ability to
make cash disbursements, such as for capital expenditures. The following table
sets forth the calculation of Adjusted EBITDA and information related to the
debt covenant financial ratios.
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2003 2004
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Net income................................................. $ 1,271 $ 8,891 $ 14,862
Adjustments to reconcile net income to Adjusted EBITDA:
Cumulative effect of a change in accounting principle... - 253 -
Provision (benefit) for income taxes.................... (39) 4,719 8,472
Interest and other financial costs, net................. 51,423 46,878 47,760
Depreciation and amortization expense................... 60,301 60,375 58,750
Transition expense...................................... - - 665
Other non-cash charges (credits), net................... 605 805 979
----------- ----------- -----------
Adjusted EBITDA............................................ $ 113,561 $ 121,921 $ 131,488
=========== =========== ===========
32
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2003 2004
---------- ----------- ------------
(IN THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Interest expense coverage ratio:
Actual ratio at period end................................... 2.42x 2.91x 3.25x
Required ratio at period end (no less than).................. 1.80x 2.00x 2.50x(1)
Minimum amount of Adjusted EBITDA to meet required ratio..... $ 84,625 $ 83,913 N/A(1)
Leverage ratio:
Actual ratio at period end(2)................................ 4.55x 4.04x 4.16x
Required ratio at period end (no greater than)............... 4.65x 4.15x 5.50x(1)
Minimum amount of Adjusted EBITDA to meet required ratio..... $ 111,192 $ 118,767 N/A(1)
(1) The first covenant test under the 2004 Credit Agreement is as of March 31,
2005. The required ratios presented are the requirements for that date.
There are no required minimum or maximum ratio levels as of December 31,
2004.
(2) The 2004 Credit Agreement specifies amounts to be added to our actual
Adjusted EBITDA amounts in order to determine pro forma Adjusted EBITDA
amounts to be used in the covenant tests during 2005 in order to adjust
for the historical results of the sites acquired from Rip Griffin and the
termination of our master lease agreement, each of which transaction was
funded through the 2004 Refinancing. The pro forma Adjusted EBITDA amount
used in this calculation for 2004 was $153,802,000.
OFF-BALANCE SHEET ARRANGEMENTS
On September 9, 1999, we entered into a master lease program with a lessor
that was used to finance the construction of eight travel centers on land we
own. As part of the 2004 Refinancing, we purchased the leased assets from the
lessor and terminated the master lease facility. We have no off-balance sheet
arrangements as of December 31, 2004.
SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our expected obligations to make future
required payments under various types of agreements.
PAYMENTS DUE BY PERIOD
------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2005 2006-2007 2008-2009 THEREAFTER
------ ------ --------- --------- ----------
(IN MILLIONS OF DOLLARS)
Long-term debt(1) .................... $693.9 $ 0.2 $ 9.9 $225.0 $458.8
Operating leases ..................... 133.4 13.8 24.3 17.5 77.8
Other long-term liabilities(2) ....... 21.6 8.5 8.5 3.7 0.9
------ ------ ------ ------ ------
Total contractual cash obligations.... $848.9 $ 22.5 $ 42.7 $246.2 $537.5
====== ====== ====== ====== ======
(1) Excludes interest. Also, the $225.0 million for 2008-2009 includes $25.0
million of revolving credit facility borrowings when they are
contractually due, however, we intend to repay that amount during 2005.
(2) We have an obligation to make future payments to redeem common stock of
certain of our management employees upon the death, disability or
scheduled retirement of the employees. Neither the timing nor the amounts
of any such payments can be accurately estimated and no amount for these
payments is included in the table above. As of December 31, 2004, the
aggregate amount of these future redemption payments, assuming our Board
of Directors would not modify the formula for calculating the fair market
value per share, would be approximately $6.5 million.
Our only commercial commitments of any significance as of December 31,
2004 were the $27.7 million of standby letters of credit we had outstanding.
33
LEVERAGED RECAPITALIZATION
On May 31, 2000, we and shareholders owning a majority of our voting stock
entered into a recapitalization agreement and plan of merger, as subsequently
amended, with TCA Acquisition Corporation, a newly created corporation formed by
Oak Hill Capital Partners, L.P. and its affiliates, under which TCA Acquisition
Corporation agreed to merge with and into us. This merger was completed on
November 14, 2000. Concurrent with the closing of the merger, we completed a
series of transactions to effect a recapitalization that included the following.
- TCA Acquisition Corporation issued 6,456,698 shares of common stock
to Oak Hill and the Other Investors for proceeds of $205.0 million
and then merged with and into us. We incurred $3.0 million of fees
and expenses related to the issuance of these shares of common
stock. These stock issuance costs were charged against additional
paid-in capital.
- We redeemed all shares of our common and preferred stock outstanding
prior to the closing of the merger, with the exception of 473,064
shares of common stock with a market value at that time of $15.0
million that were retained by continuing stockholders, and cancelled
all outstanding common stock options and warrants, for cash payments
totaling $263.2 million.
- All shares of treasury stock were cancelled.
After the transactions described above, Oak Hill owned 60.5% of our
outstanding common stock, the Other Investors owned, in the aggregate, 32.7% of
our outstanding common stock, Freightliner owned 4.3% of our outstanding common
stock and certain members of our management owned 2.5% of our outstanding common
stock. The total amount of our equity capitalization after these transactions,
given the $31.75 per share merger consideration that was paid in our merger and
recapitalization transactions, was $220.0 million. The transactions described
above, which resulted in a change of control of us, have been accounted for as a
leveraged recapitalization, as opposed to a purchase business combination, since
the change of control was effected through issuance of new shares to our new
control group in conjunction with a redemption of most of our then outstanding
equity securities. We followed leveraged recapitalization accounting because of
the significance of the ownership interest in us that was retained by continuing
stockholders. In accounting for our leveraged recapitalization, we retained the
historical cost bases of our assets and liabilities and consequently recorded
charges totaling $179.0 million to our equity accounts upon the redemption of
equity securities. This accounting treatment contrasts with that followed in a
purchase business combination, in which a company reflects the new basis in its
assets and liabilities of its new control group by increasing or decreasing its
historical balances based on the estimated fair values at that time and avoids
the charge to equity that accompanies the redemption of equity securities. Based
on a limited appraisal of our owned network sites performed in connection with
the merger and recapitalization transactions, the estimated fair value of our
sites at June 15, 2000 was approximately $1.05 billion.
ENVIRONMENTAL MATTERS
We own and operate underground storage tanks and aboveground storage tanks
at company-operated sites and leased sites that must comply with Environmental
Laws. We have estimated the current ranges of remediation costs at currently
active sites and what we believe will be our ultimate share for those costs and,
as of December 31, 2004, we had a reserve of $13.2 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 $5.3
million of cash in an escrow account to fund certain of these estimated
expenditures, leaving an estimated net amount of $4.1 million to be funded from
future operating cash flows. We estimate that the gross cash outlays related to
the matters for which we have accrued this reserve will be approximately $4.6
million in 2005; $3.0 million in 2006; $2.4 million in 2007; $1.7 million in
2008; $1.4 million in 2009 and $0.1 million 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. 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.
34
We have obtained insurance of up to $35.0 million for known and up to $40.0
million for unknown environmental liabilities, subject, in each case, to certain
limitations. While it is not possible to quantify with certainty our
environmental exposure, we believe that the potential liability, beyond that
considered in the reserve, for all environmental proceedings, based on
information known to date, will not have a material adverse effect on our
financial condition, results of operations or our liquidity. For further
discussion of environmental matters, see the "Business - Regulation" section of
this annual report and the footnotes to the audited consolidated financial
statements included elsewhere in this annual report.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FIN 46R. In December 2003, the FASB issued revised FIN 46R, "Consolidation
of Variable Interest Entities." We must adopt this accounting guidance effective
January 1, 2005. It had been our intention to consolidate into our consolidated
financial statements the entity that was the lessor under our master lease
program covering eight of our sites. However, as part of the 2004 Refinancing,
we purchased the leased assets from the lessor and terminated the master lease
facility, so we will not apply FIN 46R with respect to that terminated
arrangement. We evaluated whether FIN 46R will require consolidation of our
franchisees, and have determined that it will not.
FAS 123R. In December 2004, the FASB issued a revision of FAS 123,
"Share-Based Payment" (FAS 123R). FAS 123R requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. The cost to be recognized will be measured based on the fair value
of the equity or liability instruments issued. The scope of FAS 123R includes a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. FAS 123R replaces FAS 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." As originally issued in 1995, FAS
123 established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that statement
permitted entities the option of continuing to apply the guidance of APB 25 as
long as the footnotes to the financial statements disclosed what net income
would have been had the preferable fair-value-based method been used. At that
time, we determined to continue to apply the guidance of APB 25 and make the
required disclosures in our financial statement footnotes. Accordingly, we will
be required to change our method of accounting for stock compensation costs. We
will be required to adopt FAS 123R as of January 1, 2006. FAS 123R applies only
to those awards granted or which become vested after the required effective
date. We expect that the adoption of FAS 123R in the first quarter of 2006 will
have no material effect on our results of operations, financial condition or
cash flows.
FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate
to our future prospects, developments and business strategies. The statements
contained in this annual report that are not statements of historical fact may
include forward-looking statements that involve a number of risks and
uncertainties. We have used the words "may," "will," "expect," "anticipate,"
"believe," "estimate," "plan," "intend" and similar expressions in this annual
report to identify forward-looking statements. These forward-looking statements
are made based on our expectations and beliefs concerning future events
affecting us and are subject to uncertainties and factors relating to our
operations and business environment, all of which are difficult to predict and
many of which are beyond our control, that could cause our actual results to
differ materially from those matters expressed in or implied by forward-looking
statements. The following factors are among those that could cause our actual
results to differ materially from the forward-looking statements:
- competition from other travel center and truck stop operators,
including additional or improved services or facilities of
competitors, and from the potential commercialization of state-owned
interstate rest areas;
- the economic condition of the trucking industry, which in turn is
dependent on general economic factors;
35
- increased environmental regulation;
- changes in governmental regulations;
- changes in interest rates;
- diesel fuel and gasoline pricing;
- availability of diesel fuel and gasoline supply;
- ability to refinance our Senior Subordinated Notes due 2009;
- success of new business ventures, including the risks that the Rip
Griffin sites acquired and any other businesses or investments that
we have acquired or may acquire may not be successfully integrated
into our current business operations; and
- availability of sufficient qualified personnel to staff
company-operated sites.
All of our forward-looking statements should be considered in light of
these factors and all other risks discussed from time to time in our filings
with the Securities and Exchange Commission. We do not undertake to update our
forward-looking statements or risk factors to reflect future events or
circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to commodity price risk and interest rate risk. Our fuel
purchase contracts provide for purchase prices based on average market prices
for diesel fuel and gasoline, exposing us to commodity price risk. We mitigate
this risk exposure in several ways, but primarily by holding less than three
days of diesel fuel inventory at our sites and selling a large portion of our
fuel volume on the basis of a daily industry index of average fuel costs plus a
pumping fee, which minimize the effect on our margins of sudden sharp changes in
commodity market prices. We manage the price exposure related to sales volumes
not covered by the daily industry index pricing formulae through the use, from
time to time, on a limited basis, of derivative instruments designated by
management as hedges of anticipated purchases. We had no open derivative
contracts at any point in time during the year ended December 31, 2004.
The interest rate risk faced by us results from our highly-leveraged
position and our level of variable rate indebtedness, the rates for which are
based on short-term lending rates, primarily the London Interbank Offered Rate.
From time to time, we may use interest rate protection agreements to reduce our
exposure to market risks from changes in interest rates by fixing interest rates
on variable rate debt and reducing certain exposures to interest rate
fluctuation. Amounts due to or from interest rate protection agreement
counterparties are recorded in interest expense in the period in which they
accrue. During 2004, we were involved in no interest rate protection agreements.
36
The following table summarizes information about our financial instruments
that are subject to changes in interest rates:
DECEMBER 31, 2004
----------------------------------------------------
FIXED RATE VARIABLE RATE
INDEBTEDNESS INDEBTEDNESS
-------------------------- ------------------------
PRINCIPAL WEIGHTED PRINCIPAL WEIGHTED
PAYMENT AVERAGE PAYMENT AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
----------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
Year Ended December 31:
2005................................... $ 198 12.60% $ - 4.32%
2006................................... 209 12.60% 4,750 4.32%
2007................................... 219 12.61% 4,750 4.32%
2008................................... 230 12.62% 4,750 4.32%
2009................................... 190,242 12.51% 29,750 4.32%
Thereafter.................................. 2,817 5.0% 456,000 4.32%
----------- ---------
Total....................................... $ 193,915 12.47% $ 500,000 4.32%
=========== =========
Fair value.................................. $ 223,130 $ 500,000
=========== =========
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Data:
PAGE
----
Financial Statements:
Report of Independent Registered Public Accounting Firm ........................................... 39
Consolidated Balance Sheet at December 31, 2003 and 2004 .......................................... 40
Consolidated Statement of Income and Comprehensive Income for each of the three years in the period
ended December 31, 2004 ......................................................................... 41
Consolidated Statement of Cash Flows for each of the three years in the period ended December
31, 2004 ........................................................................................ 42
Consolidated Statement of Nonredeemable Stockholders' Equity for each of the three years in
the period ended December 31, 2004 .............................................................. 43
Notes to the Consolidated Financial Statements .................................................... 44
Financial Statement Schedule:
II - Valuation and Qualifying Accounts ............................................................ 80
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of TravelCenters of America, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of TravelCenters of America, Inc. and its subsidiaries at December 31,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 3, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" as of January 1, 2003.
