ITEM 1. BUSINESS
BUSINESS OVERVIEW
We are a holding company which, through our wholly owned subsidiaries, owns, operates and franchises travel centers along the United States interstate highway system to serve long-haul trucking fleets and their drivers, independent truck drivers and general motorists. Our network is the largest, and only nationwide, full-service travel center network in the United States. At December 31, 2002, our geographically diverse network consisted of 152 sites located in 40 states. In January 2003, we began operating in Canada through the acquisition of a travel center located in Woodstock, Ontario. Our operations are conducted through three distinct types of travel centers:
- sites owned or leased and operated by us, which we refer to as company-operated sites;
- sites owned by us and leased to independent lessee-franchisees, which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate highway system, 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, 22 different brands of fast food restaurants, which we refer to as quick service restaurants, or QSRs, travel and convenience stores and other driver amenities.
The U.S. travel center and truck stop industry in which we operate consists of travel centers, truck stops, diesel fuel outlets and similar facilities designed to meet the needs of long-haul trucking fleets and their drivers, independent truck drivers and general motorists. According to the National Association of Truck Stop Operators, or "NATSO," the travel center and truck stop industry is highly fragmented, with in excess of 3,000 travel centers and truck stops located on or near interstate highways nationwide, of which we consider approximately 500 to be full-service facilities. Further, only eight chains in the United States have 25 or more travel center and truck stop locations on the interstate highways, which we believe is the minimum number of locations needed to provide even regional coverage to truck drivers and trucking fleets.
HISTORY AND ORGANIZATION
We were formed in December 1992 by a group of institutional investors. We were originally incorporated as National Auto/Truckstops Holdings Corporation but changed our name to TravelCenters of America, Inc. in March 1997. We primarily have created our network through the following series of acquisitions:
- In April 1993, we acquired the truckstop network assets of a subsidiary of Unocal Corporation, which sites we refer to as the "Unocal network." The Unocal network included a total of 139 facilities, of which 95 were leased sites, 42 were franchisee-owned sites and two sites were company-operated sites.
- In December 1993, we acquired the truckstop network assets of certain subsidiaries of The British Petroleum Company p.l.c., which assets we refer to as the "BP network." The BP network included 38 company-operated sites and six franchisee-owned sites.
- In December 1998, we acquired substantially all of the truckstop network assets of Burns Bros., Inc. and certain of its affiliates, which assets we refer to as the Burns Bros. network. The Burns Bros. network included 17 company-operated sites, located in nine western and northwestern states.
- In June 1999, we acquired the travel center and truck stop network assets of Travel Ports of America, Inc. through the acquisition of 100% of the stock of Travel Ports. The Travel Ports network consisted of 16 company-operated sites in seven states, primarily in the northeastern region of the United States.
Historically, until 1997, the Unocal network operated principally as a fuel wholesaler and franchisor, with relatively few company-operated sites. In contrast to the Unocal network, the BP network operated principally as an owner-operator of travel centers. In January 1997, we instituted a plan to combine the Unocal network and the BP network, which had been previously managed and financed separately, into a single network to be operated under the "TravelCenters of America" and "TA" brand names under the leadership of a single management team. Prior to combining the Unocal and BP networks, the Unocal network was operated through National Auto/Truckstops, Inc. and the BP network was operated through TA Operating Corporation, each of National Auto/Truckstops, Inc. and TA Operating Corporation being a wholly owned subsidiary of ours. At the time we approved the plan to combine our networks, there were 122 sites operating in the Unocal network and 49 sites operating in the BP network. In November 2000, National Auto/Truckstops, Inc. merged with and into TA Operating Corporation.
In July 1999, we signed an agreement with Freightliner LLC to become an authorized provider of express service, minor repair work and a specified menu of warranty repairs to Freightliner's customers through the Freightliner ServicePoint Program. Under the agreement, our truck repair facilities have been added to Freightliner's 24-hour customer assistance center database as a major referral point for emergency and roadside repairs and also have access to Freightliner's parts distribution, service and technical information systems. Freightliner, a DaimlerChrysler company, is a leading manufacturer of heavy trucks in North America. Freightliner also acquired a minority ownership interest in us at that time.
On May 31, 2000, we and shareholders owning a majority of our voting stock entered into a recapitalization agreement and plan of merger, as amended, with TCA Acquisition Corporation, a newly created corporation formed by Oak Hill Capital Partners, L.P. and its affiliates ("Oak Hill"), under which TCA Acquisition Corporation agreed to merge with and into us. This merger was completed on November 14, 2000. Concurrent with the closing of the merger, we completed a series of transactions to effect a recapitalization and a refinancing that included the following:
- TCA Acquisition Corporation issued 6,456,698 shares of common stock to Oak Hill and a group of other institutional investors, which we refer to as the Other Investors, for proceeds of $205.0 million and then merged TCA Acquisition Corporation with and into us. At the time of the merger, the Other Investors were Olympus Growth Fund III, L.P., Olympus Executive Fund, L.P., Monitor Clipper Equity Partners, L.P., Monitor Clipper Equity Partners (Foreign), L.P., UBS Capital Americas II, LLC, Credit Suisse First Boston LFG Holdings 2000, L.P. and Credit Suisse First Boston Corporation, each of whom is an affiliate of certain of our former shareholders. Since that time, certain of these investors have sold their shares to other investors, including affiliates of certain of the Other Investors. Such sales of our shares are not frequent but could occur in the future.
