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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
Commission file number 333-52442
----------------------------------
TRAVELCENTERS OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3856519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24601 Center Ridge Road, Suite 200
Westlake, OH 44145-5639
(Address of principal executive offices, including zip code)
(440) 808-9100
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
As of April 30, 2005, there were outstanding 6,937,003 shares of our
common stock, par value $0.00001 per share. The outstanding shares of our common
stock were issued in transactions not involving a public offering. As a result,
there is no public market for our common stock.
TRAVELCENTERS OF AMERICA, INC.
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause our actual results to differ from future
performance suggested herein. In the context of forward-looking information
provided in this Form 10-Q and in other reports, please refer to the discussion
of risk factors detailed in, as well as the other information contained in, our
filings with the Securities and Exchange Commission.
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Balance Sheet as of December 31, 2004
and March 31, 2005.............................................. 2
Unaudited Consolidated Statement of Operations and
Comprehensive Income for the three months ended March 31,
2004 and 2005................................................... 3
Unaudited Consolidated Statement of Cash Flows for the three
months ended March 31, 2004 and 2005............................ 4
Unaudited Consolidated Statement of Nonredeemable
Stockholders' Equity for the three months ended March 31,
2004 and 2005................................................... 5
Selected Notes to Unaudited Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................... 27
Item 4. Controls and Procedures......................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 28
Item 6. Exhibits........................................................ 28
SIGNATURE........................................................................... 29
1
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
DECEMBER 31, MARCH 31,
2004 2005
------------ ---------
ASSETS (IN THOUSANDS OF DOLLARS)
Current assets:
Cash and cash equivalents.......................................................... $ 45,846 $ 33,054
Accounts receivable (less allowance for doubtful accounts of $1,606 for 2004
and $1,691 for 2005)............................................................ 61,484 80,399
Inventories........................................................................ 75,907 80,023
Deferred income taxes.............................................................. 6,952 6,952
Other current assets............................................................... 8,347 7,377
--------- ---------
Total current assets.......................................................... 198,536 207,805
Property and equipment, net........................................................... 604,359 603,412
Goodwill.............................................................................. 48,898 49,641
Deferred financing costs, net......................................................... 28,289 27,199
Deferred income taxes................................................................. 4,363 5,268
Other noncurrent assets............................................................... 13,284 13,019
--------- ---------
Total assets.................................................................. $ 897,729 $ 906,344
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................................... $ 198 $ 1,388
Accounts payable................................................................... 88,754 113,459
Other accrued liabilities.......................................................... 61,800 72,364
--------- ---------
Total current liabilities..................................................... 150,752 187,211
Commitments and contingencies......................................................... - -
Long-term debt (net of unamortized discount).......................................... 682,892 657,110
Deferred income taxes................................................................. 1,156 1,010
Other noncurrent liabilities.......................................................... 23,212 22,532
--------- ---------
858,012 867,863
Redeemable equity..................................................................... 1,864 1,902
Nonredeemable stockholders' equity:
Common stock and other nonredeemable stockholders' equity.......................... 216,868 216,815
Accumulated deficit................................................................ (179,015) (180,236)
--------- ---------
Total nonredeemable stockholders' equity...................................... 37,853 36,665
--------- ---------
Total liabilities, redeemable equity and nonredeemable stockholders' equity... $ 897,729 $ 906,344
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
2
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2005
--------- ---------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel............................................................ $ 397,411 $ 641,021
Non-fuel........................................................ 159,304 187,956
Rent and royalties.............................................. 2,638 2,477
--------- ---------
Total revenues............................................ 559,353 831,454
Cost of goods sold (excluding depreciation):
Fuel............................................................ 375,827 619,679
Non-fuel........................................................ 64,384 75,645
--------- ---------
Total cost of goods sold (excluding depreciation)......... 440,211 695,324
--------- ---------
Gross profit (excluding depreciation).............................. 119,142 136,130
Operating expenses................................................. 86,036 98,804
Selling, general and administrative expenses....................... 10,405 10,627
Transition expense................................................. - 324
Depreciation and amortization expense.............................. 14,077 15,273
(Gain) loss on asset sales......................................... 12 (186)
--------- ---------
Income from operations............................................. 8,612 11,288
Equity in earnings of affiliate.................................... 79 -
Interest and other financial costs, net............................ (11,477) (13,235)
--------- ---------
(Loss) before income taxes......................................... (2,786) (1,947)
Benefit for income taxes........................................... (1,014) (726)
--------- ---------
Net (loss)......................................................... (1,772) (1,221)
Other comprehensive income (expense), net of tax (Note 4):
Foreign currency translation adjustments....................... (52) (53)
--------- ---------
Comprehensive income (loss)........................................ $ (1,824) $ (1,274)
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
3
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2005
-------- --------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)..................................................................... $ (1,772) $ (1,221)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense....................................... 14,077 15,273
Amortization of deferred financing costs.................................... 921 1,090
Deferred income tax provision............................................... (1,194) (1,036)
Provision for doubtful accounts............................................. 150 100
(Gain) loss on sales of property and equipment.............................. 12 (186)
Changes in assets and liabilities, adjusted for the effects of business
acquisitions:
Accounts receivable....................................................... (10,307) (19,344)
Inventories............................................................... (970) (3,785)
Other current assets...................................................... 626 974
Accounts payable and other accrued liabilities............................ 31,425 36,402
Other, net.................................................................. 741 (29)
-------- --------
Net cash provided by operating activities................................... 33,709 28,238
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.......................................................... - (935)
Proceeds from asset sales...................................................... - 641
Capital expenditures........................................................... (11,003) (13,829)
-------- --------
Net cash used in investing activities....................................... (11,003) (14,123)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in excess of bank balances................. (2,321) (1,894)
Revolving loan borrowings (repayments), net.................................... (5,600) (25,000)
Long-term debt repayments...................................................... (837) (49)
Other.......................................................................... - 38
-------- --------
Net cash provided by (used in) financing activities......................... (8,758) (26,905)
-------- --------
Effect of exchange rate changes on cash..................................... (3) (2)
-------- --------
Net increase (decrease) in cash........................................... 13,945 (12,792)
Cash at the beginning of the period............................................... 15,005 45,846
-------- --------
Cash at the end of the period..................................................... $ 28,950 $ 33,054
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2005
---------- ----------
(IN THOUSANDS OF DOLLARS)
COMMON STOCK:
Balance at beginning and end of period.................................... $ 3 $ 3
========== ==========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning and end of period.................................... $ 216,112 $ 215,743
========== ==========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of period............................................ $ 804 $ 1,122
Foreign currency translation adjustments, net of tax.................. (52) (53)
---------- ----------
Balance at end of period.................................................. $ 752 $ 1,069
========== ==========
ACCUMULATED DEFICIT:
Balance at beginning of period............................................ $ (193,877) $ (179,015)
Net loss........................................................... (1,772) (1,221)
---------- ----------
Balance at end of period.................................................. $ (195,649) $ (180,236)
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
5
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system and in Canada to serve long-haul trucking fleets and their
drivers, independent truck drivers and general motorists. At March 31, 2005, our
geographically diverse nationwide network of full-service travel centers
consisted of 159 sites located in 40 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 March 31, 2005, our network consisted of 138 company-operated sites, 11
leased sites and 10 franchisee-owned sites. During the three-month period ended
March 31, 2005, we converted one leased site to a company-operated site.