/S/ PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
March 24, 2005
39
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
------------------------
2003 2004
--------- ---------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 15,005 $ 45,846
Accounts receivable (less allowance for doubtful accounts of $1,707 for 2003
and $1,606 for 2004) ....................................................... 42,987 61,484
Inventories ................................................................... 63,981 75,907
Deferred income taxes ......................................................... 3,823 6,952
Other current assets .......................................................... 6,962 8,347
--------- ---------
Total current assets ..................................................... 132,758 198,536
Property and equipment, net ...................................................... 438,133 604,359
Goodwill ......................................................................... 25,584 48,898
Deferred financing costs, net .................................................... 24,012 28,289
Deferred income taxes ............................................................ 14,519 4,363
Other noncurrent assets .......................................................... 15,561 13,284
--------- ---------
Total assets ............................................................. $ 650,567 $ 897,729
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......................................... $ 3,354 $ 198
Accounts payable .............................................................. 59,754 88,754
Other accrued liabilities ..................................................... 50,020 61,800
--------- ---------
Total current liabilities ................................................ 113,128 150,752
Commitments and contingencies - -
Long-term debt (net of unamortized discount) ..................................... 502,033 682,892
Deferred income taxes ............................................................ 2,137 1,156
Other noncurrent liabilities ..................................................... 8,318 23,212
--------- ---------
625,616 858,012
Redeemable equity ................................................................ 1,909 1,864
Nonredeemable stockholders' equity:
Common stock and other nonredeemable stockholders' equity ..................... 216,919 216,868
Accumulated deficit (Note 15) ................................................. (193,877) (179,015)
--------- ---------
Total nonredeemable stockholders' equity ................................... 23,042 37,853
--------- ---------
Total liabilities, redeemable equity and nonredeemable stockholders' equity $ 650,567 $ 897,729
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
40
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2003 2004
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel .......................................................... $ 1,237,989 $ 1,513,648 $ 1,959,239
Non-fuel ...................................................... 617,342 649,502 707,958
Rent and royalties ............................................ 15,539 13,080 10,667
----------- ----------- -----------
Total revenues ............................................ 1,870,870 2,176,230 2,677,864
Cost of goods sold (excluding depreciation):
Fuel .......................................................... 1,136,368 1,408,728 1,857,160
Non-fuel ...................................................... 253,312 266,038 289,867
----------- ----------- -----------
Total cost of goods sold (excluding depreciation) ......... 1,389,680 1,674,766 2,147,027
----------- ----------- -----------
Gross profit (excluding depreciation) ............................ 481,190 501,464 530,837
Operating expenses ............................................... 332,223 342,045 361,504
Selling, general and administrative expenses ..................... 37,818 40,543 43,180
Transition expense ............................................... - - 665
Depreciation and amortization expense ............................ 60,301 60,375 58,750
(Gain) on asset sales ............................................ (1,089) (1,476) (2,547)
----------- ----------- -----------
Income from operations ........................................ 51,937 59,977 69,285
Equity in earnings of affiliate .................................. 718 764 194
Gain on sale of investment ....................................... - - 1,615
Interest and other financial costs, net .......................... (51,423) (46,878) (47,760)
----------- ----------- -----------
Income before income taxes and the cumulative effect of a change
in accounting principle ....................................... 1,232 13,863 23,334
Provision for income taxes ....................................... (39) 4,719 8,472
----------- ----------- -----------
Income before the cumulative effect of a change in accounting
principle ..................................................... 1,271 9,144 14,862
Cumulative effect of a change in accounting, net of related taxes
(Note 3) ...................................................... - (253) -
----------- ----------- -----------
Net income ............................................. 1,271 8,891 14,862
Other comprehensive income (expense), net of tax (Note 5):
Unrealized (loss) gain on derivative instruments............. 1,920 - -
Foreign currency translation adjustments .................... - 804 318
----------- ----------- -----------
Comprehensive income ................................... $ 3,191 $ 9,695 $ 15,180
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
41
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2003 2004
-------- -------- ---------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 1,271 $ 8,891 $ 14,862
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of a change in accounting principle, net of
related tax .................................................... - 253 -
Depreciation and amortization .................................... 60,301 60,375 58,750
Amortization of deferred financing costs ......................... 3,050 3,440 3,882
Financing costs expensed upon extinguishment of debt ............. - - 1,699
Deferred income tax provision .................................... 2,690 3,535 5,974
Provision for doubtful accounts .................................. 1,100 1,180 307
(Gain) on asset sales ............................................ (1,089) (1,476) (4,162)
Changes in assets and liabilities, adjusted for the effects of
business acquisitions:
Accounts receivable ............................................ (2,194) (1,360) (19,235)
Inventories .................................................... (3,819) (361) (6,321)
Other current assets ........................................... (282) 1,233 (1,255)
Accounts payable and other accrued liabilities ................. 18,282 3,646 40,504
Other, net ....................................................... (3,736) (2,032) 2,141
-------- -------- ---------
Net cash provided by operating activities ........................ 75,574 77,324 97,146
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions ............................................... (4,243) (10,190) (126,117)
Proceeds from asset sales ........................................... 4,773 3,900 13,816
Capital expenditures ................................................ (42,640) (44,196) (122,919)
-------- -------- ---------
Net cash used in investing activities ............................ (42,110) (50,486) (235,220)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in excess of bank balances ...... (14,062) (2,598) 2,934
Revolving loan borrowings (repayments), net ......................... (21,500) (8,800) 11,400
Long-term debt repayments ........................................... (3,409) (14,688) (310,401)
Long-term debt borrowings ........................................... - - 475,000
Debt issuance costs ................................................. - - (9,857)
Other ............................................................... (334) - (158)
-------- -------- ---------
Net cash provided by (used in) financing activities .............. (39,305) (26,086) 168,918
-------- -------- ---------
Effect of exchange rate changes on cash .......................... - 206 (3)
-------- -------- ---------
Net increase (decrease) in cash .................................. (5,841) 958 30,841
Cash and cash equivalents at the beginning of the year ................. 19,888 14,047 15,005
-------- -------- ---------
Cash and cash equivalents at the end of the year ....................... $ 14,047 $ 15,005 $ 45,846
======== ======== =========
The accompanying notes are an integral part of these consolidated
financial statements.
42
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2003 2004
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
COMMON STOCK:
Balance at beginning and end of year ........................... $ 3 $ 3 $ 3
========= ========= =========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year ................................... $ 217,290 $ 217,290 $ 216,112
Accretion of redeemable equity .......................... - (1,178) (369)
--------- --------- ---------
Balance at end of year ......................................... $ 217,290 $ 216,112 $ 215,743
========= ========= =========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year ................................... $ (1,920) $ - $ 804
Change in fair value of interest rate swap agreement, net
of tax .............................................. 1,920 - -
Foreign currency translation adjustments, net of tax .... - 804 318
--------- --------- ---------
Balance at end of year ......................................... $ - $ 804 $ 1,122
========= ========= =========
ACCUMULATED DEFICIT:
Balance at beginning of year ................................... $(204,039) $(202,768) $(193,877)
Net income .............................................. 1,271 8,891 14,862
--------- --------- ---------
Balance at end of year ......................................... $(202,768) $(193,877) $(179,015)
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
43
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the North American highway
system to serve long-haul trucking fleets and their drivers, independent truck
drivers and general motorists. At December 31, 2004, our geographically diverse
nationwide network of full-service travel centers consisted of 160 sites located
in 41 states and the province of Ontario, Canada. Our operations are conducted
through three distinct types of travel centers:
- sites 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.
At December 31, 2004, our network consisted of 138 company-operated sites,
12 leased sites and 10 franchisee-owned sites. During 2004, we converted two
leased sites to company-operated sites, sold two company-operated sites and
added twelve existing company-operated sites to our network.
Our travel centers are located at key points along the U.S. interstate
highway system and in Canada, typically on 20- to 25-acre sites. Operating under
the "TravelCenters of America" and "TA" brand names, our nationwide network
provides our customers with diesel fuel and gasoline as well as non-fuel
products and services such as truck repair and maintenance services,
full-service restaurants, fast food restaurants, travel and convenience stores
and other driver amenities. We also collect rents and franchise royalties from
the franchisees who operate the leased sites and franchisee-owned sites and, as
a franchisor, assist our franchisees in providing service to long-haul trucking
fleets and their drivers, independent truck drivers and general motorists.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of
TravelCenters of America, Inc. and its wholly owned subsidiaries, TA Operating
Corporation and TA Franchise Systems Inc., as well as TA Licensing, Inc., TA
Travel, L.L.C., 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.
Revenue Recognition
Sales revenues and related costs are recognized at the time of delivery of
motor fuel to customers at either the terminal or the customer's facility for
wholesale fuel sales and at the time of final sale to consumers at our
company-operated sites for retail fuel and non-fuel sales. The estimated cost to
us of the redemption by customers of our loyalty program points is recorded as a
discount against gross sales in determining the net sales amount presented in
our consolidated statement of operations.
44
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For those travel centers that we own but lease to a franchisee, rent
revenue is recognized based on the rent payment due for each period. These
leases specify rent increases each year based on inflation rates for the
respective periods or capital improvements we make at the site. As the rent
increases related to these factors are contingent upon future events, the
related rent revenue is not recognized until it becomes accruable.
Franchise royalty revenues are collected and recognized monthly and are
determined as a percentage of the franchisees' revenues. Initial franchise fee
revenues are recognized at the point when the franchisee opens for business
under our brand name, which is when we have fulfilled all of our initial
obligations under the related agreements. Initial franchise fees for the years
ended December 31, 2002, 2003 and 2004 were $100,000, $0 and $100,000,
respectively.
Cash and Cash Equivalents
For purposes of the statement of cash flows, we consider all highly liquid
investments with an initial maturity of three months or less to be cash.
Inventories
Inventories are stated at the lower of cost or market value, cost being
determined principally on the weighted average cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the following estimated useful lives of the assets:
Buildings and site improvements.......... 15 - 20 years
Pumps and underground storage tanks...... 5 - 20 years
Machinery and equipment.................. 3 - 15 years
Furniture and fixtures................... 5 - 10 years
Repair and maintenance costs are charged to expense as incurred, while
major renewals and betterments are capitalized. The cost and related accumulated
depreciation of property and equipment sold, replaced or otherwise disposed of
are removed from the accounts. Any resulting gains or losses are recognized in
operations.
Intangible Assets
Acquired intangible assets, other than goodwill, are initially recognized
based on their fair value. Those intangible assets acquired in a business
combination are initially recognized in accordance with FAS 141, "Business
Combinations." FAS 141 requires an allocation of purchase price to all assets
and liabilities acquired, including those intangible assets that arise from
contractual or other legal rights or are otherwise capable of being separated or
divided from the acquired entity (but excluding goodwill), based on the relative
fair values of the acquired assets and liabilities. Any excess of acquisition
cost over the fair value of the acquired net assets is recorded as goodwill.
Costs of internally developing, maintaining, or restoring intangible assets that
are not specifically identifiable, that have indeterminate lives or that are
inherent in a continuing business and related to the entity as a whole are
expensed as incurred. Intangible assets with finite lives are amortized on a
straight-line basis over their estimated lives, principally the terms of the
related contractual agreements giving rise to them. Goodwill and intangible
assets with indefinite lives are not amortized but are reviewed on January 1 of
each year (or more frequently if impairment indicators arise) for impairment
(see Note 9).
45
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Internal-Use Software Costs
During the application development stage of an internal-use computer
software project, we capitalize (i) the external direct costs of materials and
services consumed in developing or obtaining the internal-use computer software,
(ii) to the extent of time spent directly on the project, payroll costs of
employees directly associated with and who devote time to the project, and (iii)
related interest costs incurred. Internal and external costs incurred in the
preliminary project stage and post-implementation stage, such as for exploring
alternative technologies, vendor selection and maintenance, are expensed as
incurred, as are all training costs. The costs of significant upgrades and
enhancements that result in additional functionality are accounted for in the
same manner as similar costs for new software projects. The costs of all other
upgrades and enhancements are expensed as incurred.
Impairment of Long-Lived Assets
Impairment charges are recognized when the carrying value of a long-lived
asset to be held and used in the business is not recoverable and exceeds its
fair value, and when the carrying value of a long-lived asset to be disposed of
exceeds the estimated fair value of the asset less the estimated cost to sell
the asset. Such impairment charges are recognized in the period during which the
circumstances surrounding an asset to be held and used have changed such that
the carrying value is no longer recoverable, or during which a commitment to a
plan to dispose of the asset is made. Such tests are performed at the individual
travel center level. In addition, intangible assets are subjected to further
evaluation and impairment charges are recognized when events and circumstances
indicate the carrying value of the intangible asset exceeds the fair market
value of the asset. Impairment charges are included in depreciation and
amortization expense in our consolidated income statement.
Deferred Financing Costs
Deferred financing costs were incurred in conjunction with issuing
long-term debt and are amortized into interest expense over the lives of the
related debt instruments using the effective interest method (see Note 12).
Classification of Costs and Expenses
Cost of goods sold (excluding depreciation) represents the costs of fuels
and other products sold, including freight. Operating expenses principally
represent costs incurred in operating our sites, consisting primarily of labor,
maintenance, supplies, utilities and occupancy costs. Transition expense
represents the costs incurred to convert and integrate acquired sites into our
network and include costs such as for training, employee relocation and deferred
maintenance, all of which costs incurred during 2004 were in connection with the
Rip Griffin acquisition. Costs of advertising are expensed as incurred.