- 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 remain 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, 2002, 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 has the following direct or indirect wholly owned subsidiaries:
- TA Licensing, Inc.
- TA Travel, L.L.C.
- TravelCenters Properties, L.P.
- TravelCenters Realty, L.L.C.
In January 2003, we formed three wholly-owned Canadian entities through which our Canadian operations are conducted:
- 3703000 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;
- 40 leased sites were converted to company-operated sites, five during 2002, three during 2000, five during 1998 and 27 during 1997;
- one franchisee-owned site was converted to a company-operated site during 2000;
- five new network sites were constructed, one in 2002, one in 2001, one in 2000 and two in 1999;
- two company-operated sites were added to our network through individual site acquisitions during 2000 (one additional site was acquired in January 2003);
- franchise agreements covering 28 franchisee-owned sites were terminated, one in 2000 and 27 in 1997;
- 31 sites we owned were sold, three during 2002, four during 2001, two during 2000, five during 1999, two during 1998 and 15 during 1997 (one additional site was sold in January 2003);
- three franchisee-owned sites were added to our network, one in 2002, one in 1999 and one in 1998; and
- two company-operated sites were closed during 1999 (one was sold during 2002 and our selling efforts are continuing for the other).
In 1997, we initiated a capital program to upgrade, rebrand and re-image our travel centers and to build new travel centers. This capital program was substantially completed during 2002. Under this capital program, as revised as a result of the Burns Bros. acquisition and the Travel Ports acquisition, we invested approximately $407 million in our sites by the end of 2002. Through December 31, 2002, we had completed full re-image projects at 36 of our sites at an average investment of $2.1 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 60 sites at an average cost of $0.3 million. During 2003, we intend to continue our re-imaging program for the company-operated sites by completing full re-image projects at an additional three sites at an aggregate cost of approximately $5.3 million. After 2003, we will have only eight company-operated sites at which a re-image project may be completed some time in the future. In addition to improving our existing sites, we have identified several new interstate areas available for our network's expansion. We have designed a "protoype" facility and a smaller "protolite" facility to standardize our travel centers and expand our brand name into new geographic markets while also increasing our appeal to motorists. The prototype and protolite designs combine an improved and efficient facility layout with nationally branded QSRs and gasoline brands as well as expanded product and service offerings. Since May 1999, we have completed construction of seven prototype facilities and three protolite facilities. Further, we are currently developing two protolite facilities, one of which is a rebuilding of a current site. Most of our future expansion will be with the protolite format, which requires significantly less land and capital investment than the prototype design and enables us to quickly and cost efficiently gain a presence in smaller markets. We also intend to pursue strategic acquisitions and additional franchisee-owned sites. Our franchisees will also continue to invest additional amounts of their own capital for reimaging and other projects at the sites they operate.
REFINANCING
As part of the transactions we completed to consummate our merger with TCA Acquisition Corporation and the related recapitalization, we completed a refinancing of our indebtedness, which refinancing transactions we refer to as the "2000 Refinancing." In the 2000 Refinancing, we issued $190 million of senior subordinated notes due 2009 and borrowed $328.3 million under our amended and restated senior credit facility that consists of a fully-drawn $328 million term loan facility and a $100 million revolving credit facility. The proceeds from these borrowings, along with proceeds from the issuance of common stock and other cash on hand, were used to:
- pay for the tender offer and consent solicitation for our 10 1/4% Senior Subordinated Notes due 2007, including accrued interest, premiums and a prepayment penalty;
- repay all amounts, including accrued interest, then outstanding under our existing amended and restated credit agreement;
- redeem in full all of our then existing senior secured notes and pay related accrued interest and prepayment penalties;
- make cash payments to certain of our then current equity owners, whose shares and unexercised stock options and warrants were redeemed and cancelled pursuant to the recapitalization agreement and plan of merger; and
- pay fees and expenses related to the financings and the merger and recapitalization transactions.
The $190 million of Senior Subordinated Notes were issued as part of units that also included warrants exercisable for 277,165 shares of our common stock. See "Liquidity and Capital Resources" in Item 7 for further discussion of the 2000 Refinancing.
OUR TRAVELCENTERS
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 122 company-operated sites as of December 31, 2002, we offered branded gasoline at 93 sites and unbranded gasoline at 17 sites.
- Full-Service and Fast Food Restaurants. Most of our travel centers have both full-service restaurants and QSRs that offer customers a wide variety of nationally recognized brand names and food choices. Our full-service restaurants, branded under our "Country Pride," "Buckhorn Family Restaurants" and "Fork in the Road" proprietary brands, offer "home style" meals through menu table service and buffets. We also offer nationally branded QSRs such as Arby's, Burger King, Dunkin' Donuts, Pizza Hut, Popeye's Chicken & Biscuits, Sbarro, Subway, Taco Bell and 14 other brands. We generally attempt to locate QSRs within the main travel center building, as opposed to constructing stand-alone buildings. As of December 31, 2002, we had 159 QSRs in our company-operated sites, and 101 of our network travel centers offered at least one branded QSR.
- Truck Repair and Maintenance Shops. All but eight of our network travel centers have truck repair and maintenance shops. The typical repair shop has between two and four service bays, a parts storage room and trained mechanics on duty at all times. These shops, which generally operate 24 hours per day, 365 days per year, offer extensive maintenance and emergency repair and road services, ranging from basic services such as oil changes and tire repair to specialty services such as diagnostics and repair of air conditioning, air brake and electrical systems. Our work is backed by a warranty honored at all of our repair and maintenance facilities. As of December 31, 2002, all but two of our network sites that have truck repair and maintenance shops were participating in the Freightliner ServicePoint Program.