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
with a selection of over 4,000 items and other driver amenities. We also collect
rents and franchise royalties from the franchisees who operate the leased sites
and franchisee-owner sites and, as a franchisor, assist our franchisees in
providing service to long-haul trucking fleets and their drivers, independent
truck drivers and general motorists.
The consolidated financial statements include the accounts of
TravelCenters of America, Inc. and its wholly owned subsidiaries, TA Operating
Corporation and TA Franchise Systems Inc., as well as TA Licensing, Inc., TA
Travel, L.L.C., 3073000 Nova Scotia Company, TravelCentres Canada Inc., and
TravelCentres Canada Limited Partnership, which are all direct or indirect
wholly owned subsidiaries of TA Operating Corporation. Intercompany accounts and
transactions have been eliminated. With only one of our 159 travel centers
located in Canada, the amounts of revenues and long-lived assets located in
Canada are not material.
The accompanying unaudited, consolidated financial statements as of and
for the quarters ended March 31, 2004 and 2005 have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, these statements should be read in conjunction with our audited
financial statements as of and for the year ended December 31, 2004. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, all of which were of a normal recurring
nature, necessary to state fairly, in all material respects, our consolidated
financial position at March 31, 2005, and our results of operations, changes in
nonredeemable stockholders' equity and cash flows for the three-month periods
ended March 31, 2004 and 2005, and are not necessarily indicative of the results
to be expected for the full year.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
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
6
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED 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.
3. 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 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, 2004.
THREE MONTHS ENDED
MARCH 31, 2004
-------------------------
(IN THOUSANDS OF DOLLARS)
Total revenue.............................................................. $ 596,173
Gross profit............................................................... $ 130,456
Income (loss) from continuing operations................................... $ (1,499)
Net income................................................................. $ (1,499)
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,
2004, or that may result in the future.
4. COMPREHENSIVE INCOME
Income tax provision (benefit) related to other comprehensive income
(loss) consisted of the following:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2005
----------- -----------
(IN THOUSANDS OF DOLLARS)
Related to gain or loss on foreign currency translation adjustments........ $ (19) $ (17)
---------- ----------
Total.................................................................. $ (19) $ (17)
========== ==========
5. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, MARCH 31,
2004 2005
------------ ----------
(IN THOUSANDS OF DOLLARS)
Non-fuel merchandise....................................................... $ 65,663 $ 68,500
Petroleum products......................................................... 10,244 11,523
----------- ----------
Total inventories...................................................... $ 75,907 $ 80,023
=========== ==========
7
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. GOODWILL AND INTANGIBLE ASSETS
For the three-month period ended March 31, 2005, we recorded goodwill of
$743,000 in connection with converting a leased site to a company-operated site.
The changes in the carrying amount of goodwill for the three months ended March
31, 2004 and 2005 were as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2005
---------- ----------
(IN THOUSANDS OF DOLLARS)
Balance as of beginning of period................................... $ 25,584 $ 48,898
Goodwill recorded during the period................................. - 743
---------- ----------
Balance as of end of period......................................... $ 25,584 $ 49,641
========== ==========
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, MARCH 31,
2004 2005
------------ ----------
(IN THOUSANDS OF DOLLARS)
Amortizable intangible assets:
Leasehold interest........................................... $ 1,724 $ 1,724
Other........................................................ 1,396 1,396
----------- ----------
Total amortizable intangible assets...................... 3,120 3,120
Less - accumulated amortization.............................. 2,421 2,474
----------- ----------
Net carrying value of amortizable intangible assets...... 699 646
Net carrying value of trademarks.................................... 1,398 1,398
----------- ----------
Intangible assets, net................................... $ 2,097 $ 2,044
=========== ==========
Total amortization expense for our amortizable intangible assets for the
three-month periods ended March 31, 2004 and 2005 was $47,000 and $53,000,
respectively. The estimated aggregate amortization expense for our amortizable
intangible assets for the year ending December 31, 2005 and each of the four
succeeding fiscal years are $130,000 for 2005 and $60,000 for each of 2006,
2007, 2008 and 2009.