Operating Lease Expense
Generally, rental on operating leases is charged to expense over the lease
term as it becomes payable. Certain operating leases specify scheduled rent
increases over the lease term. The effects of those scheduled rent increases,
which are included in minimum lease payments, are recognized in rent expense
over the lease term on a straight-line basis.
Stock-Based Employee Compensation
We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. For
46
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
granted options that vest over time, no compensation expense is reflected in net
income, as all of those options had an exercise price equal to or greater than
the market value of the underlying common stock at the date of grant. For
granted options that vest based on attaining certain measures of performance,
compensation expense is recognized when it becomes probable that the performance
triggers for such options will be achieved. The following table illustrates the
effect on net income if we had applied the fair value recognition provisions of
FAS No. 123 to stock-based employee compensation.
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2003 2004
--------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Net income, as reported.............................................. $ 1,271 $ 8,891 $ 14,862
Add back - Stock-based employee compensation expense (benefit),
net of related tax effects, included in net income (loss) as
Reported......................................................... - - -
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
related tax effects.............................................. (703) (698) (674)
--------- ---------- ----------
Pro forma net income................................................. $ 568 $ 8,193 $ 14,188
========= ========== ==========
The fair value of these options used to calculate the pro forma
compensation expense amounts was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: a risk-free interest rate of 5.5%, a dividend yield of 0.0%, a
volatility factor of 0.0001%, and an expected life of the options of ten years.
Environmental Remediation
We provide for remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is reasonably
determinable. Remediation expenses are included within operating expenses in our
consolidated statement of income. Generally, the timing of remediation accruals
coincides with completion of a feasibility study or the commitment to a formal
plan of action. If recoveries of remediation costs from third parties are
probable, a receivable is recorded. Accruals are not recorded for the costs of
remediation activities undertaken on our behalf by BP, at BP's sole expense (see
Note 19). In our consolidated balance sheet, the accrual for environmental
matters is included in other noncurrent liabilities, with the amount estimated
to be expended within the subsequent year reported as a current liability within
the other accrued liabilities balance.
Defined Contribution Plan
We sponsor a 401(k) defined contribution plan to provide eligible
employees with additional income upon retirement. Our contributions to the plans
are based on employee contributions and compensation and are recognized in
operating expenses in the period incurred.
Asset Retirement Obligations
As of January 1, 2003, we began recognizing the future costs to remove our
underground storage tanks over the estimated useful lives of each tank in
accordance with the provisions of FAS 143, "Accounting for Asset Retirement
Obligations." A liability for the fair value of an asset retirement obligation
with a corresponding increase to the carrying value of the related long-lived
asset is recorded at the time an underground storage tank is installed. We
amortize the amount added to property and equipment and recognize accretion
expense in connection with the discounted liability over the remaining life of
the respective underground storage tank. The estimated liability is
47
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
based on historical experiences in removing these tanks, estimated tank useful
lives, external estimates as to the cost to remove the tanks in the future and
regulatory requirements. The liability is a discounted liability using a
credit-adjusted risk-free rate. Revisions to the liability could occur due to
changes in tank removal costs, tank useful lives or if new regulations regarding
the removal of such tanks are enacted. See Note 3.
Income Taxes
Deferred income tax assets and liabilities are established to reflect the
future tax consequences of differences between the tax bases and financial
statement bases of assets and liabilities. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance.
Concentration of Credit Risk
We grant credit to our customers and may require letters of credit or
other collateral. Allowances for doubtful accounts and notes receivable are
maintained based on historical payment patterns, aging of accounts receivable,
periodic review of our customers' financial condition, and actual write-off
history.
Derivative Instruments
We recognize derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the derivative and
the resulting designation. We designate our derivatives based upon criteria
established by FAS 133, "Accounting for Derivative Instruments and Hedging
Activities." For a derivative designated as a fair value hedge, the change in
fair value is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributed to the risk being hedged.
For a derivative designated as a cash flow hedge, the effective portion of the
derivative's gain or loss is initially reported as a component of accumulated
other comprehensive income (loss) and subsequently reclassified into earnings
when the hedged exposure affects earnings. The ineffective portion of the gain
or loss is reported in earnings immediately. We use derivatives to manage risk
arising from changes in interest rates. Our objectives for holding derivatives
are to decrease the volatility of earnings and cash flows associated with
changes in interest rates. See Note 20.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which estimation is practicable: the
fair values of financial instruments classified as current assets or liabilities
approximate the carrying values due to the short-term maturity of the
instruments; the fair value of our fixed-rate indebtedness that is publicly
traded is estimated based on the quoted price for those notes. The fair value of
our fixed-rate indebtedness that is not publicly traded is estimated based on
the current borrowing rates available to us for financings with similar terms
and maturities (see Note 12); and the fair values of our interest rate
protection agreements are based on bank-quoted market prices.
3. CHANGE IN ACCOUNTING PRINCIPLE
As of January 1, 2003, we began recognizing the future costs to remove our
underground storage tanks over the estimated useful lives of each tank in
accordance with the provisions of Statement of Financial Accounting Standards
(FAS) No. 143, "Accounting for Asset Retirement Obligations." A liability for
the fair value of an asset retirement obligation with a corresponding increase
to the carrying value of the related long-lived asset is recorded at the time an
underground storage tank is installed. We amortize the amount added to property
and equipment and recognize accretion expense in connection with the discounted
liability over the remaining life of the respective underground storage tank.
The estimated liability is based on historical experiences in removing these
tanks,
48
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
estimated tank useful lives, external estimates as to the cost to remove the
tanks in the future and regulatory requirements. The liability is a discounted
liability using a credit-adjusted risk-free rate of approximately 12.8%.
Revisions to the liability could occur due to changes in tank removal costs,
tank useful lives or if new regulations regarding the removal of such tanks are
enacted.
Upon adoption of FAS 143, we recorded a discounted liability of $589,000,
increased property and equipment by $172,000 and recognized a one-time
cumulative effect charge of $253,000 (net of a deferred tax benefit of
$164,000). The pro forma effects for the years December 31, 2001 and 2002,
assuming the adoption of FAS 143 as of January 1, 2001, were not material.
A reconciliation of our asset retirement obligation liability, which is
included within other noncurrent liabilities in our consolidated balance sheet,
for the year ended December 31, 2003 was as follows:
YEAR ENDED DECEMBER 31,
------------------------
2003 2004
---------- ----------
(IN THOUSANDS OF DOLLARS)
Balance at January 1,............ $ 589 $ 663
Liabilities incurred........... 10 33
Liabilities settled............ (13) (19)
Accretion expense.............. 77 83
Revisions to estimates......... - -
---------- ----------
Balance at December 31,.......... $ 663 $ 760
========== ==========
4. RECENTLY ISSUED ACCOUNTING STANDARDS
FIN 46R. In December 2003, the Financial Accounting Standards Board (FASB)
issued revised FASB Interpretation No. (FIN) 46R, "Consolidation of Variable
Interest Entities." We must adopt this accounting guidance effective January 1,
2005. It had been our intention to consolidate into our consolidated financial
statements the entity that was the lessor under our master lease program
covering eight of our sites. However, as part of the 2004 Refinancing, we
purchased the leased assets from the lessor and terminated the master lease
facility, so we will not apply FIN 46R with respect to that terminated
arrangement. We evaluated whether FIN 46R will require consolidation of our
franchisees, and have determined that it will not. We adopted the disclosure
requirements of FIN 46R in 2002 and 2003.
FAS 123R. In December 2004, the FASB issued a revision of FAS 123,
"Share-Based Payment" (FAS 123R). FAS 123R requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. The cost to be recognized will be measured based on the fair value
of the equity or liability instruments issued. The scope of FAS 123R includes a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. FAS 123R replaces FAS 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." As originally issued in 1995, FAS
123 established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that statement
permitted entities the option of continuing to apply the guidance of APB 25 as
long as the footnotes to the financial statements disclosed what net income
would have been had the preferable fair-value-based method been used. At that
time, we determined to continue to apply the guidance of APB 25 and make
49
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the required disclosures in our financial statement footnotes. Accordingly, we
will be required to change our method of accounting for stock compensation
costs. We will be required to adopt FAS 123R as of January 1, 2006. FAS 123R
applies only to those awards granted or which become vested after the required
effective date. We expect that the adoption of FAS 123R in the first quarter of
2006 will have no material effect on our results of operations, financial
condition or cash flows.
5. ACQUISITION
On December 1, 2004, we acquired from Rip Griffin Truck Service Center,
Inc. the assets related to eleven travel centers located in seven states,
primarily in the southwestern region of the United States. The acquisition was
completed to strengthen our presence in the southwestern United States and
included the land, buildings, equipment, inventories and certain prepaid assets
at the eleven travel centers. The results from these eleven sites were included
in our consolidated financial statements from December 1, 2004.
The aggregate purchase price was $129,142,000, all of which was paid in
cash or assumed liabilities. The acquisition was funded with borrowings under
our 2004 Credit Agreement as part of the 2004 Refinancing (see Note 12). We
expect that all of the goodwill resulting from this acquisition will be tax
deductible. The following table summarizes the amounts assigned to the assets
acquired and the liabilities assumed at the date of acquisition.
Current assets................... $ 5,799
Property and equipment........... 99,360
Goodwill......................... 22,993
Intangible assets................ 500
Other noncurrent assets.......... 490
-----------
Total assets acquired.......... 129,142
Current liabilities.............. 995
Noncurrent liabilities........... 1,515
-----------
Net assets acquired.............. $ 126,632
===========
As part of our purchase accounting for this acquisition, we did not
recognize a liability for the potential costs to bring the parking lot at one
site into an acceptable condition. Until further testing is complete, any
repairs are not considered probable and any related cost cannot be estimated. We
also cannot estimate any third-party recoveries we may receive to reimburse some
or all of the potential costs. We expect this pre-existing contingency, which we
have assumed, will be resolved during 2005. Should an accrual be necessary, the
amount of goodwill recognized would be increased. The following unaudited pro
forma information presents our results of operations as if the acquisition of
the Rip Griffin sites had taken place on January 1, 2003.
YEAR ENDED DECEMBER 31,
---------------------------
2003 2004
------------ ------------
(IN THOUSANDS OF DOLLARS)
Total revenue............................................ $ 2,361,314 $ 2,879,984
Gross profit............................................. $ 550,098 $ 577,851
Income before extraordinary item and accounting change... $ 11,713 $ 18,086
Net income............................................... $ 11,460 $ 18,086
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
that actually would have resulted had the acquisition occurred on January 1,
2003, or that may result in the future.
50
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2002, 2003 and 2004, we paid aggregate
amounts of $4,243,000, $10,190,000 and $636,000, respectively, to convert five,
six and two, respectively, leased sites to company-operated sites. These
acquisitions are considered immaterial, individually and in the aggregate, for
further disclosures.
6. COMPREHENSIVE INCOME
Income tax provision (benefit) related to other comprehensive income
(loss) consisted of the following:
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Related to gain or loss on derivative instruments........... $ 990 $ - $ -
Related to foreign currency translation adjustments......... - 320 83
---------- ---------- ----------
Total..................................................... $ 990 $ 320 $ 83
========== ========== ==========
7. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
-------------------------
2003 2004
---------- ----------
(IN THOUSANDS OF DOLLARS)
Non-fuel merchandise...................................................... $ 57,881 $ 65,663
Petroleum products........................................................ 6,100 10,244
---------- ----------
Total inventories.................................................... $ 63,981 $ 75,907
========== ==========
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
-------------------------
2003 2004
----------- -----------
(IN THOUSANDS OF DOLLARS)
Land ................................................................ $ 69,130 $ 82,382
Buildings and improvements........................................... 424,102 575,944
Machinery, equipment and furniture................................... 275,642 310,454
Construction in progress............................................. 14,644 20,685
----------- -----------
Total cost...................................................... 783,518 989,465
Less: accumulated depreciation....................................... 345,385 385,107
----------- -----------
Property and equipment, net..................................... $ 438,133 $ 604,359
=========== ===========
At December 31, 2004, we were holding for sale one former travel center
that had been closed during 2003.
51
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. GOODWILL AND INTANGIBLE ASSETS
Goodwill. Goodwill results from our business acquisitions and represents
the excess of amounts paid to the sellers over the fair values of the tangible
assets acquired. For the years ended December 31, 2002, 2003 and 2004, we
recorded goodwill of $4,242,000, $1,999,000 and $23,314,000, respectively, in
connection with converting leased sites to company-operated sites and, in 2004,
the Rip Griffin acquisition (see Note 5). The changes in the carrying amount of
goodwill for the years ended December 31, 2002, 2003 and 2004 were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Balance as of beginning of period........................... $ 19,343 $ 23,585 $ 25,584
Goodwill recorded during the period......................... 4,242 1,999 23,314
---------- ---------- ----------
Balance as of end of period................................. $ 23,585 $ 25,584 $ 48,898
========== ========== ==========
Intangible Assets. Leasehold interest represents the value, obtained
through the BP acquisition, of favorable lease provisions at one location, the
lease for which extended 11 1/2 years from the date of the BP acquisition. The
leasehold interest is being amortized over the 11 1/2 year period. Trademarks
relate primarily to our purchase of the trademarks, service marks, trade names
and commercial symbols from BP and Travel Ports. The trademarks have indefinite
lives and, therefore, are not amortized. Other intangible assets primarily
includes noncompetition agreements that are amortized over their contractual
lives.