- Travel and Convenience Stores. Each travel center has a travel and convenience store that caters to truck drivers, motorists, recreational vehicle operators and bus drivers and passengers. Each travel and 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, music and audio 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. Many 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 25 to 30 pay telephones with AT&T long distance service. 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. Sixteen of these motels are operated under franchise grants from nationally branded motel chains, including Days Inn, HoJo Inn, Super 8, Rodeway and Travelodge.
OPERATIONS
Fuel Supply. We purchase diesel fuel from various suppliers at rates that fluctuate with market prices and are reset daily, and resell fuel to our customers at prices that we establish daily. By establishing supply relationships with an average of four to five alternate suppliers per location, we have been able to effectively create competition for our purchases among various diesel fuel suppliers on a daily basis. We believe that this positioning with our suppliers will help our sites avoid product outages during times of diesel fuel supply disruptions. We have a single source of supply for gasoline at most of our sites that offer branded gasoline. Sites selling unbranded gasoline do not have exclusive supply arrangements.
Other than pipeline tenders, fuel purchases made by us are delivered directly from suppliers' terminals to our travel centers. We do not contract to purchase substantial quantities of fuel for our inventory and are therefore susceptible to price increases and interruptions in supply. We 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 sell a majority of our diesel fuel on the basis of a daily industry index of average fuel costs plus a pumping fee and we hold less than three days of diesel fuel inventory at our sites. We engage in only 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 Equilon Enterprises LLC for Shell 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 2002, the distribution center shipped approximately $43.5 million of products. We believe the distribution center provides us with cost savings by using its consolidated purchasing power to negotiate volume discounts with third-party suppliers. The distribution center is also able to obtain further price reductions from suppliers in the form of reduced shipping charges, as suppliers need only deliver their products to the distribution center warehouse, as opposed to each site individually.
COMPETITION
The U.S. travel center and truck stop industry in which we operate consists of travel centers, truck stops, diesel fuel outlets and similar facilities designed to meet the needs of long-haul trucking fleets and their drivers, independent truck drivers and general motorists. The travel center and truck stop industry is highly competitive and fragmented. According to NATSO, there are in excess of 3,000 travel center and truck stops located on or near highways nationwide, of which we consider approximately 500 to be full-service facilities. Further, only eight chains in the United States have 25 or more travel center and truck stop locations on the interstate highways, which we believe is the minimum number of locations needed to provide even regional coverage to truck drivers and trucking fleets. There are generally two types of facilities designed to serve the trucking industry:
- full-service travel centers, such as those in our network, which offer a broad range of products and services to long-haul trucking fleets and their drivers, independent truck drivers and general motorists, such as diesel fuel and gasoline; full-service and fast food dining; truck repair and maintenance; travel and convenience stores; secure parking areas and other driver amenities; and,
- pumper-only truck stops, which provide diesel fuel, typically at discounted prices, with a more limited mix of additional services than a full-service travel center.
Fuel and non-fuel products and services can be obtained by long-haul truck drivers from a wide variety of sources other than us, including regional full-service travel center and pumper-only truck stop chains, independently owned and operated truck stops, some large service stations and fleet-operated fueling terminals.
We believe that we experience substantial competition from pumper-only truck stop chains and that this competition is based principally on diesel fuel prices. In the pumper-only truck stop segment, the largest networks, based on the number of facilities, are Pilot Travel Centers LLC, with approximately 296 sites, Flying J Inc., with approximately 153 sites, and Love's Travel Stops & Country Stores, Inc., with approximately 75 sites. We experience additional substantial competition from major full-service travel center networks and independent chains, which is based principally on diesel fuel prices, non-fuel product and service offerings and customer service. In the full-service travel center segment, the only large network, other than ours, is operated by Petro Stopping Centers, L.P., with approximately 60 sites. Our truck repair and maintenance shops compete with regional full-service travel center and truck stop chains, full-service independently owned and operated truck stops, fleet maintenance terminals, independent garages, truck dealerships and auto parts service centers. We also compete with a variety of
establishments located within walking distance of our travel centers, including full-service restaurants, QSRs, electronics stores, drugstores and travel and convenience stores.
A significant portion of all intercity diesel fuel consumption by trucking fleets and companies with their own trucking capability occurs through self-fueling at both dedicated terminals and at fuel depots strategically located across the country. These terminals often provide facilities for truck repair and maintenance. Our pricing decisions for diesel fuel and truck repair and maintenance services cannot be made without considering the existence of these operations and their capacity for expansion. However, we believe that a 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.
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. In response to repeated requests over the past several years from state governments that want to earn additional revenues from these rest areas, recent federal legislation provides for limited tests for commercializing these rest areas. 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, and any additional rest area commercialized in ensuing years, will increase the number of outlets competing with us for the business of highway travelers. It is possible we may obtain the opportunity to play a role in these commercialization efforts, which would reduce any negative effects of such commercialization on our travel center business.
RELATIONSHIPS WITH THE OPERATORS AND FRANCHISEE-OWNERS
TA Licensing, Inc., a wholly owned subsidiary of TA Operating Corporation, licenses its trademarks to us, TA Operating Corporation and TA Franchise Systems. We enter into franchise agreements with operators and franchisee-owners of travel centers through TA Franchise Systems, and TA Franchise Systems collects franchise fees and royalties under these agreements. TA Franchise System's assets consist primarily of the rights under the original franchise agreements, the network franchise agreements and its trademark licenses from TA Licensing. TA Franchise Systems has no tangible assets.