7. STOCK-BASED EMPLOYEE COMPENSATION
We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. For granted options
that vest over time, no compensation expense is reflected in net income, as all
of those options had an exercise price equal to or greater than the market value
of the underlying common stock at the date of grant. For granted options that
vest based on attaining certain measures of performance, compensation expense is
recognized when it becomes probable that the performance triggers for such
options will be achieved. The following table illustrates the effect on net
(loss) if we had applied the fair value recognition provisions of FAS No. 123 to
stock-based employee compensation.
8
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2005
---------- ----------
(IN THOUSANDS OF DOLLARS)
Net (loss), as reported......................................................... $ (1,772) $ (1,221)
Add back - Stock-based employee compensation expense, net of related tax
effects, included in net (loss) as reported................................. - 7
Deduct - Total stock-based employee compensation expense determined under fair
value based methods for all awards, net of related tax effects.............. (168) (166)
--------- ---------
Pro forma net (loss)............................................................ $ (1,940) $ (1,380)
========= =========
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.
8. 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.
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 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 financial condition,
results of operations or liquidity.
9
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
We have obtained insurance of up to $35,000,000 for known environmental
liabilities 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 March 31, 2005, we had a reserve for environmental matters of
$13,681,000, 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 $4,202,000 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 MARCH 31, 2005
-------------------------
(IN THOUSANDS OF DOLLARS)
Gross liability for environmental matters:
Included in the accrued liabilities balance............................. $ 5,739
Included in the noncurrent liabilities balance.......................... 7,942
-------------
Total recorded liabilities........................................... 13,681
Less - expected recoveries of future expenditures:
Included in the accounts receivable balance............................. 2,191
Included in the other noncurrent assets balance......................... 2,018
Less-cash in escrow account included in other noncurrent assets............... 5,270
-------------
Net environmental costs to be funded by future operating cash flows..... $ 4,202
=============
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)
The remainder of 2005......................................................... $ 4,968
2006.......................................................................... 3,080
2007.......................................................................... 2,405
2008.......................................................................... 1,723
2009.......................................................................... 1,419
Thereafter.................................................................... 86
-------------
$ 13,681
=============
10
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED 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 that we are not now involved in
any litigation, individually, or in the aggregate, which could have a material
adverse affect on our business, financial condition, results of operations or
cash flows.
9. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2005
---------- -----------
(IN THOUSANDS OF DOLLARS)
Revolving loan borrowings................................................. $ 94,100 $ 35,300
Revolving loan repayments................................................. (99,700) (60,300)
---------- ----------
Revolving loan borrowings (repayments), net............................. $ (5,600) $ (25,000)
========== ==========
Cash paid during the period for:
Interest................................................................ $ 5,480 $ 5,449
Income taxes (net of refunds)........................................... $ 269 $ 538
Inventory received in liquidation of trade accounts receivable............ $ - $ 324
10. OTHER INFORMATION
Interest and other financial costs consisted of the following:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2005
----------- -----------
(IN THOUSANDS OF DOLLARS)
Cash interest expense..................................................... $ (10,175) $ (11,762)
Cash interest income...................................................... 23 74
Amortization of discount on debt.......................................... (404) (457)
Amortization of deferred financing costs.................................. (921) (1,090)
---------- ----------
Interest and other financial costs, net................................... $ (11,477) $ (13,235)
========== ==========
11. RELATED PARTY TRANSACTIONS
Certain members of our senior management have purchased common stock
pursuant to management subscription agreements. As a result of such purchases,
we have notes and related interest receivable from the management stockholders
totaling $1,514,000 and $1,571,000 at December 31, 2004 and March 31, 2005,
respectively.
Until April 2004, we owned a 21.5% voting interest in Simons Petroleum,
Inc. During the three-month period ended March 31, 2004, diesel fuel provided by
Simons accounted for $63,406,000 of our cost of goods sold and we made sales of
diesel fuel to Simons in the amount of $494,000. We also lease a travel center
from Simons and the rent expense related to this site for the three-month period
ended March 31, 2004 was $102,000.
11
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance
sheet schedules as of December 31, 2004 and March 31, 2005 and our condensed
consolidating statement of operations schedules and condensed consolidating
statement of cash flows schedules for the three-month periods ended March 31,
2004 and 2005. In the following schedules, "Parent Company" refers to the
unconsolidated balances of TravelCenters of America, Inc., "Guarantor
Subsidiaries" refers to the consolidated balances of TA Operating Corporation
and its domestic subsidiaries, but excluding its three Canadian subsidiaries,
and "Nonguarantor Subsidiaries" refers to the combined balances of TA Franchise
Systems Inc. and our three Canadian subsidiaries. "Eliminations" represent the
adjustments necessary to (a) eliminate intercompany transactions and (b)
eliminate investments in subsidiaries.
The Guarantor Subsidiaries (TA Operating Corporation, TA Licensing, Inc.,
and TA Travel, L.L.C.), are direct or indirect wholly-owned subsidiaries of ours
and have fully and unconditionally, jointly and severally, guaranteed the
indebtedness of TravelCenters of America, Inc., which consists of the Senior
Credit Facility and the Senior Subordinated Notes due 2009.