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,
---------------------------
2003 2004
------------ ------------
(IN THOUSANDS OF DOLLARS)
Amortizable intangible assets:
Leasehold interest................................................... $ 1,724 $ 1,724
Other................................................................ 1,015 1,396
------------ ------------
Total amortizable intangible assets.............................. 2,739 3,120
Less - accumulated amortization............................................. 2,334 2,421
------------ ------------
Net carrying value of amortizable intangible assets.............. 405 699
Net carrying value of trademarks............................................ 1,398 1,398
------------ ------------
Intangible assets, net........................................... $ 1,803 $ 2,097
============ ============
Total amortization expense for our amortizable intangible assets for the
years ended December 31, 2002, 2003 and 2004 was $1,896,000, $686,000 and
$189,000, respectively. The estimated aggregate amortization expense for our
amortizable intangible assets for each of the five succeeding fiscal years are
$130,000 for 2005; and $60,000 for each of 2006, 2007, 2008 and 2009.
52
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
DECEMBER 31,
-------------------------
2003 2004
----------- -----------
(IN THOUSANDS OF DOLLARS)
Taxes payable, other than income taxes............................... $ 16,785 $ 19,375
Accrued wages and benefits........................................... 13,193 17,323
Interest payable..................................................... 6,952 5,962
Other accrued liabilities............................................ 13,090 19,140
----------- -----------
Total other accrued liabilities...................................... $ 50,020 $ 61,800
=========== ===========
11. REVOLVING LOAN
We have available to us a revolving credit facility of $125,000,000. The
revolving credit facility includes a $90,000,000 sublimit for letters of credit.
The interest rate for each borrowing under this revolving credit facility is
based, at our election, on either a prime rate-based alternate base rate (ABR)
or an adjusted London Interbank Offered Rate (LIBOR). Added to either the ABR or
LIBOR rates are the following interest rate spreads that decline as our Leverage
Ratio (as defined in the 2004 Credit Agreement) declines:
ABR LIBOR
Leverage Ratio Spread Spread
- ------------------------------------------------------------------------ ------ ------
Equal to or greater than 4.0 to 1.0..................................... 1.25% 2.25%
Less than 4.0 to 1.0 but equal to or greater than 3.5 to 1.0............ 1.00% 2.00%
Less than 3.5 to 1.0.................................................... 0.75% 1.75%
Commitment fees are calculated as 0.5% of the daily average unused amount
of the revolving loan commitment. At December 31, 2003 and 2004, there were
outstanding borrowings under our revolving credit facilities of $13,600,000 and
$25,000,000, respectively. There were $27,699,000 of available borrowings
reserved for letters of credit at December 31, 2004. The revolving loan facility
matures in December 2009. See Note 12 for additional information regarding this
and all of our indebtedness.
12. LONG-TERM DEBT
On December 1, 2004, we completed a refinancing, which we refer to as the
"2004 Refinancing." In the 2004 Refinancing, we borrowed $500,000,000 under an
Amended and Restated Credit Agreement that we refer to as the 2004 Credit
Agreement. The 2004 Credit Agreement included a fully-drawn $475,000,000 term
loan facility and a $125,000,000 revolving credit facility under which
$25,000,000 was drawn at closing. The proceeds from these borrowings were
utilized to:
- repay all amounts, including accrued interest, outstanding under the
existing amended and restated credit agreement into which we had entered
in November 2000 and which we refer to as the 2000 Credit Agreement;
- pay for the acquisition of the assets acquired from Rip Griffin (see Note
5);
- terminate the master lease facility under which since 1999 we built eight
travel centers on land we owned, thereby gaining ownership of the
improvements at those eight sites; and
- pay fees and expenses related to the financing and the acquisition
transactions.
53
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt (net of unamortized discount) consisted of the following:
DECEMBER 31,
-------------------------
INTEREST
RATE MATURITY 2003 2004
-------- -------- ---------- ------------
(IN THOUSANDS OF DOLLARS)
2004 Term Loan (a)..................................... (b) 2011 $ - $ 475,000
2000 Term Loan (c)..................................... - - 310,212 -
Revolving Credit Facility (a).......................... (d) 2009 13,600 25,000
Senior Subordinated Notes due 2009 (e)................. 12.75% 2009 190,000 190,000
Note payable (f)....................................... 5.00% 2018 4,104 3,915
---------- ----------
Total............................................. 517,916 693,915
Less: amounts due within one year...................... 3,354 198
Less: unamortized discount............................. 12,529 10,825
---------- ----------
Long-term debt (net of unamortized discount)...... $ 502,033 $ 682,892
========== ==========
- -------------------------
(a) On December 1, 2004, in connection with the 2004 Refinancing, we entered
into a $600,000,000 Amended and Restated Credit Agreement with a group of
lenders, which borrowing we refer to as the 2004 Credit Agreement. The 2004
Credit Agreement provides for a $475,000,000 term loan facility, which was
fully drawn at closing, and a $125,000,000 revolving credit facility (see
Note 11). Term loan principal payments of $1,187,500 are due at each
quarter end, beginning March 31, 2006, through September 30, 2011, with the
remaining balance due at maturity. The term loan facility matures on
December 1, 2011 and the revolving credit facility matures on December 1,
2009, provided however that if we have not refinanced our Senior
Subordinated Notes due 2009 with qualified indebtedness prior to October 1,
2008, the term loan and revolving credit facilities will mature on October
1, 2008.
(b) Interest accrues at variable rates based, at our election, on either
adjusted LIBOR plus 1.75% or a prime rate-based alternate base rate plus
0.75%. We have the option to select which rate will be applied at the
beginning of each loan period, the term of which, for LIBOR borrowings,
varies, at our election, from one to six months and, for alternate base
rate borrowings, extends until we elect to convert to LIBOR borrowings. At
December 31, 2004, the term loan was comprised of borrowings at an average
rate of 4.32% for interest periods that end in March 2005 and June 2005.
Interest payments are due at each quarter end for interest related to
alternate base rate borrowings and at the end of each loan period, but not
less frequently than quarterly, for LIBOR borrowings.
(c) In November 2000, in connection with a refinancing that we refer to as the
2000 Refinancing, we entered into the 2000 Credit Agreement, which included
a $328,000,000 term loan facility that had been fully drawn at closing of
the 2000 Refinancing. The then outstanding balance of this 2000 Term Loan
was repaid in full as part of the 2004 Refinancing.
(d) Interest accrues at variable rates based, at our election, on either
adjusted LIBOR or a prime rate-based alternate base rate (ABR). Added to
either the ABR or LIBOR rates are interest rate spreads of 0.75% to 1.25%
for ABR borrowings and of 1.75% to 2.25% for LIBOR borrowings, depending on
our Leverage Ratio (see Note 11). We have the option to select which rate
will be applied at the beginning of each loan period, the term of which,
for LIBOR borrowings, varies, at our election, from one to six months and,
for alternate base rate borrowings, extends until we elect to convert to
LIBOR borrowings. At December 31, 2004 we had $25,000,000 of alternate base
rate borrowings at 6.5%. Interest payments are due at each quarter end for
interest related to alternate base rate borrowings and at the end of each
loan period, but not less frequently than quarterly, for LIBOR borrowings.
54
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(e) On November 14, 2000, in connection with the 2000 Refinancing, we issued
Senior Subordinated Notes with an aggregate face amount of $190,000,000.
These notes were issued at a discount of 3.704% and each $1,000 note was
accompanied by detachable warrants (see Note 15). The warrants had an
aggregate fair value at issuance of $8,360,000. Based on the relative fair
values of the notes and the warrants at the time of issuance, $8,050,000
has been recognized as unamortized debt discount in our balance sheet, as
has been the original issue discount of the notes. The debt discount is
being amortized into interest expense using the effective interest method
over the life of the notes. Interest payments on these notes are due
semiannually on May 1 and November 1. Optional prepayments are allowed
under certain circumstances, any such payments reducing the required
payment of $190,000,000 due on May 1, 2009. We expect to refinance these
Senior Subordinated Notes no later than November 2005, at which time they
are callable by us at 106.375% of their face value.
(f) On September 1, 1998, in connection with the purchase of the operating
assets of a leased site, we issued a note payable to the former operator of
the site for $4,919,000. The note bears interest at 5% and requires
quarterly payments of principal and interest of $98,000 through October 1,
2018. The note was recorded net of a discount of $1,875,000. This note is
collateralized by a mortgage interest in the related travel center.
Debt Extinguishments Expense and Debt Issuance Costs. As part of the 2004
Refinancing, we amended and restated our 2000 Credit Agreement, and the
borrowings thereunder, as the 2004 Credit Agreement. As part of this
refinancing, we paid fees of $7,355,000 to our lenders and $2,502,000 to other
parties, such as law firms. We also charged to expense $562,000 of unamortized
debt issuance costs incurred in connection with the 2000 Refinancing with
respect to those lenders that did not continue as parties to the 2004 Credit
Agreement. As a result, in 2004 we recognized a charge to debt extinguishment
expense of $1,699,000 and we capitalized as deferred financing costs $8,720,000
of costs associated with the additional borrowings under the 2004 Credit
Agreement. Debt extinguishment expense is included within the interest and other
financial costs, net balance in our consolidated statement of income.
Pledged Assets. The borrowings under the 2004 Credit Facility are
collateralized by mortgages on substantially all of our property and equipment,
liens on all of our accounts receivable and inventories and security agreements
related to our cash balances and significant operating contracts.
Change of Control. In the event of a change in control (as defined in the
relevant instruments) of the company, the total amount outstanding under the
debt agreements described above may be declared immediately due and payable.
Mandatory Prepayments. The 2004 Credit Facility obligates us to make
annual mandatory prepayments of term loan indebtedness equal to one-half of the
Excess Cash Flow (as defined in the agreement) amount generated in the previous
year. For the years ended December 31, 2002 and 2003, we generated $22,627,000
and $25,312,000, respectively, of Excess Cash Flow and, therefore, prepaid
$11,314,000 and $12,656,000, respectively, of the term loan the succeeding
years. Under the 2004 Credit Agreement, the Excess Cash Flow calculation and
mandatory prepayment are not required until 2006, and will be based upon 2005
cash flow results.
Debt Covenants. Under the terms of the 2004 Credit Facility, we are
required to maintain certain affirmative and negative covenants, that, among
other things, limit the amount of indebtedness we can incur, limit the amount of
lease payments we can make, limit the amount of dividend payments and debt
prepayments we can make, limit the amount of capital expenditures we can make
and require us to maintain a minimum interest coverage ratio and a maximum
leverage ratio. We believe we were in compliance with the covenants throughout
2004 and at December 31, 2004.
55
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the Indenture for the Senior Subordinated Notes due
2009, we are required to maintain certain affirmative and negative covenants
that, among other things, limit our ability to incur indebtedness, pay
dividends, redeem stock or sell assets or subsidiaries. We believe we were in
compliance with the covenants throughout 2004 and at December 31, 2004.
Future Payments. Scheduled payments of long-term debt in the next five
years are $198,000 in 2005; $4,959,000 in 2006; $4,969,000 in 2007; $4,980,000
in 2008; and $219,992,000 in 2009.
Fair Value. Based on the borrowing rates currently available to us for
bank loans and other indebtedness with similar terms and average maturities and
the year-end quoted market price of the Senior Subordinated Notes due 2009, the
fair value of long-term debt at December 31, 2003 and 2004 was $545,116,000 and
$723,130,000, respectively.
13. LEASING TRANSACTIONS
As a lessee. We have entered into lease agreements covering certain of our
travel center locations, warehouse and office space, computer and office
equipment and vehicles. Most long-term leases include renewal options and, in
certain cases, they include escalation clauses and purchase options. Future
minimum lease payments required under operating leases that had remaining
noncancelable lease terms in excess of one year, as of December 31, 2004, were
as follows:
YEAR ENDING MINIMUM LEASE
DECEMBER 31, PAYMENTS
- ------------ ---------------------------
(IN THOUSANDS OF DOLLARS)
2005................................................................................... $ 13,805
2006................................................................................... 13,161
2007................................................................................... 11,188
2008................................................................................... 9,525
2009................................................................................... 7,982
Thereafter............................................................................. 77,731
-------------
$ 133,392
=============
Rent expense under our operating leases is included in both operating
expenses and selling, general and administrative expenses in our consolidated
statement of operations and comprehensive income and consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Minimum rent......................................................... $ 23,623 $ 24,061 $ 23,780
Contingent rent...................................................... (2,201) (2,690) (2,294)
---------- ---------- ----------
Total rent expense................................................. $ 21,422 $ 21,371 $ 21,486
========== ========== ==========
56
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Contingent rent represents the increases or decreases in lease payments
that result from changes after the inception of the lease in the factors on
which the lease payments are based. For us, contingent rent relates to those
leases that provide for increases in rent payments based on changes in the
consumer price index, increases in rent payments based on the level of sales
and/or operating results of the leased site, and changes in rent payments based
on changes in interest rates, specifically LIBOR.