Network Franchise Agreement
As of December 31, 2002, there were 22 sites operating under network franchise agreements. The more significant provisions of the network franchise agreement are described in the following paragraphs.
Initial Franchise Fee. The initial franchise fee for a new franchise is $100,000.
Term of Agreement. The initial term of the network franchise agreement is ten years. The network franchise agreement provides for two five-year renewals on the terms being offered to prospective franchisees at the time of the franchisee's renewal. We reserve the right to decline renewal under certain circumstances or if specified terms and conditions are not satisfied by the franchisee. The average remaining term of these agreements, including all renewal periods, is approximately 20 years. The initial terms of the current network franchise agreements expire in July 2012 through January 2013.
Protected Territory. Subject to specified exceptions, including existing operations, so long as the franchisee is not in default under the network franchise agreement, we agree not to operate, or allow another person to operate, a travel center or travel center business that uses the "TA" brand, within 75 miles in either direction along the primary interstate on which the franchised site is located.
Restrictive Covenants. Except for the continued operation of specified businesses identified by the franchisee at the time of execution of the network franchise agreement, the franchisee cannot, during the term of the
agreement, operate any travel center or truck stop-related business under a franchise agreement, licensing agreement or marketing plan or system of its own or another person or entity. If the franchisee owns the franchised premises, the franchisee may continue to operate a travel center at the franchised premises after termination of the franchise agreement, but if the termination is for any reason other than a termination at the expiration of the term of the agreement, 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
- 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, 2002, there were 20 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 20 years. The initial terms of the current network lease agreements expire in July 2012 through January 2013.
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 eight sites that continue to operate under the franchise agreements they had with TA Franchise Systems prior to the network franchise agreement being revised to its current form in 2002. The terms of these franchise agreements are generally the same as the network franchise agreement, but they do not require the franchises to purchase their diesel fuel from us and their provisions vary. At the expiration of these agreements, the respective franchisees may be offered an option to renew their franchises under a form of our then-current franchise agreement for franchisee-owned sites.
Term of Agreement. In general, the initial terms of the original franchise agreements are 10 years. The original franchise agreements provide for one or two renewals for an aggregate of 10 years. The original franchise agreements offer no assurance that the terms of the renewal will be the same as those of the initial franchise agreements. We may decline renewal under some circumstances or if specified terms and conditions are not satisfied by the franchisee. Excluding one franchise agreement that expired in January 2002 and for which a network franchise agreement is currently being negotiated, 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, the travel center or travel center business that uses the "TA" brand, within a specified area in either direction along one or more interstates at which the franchised site is located.
Restrictive Covenants. Although the restrictive covenants in the original franchise agreements may vary slightly from franchise to franchise, each franchisee is subject to restrictions that prohibit two or more of the following during the term of the franchise agreement and for two years after its expiration:
- operation of any other truck stop or travel center within its protected territory;
- operation of the franchise location under any national brand other than "TA";
- operation of the branded facility within a certain distance of any other TA facility; and
- operation of any competitive business or a business that trades upon the franchise within the area adjacent to the franchise location.
Royalty Payments. In general, we require franchisees to pay us a continuing services and royalty fee generally equal to 4% of all revenues earned directly or indirectly by the franchisee from any business conducted at or from the franchised premises, excluding fuel sales and sales of branded fast food. As part of the royalty fee, we generally require the franchisee to pay us $0.004 per gallon on all sales of qualified diesel fuel.
Advertising, Promotion and Image Enhancement. The network franchise agreement requires the franchisees to contribute 0.25% of all revenues, including revenues from fuel and fast food sales, to partially fund system-wide advertising, marketing and promotional expenses we incur, and mandates certain minimum franchisee expenditures on advertising. We are required to match the amounts of the franchisees' contributions towards the system-wide expenses.
Fuel Purchases and Sales. We do not require franchisees to purchase gasoline or diesel fuel from us. However, we charge royalty fees generally on diesel fuel sales as described above.
Non-fuel Product Offerings. Franchisees are required to operate their travel centers in conformity with our guidelines, participate in and comply with all programs that we prescribe as mandatory and offer any products and services we deem integral to the network.
Termination of an Original Franchise Agreement. We may terminate the franchise agreement upon the occurrence of certain defaults, upon notice and without affording the franchisee an opportunity to cure the defaults. When other defaults occur, we may terminate the franchise agreement if, after receipt of a notice of default, the franchisee has not cured the default within the applicable cure period. The franchisee may terminate the franchise agreement upon thirty days notice, if we are in material default under the franchise agreement and we fail to cure or attempt to cure the default within a reasonable period after notification.
REGULATION
Franchise Regulation. State franchise laws apply to TA Franchise Systems, and some of these laws require TA Franchise Systems to register with the state before it may offer a franchise, require TA Franchise Systems to deliver specified disclosure documentation to potential franchisees, and impose special regulations upon petroleum franchises. Some state franchise laws also impose restrictions on TA Franchise Systems' ability to terminate or not to renew its respective franchises, and impose other limitations on the terms of the franchise relationship or the conduct of the franchisor. Finally, a number of states include, within the scope of their petroleum franchising statutes, prohibitions against price discrimination and other allegedly anticompetitive conduct. These provisions supplement applicable antitrust laws at the federal and state levels.