12
CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:
DECEMBER 31, 2004
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash and cash equivalents.................. $ - $ 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.................... 298,103 3,439 - (301,542) -
--------- --------- --------- --------- ---------
Total assets.......................... $ 345,629 $ 849,131 $ 12,323 $(309,354) $ 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)............. (373,589) 379,179 (5,590) - -
Other noncurrent liabilities.................. - 23,212 - - 23,212
--------- --------- --------- --------- ---------
Total liabilities..................... 305,780 556,978 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) 105,869 4,910 (110,779) (179,015)
--------- --------- --------- --------- ---------
Total nonredeemable stockholders'
equity............................. 37,985 292,153 9,258 (301,543) 37,853
--------- --------- --------- --------- ---------
Total liabilities, redeemable equity
and nonredeemable stockholders'
equity............................. $ 345,629 $ 849,131 $ 12,323 $(309,354) $ 897,729
========= ========= ========= ========= =========
13
MARCH 31, 2005
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash and cash equivalents............. $ - $ 32,364 $ 690 $ - $ 33,054
Accounts receivable, net.............. - 80,969 1,222 (1,792) 80,399
Inventories........................... - 79,557 466 - 80,023
Deferred income taxes................. - 6,940 12 - 6,952
Other current assets.................. 520 6,942 62 (147) 7,377
--------- --------- --------- --------- ---------
Total current assets............. 520 206,772 2,452 (1,939) 207,805
Property and equipment, net.............. - 593,927 9,440 - 603,412
Goodwill................................. - 49,641 - - 49,641
Deferred financing costs, net............ 27,199 - - - 27,199
Deferred income taxes.................... 18,442 (13,358) 184 - 5,268
Other noncurrent assets.................. 798 18,962 - (6,741) 13,019
Investment in subsidiaries............... 301,056 3,375 - (304,431) -
--------- --------- --------- --------- ---------
Total assets..................... $ 348,015 $ 859,364 $ 12,076 $(313,111) $ 906,344
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.. $ 1,188 $ 200 $ - $ - $ 1,388
Accounts payable...................... - 113,321 470 (332) 113,459
Other accrued liabilities............. 2,338 69,698 1,935 (1,607) 72,364
--------- --------- --------- --------- ---------
Total current liabilities........ 3,526 183,219 2,405 (1,939) 187,211
Long-term debt (net of unamortized
discount)............................. 654,601 2,509 6,741 (6,741) 657,110
Deferred income taxes.................... - 1,010 - - 1,010
Intercompany payable (receivable)........ (348,778) 355,207 (6,429) - -
Other noncurrent liabilities............. - 22,532 - - 22,532
--------- --------- --------- --------- ---------
Total liabilities................ 309,349 564,477 2,717 (8,680) 867,863
Redeemable equity........................ 1,902 - - - 1,902
Nonredeemable stockholders' equity:
Common stock and other
nonredeemable stockholders' equity 217,000 186,258 4,321 (190,764) 216,815
Retained earnings
(accumulated deficit)............. (180,236) 108,629 5,038 (113,667) (180,236)
--------- --------- --------- --------- ---------
Total nonredeemable stockholders'
equity........................ 36,764 294,887 9,359 (304,431) 36,579
--------- --------- --------- --------- ---------
Total liabilities, redeemable
equity and nonredeemable
stockholders' equity.......... $ 348,015 $ 859,364 $ 12,076 $(313,111) $ 906,344
========= ========= ========= ========= =========
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:
THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel.................................... $ - $ 393,356 $ 4,055 $ - $ 397,411
Non-fuel................................ - 158,459 845 - 159,304
Rent and royalties...................... - 2,339 1,173 (874) 2,638
--------- --------- --------- --------- ---------
Total revenues.......................... - 554,154 6,073 (874) 559,353
Cost of goods sold (excluding depreciation) - 435,970 4,241 - 440,211
--------- --------- --------- --------- ---------
Gross profit (excluding depreciation)...... - 118,184 1,832 (874) 119,142
Operating expenses......................... - 85,498 1,412 (874) 86,036
Selling, general and
administrative expenses................ 317 9,777 311 - 10,405
Depreciation and amortization expense...... - 13,940 137 - 14,077
Loss on asset sales........................ - 12 - - 12
--------- --------- --------- --------- ---------
Income (loss) from operations.............. (317) 8,957 (28) - 8,612
Equity income (loss)....................... 2,308 56 - (2,285) 79
Interest and other financial costs, net.... (6,098) (5,304) (75) - (11,477)
--------- --------- --------- --------- ---------
Income (loss) before income taxes.......... (4,107) 3,709 (103) (2,285) (2,786)
Provision (benefit) for income taxes....... (2,335) 1,350 (29) - (1,014)
--------- --------- --------- --------- ---------
Net income (loss).......................... $ (1,772) $ 2,359 $ (74) $ (2,285) $ (1,772)
========= ========= ========= ========= =========
15
THREE MONTHS ENDED MARCH 31, 2005
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel.................................... $ - $ 634,719 $ 6,302 $ - $ 641,021
Non-fuel................................ - 186,742 1,214 - 187,956
Rent and royalties...................... - 1,889 1,160 (572) 2,477
--------- --------- --------- --------- ---------
Total revenues.......................... - 823,350 8,676 (572) 831,454
Cost of goods sold (excluding depreciation) - 688,734 6,590 - 695,324
--------- --------- --------- --------- ---------
Gross profit (excluding depreciation)...... - 134,616 2,086 (572) 136,130
Operating expenses......................... - 98,056 1,320 (572) 98,804
Selling, general and
administrative expenses................ 338 9,993 296 - 10,627
Transition expense......................... - 324 - - 324
Depreciation and amortization expense...... - 15,126 147 - 15,273
(Gain) on asset sales...................... - (186) - - (186)
--------- --------- --------- --------- ---------
Income (loss) from operations.............. (338) 11,303 323 - 11,288
Equity income (loss)....................... 2,952 (64) - (2,888) -
Interest and other financial costs, net.... (6,318) (6,797) (120) - (13,235)
--------- --------- --------- --------- ---------
Income (loss) before income taxes.......... (3,704) 4,442 203 (2,888) (1,947)
Provision (benefit) for income taxes....... (2,483) 1,682 75 - (726)
--------- --------- --------- --------- ---------
Net income (loss).......................... $ (1,221) $ 2,760 $ 128 $ (2,888) $ (1,221)
========= ========= ========= ========= =========
16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SCHEDULES:
THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................. $ (440) $ 34,115 $ 34 $ - $ 33,709
-------- -------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................. - (11,003) - - (11,003)
-------- -------- -------- --------- --------
Net cash used in investing
activities ...................... - (11,003) - - (11,003)
-------- -------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances ........... - (2,321) - - (2,321)
Revolving loan borrowings
(repayments), net ................. (5,600) - - - (5,600)
Long-term debt repayments ............ (791) (46) - - (837)
Intercompany advances ................ 6,831 (7,065) 234 - -
-------- -------- -------- --------- --------
Net cash provided by (used in)
financing activities ............ 440 (9,432) 234 - (8,758)
-------- -------- -------- --------- --------
Effect of exchange rate changes on
cash ............................ - - (3) - (3)
-------- -------- -------- --------- --------
Net increase (decrease) in cash and
cash equivalents ................ - 13,680 265 - 13,945
Cash and cash equivalents at the
beginning of the period .............. - 14,746 259 - 15,005
-------- -------- -------- --------- --------
Cash and cash equivalents at the end of
the period ........................... $ - $ 28,426 $ 524 $ - $ 28,950
======== ======== ======== ========= ========
17
THREE MONTHS ENDED MARCH 31, 2005
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES.................. $ 151 $ 27,292 $ 795 $ - $ 28,238
-------- -------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions................. - (935) - - (935)
Proceeds from asset sales............. - 641 - - 641
Capital expenditures.................. - (13,829) - - (13,829)
-------- -------- -------- --------- --------
Net cash used in investing
activities....................... - (14,123) - - (14,123)
-------- -------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............ - (1,894) - - (1,894)
Revolving loan borrowings
(repayments), net.................. (25,000) - - - (25,000)
Long-term debt repayments............. - (49) - - (49)
Other................................. 38 - - - 38
Intercompany advances................. 24,811 (23,971) (840) - -
-------- -------- -------- --------- --------
Net cash provided by (used in)
financing activities............. (189) (25,914) (840) - (26,943)
-------- -------- -------- --------- --------
Effect of exchange rate changes on
cash............................. - - (2) - (2)
-------- -------- -------- --------- --------
Net increase (decrease) in cash and
cash equivalents................. - - (12,792)
Cash and cash equivalents at the
beginning of the period............... - 45,109 737 - 45,846
-------- -------- -------- --------- --------
Cash and cash equivalents at the end of
the period............................ $ - $ 32,364 $ 690 $ - $ 33,054
======== ======== ======== ========= ========
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and selected notes to unaudited
consolidated financial statements included herein, and the audited financial
statements and the Management's Discussion and Analysis included with our Form
10-K for the year ended December 31, 2004. Our results of operations for a
particular quarter may not be indicative of results expected during the other
quarters or for the entire year.
CRITICAL ACCOUNTING POLICIES
We have no material changes to the disclosure on this matter made in
our annual report on Form 10-K for the year ended December 31, 2004.
OVERVIEW
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. Our network is the largest nationwide,
full-service travel center network in the United States. At March 31, 2005, our
geographically diverse network consisted of 159 sites located in 40 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, typically on 20- to 25-acres sites. Most of our network
properties were developed more than 20 years ago when prime real estate
locations along the interstate highway system were more readily available than
they are today, making a network such as ours difficult to replicate. Operating
under the "TravelCenters of America" and "TA" brand names, our nationwide
network provides an advantage to long-haul trucking fleets by enabling them to
route their trucks within a single network from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, more than 20 different brands of fast food
restaurants, travel and convenience stores 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 three-month periods ended March
31, 2004 and 2005, our revenues and gross profit were composed as follows:
19
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2005
----- -----
Revenues:
Fuel ............................................ 71.0% 77.1%
Non-fuel ........................................ 28.5% 22.6%
Rent and royalties .............................. 0.5% 0.3%
----- -----
Total revenues ............................ 100.0% 100.0%
===== =====
Gross profit (excluding depreciation):
Fuel ............................................ 18.1% 15.7%
Non-fuel ........................................ 79.7% 82.5%
Rent and royalties .............................. 2.2% 1.8%
----- -----
Total gross profit (excluding depreciation) 100.0% 100.0%
===== =====
COMPOSITION OF OUR NETWORK
The changes in the number of sites within our network and in their method
of operation (company-operated, leased or franchisee-owned) are significant
factors influencing the changes in our results of operations. The following
table summarizes the changes in the composition of our network from December 31,
2003 through March 31, 2005:
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
-------- ------ ----------- -----
Number of sites at December 31, 2003 ................... 126 14 10 150
2004 First Quarter Activity:
No activity ......................................... - - - -
--- --- --- ---
Number of sites at March 31, 2004 ...................... 126 14 10 150
April - December 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
2005 Activity:
Sales of sites ...................................... (1) - - (1)
Conversion of leased sites to company-operated sites 1 (1) - -
--- --- --- ---
Number of sites at March 31, 2005 ...................... 138 11 10 159
=== === === ===
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.
RESULTS OF OPERATIONS
SAME-SITE RESULTS COMPARISONS
As part of our discussion and analysis of operating results we refer to
increases and/or decreases in results on a same-site basis. For purposes of
these comparisons, we include a site in the same-site comparisons 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.
20
For purposes of the following discussion, the sites acquired from Rip
Griffin were treated as same-sites and the actual results of those sites for the
current year and prior year (under Rip Griffin's ownership) periods were
included in calculating the same-site growth statistics.
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.