As a lessor. Fourteen of the travel centers we owned were leased to
franchisees under operating lease agreements during all or a portion of the year
ended December 31, 2004. During 2004, two of these leases were mutually
terminated, and, as a result, these sites were converted to company-operated
sites. At December 31, 2004, we had such lease arrangements in place at 12 of
our sites. Our lease agreements provide for initial terms of ten years with two
renewal terms of five years each. These leases include rent escalations that are
contingent on future events, namely inflation or capital improvements. Rent
revenue from such operating lease arrangements totaled $9,488,000, $7,564,000
and $5,655,000 for the years ended December 31, 2002, 2003 and 2004,
respectively. At December 31, 2004, the cost and accumulated depreciation of the
assets covered by these lease agreements was $34,657,000 and $19,109,000,
respectively. Future minimum lease payments receivable under these operating
leases as of December 31, 2004 were as follows:
YEAR ENDING MINIMUM LEASE
DECEMBER 31, PAYMENTS
- ------------ -------------------------
(IN THOUSANDS OF DOLLARS)
2005................................................................................... $ 4,816
2006................................................................................... 4,816
2007................................................................................... 4,816
2008................................................................................... 4,816
2009................................................................................... 4,816
Thereafter............................................................................. 12,401
-------------
$ 36,481
=============
14. REDEEMABLE EQUITY
At each of December 31, 2003 and 2004, there were 182,800 and 177,871
shares, respectively, of our common stock owned by certain of our management
employees. We refer to these shares of common stock as management shares. For
the purchase of management shares, each of the management employees who entered
into the management subscription agreement received financing from us for no
more than one-half of the purchase price of the management shares. In connection
with this financing each management employee executed a note in our favor and a
pledge agreement. At December 31, 2003 and 2004, the aggregate principal amount
of such notes due us from the management employees was $1,022,000 and $983,000,
respectively, and is reflected as a reduction to the redeemable common stock
balance.
Under the terms of the management subscription agreements and other
agreements governing the management shares, the management employees have rights
to require us to repurchase the management shares at fair market value upon the
employee's termination of employment due to death, disability or scheduled
retirement. Repurchase will generally be for cash at the fair market value on
the date of termination if termination is due to death or disability or
scheduled retirement at or after age 62, or for cash in installments over a
period of years at fair market value each year if termination is due to
scheduled retirement prior to age 62. Prior to an initial public
57
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
offering of our common stock, the fair market value is determined by a formula
set forth in the agreement that can be modified by the Board of Directors. The
formula to calculate the fair market value is (A) the product of (1) a
multiplier (currently 6.5) and (2) EBITDA (as defined in our bank debt
agreement) for the most recent four consecutive full fiscal quarters, plus (B)
consolidated cash and cash equivalents in excess of $10,000,000, minus (C)
consolidated indebtedness, divided by (D) the total number of shares of common
stock outstanding on a fully diluted basis assuming full conversion and exercise
of all common stock equivalents and similar stock rights.
If there is a change of control of us which involves the sale by
stockholders of their equity interest to a third party during the time that
installments are being paid to the management employees, we will accelerate the
installment payments at the time of the close of the change of control. In other
cases of termination, we will have call rights at fair market value that
generally will be exercised for cash, although in limited circumstances the call
rights may be exercised by promissory note. In all cases, repurchase rights are
restricted under law, credit agreements, financing documents and other
contracts, and our board's good faith determination that repurchases would not
cause undue financial strain on us. The 2004 Credit Facility and the Indenture
for the Senior Subordinated Notes limit our ability to repurchase the management
shares. The amount paid upon repurchase of any management shares will be reduced
by the principal balance of and unpaid accrued interest on the related notes
receivable. At the point in time that redemption of shares of redeemable common
stock becomes probable, the fair value of the shares will be accreted to their
estimated redemption value by a charge to nonredeemable stockholders' equity.
Such a charge to nonredeemable stockholders' equity will occur only if our
value, and therefore the fair value of our common stock, has increased. Our
policy is to consider redemption of an individual stockholder's shares probable
at the time that the stockholder provides notice of his or her intention to
retire, dies or is declared disabled.
15. NONREDEEMABLE STOCKHOLDERS' EQUITY
Common stock and other nonredeemable stockholders' equity consisted of the
following:
DECEMBER 31,
-------------------------
2003 2004
----------- -----------
(IN THOUSANDS OF DOLLARS)
Common Stock - 20,000,000 shares authorized, $0.00001 par value,
6,939,498 and 6,934,569 shares issued and outstanding at December
31, 2003 and 2004, respectively................................... $ 3 $ 3
Accumulated other comprehensive income....................................... 804 1,122
Additional paid-in capital................................................... 217,071 215,743
----------- -----------
Total............................................................. $ 217,878 $ 216,868
=========== ===========
The numbers of outstanding shares of common stock in the table include the
redeemable shares owned by certain of our management employees as discussed in
Note 14.
MERGER AND RECAPITALIZATION
On May 31, 2000, we and shareholders owning a majority of our voting stock
entered into a recapitalization agreement and plan of merger, as subsequently
amended, with TCA Acquisition Corporation, a newly created corporation formed by
Oak Hill Capital Partners, L.P. and its affiliates, under which TCA Acquisition
Corporation agreed to merge with and into us. This merger was completed on
November 14, 2000. Concurrent with the closing of the merger, we completed a
series of transactions to effect a recapitalization that included the following.
58
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- TCA Acquisition Corporation issued 6,456,698 shares of common stock
to Oak Hill and other institutional investors for proceeds of
$205,000,000 and then merged with and into us. We incurred
$3,015,000 of fees and expenses related to the issuance of these
shares of common stock. These stock issuance costs were charged
against additional paid-in capital.
- We redeemed all shares of our common and preferred stock outstanding
prior to the closing of the merger, with the exception of 473,064
shares of common stock with a market value at that time of
$15,020,000 that were retained by continuing stockholders, and
cancelled all outstanding common stock options and warrants, for
cash payments totaling $263,153,000.
- All shares of treasury stock were cancelled.
After the transactions described above, Oak Hill owned 60.5% of our
outstanding common stock, the Other Investors owned, in the aggregate, 32.7% of
our outstanding common stock, Freightliner owned 4.3% of our outstanding common
stock and certain members of our management owned 2.5% of our outstanding common
stock. The total amount of our equity capitalization after these transactions,
given the $31.75 per share merger consideration that was paid in our merger and
recapitalization transactions, was $220,020,000. The transactions described
above, which resulted in a change of control over us, have been accounted for as
a leveraged recapitalization, as opposed to a purchase business combination,
since the change of control was effected through issuance of new shares to our
new control group in conjunction with a redemption of most of our then
outstanding equity securities. We followed leveraged recapitalization accounting
because of the significance of the ownership interest in us that was retained by
continuing stockholders. In accounting for our leveraged recapitalization, we
retained the historical cost bases of our assets and liabilities and
consequently recorded charges totaling $178,965,000 to our equity accounts upon
the redemption of equity securities. This accounting treatment contrasts with
that followed in a purchase business combination, in which a company reflects
the new basis in its assets and liabilities of its new control group by
increasing or decreasing its historical balances based on the estimated fair
values at that time and avoids the charge to equity that accompanies the
redemption of equity securities.
OTHER COMMON STOCK ISSUANCES
During the year ended December 31, 2002, we issued 7,302 shares of common
stock to certain members of management for cash and notes receivable (see Notes
14 and 18) aggregating $232,000.
PREFERRED STOCK
The board of directors has the authority to issue preferred stock in one
or more classes or series and to fix the designations, powers, preferences and
dividend rates, conversion rights, terms of redemption, and liquidation
preferences and the number of shares constituting each class or series. Our
authorized capital stock includes 5,000,000 shares of preferred stock with a par
value of $0.00001. No preferred stock has been issued.
COMMON STOCK
Voting Rights. Each share of common stock entitles the holder to one vote
on all matters submitted to a vote of our stockholders.
Dividends. Holders of common stock are entitled to receive dividends if,
as and when declared by our board of directors out of funds legally available.
Our debt agreements limit the amount of dividends we are able to pay.
59
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Liquidation Rights and Other Rights. Upon our liquidation, dissolution or
winding up, the holders of our common stock will be entitled to share pro rata
in the distribution of all of our assets remaining after satisfaction of all of
our liabilities and the payment of the liquidation preference of any outstanding
preferred stock. The holders of our common stock do not have any conversion,
redemption or preemptive rights.
Repurchase Rights. Certain members of our senior management have purchased
shares of our common stock pursuant to individual management subscription
agreements. We have the right to repurchase, and the employees have the right to
require us to repurchase, subject to certain limitations, at fair market value,
these shares of common stock upon termination of employment due to death,
disability or a scheduled retirement. These shares are classified as redeemable
equity in our consolidated balance sheet (see Note 14).
REGISTRATION RIGHTS
Under a stockholders' agreement to which all of our stockholders are
party, certain of our stockholders have the right, under certain circumstances,
to require us to register under the Securities Act of 1933 shares of our common
stock held by them and allow them to include shares of common stock held by them
in a registration under the Securities Act commenced by us.
COMMON STOCK WARRANTS
In connection with the issuance of our Senior Subordinated Notes due 2009
as part of our merger and recapitalization transactions, we issued warrants
exercisable for shares of our common stock. The warrants were issued under a
warrant agreement between us and State Street Bank and Trust Company (now US
Bank), as warrant agent. We originally issued the warrants in connection with a
private placement of 190,000 units, each unit consisting of one Senior
Subordinated Note due 2009 and four warrants. Each warrant entitles its holder
to purchase 0.36469 shares of our common stock at an exercise price of $0.001
per share, subject to anti-dilution adjustments under some circumstances. At the
time of their issuance in November 2000, each warrant had a fair value of
$11.579, or $31.75 per share for each share issuable upon the exercise of the
warrants. The fair value of the warrants was initially recognized as unamortized
debt discount and is being amortized into interest expense using the effective
interest method over the life of our Senior Subordinated Notes. We have no
warrants outstanding other than the 760,000 warrants issued as part of the unit
offering in 2000.
Exercise of Warrants. The warrants may be exercised at any time. However,
holders of warrants will be able to exercise their warrants only if the shelf
registration statement is effective or the exercise of the warrants is exempt
from the requirements of the Securities Act and only if the shares of common
stock are qualified for sale or exempt from qualification under the applicable
securities laws of the states or other jurisdiction in which the holders reside.
Unless earlier exercised, the warrants will expire on May 1, 2009.
At our option, fractional shares of common stock may not be issued upon
exercise of the warrants. If any fraction of a share of common stock would,
except for the foregoing provision, be issuable upon the exercise of any
warrants, we will pay an amount in cash equal to the current market value per
share of common stock, as determined on the day immediately preceding the date
the warrant is presented for exercise, multiplied by the fraction, computed to
the nearest whole cent. The exercise price and the number of shares of common
stock issuable upon exercise of a warrant are both subject to adjustment in
certain cases.
No Rights as Stockholders. The holders of unexercised warrants are not
entitled, as such, to receive dividends, to vote, to consent, to exercise any
preemptive rights or to receive notice as our stockholders of any stockholders
meeting for the election of our directors or any other purpose, or to exercise
any other rights whatsoever as our stockholders.
60
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
STOCK AWARD AND OPTION PLAN
2001 Stock Plan. During 2001, we granted to certain of our executives
non-qualified stock options to purchase 944,881 shares of our common stock under
a stock incentive plan our board of directors adopted in November 2000 and which
was approved by a vote of our stockholders in 2001. All of the options have a
term of 10 years from the date of grant, although the options will be terminated
earlier if certain customary events occur. For example, if an executive's
employment is terminated by us without cause or by the executive for good reason
or due to death, disability or scheduled retirement, all vested options will
expire 60 days following termination of employment. Under certain circumstances,
the executive will be allowed to hold a limited portion of his unvested options
for a longer period of time following termination of employment for further
vesting. Each option grant consists of 41.67% time options and 58.33%
performance options. Time options become exercisable with the passage of time,
while performance options become exercisable if certain investment return
targets are achieved. Time options generally vest 20% per year over a period of
five years. Performance options vest if Oak Hill achieves specified internal
rates of return on specified measurement dates. In general, the number of
performance options that will vest is based upon Oak Hill achieving internal
rates of return between 22.5% and 30.0% on a measurement date. A measurement
date is generally defined as the earliest of (1) five years from the closing of
the merger and recapitalization transactions (November 14, 2000), (2) specified
dates following an initial public offering of our stock, depending on the date
the initial public offering occurs, or (3) the date that at least 30% of our
shares owned by Oak Hill are distributed to its limited partners or sold, except
that a subsequent measurement date may occur if less than 100% of our shares
owned by Oak Hill are so sold or distributed. Vesting is partially accelerated
for time options following termination of employment due to death, disability or
scheduled retirement. If a change of control occurs, the vesting of time options
will fully accelerate. Option holders will have rights to require us to
repurchase shares obtained upon the exercise of vested options upon a
termination of employment due to disability, death or, subject to a six-month
holding period, scheduled retirement, and, in certain limited cases, upon a
change of control. In connection with our initial grant of options under this
plan, we established and granted a discretionary pool of options that will be
allocated periodically, first to new members of management who become option
holders after the date of the initial grant, and then to other members on a pro
rata basis. The total number of shares underlying the initial grant of options
will not increase as a result. The time options are subject to fixed plan
accounting and, accordingly, no charge to earnings will be required with respect
to them since the exercise price equaled the fair value at the date of grant.
The performance options are subject to variable plan accounting and,
accordingly, a non-cash charge to earnings will be required when it becomes
probable that the performance triggers for such options will be achieved. It is
not possible to determine at this time, nor may it be possible until close to
the end of the five-year performance period, whether it will be probable that we
will achieve the performance triggers. It is not possible to predict whether any
such required non-cash charge will be material to our results for the period in
which the charge is recognized, as we expect that the performance triggers can
only be attained as a result of a significant increase in our results of
operations. The options granted to future participants in the option plan under
the discretionary pool, including time options, also may be subject to a
compensation charge.
61
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Status Summary. The following table reflects the status and
activity of options under our stock plans:
YEAR ENDED DECEMBER 31,
----------------------------
2002 2003 2004
-------- ------- -------
Options outstanding, beginning of year............................... 944,881 944,881 944,881
Granted.............................................................. - - -
Exercised............................................................ - - -
Cancelled............................................................ - - (5,506)
------- ------- -------
Options outstanding, end of year..................................... 944,881 944,881 939,375
======= ======= =======
Options exercisable, end of year..................................... 157,480 236,220 309,454
Options available for grant, end of year............................. - - -
Weighted-average remaining contractual life of options outstanding,
in years .......................................................... 8 7 6
The weighted-average exercise price was $31.75 per share for all
outstanding options as of December 31, 2002, 2003 and 2004.