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 Unocal and BP networks and also regarding historical contamination at certain of the former Burns Bros. and Travel Ports facilities. While we cannot precisely estimate the ultimate costs we will incur in connection with the investigation and remediation of these properties, based on our current knowledge, we do not expect that the costs to be incurred at these properties, individually or in the aggregate, will be material to our results of operations or financial condition. While the matters discussed above are, to the best of our knowledge, the only proceedings for which we are currently exposed to potential liability, particularly given the Unocal and BP indemnities discussed below, we cannot assure you that additional contamination does not exist at these or additional network properties, or that material liability will not be imposed on us in the future. If additional environmental problems arise or are discovered, or if additional environmental requirements are imposed by government agencies, increased environmental compliance or remediation expenditures may be required, which could have a material adverse effect on us. As of December 31, 2002, we had a reserve for those matters of $2.9 million. In addition, we have obtained environmental insurance of up to $25.0 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 agreement with Unocal, Phase II environmental assessments of all Unocal network properties were completed by Unocal by December 31, 1998. Under the terms of this agreement, Unocal is 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 must 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. The remediation must achieve compliance with the Environmental Laws in effect on the date the remediation is completed. We must make claims for indemnification prior to April 14, 2004. Except as described above, Unocal does not have any responsibility for any environmental liabilities arising out of the ownership or operations of the Unocal network after the date of the acquisition of the Unocal network. We cannot assure you that Unocal, if additional environmental claims or liabilities were to arise under the agreement with Unocal, would not dispute our claims for indemnification.
Prior to the acquisition of the BP network, all of the 38 company-owned locations purchased by us were subject to Phase I and Phase II environmental assessments, undertaken at BP's expense. The environmental agreement with BP provides that, with respect to environmental contamination or non-compliance with Environmental Laws identified in the Phase I or Phase II environmental assessments, BP is responsible for:
- all costs incurred for remediation of the environmental contamination, and
- for otherwise bringing the properties into compliance with Environmental Laws as in effect at the date of the acquisition of the BP network.
The remediation must achieve compliance with the Environmental Laws in effect on the date the remedial action is completed. The environmental agreement with BP requires BP to indemnify us against any other environmental liabilities that arise out of conditions at, or ownership or operations of, the BP network locations prior to the date of the acquisition of the BP network. We must make claims for indemnification before December 11, 2004. BP must also indemnify us for liabilities relating to non-compliance with Environmental Laws for which claims were made before December 11, 1996. Except as described above, BP does not have any responsibility for any environmental liabilities arising out of the ownership or operations of the BP network after the date of the acquisition of the BP network. We cannot assure you that BP, if additional environmental claims or liabilities were to arise under the environmental agreement with BP, would not dispute our claims for indemnification.
As part of the Burns Bros. acquisition, Phase I environmental assessments were conducted on all 17 sites acquired. Based on the results of those assessments, Phase II environmental assessments were conducted on nine of the sites. The purchase price paid to Burns Bros. was adjusted based on the findings of the Phase I and Phase II environmental assessments. Under the asset purchase agreement with Burns Bros., we released Burns Bros. from any environmental liabilities that may have existed as of the Burns Bros. acquisition date, other than specified non-waived environmental claims as described in the agreement with Burns Bros.
As part of the Travel Ports acquisition, Phase I environmental assessments were conducted on all 16 sites acquired. Based on the results of those assessments, Phase II environmental assessments were conducted on five of these sites. The results of these assessments were taken into account in recognizing the related environmental contingency accrual for purchase accounting purposes.
EMPLOYEES
As of December 31, 2002, we employed approximately 10,000 people on a full- or part-time basis. Of this total, approximately 9,630 were employees at our company-operated sites, approximately 320 performed managerial, operational or support services at our headquarters or elsewhere and approximately 50 employees staffed the distribution center. All but nine of our employees are non-union. We believe that our relationship with our employees is satisfactory.
ITEM 2.
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 142 owned sites in operation as of December 31, 2002, the land and improvements at 13 are leased, the improvements but not the land at eight are leased, three are subject to ground leases of the entire site and seven are subject to ground leases of portions of these sites. We consider our facilities suitable and adequate for the purposes for which they are used. In addition to these 142 sites, we own one site that will be developed as a travel center and one site that is closed and held for sale.
ITEM 3.
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.
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 2002.
PART II
ITEM 5.
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 March 15, 2003, the outstanding shares of our common stock were held of record by 38 stockholders.
Dividends. We have never paid or declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. We intend to retain our future earnings, if any, to fund the development and growth of our business. Our future decisions concerning the payment of dividends on the common stock will depend upon our results of operations, financial condition and capital expenditure plans, as well as other factors as the board of directors, in its sole discretion, may consider relevant. In addition, our existing indebtedness restricts, and we anticipate our future indebtedness may restrict, our ability to pay dividends.
Recent sales of unregistered securities. During 2000, 2001 and 2002, we sold or issued the unregistered securities described below. None of the following transactions involved any public offering. All sales were made in reliance on Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), Rule 701 promulgated under the Securities Act and/or Regulation D promulgated under the Securities Act. These sales were made without general solicitation or advertising. The recipients in each such transaction represented their intention to acquire the securities for investment only and not with a view to sell or for sale in connection with any distribution thereof.
(1) In November 2000, in connection with our merger and recapitalization transactions further described in number (5) below, we sold 100,000 shares to Freightliner at $33.30 per share.
(2) In a series of sales to management, we sold the following:
- In 2000, we sold 2,321 shares at $31.75 per share. The proceeds from this sale were used for general corporate purposes.