QUARTER ENDED MARCH 31, 2005 COMPARED TO QUARTER ENDED MARCH 31, 2004
Revenues. Our consolidated revenues for the three-month period ended March
31, 2005 were $831.5 million, which represents an increase from the three-month
period ended March 31, 2004 of $272.1 million, or 48.6%, that is primarily
attributable to an increase in fuel revenue but also resulted from increased
non-fuel revenues, both of which factors were affected by the acquistion of
eleven travel centers from Rip Griffin Truck Service Center, Inc. on December 1,
2004.
Fuel revenue for the three-month period ended March 31, 2005 increased by
$243.6 million, or 61.3%, as compared to the three-month period ended March 31,
2004. The increase was attributable principally to increased average selling
prices for both diesel fuel and gasoline, but also to increased levels of diesel
fuel and gasoline sales volumes. Average diesel fuel and gasoline sales prices
for the three-month period ended March 31, 2005 increased by 41.0% and 22.4%,
respectively, as compared to the three-month period ended March 31, 2004,
reflecting increases in commodity prices that were attributable to higher crude
oil costs that were primarily due to increased worldwide demand and the
expectations of continuing growth in demand. Diesel fuel and gasoline sales
volumes for the three-month period ended March 31, 2005 increased 17.3% and
8.5%, respectively, as compared to the three-month period ended March 31, 2004.
For the three-month period ended March 31, 2005, we sold 382.9 million gallons
of diesel fuel and 44.2 million gallons of gasoline, as compared to 326.3
million gallons of diesel fuel and 40.8 million gallons of gasoline for the
three-month period ended March 31, 2004. The diesel fuel sales volume increase
of 56.6 million gallons primarily resulted from a net increase in sales volumes
at sites we added to or eliminated from our network during 2004 and 2005,
particularly the 11 sites acquired from Rip Griffin in December 2004, an
increase in same-site diesel fuel sales volumes, and a 7.0 million gallon
increase in wholesale diesel fuel sales volume. The gasoline sales volume
increase of 3.5 million gallons was primarily attributable to a net increase in
sales volumes at company-operated sites we added to or eliminated from our
network during 2004 and 2005, particularly the 11 sites acquired from Rip
Griffin in December 2004, and an increase in same-site gasoline sales volumes.
For the three-month period ended March 31, 2005 as compared to the same period
in the prior year, same-site diesel fuel sales volumes increased by 10.1% and
same-site gasoline sales volumes increased by 2.3%. We believe the same-site
diesel fuel sales volume increase resulted from an improved freight market in
2005 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 2005. 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. However, we
believe that the same-site gasoline sales volume growth rate was somewhat
reduced by the historically high levels of retail gasoline prices and the effect
such price levels have on general motorist interstate travel in particular.
Non-fuel revenues for the three-month period ended March 31, 2005 of
$188.0 million reflected an increase of $28.7 million, or 18.0%, as compared to
the three-month period ended March 31, 2004. The increase was primarily
attributable to the net increase in sales at the company-operated sites we added
to or eliminated from our network during 2004 and 2005, particularly the 11
sites acquired from Rip Griffin in December 2004. For the three-month period
ended March 31, 2005 as compared to the same period in the prior year, same-site
non-fuel revenues increased by 7.3%. 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.
21
Rent and royalty revenues for the three-month period ended March 31, 2005
reflected a $0.2 million, or 6.1%, decrease as compared to the three-month
period ended March 31, 2004. This decrease was attributable to the rent and
royalty revenue lost as a result of the conversions of three leased sites to
company-operated sites during 2004 and 2005. This decrease was partially offset
by a 4.5% increase in same-site royalty revenue and a 4.9% increase in same-site
rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the
three-month period ended March 31, 2005 was $136.1 million, compared to $119.1
million for the three-month period ended March 31, 2004, an increase of $17.0
million, or 14.3%. The increase in our gross profit was primarily due to the
increases in diesel fuel, gasoline, and non-fuel sales volumes that was
partially offset by a decrease in fuel margin per gallon and decreased rent and
royalty revenue, as discussed above.
Operating and Selling, General and Administrative Expenses. Operating
expenses included the direct expenses of company-operated sites and the
ownership costs of leased sites. Selling, general and administrative expenses
included corporate overhead and administrative costs.
Our operating expenses increased by $12.8 million, or 14.8%, to $98.8
million for the three-month period ended March 31, 2005 compared to $86.0
million for the three-month period ended March 31, 2004. This increase was
primarily attributable to a net increase resulting from company-operated sites
we added to our network or eliminated, particularly the 11 sites acquired from
Rip Griffin in December 2004. On a same-site basis, operating expenses as a
percentage of non-fuel revenues for 2005 were 52.2%, compared to 54.2% for the
three-month period ended March 31, 2004, 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 three-month
period ended March 31, 2005 were $10.6 million, which reflected a $0.2 million,
or 2.1%, increase from the three-month period ended March 31, 2004 that was
primarily attributable to an increase in personnel costs that was partially
attributable to the Rip Griffin acquisition.
Transition Expense. Transition expense included the costs incurred in
converting the travel centers acquired from Rip Griffin to our operating model
and standards. In the three-month period ended March 31, 2005, we incurred $0.3
million of such costs, primarily consisting of site training and deferred
maintenance expenses. We expect to incur a total of approximately $1.3 million
of transition expenses during 2005 in connection with these sites.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the three-month period ended March 31, 2005 was $15.3 million,
compared to $14.1 million for the three-month period ended March 31, 2004, an
increase of $1.2 million, or 8.5%, that was primarily due to the increase in our
level of depreciable assets as a result of acquiring the Rip Griffin sites and
terminating our master lease agreement, both of which occurred in December 2004.
(Gain) loss on asset sales. For the three-month period ended March 31,
2005, the gain on asset sales of $0.2 million primarily was generated from the
sale of one company-operated site.