We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. For the years ended
December 31, 2002, 2003 and 2004, no stock-based employee compensation cost is
reflected in net income, as all time options granted under those plans had an
excise price equal to the market value of the underlying common stock on the
date of grant and the vesting of the performance options is not considered to be
probable. See Notes 2 and 4 for further discussion of our stock-based employee
compensation.
16. INCOME TAXES
The (benefit) provision for income taxes was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2003 2004
----------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Current:
Federal........................................................... $ (3,956) $ 56 $ 210
State............................................................. 1,227 1,065 2,264
Foreign........................................................... - 63 24
---------- ---------- ----------
(2,729) 1,184 2,498
---------- ---------- ----------
Deferred:
Federal........................................................... 3,494 3,587 7,333
State............................................................. (804) 76 (1,359)
Foreign........................................................... - (128) -
---------- ---------- ----------
2,690 3,535 5,974
---------- ---------- ----------
Total........................................................ $ (39) $ 4,719 $ 8,472
========== ========== ==========
62
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The difference between taxes calculated at the U. S. federal statutory tax
rate of 35% and our total income tax provision is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2003 2004
---------- ---------- ---------
(IN THOUSANDS OF DOLLARS)
U.S. federal statutory rate applied to income before taxes and
extraordinary items............................................... $ 431 $ 4,852 $ 8,167
State income taxes, net of federal income tax benefit................ (6) 768 113
Non-deductible meals and entertainment expenses...................... 165 187 214
Other non-deductible expenses........................................ 142 26 58
Benefit of tax credits............................................... (358) (358) (358)
Adjustment of estimated prior year tax liabilities................... (400) (650) 210
Other - net.......................................................... (13) (106) 68
--------- --------- ---------
Total........................................................ $ (39) $ 4,719 $ 8,472
========= ========= =========
For 2003, income tax benefits of $164,000 allocated to the cumulative
effect of a change in accounting principle of $417,000 differ from the amount
calculated at the federal statutory rate osf 35% by $18. This difference is due
to state taxes and graduated tax rates.
Deferred income tax assets and liabilities resulted from the following:
DECEMBER 31,
-------------------------
2003 2004
---------- -----------
(IN THOUSANDS OF DOLLARS)
Deferred tax assets:
Accounts receivable............................................................... $ 784 $ 614
Inventory......................................................................... 444 569
Intangible assets................................................................. 7,577 5,269
Deferred revenues................................................................. 180 2,299
Minimum tax credit................................................................ 3,086 3,001
Net operating loss carryforward (expiring 2020 - 2024)............................ 22,024 20,321
General business credits (expiring 2009 - 2024)................................... 5,128 5,680
Other accrued liabilities......................................................... 8,212 9,691
---------- ----------
Total deferred tax assets.................................................... 47,435 47,444
---------- ----------
Deferred tax liabilities:
Property and equipment............................................................ (30,910) (36,882)
Other comprehensive income........................................................ (320) (403)
---------- ----------
Total deferred tax liabilities............................................... (31,230) (37,285)
---------- ----------
Net deferred tax assets...................................................... $ 16,205 $ 10,159
========== ==========
63
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the composition of our federal net
operating loss carryforwards by expiration date.
AMOUNT OF NET
YEAR OF EXPIRATION OPERATING LOSS
- ---------------------------------------------------------------------------------------- ------------------------
(IN THOUSANDS OF DOLLARS)
2020.................................................................................... $ 26,594
2021.................................................................................... 27,897
2022.................................................................................... 248
2023.................................................................................... 81
2024.................................................................................... 73
----------
Total net operating loss carryforward................................................... $ 54,893
==========
Realization of our net deferred tax assets is dependent on future taxable
income. We believe it is more likely than not such net deferred tax assets will
be realized and, accordingly, we have not recognized a valuation allowance with
respect to our net deferred tax assets. Most of our net operating loss
carryforwards were generated as a result of our merger and recapitalization
transactions in November 2000. The remainder of our net operating loss
carryforwards result largely from depreciation and interest deductions and the
trends for these items relative to operating income are expected to decline,
enabling us to generate sufficient taxable income to utilize net operating loss
carryforwards. However, ultimate realization of our net deferred tax assets
could be negatively affected by market conditions and other variables not known
or anticipated at this time.
Our federal income tax returns for 2001 through 2004 are subject to
examination by the Internal Revenue Service and certain of our state income tax
returns for various states for various years from 1996 through 2004 are subject
to examination by the respective state tax authorities. We believe we have made
adequate provision for income taxes and interest that may become payable for
years not yet examined.
17. EQUITY INVESTMENT
We owned a 21.5% of the voting stock of Simons Petroleum, Inc., a
privately-held company that is a diversified marketer of diesel fuel and other
petroleum products to trucking fleets and other customers in the energy-related
and trucking industries, until April 9, 2004 when we sold the Simons shares we
owned. The carrying value of this investment, which was included in other
noncurrent assets in our consolidated balance sheet, as of December 31, 2003 was
$7,462,000. The equity income earned from this investment for the years ended
December 31, 2002, 2003 and 2004 was $718,000, $764,000 and $194,000,
respectively. Summarized condensed financial information of this investee
follows. In the tables below, income statement data for 2004 is shown for the
three months ended March 31, 2004, and balance sheet data is shown as of March
31, 2004, as that was the last full month prior to the sale of our investment in
Simons.
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------------- ENDED
2002 2003 MARCH 31, 2004
----------------- ----------------- --------------
Income statement data:
Total revenues........................................ $ 413,243 $ 523,027 $ 144,507
Gross profit.......................................... 23,292 25,483 7,530
Income from continuing operations..................... 3,727 2,665 1,072
Net income............................................ 3,727 2,665 1,072
64
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
(IN THOUSANDS OF DOLLARS)
Balance sheet data:
Current assets............................................................... $ 47,626 $ 52,847
Noncurrent assets............................................................ 7,482 8,293
Current liabilities.......................................................... 27,529 32,543
Noncurrent liabilities....................................................... 3,674 3,620
Convertible redeemable preferred stock....................................... 5,000 5,000
After the sale on April 9, 2004, 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
only for the period while we were a Simons stockholder. During the years ended
December 31, 2002 and 2003 and the period from January 1, 2004 through April 9,
2004, diesel fuel provided by Simons accounted for $183,217,000, $228,827,000,
and $70,652,000, respectively, of our cost of goods sold and we made sales of
diesel fuel to Simons in the amounts of $2,888,000, $3,328,000, and $152,000,
respectively. We also lease a travel center from Simons and the rent expense
related to this site for the years ended December 31, 2002, 2003 and 2004 was
$408,000, $408,000 and $102,000 respectively. At December 31, 2003, our
receivables from Simons were $150,000, respectively, 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 the 2000 Credit Agreement and,
therefore, in April 2004 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 2004 of $1,615,000 does not reflect these amounts.
18. RELATED PARTY TRANSACTIONS
Certain members of our senior management have purchased common stock
pursuant to management subscription agreements (see Note 15 - Repurchase
Rights). As a result of such purchases, we have notes and related interest
receivable from the management stockholders totaling $1,490,000 and $1,514,000
at December 31, 2003 and 2004, respectively. We also had transactions with an
equity investee that are described in Note 17.
19. COMMITMENTS AND CONTINGENCIES
GUARANTEES
In the normal course of business we periodically enter into agreements
that incorporate indemnification provisions. While the maximum amount to which
we may be exposed under such agreements cannot be estimated, it is the opinion
of management that any potential indemnification is not expected to have a
material adverse effect on our consolidated financial position or result of
operations. We also offer a warranty of our workmanship in our truck maintenance
and repair shops, but the annual warranty expense and corresponding liability
are immaterial.
65
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ENVIRONMENTAL MATTERS
Our operations and properties are extensively regulated through
environmental laws and regulations ("Environmental Laws") that (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. While
the costs of compliance for these matters have not had a material adverse impact
on us, it is impossible to predict accurately the ultimate effect changing laws
and regulations may have on us in the future. We incurred capital expenditures,
maintenance, remediation and other environmental related costs of approximately
$3,947,000, $4,750,000 and $4,365,000 in 2002, 2003 and 2004, respectively.
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,
and this 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.
66
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
We have obtained insurance of up to $35,000,000 for known environmental
liabilities (which includes the insurance coverage purchased by Unocal as
described above) and up to $40,000,000 for unknown environmental liabilities,
subject, in 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 we have recorded,
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.
At December 31, 2004, we had a reserve for environmental matters of
$13,156,000, a receivable for expected recoveries of certain of these estimated
future expenditures and cash in an escrow account to fund certain of these
estimated future expenditures, leaving an estimated net amount of $4,123,000 to
be funded from future operating cash flows. The following table sets forth the
various amounts recorded in our consolidated balance sheet as either current or
noncurrent assets or liabilities.
AS OF DECEMBER 31, 2004
-------------------------
(IN THOUSANDS OF DOLLARS)
Gross liability for environmental matters:
Included in the accrued liabilities balance ........................... $ 4,610
Included in the noncurrent liabilities balance ........................ 8,546
---------
Total recorded liabilities........................................... 13,156
Less - expected recoveries of future expenditures:
Included in the accounts receivable balance ........................... 1,614
Included in the other noncurrent assets balance ....................... 2,080
Less-cash in escrow account included in other noncurrent assets ......... 5,339
---------
Net environmental costs to be funded by future operating cash flows ... $ 4,123
=========
The following table sets forth the estimated gross amount of the cash
outlays related to the matters for which we have accrued the environmental
reserve. 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.
YEAR ENDING ESTIMATED GROSS
DECEMBER 31, FUTURE EXPENDITURES
- ----------------------- -------------------------
(IN THOUSANDS OF DOLLARS)
2005 .................. $ 4,610
2006 .................. 2,988
2007 .................. 2,355
2008 .................. 1,728
2009 .................. 1,419
Thereafter ............ 56
-----------
$ 13,156
===========
67
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PENDING LITIGATION
We are involved from time to time in various legal and administrative
proceedings and threatened legal and administrative proceedings incidental to
the ordinary course of our business. We believe we are currently not involved in
any litigation, individually or in the aggregate, which could have a material
adverse effect on our business, financial condition, results of operations or
cash flows.
20. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
We attempt to manage the risk arising from changes in interest rates by
using derivative financial instruments such as interest rate swaps. On November
14, 2000, we entered into an interest rate swap agreement with a notional
principal amount of $80,000,000 to exchange our variable rate of LIBOR plus 3
25% with a fixed interest rate of 6.0875%. The swap agreement matured on
December 15, 2002. We had no swap agreements in place throughout 2003 and 2004
and as of December 31, 2003 and 2004.
To qualify for hedge accounting, derivative contracts must meet defined
correlation and effectiveness criteria, be designated as hedges and result in
cash flows and financial statement effects which substantially offset those of
the position being hedged. Amounts receivable or payable under derivative
financial instrument contracts, when recognized, are reported in our
consolidated balance sheet. Pursuant to the provisions of FAS 133, we determined
that the interest rate swap agreement was 100% effective and qualified for cash
flow hedge accounting.
During the year ended December 31, 2002, the fair value of the swap
agreement increased until its maturity on December 15, 2002, resulting in the
recognition of an increase in other comprehensive income of $1,920,000 (net of
tax).
21. OTHER INFORMATION
YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2003 2004
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Operating expenses and Selling, general and
administrative expenses included the following:
Repairs and maintenance expenses ...................... $ 12,055 $ 13,430 $ 12,361
Advertising expenses .................................. $ 7,047 $ 4,715 $ 5,885
Taxes other than payroll and income taxes ............. $ 7,598 $ 8,611 $ 8,350
401(k) plan contribution expense ...................... $ 1,779 $ 1,707 $ 1,577
Interest and other financial costs, net consisted
of the following:
Cash interest expense ................................. $ (47,170) $ (42,053) $ (40,795)
Cash interest income .................................. 157 96 320
Amortization of discount on debt ...................... (1,360) (1,481) (1,704)
Amortization of deferred financing costs .............. (3,050) (3,440) (3,882)
Loss on extinguishment of debt ........................ - - (1,699)
----------- ----------- -----------
Interest and other financial costs, net ............... $ (51,423) $ (46,878) $ (47,760)
=========== =========== ===========
68
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
-------------------------------------------
2002 2003 2004
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Revolving loan borrowings ..................................... $ 473,800 $ 458,100 $ 337,400
Revolving loan repayments ..................................... (495,300) (466,900) (326,000)
----------- ----------- -----------
Revolving loan borrowings (repayments), net ................ $ (21,500) $ (8,800) $ 11,400
=========== =========== ===========
Cash paid during the year for:
Interest ................................................... $ 47,480 $ 39,645 $ 41,815
Income taxes (net of refunds) .............................. $ (2,559) $ 635 $ 1,611
Inventory, property and equipment, and goodwill received in
liquidation of trade accounts and notes receivable ......... $ 2,060 $ 1,226 $ 637
Notes received from sales of property and equipment ........... $ 250 $ - $ -
Notes received upon common stock issuance ..................... $ 116 $ - $ -
23. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance
sheet schedules as of December 31, 2003 and 2004 and our condensed consolidating
statement of income schedules and condensed consolidating statement of cash
flows schedules for the years ended December 31, 2002, 2003 and 2004. In the
following schedules, "Parent Company" refers to the unconsolidated balances of
TravelCenters of America, Inc., "Guarantor Subsidiaries" refers to the combined
unconsolidated balances of TA Operating Corporation and its domestic
subsidiaries, and "Nonguarantor Subsidiary" refers to the combined balances of
TA Franchise Systems Inc. and our Canadian subsidiaries that are included only
since their formation in January 2003. "Eliminations" represent the adjustments
necessary to (a) eliminate intercompany transactions and (b) eliminate our
investments in our subsidiaries.