- In November 2000, in connection with our merger and recapitalization transactions further described in number (5) below, certain members of management exercised options to purchase an aggregate of 37,572 shares for aggregate proceeds of $421,726.
- In 2001, we sold 2,434 shares at $31.75 per share. The proceeds from this sale were used for general corporate purposes.
- In 2002, we sold 7,302 shares at $31.75 per share. The proceeds from these sales were used for general corporate purposes.
(3) We consummated an offering of Senior Subordinated Notes due 2009 to "qualified institutional buyers," as defined in Rule 144A under the Securities Act and to non-U.S. persons under Regulation S of the Securities Act. The offering was consummated on November 14, 2000 with the sale of 190,000 units, each unit consisting of one 12 3/4% Senior Subordinated Note due 2009 of TravelCenters of America, Inc. with a principal amount of $1,000, three initial warrants to purchase 0.36469 shares of our common stock and one contingent warrant to purchase 0.36469 shares of our common stock. We filed an exchange offer registration statement on December 21, 2000 with respect to a proposed exchange of the outstanding notes for registered notes having substantially the same terms as the outstanding notes. A second registration statement was filed on December 21, 2000 to register the warrants and the shares of common stock issuable upon exercise of the warrants.
We received net proceeds of approximately $171.7 million from the sale of the units, which included the sale of the outstanding notes, the initial warrants and contingent warrants, (after deducting discounts, commissions and certain expenses of the offering of the notes). The net proceeds from the unit sale, together with cash, borrowings under the Senior Credit Facility and the proceeds from the sale of common equity were used to:
- make cash payments totaling approximately $263.2 million to certain of our then current equity owners, whose shares and unexercised common stock options and warrants were redeemed or canceled in connection with the Transactions;
- pay $16.3 million for the merger transaction expense of certain of our then current equity owners;
- repay all amounts outstanding under our Amended and Restated Credit Agreement dated as of November 24, 1998;
- redeem in full all of our then existing senior secured notes and pay a prepayment penalty;
- pay for the tender offer and consent solicitation for our 10 1/4% Senior Subordinated Notes due 2007, including related premiums and a prepayment penalty; and
- pay other transaction fees and expenses.
The initial warrants may be exercised at any time on or after November 14, 2001, and the contingent warrants may be exercised at any time after March 31, 2003. 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 registration 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 jurisdictions in which the holders reside. Unless earlier exercised, the warrants will expire on May 1, 2009.
Summary of Equity Compensation Plans. The following table sets forth information about all our equity compensation plans in effect as of December 31, 2002, 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
ITEM 6.
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 be read in conjunction with "Management's Discussion and Analysis" and our audited consolidated financial statements included elsewhere in this annual report. The results of operations and other financial and operating data of the 17 sites acquired from Burns Bros. and the 16 sites acquired in the Travel Ports acquisition are included in our consolidated financial statements beginning on the dates we completed the acquisitions, December 3, 1998 and June 3, 1999, respectively.
Notes to Selected Financial Data
(1) Reflects the operating results of 17 sites we acquired from Burns Bros. on December 3, 1998.
(2) Reflects the operating results of 16 sites we acquired as part of our acquisition of Travel Ports on June 3, 1999.
(3) Beginning in 2002, as a result of adopting a new accounting pronouncement, we ceased amortization of our goodwill and trademark intangible assets.
(4) 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.
(5) "Mandatorily redeemable preferred stock" was comprised of two series of convertible preferred stock that were redeemed as part of our merger and recapitalization transactions in November 2000.
(6) "EBITDA," as used here for years after 1999, 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, which includes stock compensation expense, (d) transition expense and (e) costs of the merger and recapitalization transactions. For years prior to 2000, gains or losses on sales of property and equipment were also adjusted out of net income to determine EBITDA, as this was the definition for EBITDA in our prior bank debt agreement. We have included certain information concerning EBITDA because management believes that EBITDA is generally accepted by our security holders as providing useful information regarding a company's ability to service and/or incur debt. Further, EBITDA is a key measure monitored by our stockholders and lenders and, importantly, is a primary component of the financial ratio covenants in our debt agreements. EBITDA should not be considered in isolation from, or as a substitute for, net income, cash flows from operating activities or other consolidated income or cash flow statement data prepared in accordance with generally accepted accounting principles. While EBITDA is frequently used by other companies as a measure of operations and ability to meet debt service requirements, EBITDA as we use the term is not necessarily comparable to similarly titled captions of other companies due to differences in methods of calculation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial position and results of operations is based upon, and should be read in conjunction with, our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management believes the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of our consolidated financial statements are the allowance for doubtful accounts, asset impairment, environmental liabilities, income tax accounting, recognition of stock compensation expense related to stock options and redeemable common stock held by employees, and consolidation of special purpose entities.
Allowances for doubtful accounts and notes receivable are maintained based on historical payment patterns, aging of accounts receivable, periodic review of our customers' financial condition, and actual writeoff history. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying value of those assets, and when the carrying value of a long-lived asset to be disposed of exceeds the estimated fair value of the asset less the estimated cost to sell the asset. The net carrying value of assets not recoverable is then reduced to fair value. Our estimated cash flows are based on historical results adjusted to reflect the best estimate of future market and operating conditions. The estimates of fair value represent the best estimate based on industry trends and reference to market rates and transactions. If these estimates or their underlying assumptions change in the future, we may be required to record additional impairment charges for these assets or to reverse previously recognized impairment charges.