Income from Operations. We generated income from operations of $11.3
million for the three-month period ended March 31, 2005, compared to income from
operations of $8.6 million for the three-month period ended March 31, 2004. This
increase of $2.7 million, or 31.1%, as compared to the 2004 period was primarily
attributable to the increased levels of fuel sales volumes, non-fuel revenues
and non-fuel gross margin, all due largely to the acquisition of sites from Rip
Griffin, which was partially offset by the decreased level of fuel margins per
gallon.
Interest and Other Financial Costs -- Net. Interest and other financial
costs, net, for the three-month period ended March 31, 2005 increased by $1.8
million, or 15.3%, compared to the three-month period ended March 31, 2004. This
increase primarily resulted from both an increased level of indebtedness during
2005 as compared to 2004, as a result of the 2004 Refinancing, and also rising
interest rates throughout 2004 and 2005. The effects of these factors was
partially offset by the decrease in our interest rate spreads as a result of the
2004 Refinancing.
22
Income Taxes. Our effective income tax rates for the three-month periods
ended March 31, 2005 and 2004 were 37.3% and 36.4%, 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.
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 from that date. The following table presents
our pro forma results of operations as if the acquisition of the Rip Griffin
sites had taken place on January 1, 2004 and provides a comparison of these
amounts to our actual results of operations as previously reported.
THREE MONTHS ENDED
MARCH 31, 2004
------------------------
AS REPORTED PRO FORMA
----------- ---------
(IN MILLIONS OF DOLLARS)
Total revenue.................................. $ 559.4 $ 596.2
Gross profit................................... $ 119.1 $ 130.7
Income (loss) from continuing operations....... $ (1.8) $ (1.3)
Net income..................................... $ (1.8) $ (1.3)
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,
2004, 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 continue to rise during the remainder of 2005 from levels
that existed during 2004 and the first three months of 2005, 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 $4.8 million. A significant
increase in diesel fuel and gasoline prices increases our cash investment in
working capital and can also have a depressing effect on our sales volumes and
fuel margins per gallon.
The primary risk we face with respect to the expected availability of
borrowing under our revolving credit facility are the limitations imposed upon
us by the covenants contained in 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 the first three months of 2005 and as of March 31, 2005, 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.
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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 of transition capital expenditures primarily
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 the remainder of 2005 we
will make our remaining scheduled debt repayments of $0.2 million and we also
anticipate that we will have no net 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.
HISTORICAL CASH FLOWS
Net cash provided by operating activities was $28.2 million for the first
quarter of 2005, compared to $33.7 million for the same period in the prior
year. This $5.5 million decrease in cash provided by operations was primarily
attributable to a $7.0 million increase in the amount of cash invested in net
working capital that was somewhat offset by an increase in our profitability.
The investment in working capital resulted primarily from the significant
increases in diesel fuel and gasoline prices since December 31, 2004, which
resulted in our accounts receivable and inventories balances increasing more
than our current liabilities balances.
Net cash used in investing activities was $14.1 million for the first
quarter of 2005, as compared to $11.0 million for the first quarter of 2004. The
level of capital expenditures in the first quarter of 2005 was $2.8 million
greater than that in the first quarter of 2004. The increase in cash used in
investing activities also resulted from a lack of business acquisitions or asset
sales during 2004, as compared to the net expenditure of $0.3 million in these
areas in the first quarter of 2005, which was related to the conversion of one
leased site to a company-operated site and the sale of one-company-operated
site. We expect cash used in investing activities for the year ending December
31, 2005 to total $80.1 million, as compared to $235.2 million for the year
ended December 31, 2004. The decrease from 2004 is due to the Rip Griffin
acquisition and master lease facility termination that were completed during
2004.
Net cash used in financing activities was $26.9 million during the first
quarter of 2005, as compared to $8.8 million of cash used in financing
activities for the first quarter of 2004. During the first quarter of 2005, we
made net repayments of revolving credit facility indebtedness of $25.0 million
and reduced the amount of outstanding checks in excess of funds on deposit by
$1.9 million. In the first quarter of 2004, we made net repayments of revolving
credit facility indebtedness of $5.6 million, made scheduled debt repayments of
$0.8 million and reduced the amount of outstanding checks in excess of funds on
deposit by $2.3 million. The total amount of our scheduled debt repayments for
2005 is $0.2 million.
ADJUSTED EBITDA AND DEBT COVENANT COMPLIANCE
Adjusted EBITDA, as used here, is based on the definition for "EBITDA" in
our bank debt agreement and consists of net income plus the sum of (a) income
taxes, (b) interest expense, net, (c) depreciation, amortization and other
noncash charges, (d) transition expense, (e) extraordinary losses and cumulative
effects of accounting changes and (f) the costs of the merger and
recapitalization transactions. We have included this information concerning
Adjusted EBITDA because Adjusted EBITDA is a primary component for calculating
the financial ratio covenants in our debt agreements. We also use Adjusted
EBITDA as a basis for determining bonus payments to our corporate and site-level
management employees and as a key component in the formula for calculating the
fair value of our redeemable common stock and stock options. Adjusted EBITDA
should not be considered in isolation from, or as a
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substitute for, net income, income from operations, cash flows from operating
activities or other consolidated income or cash flow statement data prepared in
accordance with generally accepted accounting principles. While the non-GAAP
measures "EBITDA" and "Adjusted EBITDA" are frequently used by other companies
as measures of operations and/or ability to meet debt service requirements,
Adjusted EBITDA as we use the term is not necessarily comparable to similarly
titled captions of other companies due to differences in methods of calculation.