The Guarantor Subsidiaries, (TA Operating Corporation, TA Licensing, Inc.,
and TA Travel, L.L.C ), are direct wholly-owned subsidiaries of ours and have
fully and unconditionally, jointly and severally, guaranteed the indebtedness of
TravelCenters of America, Inc., which consists of the 2004 Credit Agreement and
the Senior Subordinated Notes due 2009 (see Note 12).
69
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:
DECEMBER 31, 2003
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash ....................................................... $ - $ 14,746 $ 259 $ - $ 15,005
Accounts receivable, net ................................... - 43,489 1,056 (1,558) 42,987
Inventories ................................................ - 63,771 210 - 63,981
Deferred income taxes ...................................... - 3,820 3 - 3,823
Other current assets ....................................... 620 6,598 4 (260) 6,962
--------- --------- --------- --------- ---------
Total current assets ................................. 620 132,424 1,532 (1,818) 132,758
Property and equipment, net .................................... - 431,470 6,663 - 438,133
Goodwill ....................................................... - 25,584 - - 25,584
Deferred financing costs, 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
========= ========= ========= ========= =========
70
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash ....................................................... $ - $ 45,109 $ 737 $ - $ 45,846
Accounts receivable, net ................................... - 61,178 1,305 (999) 61,484
Inventories ................................................ - 75,426 481 - 75,907
Deferred income taxes ...................................... - 6,939 13 - 6,952
Other current assets ....................................... 778 7,602 (3) (30) 8,347
--------- ----------- ----------- ----------- -----------
Total current assets ................................. 778 196,254 2,533 (1,029) 198,536
Property and equipment, net .................................... - 594,709 9,650 - 604,359
Goodwill ....................................................... - 48,898 - - 48,898
Deferred financing costs, net .................................. 28,289 - - - 28,289
Deferred income taxes .......................................... 17,642 (13,419) 140 - 4,363
Other noncurrent assets ........................................ 817 19,250 - (6,783) 13,284
Investment in subsidiaries ..................................... 300,965 3,439 - (304,404) -
--------- ----------- ----------- ----------- -----------
Total assets ......................................... $ 348,491 $ 849,131 $ 12,323 $ (312,216) $ 897,729
========= =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................... $ - $ 198 $ - $ - $ 198
Accounts payable ........................................... - 88,202 662 (110) 88,754
Other accrued liabilities .................................. (991) 62,499 1,210 (918) 61,800
--------- ----------- ----------- ----------- -----------
Total current liabilities ............................ (991) 150,899 1,872 (1,028) 150,752
Long-term debt (net of unamortized discount) ................... 680,360 2,532 6,783 (6,783) 682,892
Deferred income taxes .......................................... - 1,156 - - 1,156
Intercompany payable (receivable) .............................. (370,727) 376,317 (5,590) - -
Other noncurrent liabilities ................................... - 23,212 - - 23,212
--------- ----------- ----------- ----------- -----------
Total liabilities .................................... 308,642 554,116 3,065 (7,811) 858,012
Redeemable equity .............................................. 1,864 - - - 1,864
Nonredeemable stockholders' equity:
Common stock and other nonredeemable stockholders' equity ...... 217,000 186,284 4,348 (190,764) 216,868
Retained earnings (deficit) ................................. (179,015) 108,731 4,910 (113,641) (179,015)
--------- ----------- ----------- ----------- -----------
Total nonredeemable stockholders' equity ............. 37,985 295,015 9,258 (304,405) 37,853
--------- ----------- ----------- ----------- -----------
Total liabilities, redeemable equity and
nonredeemable stockholders' equity ................ $ 348,491 $ 849,131 $ 12,323 $ (312,216) $ 897,729
========= =========== =========== =========== ===========
71
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF INCOME SCHEDULES:
YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel ....................................................... $ - $ 1,237,989 $ - $ - $ 1,237,989
Non-fuel ................................................... - 617,342 - - 617,342
Rent and royalties ......................................... - 13,842 6,036 (4,339) 15,539
--------- ----------- ----------- ----------- -----------
Total revenues ............................................. - 1,869,173 6,036 (4,339) 1,870,870
Cost of goods sold (excluding depreciation) ................... - 1,389,680 - - 1,389,680
--------- ----------- ----------- ----------- -----------
Gross profit (excluding depreciation) .......................... - 479,493 6,036 (4,339) 481,190
Operating expenses ............................................. - 332,159 4,403 (4,339) 332,223
Selling, general and
administrative expenses .................................... 813 35,524 1,481 - 37,818
Depreciation and amortization expense .......................... - 60,301 - - 60,301
(Gain) on asset sales .......................................... - (1,089) - - (1,089)
--------- ----------- ----------- ----------- -----------
Income (loss) from operations .................................. (813) 52,598 152 - 51,937
Equity income (loss) ........................................... 16,976 718 - (16,976) 718
Interest and other financial costs, net ........................ (22,409) (29,014) - - (51,423)
--------- ----------- ----------- ----------- -----------
Income (loss) before income taxes .............................. (6,246) 24,302 152 (16,976) 1,232
Provision (benefit) for income taxes ........................... (7,517) 7,420 58 - (39)
--------- ----------- ----------- ----------- -----------
Net income (loss) .............................................. $ 1,271 $ 16,882 $ 94 $ (16,976) $ 1,271
========= =========== =========== =========== ===========
72
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel ....................................................... $ - $ 1,502,268 $ 11,380 $ - $ 1,513,648
Non-fuel ................................................... - 646,244 3,258 - 649,502
Rent and royalties ......................................... - 11,623 5,516 (4,059) 13,080
--------- ----------- ----------- ----------- -----------
Total revenues ............................................. - 2,160,135 20,154 (4,059) 2,176,230
Cost of goods sold (excluding depreciation) ................... - 1,662,643 12,123 - 1,674,766
--------- ----------- ----------- ----------- -----------
Gross profit (excluding depreciation) .......................... - 497,492 8,031 (4,059) 501,464
Operating expenses ............................................. - 340,008 6,096 (4,059) 342,045
Selling, general and administrative
expenses .................................................... 1,023 38,615 905 - 40,543
Depreciation and amortization expense .......................... - 59,909 466 - 60,375
(Gain) on asset sales .......................................... - (1,476) - - (1,476)
--------- ----------- ----------- ----------- -----------
Income (loss) from operations .................................. (1,023) 60,436 564 - 59,977
Equity income (loss) ........................................... 25,328 651 - (25,215) 764
Interest and other financial costs, net ........................ (23,803) (22,806) (269) - (46,878)
--------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle ................. 502 38,281 295 (25,215) 13,863
Provision (benefit) for income taxes ........................... (8,389) 13,085 23 - 4,719
--------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of a change
in accounting principle .................................... 8,891 25,196 272 (25,215) 9,144
Cumulative effect of a change in accounting
principle (less applicable income tax benefit) ............. - (253) - - (253)
--------- ----------- ----------- ----------- -----------
Net income (loss) .............................................. $ 8,891 $ 24,943 $ 272 $ (25,215) $ 8,891
========= =========== =========== =========== ===========
73
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel ....................................................... $ - $ 1,939,194 $ 20,045 $ - $ 1,959,239
Non-fuel ................................................... - 703,922 4,036 - 707,958
Rent and royalties ......................................... - 9,442 5,013 (3,788) 10,667
--------- ----------- ----------- ----------- -----------
Total revenues ............................................. - 2,652,558 29,904 (3,788) 2,677,864
Cost of goods sold (excluding depreciation) .................... - 2,125,985 21,042 - 2,147,027
--------- ----------- ----------- ----------- -----------
Gross profit (excluding depreciation) .......................... - 526,573 8,052 (3,788) 530,837
Operating expenses ............................................. - 358,968 6,324 (3,788) 361,504
Selling, general and administrative expenses ................... 1,393 40,619 1,168 - 43,180
Transition expense ............................................. - 665 - - 665
Depreciation and amortization expense .......................... - 58,196 554 - 58,750
(Gain) on asset sales .......................................... - (2,547) - - (2,547)
--------- ----------- ----------- ----------- -----------
Income (loss) from operations .................................. (1,393) 70,672 6 - 69,285
Equity income (loss) ........................................... 34,122 (102) - (33,826) 194
Gain on sale of investment ..................................... - 1,615 - - 1,615
Interest and other financial costs, net ........................ (24,632) (22,818) (310) - (47,760)
--------- ----------- ----------- ----------- -----------
Income (loss) before income taxes .............................. 8,097 49,367 (304) (33,826) 23,334
Provision (benefit) for income taxes ........................... (6,765) 15,213 24 - 8,472
--------- ----------- ----------- ----------- -----------
Net income (loss) .............................................. $ 14,862 $ 34,154 $ (328) $ (33,826) $ 14,862
========= =========== =========== =========== ===========
74
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SCHEDULES:
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES: .................... $ (7,105) $ 82,379 $ 300 $ - $ 75,574
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions .................... - (4,243) - - (4,243)
Proceeds from asset sales ................ - 4,773 - - 4,773
Capital expenditures ..................... - (42,640) - - (42,640)
--------- --------- --------- --------- ---------
Net cash used in investing activities... - (42,110) - - (42,110)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances ................ - (14,062) - - (14,062)
Revolving loan borrowings (repayments,
net) ................................... (21,500) - - - (21,500)
Long-term debt repayments ................ (3,280) (129) - - (3,409)
Other .................................... (334) - - - (334)
Intercompany advances .................... 32,219 (31,919) (300) - -
--------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities ................. 7,105 (46,110) (300) - (39,305)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash ........ - (5,841) - - (5,841)
Cash at the beginning of the year .......... - 19,888 - - 19,888
--------- --------- --------- --------- ---------
Cash at the end of the year ................ $ - $ 14,047 $ - $ - $ 14,047
========= ========= ========= ========= =========
75
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES: $ (9,255) $ 83,697 $ 1,066 $ 1,816 $ 77,324
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions ..................... - (4,923) (5,267) - (10,190)
Proceeds from sales of property and
equipment ............................... - 3,900 - - 3,900
Capital expenditures ...................... - (43,466) (730) - (44,196)
-------- -------- -------- -------- --------
Net cash used in investing activities.... - (44,489) (5,997) - (50,486)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances ................. - (2,598) - - (2,598)
Revolving loan borrowings
(repayments), net ....................... (8,800) - - - (8,800)
Long-term debt repayments ................. (14,508) (180) - - (14,688)
Other ..................................... - - 1,816 (1,816) -
Intercompany advances ..................... 32,563 (35,731) 3,168 - -
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities .................. 9,255 (38,509) 4,984 - (26,086)
-------- -------- -------- -------- --------
Effect of exchange rate changes
on cash ............................... - - 206 - 206
-------- -------- -------- -------- --------
Net increase (decrease) in cash ....... - 699 259 - 958
Cash at the beginning of the year ........... - 14,047 - - 14,047
-------- -------- -------- -------- --------
Cash at the end of the year ................. $ - $ 14,746 $ 259 $ - $ 15,005
======== ======== ======== ======== ========
76
TRAVELCENTERS OF AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES: $ (12,742) $ 108,648 $ (793) $ 2,033 $ 97,146
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions ................ - (126,117) - - (126,117)
Proceeds from asset sales ............ - 13,816 - - 13,816
Capital expenditures ................. - (119,968) (2,951) - (122,919)
--------- --------- --------- --------- ---------
Net cash used in investing
activities ....................... - (232,269) (2,951) - (235,220)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances ............ - 2,934 - - 2,934
Revolving loan borrowings
(repayments), net .................. 11,400 - - - 11,400
Long-term debt repayments ............ (310,212) (189) - - (310,401)
Long-term debt borrowings ............ 475,000 - - - 475,000
Debt issuance costs paid ............. (9,857) - - - (9,857)
Other ................................ (158) - 2,033 2,033 (158)
Intercompany advances ................ (153,431) 151,239 2,192 - -
--------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities ............. 12,742 153,984 4,225 (2,033) 169,918
--------- --------- --------- --------- ---------
Effect of exchange rate changes
on cash .......................... - - (3) - (3)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash .. - 30,363 478 - 30,841
Cash at the beginning of the year ...... - 14,746 259 - 15,005
--------- --------- --------- --------- ---------
Cash at the end of the year ............ $ - $ 45,109 $ 737 $ - $ 45,846
========= ========= ========= ========= =========
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer, after conducting an evaluation,
together with other members of our management, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the
end of the period covered by this report, have concluded that our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-14
(c)) were effective to ensure that information required to be disclosed by
us in our reports filed or submitted under the Securities Exchange Act of
1934 (the "Exchange Act") is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the Securities
and Exchange Commission (the "SEC").
(b) Changes in internal controls. There were no 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.