For purposes of assessing our goodwill for impairment, we have determined that we are one reporting unit and that the estimated fair value of that reporting unit, based on a discounted cash flow analysis, exceeded its carrying value. With respect to our trademark intangible assets, the estimated fair value, based on a discounted cash flow analysis, exceeded the carrying value. Accordingly, we have not recognized an impairment charge with respect to any of our intangible assets. A number of assumptions and methods are used in preparing the valuations underlying these impairment tests, including estimates of future cash flows and discount rates. Applying other assumptions or valuation methods could result in different results of these impairment tests. Similarly, defining the reporting unit differently could lead to a different result for goodwill. Our goodwill and trademark intangible assets will be assessed for impairment annually as of January 1 of each year.
We establish an environmental contingency reserve when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. The estimates of these costs are based on our best estimates of our future obligations given current and pending laws and the currently available facts concerning each environmental incident, as well as our estimate of amounts recoverable under indemnification agreements and/or state or private insurance plans. Should the actual costs to remediate an incident differ from our estimates, or should new facts come to light or laws become enacted that modify the scope of our remediation projects, revisions to the estimated environmental contingency reserve would be required.
As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for financial statement and tax purposes. These timing differences result in deferred tax assets and liabilities, which are included
in our consolidated balance sheet. We are required to record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to 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 retained earnings. Such a charge to retained earnings will occur only if our value, and therefore the fair value of our common stock, has increased. Our policy is to consider redemption of an individual stockholder's shares probable at the time that the stockholder provides notice of his or her intention to retire, dies or is declared disabled. In addition to these redeemable shares of common stock purchased by management employees, we have granted to certain of our executives non-qualified stock options to purchase 944,881 shares of our common stock under a stock incentive plan. Each option grant consists of 41.67% time options and 58.33% performance options. Time options become exercisable with the passage of time, while performance options become exercisable if certain investment return targets are achieved. Time options generally vest 20% per year over a period of five years. Performance options vest if Oak Hill achieves specified internal rates of return on specified measurement dates. The time options are subject to fixed plan accounting and, accordingly, no charge to earnings will be required with respect to them since the exercise price equaled the fair value at the date of grant. The performance options are subject to variable plan accounting and, accordingly, a non-cash charge to earnings will be required when it becomes probable that the performance triggers for such options will be achieved. Because our common stock is privately held, determining its value is subject to estimates and to factors, such as multiples being paid in the mergers and acquisitions market at the time of the measurement and/or the state of the capital markets at that time, that are not easily forecasted or controlled and which may not have a direct relationship to our financial results or condition. It is not possible to determine at this time, nor may it be possible until close to the end of the five-year performance period, whether it will be probable that we will achieve the performance triggers. It is not possible to predict whether any such required non-cash charge will be material to our results for the period in which the charge is recognized, as we expect that the performance triggers can only be attained as a result of a significant increase in our results of operations.
We have entered into lease transactions of travel centers with a special purpose entity. These lease transactions are evaluated for lease classification in accordance with Statement of Financial Accounting Standards (FAS) No. 13, "Accounting for Leases." We do not consolidate the lessor entity so long as the owners of the special purpose entity maintain a substantial residual equity investment of at least three percent that is at risk during the entire term of the lease, which has been the case to date. In January 2003, the FASB issued FASB Interpretation No. (FIN) 46 "Consolidation of Variable Interest Entities." We must adopt this accounting guidance by July 1, 2003. Under FIN 46, as the lessor with whom we have entered into our master lease program is currently capitalized and structured, we would be required to consolidate the lessor in our consolidated financial statements. We and the lessor are currently evaluating our alternatives with respect to the master lease facility and have not yet concluded on our course of action. Consolidating the lessor would affect our consolidated balance sheet by increasing property and equipment, other assets and long-term debt and would affect our consolidated statement of operations by reducing operating expenses, increasing depreciation expense and increasing interest expense. Consolidating the lessor is not expected to result in violation of our debt covenants.
OVERVIEW
We are a holding company which, through our wholly owned subsidiaries, owns, operates and franchises travel centers along the United States interstate highway system to serve long-haul trucking fleets and their drivers, independent truck drivers and general motorists. Our network is the largest, and only nationwide, full-service travel center network in the United States. Our geographically diverse network consists of 152 sites located in 40 states in the United States and, effective January 2003, in the province of Ontario, Canada. Our operations are conducted through three distinct types of travel centers:
- sites owned or leased and operated by us, which we refer to as company-operated sites;
- sites owned by us and leased to independent lessee-franchisees, which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate highway system and in Canada, typically on 20- to 25-acres sites. Most of our network properties were developed more than 22 years ago when prime real estate locations along the interstate highway system were more readily available than they are today, making a network such as ours difficult to replicate. Operating under the "TravelCenters of America" and "TA" brand names, our nationwide network provides an advantage to long-haul trucking fleets by enabling them to route their trucks within a single network from coast to coast.
One of the primary strengths of our business is the diversity of our revenue sources. We have a broad range of product and service offerings, including diesel fuel and gasoline, truck repair and maintenance services, full-service restaurants, 22 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, 2000, 2001, and 2002, our revenues and gross profit were composed as follows:
COMPOSITION OF OUR NETWORK
Since December 31, 1999, 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, 1999 through December 31, 2002:
(1) Includes one company-operated site held for development until its construction was completed during 2001.