We consider our Senior Credit Facility to be a material agreement. A
majority of our outstanding indebtedness has been borrowed under the Senior
Credit Facility. Further, the Senior Credit Facility requires us to maintain
compliance with a variety of affirmative and negative covenants which primarily
act to limit the types of business activities we can undertake; limits the
amounts we can spend for items such as capital expenditures, dividends and
distributions, investments, operating leases, etc.; and limits the amount of
additional indebtedness we can incur and the liens that can be placed on our
assets. We have maintained compliance with all of these covenants for all
periods presented and expect to remain in compliance with all of the debt
covenants to which we are subject through the remainder of 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 our Senior Credit Facility declaring
our indebtedness under the Senior Credit Facility immediately due and payable.
However, the more likely consequence would be the negotiation of a waiver and/or
amendment of the covenants, which is reasonably likely to require us to pay a
significant amount of fees to the lenders and legal counsel and to further limit
our ability to make cash disbursements, such as for capital expenditures. The
following table sets forth the calculation of Adjusted EBITDA and information
related to the debt covenant financial ratios.
THREE MONTHS ENDED
MARCH 31
-------------------------
2004 2005
--------- ----------
(IN THOUSANDS OF DOLLARS,
EXCEPT RATIOS)
Net (loss) ................................................ $ (1,772) $ (1,221)
Adjustments to reconcile net (loss) to Adjusted EBITDA:
(Benefit) for income taxes ............................. (1,014) (726)
Interest and other financial costs, net ................ 11,477 13,235
Depreciation and amortization expense .................. 14,077 15,273
Transition expense ..................................... -- 324
Other non-cash charges (credits), net .................. 146 86
--------- ---------
Adjusted EBITDA ........................................... $ 22,914 $ 26,971
========= =========
Adjusted EBITDA for ratio measurement period .............. $ 121,857 $ 135,534
========= =========
Interest expense coverage ratio:
Actual ratio at period end ............................. 2.93x 3.23x
Required ratio at period end (no less than)............. 2.00x 2.50x
Minimum amount of Adjusted EBITDA to meet required
ratio................................................. $ 83,064 $ 104,926
Leverage ratio:
Actual ratio at period end(1) .......................... 3.88x 4.13x
Required ratio at period end (no greater than) ......... 4.15x 5.50x
Minimum amount of Adjusted EBITDA to meet required
ratio................................................. $ 113,953 $ 114,172
(1) 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 leverage ratio 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 the twelve-month
period ended March 31, 2005 was $151,921,000.
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DESCRIPTION OF INDEBTEDNESS
We have no material changes to the disclosure on this matter made in our
annual report on Form 10-K for the year ended December 31, 2004, except that at
March 31, 2005, we had no outstanding revolving credit facility borrowings and
had issued letters of credit of $32.0 million, leaving $93.0 million of our $125
million revolving credit facility available for borrowings.
OFF-BALANCE SHEET ARRANGEMENTS
We have no material changes to the disclosure on this matter made in our
annual report on Form 10-K for the year ended December 31, 2004.
SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We have no material changes to the disclosure on this matter made in our
annual report on Form 10-K for the year ended December 31, 2004.
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 March 31, 2005, we had a reserve of $13.7 million for unindemnified
environmental matters for which we are responsible, a receivable for estimated
recoveries of these estimated future expenditures of $4.2 million and $5.3
million of cash in an escrow account to fund certain of these estimated
expenditures, leaving an estimated net amount of $4.2 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 $5.0
million in the remainder of 2005; $3.1 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. 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 footnotes to
the unaudited consolidated financial statements included elsewhere in this
quarterly report
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
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FORWARD-LOOKING STATEMENTS
This quarterly report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to our future prospects, developments and business strategies.
The statements contained in this quarterly report that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. We have used the words "may," "will," "expect,"
"anticipate," "believe," "estimate," "plan," "intend" and similar expressions in
this quarterly report to identify forward-looking statements. These
forward-looking statements are made based on our expectations and beliefs
concerning future events affecting us and are subject to uncertainties and
factors relating to our operations and business environment, all of which are
difficult to predict and many of which are beyond our control, that could cause
our actual results to differ materially from those matters expressed in or
implied by forward-looking statements. The following factors are among those
that could cause our actual results to differ materially from the
forward-looking statements:
- competition from other travel center and truck stop operators,
including additional or improved services or facilities of competitors,
and from the potential commercialization of state-owned interstate rest
areas;
- the economic condition of the trucking industry, which in turn is
dependent on general economic factors;
- increased environmental regulation;
- changes in governmental 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 or may require a greater than expected
level of transition expenditures to be integrated; 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosure on this matter made in
our annual report on Form 10-K for the year ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer, together with other members of our
management, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by
this quarterly report on Form 10-Q. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that
the disclosure controls and procedures were effective as of the end of
the period covered by this quarterly report on Form 10-Q.
(b) Changes in internal controls. There were no changes in our internal
controls over financial reporting that occurred during the most recent
fiscal quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in various legal and administrative
proceedings and threatened legal and administrative proceedings incidental to
the ordinary course of our business. We believe that we are not now involved in
any litigation, individually, or in the aggregate, which could have a material
adverse affect on our business, financial condition, results of operations or
cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three-month period ended March 31, 2005, we sold or issued
the unregistered securities described below. The following transaction did not
involve any public offering. The sale was 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. This sale was made without general solicitation or advertising.
The recipient in such transaction represented his intention to acquire the
securities for investment only and not with a view to sell or for sale in
connection with any distribution thereof. We sold the following:
- We sold to a management employee 2,434 shares of our common stock at
$31.75 per share. The proceeds from this sale were used for general
corporate purposes.
ITEM 6. EXHIBITS
Exhibits
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Executive Officer
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRAVELCENTERS OF AMERICA, INC.
(Registrant)
Date: May 16, 2005 By: /s/ James W. George
--------------------------------------
Name: James W. George
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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