ITEM 9B. OTHER INFORMATION
In December 2004, we entered into an employment agreement, dated as of
January 1, 2005, with Joseph A. Szima, our Senior Vice President, Marketing, and
an Officer of us. This agreement was on substantially identical terms in all
material respects to the employment agreements we have with our other officer
employees, except for the salary amount. The employment agreement commenced on
January 1, 2005, and has a two-year term with automatic extensions of the second
year at the end of each year through age 65, unless notice of non-renewal is
given at least one year in advance. The agreement provides for an annual salary
of $208,000, which amount may be increased but not decreased by action of the
board of directors or its delegate, based on individual and company performance
objectives, ranging from 0% to 75% of base salary, with 75% of base salary being
the target bonus. If we terminate Mr. Szima's employment without cause or Mr.
Szima resigns with good reason, Mr. Szima will be eligible to receive, among
other things, a pro rata bonus for the year of termination, 24 months' base
salary, plus two-times target bonus. Mr. Szima agrees that during the employment
term and for the 24-month period that he is entitled to receive certain
severance payments following a termination of employment by us without cause or
by his resignation for good reason he will refrain from competing with us.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors and executive officers required by
this item is incorporated by reference to the material appearing under the
headings "Our Directors and Officers," "Code of Ethics," and "Committees of the
Board of Directors" in Exhibit 99.1 to this annual report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation required by this item is
incorporated by reference to the material appearing under the heading "Executive
Compensation" in Exhibit 99.1 to this annual report.
78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain of our beneficial
owners and management required by this item is incorporated by reference to the
material appearing under the heading "Security Ownership of Certain Beneficial
Owners and Management" in Exhibit 99.1 to this annual report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
required by this item is incorporated by reference to the material appearing
under the heading "Certain Relationships and Related Transactions" in Exhibit
99.1 to this annual report.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accounting fees and services required by
this item is incorporated by reference to the material appearing under the
heading "Principal Accounting Fees and Services" in Exhibit 99.1 to this annual
report.
79
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
A. Documents filed as part of this report:
1. Financial Statements
Financial statements filed as part of this report are listed in the Index
to Consolidated Financial Statements and Supplementary Data on page 38 of
this annual report.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Balance at Charged Charged to Balance at
Beginning (Credited) Other Deductions End of
of Period To Income Accounts from Reserves Period
---------- ---------- ---------- --------------- ----------
(In Thousands of Dollars)
Year Ended December 31, 2002:
Deducted from accounts and
notes receivable for doubtful
accounts....................... $ 2,385 $ 1,100 $ - $ (1,076)(a) $ 2,409
Year Ended December 31, 2003:
Deducted from accounts and
notes receivable for doubtful
accounts....................... $ 2,409 $ 1,180 $ - $ (1,593)(a) $ 1,996
Year Ended December 31, 2004:
Deducted from accounts and
notes receivable for doubtful
accounts....................... $ 1,996 $ 307 $ - $ (697)(a) $ 1,606
(a) Uncollectible accounts and notes receivable charged off, net of amounts
recovered.
All other schedules are omitted because they are not applicable, not
material or the required information is shown in the financial statements
listed above.
3. Exhibits
Reference is made to the Exhibit Index set forth at page 83 of this annual
report.
80
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934
No annual report or proxy statement has been furnished to our security
holders. We shall furnish to the Securities and Exchange Commission for its
information, at the time copies of such material are furnished to our security
holders, four copies of every proxy statement, form of proxy or other proxy
soliciting material sent to more than ten of our security holders with respect
to our annual meeting. The foregoing material shall not be deemed to be "filed"
with the Securities and Exchange Commission or otherwise subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934, except to the
extent that we specifically incorporate it in this Form 10-K by reference.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRAVELCENTERS OF AMERICA, INC.
March 31, 2005 By: /s/ James W. George
(Date) --------------------------------
Name: James W. George
Title: Executive Vice President,
Chief Financial Officer
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the date indicated.
Signature Title Date
/s/ Edwin P. Kuhn Chairman of the Board of Directors March 31, 2005
- --------------------------
Edwin P. Kuhn
/s/ Timothy L. Doane President, Chief Executive Officer March 31, 2005
- -------------------------- and Director (Principal Executive
Timothy L. Doane Officer)
/s/ James W. George Executive Vice President, Chief March 31, 2005
- -------------------------- Financial Officer and Secretary
James W. George (Principal Financial Officer and
Principal Accounting Officer)
/s/ Robert J. Branson Director March 31, 2005
- --------------------------
Robert J. Branson
/s/ Michael Greene Director March 31, 2005
- --------------------------
Michael Greene
/s/ Steven B. Gruber Director March 31, 2005
- --------------------------
Steven B. Gruber
/s/ Louis J. Mischianti Director March 31, 2005
- --------------------------
Louis J. Mischianti
/s/ Rowan G. P. Taylor Director March 31, 2005
- --------------------------
Rowan G. P. Taylor
82
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- ------------------------------------------------------------------------------------------ ------
2.1 Recapitalization Agreement and Plan of Merger dated as of May 31, 2000.................... (d)
2.2 Amendment No. 1 to Recapitalization Agreement and Plan of Merger dated as of October 2, (e)
2000......................................................................................
3.1 Amended and Restated Certificate of Incorporation of TravelCenters of America, Inc........ (e)
3.2 Amended and Restated By-laws of TravelCenters of America, Inc............................. (g)
3.3 Restated Certificate of Incorporation of TA Operating Corporation......................... (a)
3.4 Amended and Restated By-laws of TA Operating Corporation.................................. (a)
3.5 Amended and Restated Certificate of Incorporation of TA Licensing, Inc.................... (e)
3.6 By-laws of TA Licensing, Inc.............................................................. (e)
3.7 Certificate of Formation of TA Travel, L.L.C.............................................. (e)
3.8 Operating Agreement of TA Travel, L.L.C................................................... (e)
4.1 Indenture, dated as of November 14, 2000 by and among TravelCenters of America, Inc.,
TA Operating Corporation, TA Travel, L.L.C., TA Licensing, Inc., TravelCenters
Properties, L.P., TravelCenters Realty, Inc. and State Street Bank and Trust Company...... (e)
4.2 Form of 12-3/4% Senior Subordinated Note due 2009 (included in Exhibit 4.1)............... (e)
4.3 Exchange and Registration Rights Agreement, dated as of November 14, 2000 by and among
TravelCenters of America, Inc., TA Operating Corporation, TA Travel, L.L.C., TA
Licensing, Inc., TravelCenters Properties, L.P., TravelCenters Realty, Inc., Credit
Suisse First Boston Corporation, Chase Securities Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation.................................................................... (e)
4.4 Form of Warrant Certificate (included in Exhibit 10.21)................................... (e)
4.5 Form of Common Stock Certificate.......................................................... (f)
10.1 Amended and Restated Credit Agreement dated as of December 1, 2004........................ (l)
10.2 Asset Purchase Agreement among B.R.G, Inc., Rip Griffin Truck Service Center, Inc.,
TravelCenters of America, Inc., and TA Operating Corporation dated as of October 1, 2004.. (l)
10.3 Stockholders' Agreement among TravelCenters of America, Inc., Oak Hill Capital
Partners, L.P., Oak Hill Capital Management Partners, L.P., Olympus Growth Fund III,
L.P., Olympus Executive Fund, L.P., Monitor Clipper Equity Partners, L.P., Monitor
Clipper Equity Partners (Foreign), L.P., UBS Capital America II, LLC, Credit Suisse
First Boston LFG Holdings 2000, LLC and Freightliner LLC dated as of November 14, 2000.... (e)
10.4 Operating Agreement of Freightliner Corporation and TA Operating Corporation dated as
of July 21, 1999.......................................................................... (c)
10.5 Amendment No. 1 to Operating Agreement of Freightliner LLC and TA Operating Corporation
dated as of November 9, 2000.............................................................. (e)
10.6 Agreement for Lease, dated as of September 9, 1999, among TA Operating Corporation,
National Auto/Truckstops, Inc. and TCA Network Funding, LP................................ (c)
10.7 Lease Agreement, dated as of September 9, 1999, among TA Operating Corporation,
National Auto/Truckstops, Inc. and TCA Network Funding, LP................................ (c)
10.8 Amendment No. 2, dated as of November 27, 2001, to Agreement for Lease among TCA
Network Funding, LP and TA Operating Corporation.......................................... (h)
83
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- ----------------------------------------------------------------------------------------- ---
10.9 Master Termination Agreement dated as of December 1, 2004 among TCA Network Funding,
Limited Partnership, ML Leasing Equipment Corp., TA Operating Corporation,
TravelCenters of America, Inc., General Electric Capital Corporation, Citicapital
Commercial Corporation, PAM Capital Funding, L.P., and PAMCO Cayman LTD................... (l)
10.10* Employment Agreement, dated as of January 1, 2000, by and among TA Operating
Corporation, TravelCenters of America, Inc. and Timothy L. Doane.......................... (e)
10.11* Employment Agreement, dated as of January 1, 2000, by and among TA Operating
Corporation, TravelCenters of America, Inc. and James W. George........................... (e)
10.12* Employment Agreement, dated as of January 1, 2000, by and among TA Operating
Corporation, TravelCenters of America, Inc. and Michael H. Hinderliter.................... (e)
10.13* Employment Agreement, dated as of January 1, 2000, by and among TA Operating
Corporation, TravelCenters of America, Inc. and Edwin P. Kuhn............................. (e)
10.14* Amendment No. 1 to Employment Agreement dated as of May 26, 2000, by and among TA
Operating Corporation, TravelCenters of America, Inc. and Timothy L. Doane................ (e)
10.15* Amendment No. 1 to Employment Agreement dated as of May 26, 2000, by and among TA
Operating Corporation, TravelCenters of America, Inc. and James W. George................. (e)
10.16* Amendment No. 1 to Employment Agreement dated as of May 26, 2000, by and among TA
Operating Corporation, TravelCenters of America, Inc. and Michael H. Hinderliter.......... (e)
10.17* Amendment No. 1 to Employment Agreement dated as of May 26, 2000, by and among TA
Operating Corporation, TravelCenters of America, Inc. and Edwin P. Kuhn................... (e)
10.18* Employment Agreement, dated as of January 1, 2005, by and among TA Operating
Corporation, TravelCenters of America, Inc. and Joseph A. Szima........................... +
10.19* Amendment No. 2 to Employment Agreement, dated as of December 31, 2002, by and among TA
Operating Corporation, TravelCenters of America, Inc. and Edwin P. Kuhn................... (i)
10.20* Amendment No. 2 to Employment Agreement, dated as of December 14, 2004, by and among TA
Operating Corporation, TravelCenters of America, Inc. and Timothy L. Doane................ (k)
10.21 Warrant Agreement dated as of November 14, 2000 between TravelCenters of America, Inc.
and State Street Bank and Trust Company, as warrant agent................................. (e)
10.22 Contingent Warrant Escrow Agreement dated as of November 14, 2000 between TravelCenters
of America, Inc. and State Street Bank and Trust Company, as warrant escrow agent......... (e)
10.23* Form of Management Subscription Agreement................................................. (a)
10.24* Schedule of Management Subscription Agreements omitted pursuant to Instruction 2 to
Item 601 of Regulation S-K................................................................ +
10.25* Form of Management Note................................................................... (b)
10.26* Schedule of Management Notes omitted pursuant to Instruction 2 to Item 601 of
Regulation S-K............................................................................ +
10.27* 2001 Stock Incentive Plan of TravelCenters of America, Inc. .............................. (h)
10.28* Form of 2001 Stock Incentive Plan - Nonqualified Stock Option Agreement................... (h)
10.29* Amendment to Management Subscription Agreement with Edwin P. Kuhn......................... (j)
10.30* Form of Amendment to Management Subscription Agreement.................................... (j)
84
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- ---------------------------------------------------------------------------------- ---
10.31* Schedule of Amendments to Management Subscription Agreements omitted pursuant to
Instruction 2 to Item 601 of Regulation S-K....................................... +
10.32 Buy-out Agreement of Unocal and the Company dated as of December 31, 2003......... (j)
21.1 List of Subsidiaries of TravelCenters of America, Inc............................. +
23.1 Consent of PricewaterhouseCoopers LLP............................................. +
31.1 Section 302 Certification of Chief Executive Officer.............................. +
31.2 Section 302 Certification of Chief Financial Officer.............................. +
32.1 Section 906 Certification of Chief Executive Officer.............................. +
32.2 Section 906 Certification of Chief Financial Officer.............................. +
99.1 Information Required by Part III of Form 10-K..................................... +
(a) Incorporated by reference to exhibits filed with our Annual Report on Form
10-K for the year ended December 31, 1997.
(b) Incorporated herein by reference to exhibits filed with our Annual Report
on Form 10-K for the year ended December 31, 1998.
(c) Incorporated herein by reference to exhibits filed with our Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
(d) Incorporated herein by reference to exhibits filed with our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000.
(e) Incorporated herein by reference to exhibits filed with our Registration
Statement on Form S-4 filed on December 21, 2000.
(f) Incorporated herein by reference to exhibits filed with our Pre-Effective
Amendment No. 1 to our Registration Statement on Form S-4 filed on January
18, 2001.
(g) Incorporated herein by reference to exhibits filed with our Annual Report
on Form 10-K for the year ended December 31, 2000.
(h) Incorporated herein by reference to exhibits filed with our Annual Report
on Form 10-K for the year ended December 31, 2001.
(i) Incorporated by reference to exhibits filed with our Annual Report on Form
10-K for the year ended December 31, 2002, that was filed on March 26,
2003.
(j) Incorporated by reference to exhibits filed with our Annual Report on Form
10-K for the year ended December 31, 2003.
(k) Incorporated by reference to the exhibit filed with our Current Report on
Form 8-K filed December 17, 2004.
(l) Incorporated by reference to the exhibits filed with our Current Report on
Form 8-K filed on December 6, 2004.
+ Filed herewith
* Executive compensation plans.
85