In January 2003, we acquired an operating travel center in Woodstock, Ontario, Canada, our first location in Canada. We also sold one company-operated site in January 2003.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues. Our consolidated revenues for the year ended December 31, 2002 were $1,870.4 million, which represents a decrease from the year ended December 31, 2001 of $64.6 million, or 3.3%, that is primarily attributable to a decrease in fuel revenue.
Fuel revenue for the year ended December 31, 2002 decreased by $93.8 million, or 7.0%, as compared to the same period in 2001. The decrease was attributable principally to decreases in diesel fuel and gasoline average selling prices. Average diesel fuel and gasoline sales prices for the year ended December 31, 2002 decreased by 8.4% and 7.4%, respectively, as compared to the same period in 2001, primarily reflecting decreases in commodity prices and also reflecting our more competitive retail fuel pricing. The fuel revenue decline also resulted from a decrease in our diesel fuel sales volumes that was partially offset by an increase in gasoline sales volumes. Diesel fuel and gasoline sales volumes for the year ended December 31, 2002 decreased 1.4% and increased 27.5%,
respectively, as compared to the same period in 2001. For the year ended December 31, 2002, we sold 1,349.7 million gallons of diesel fuel and 160.6 million gallons of gasoline, as compared to 1,369.3 million gallons of diesel fuel and 125.9 million gallons of gasoline for the year ended December 31, 2001. The diesel fuel sales volume decrease resulted from a 0.9% decrease in same-site diesel fuel sales volumes and a net reduction in sales volumes at sites we added to or eliminated from our network during 2001 and 2002 of 11.6 million gallons, partially offset by an increase in our wholesale diesel fuel sales of 1.6 million gallons, or 2.7%. The gasoline sales volume increase was primarily attributable to a 20.2% increase in same-site gasoline sales volumes and also resulted from a 2.8 million net increase in gasoline sales volume at company-operated sites we added to or eliminated from our network during 2001 and 2002, as well as an 8.2 million increase in wholesale gasoline sales volume. We believe the same-site diesel fuel sales volume decrease resulted from a decline in trucking activity in 2002 as compared to 2001, resulting from the general condition of the United States economy, and occurred in spite of our continued emphasis on competitively pricing our diesel fuel. The increased level of wholesale diesel fuel sales volumes reflects our renewed efforts in this area made possible by software and control process improvements we implemented during 2002. We believe the same-site increase in gasoline sales volume resulted primarily from increased general motorist visits to our sites as a result of our gasoline and QSR offering upgrades and additions under our capital program, as well as our more competitive retail gasoline pricing.
Non-fuel revenues for the year ended December 31, 2002 of $616.9 million reflected an increase of $31.2 million, or 5.3%, from the same period in 2001. The increase was primarily attributable to an increase in non-fuel sales on a same-site basis of 3.7% for the year ended December 31, 2002 versus the same period in 2001. We believe the same-site increase reflected increased customer traffic resulting, in part, from the significant capital improvements that we have made in the network under our capital investment program to re-image, re-brand and upgrade our travel centers. The increase was also attributable to the net increase in sales at the company-operated sites added to, or eliminated from, our network during 2001 and 2002.
Rent and royalty revenues for the year ended December 31, 2002 reflected a $2.0 million, or 11.2%, decrease from the same period in 2001. This decrease was primarily attributable to the rent and royalty revenue lost as a result of the conversions of leased sites to company-operated sites, partially offset by a 2.0% increase in same-site royalty revenue that results from increased levels of retail sales by our franchisees, and a 3.3% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the year ended December 31, 2002 was $480.8 million, compared to $467.3 million for the same period in 2001, an increase of $13.5 million, or 2.9%. The increase in our gross profit was primarily due to increased margin resulting from the increased level of non-fuel sales, partially offset by the decline in rent and royalty revenues and a decline in fuel margin that resulted from decreased diesel fuel sales volumes and a 2.6% decrease in fuel margin per gallon.
Operating and Selling, General and Administrative Expenses. Operating expenses included the direct expenses of company-operated sites and the ownership costs of leased sites. Selling, general and administrative expenses included corporate overhead and administrative costs.
Our operating expenses increased by $4.5 million, or 1.4%, to $330.2 million for the year ended December 31, 2002 compared to $325.7 million for the same period in 2001. This increase was attributable to a $4.4 million net increase resulting from company-operated sites we added to our network or eliminated from our network during 2001 or 2002, partially offset by a 0.1% decline in operating expenses on a same-site basis. On a same-site basis, operating expenses as a percentage of non-fuel revenues for the year ended December 31, 2002 were 52.9%, compared to 54.9% for the same period in 2001, reflecting reduced utility costs and the results of our cost-control measures at our sites.
Our selling, general and administrative expenses for the year ended December 31, 2002 were $38.1 million, which reflected a decrease of $0.2 million, or 0.5% from the same period in 2001.
Depreciation and Amortization Expense. Depreciation and amortization expense for the year ended December 31, 2002 was $60.8 million, compared to $63.5 million for the same period in 2001. This decrease was attributable to a $1.8 million decrease in amortization of intangible assets, a $1.0 million decrease in the amount of impairment charges recognized in 2002 as compared to 2001 and the change we made in depreciable lives of certain assets effective April 1, 2001. During the year ended December 31, 2002 we recognized impairment charges aggregating $1.5 million with respect to certain of the sites we were holding for sale as a result of reductions in the estimated sales proceeds of certain of those sites. During 2002, we sold four of the facilities that we were holding for sale as of December 31, 2001. On January 3, 2003, we sold the one remaining site held for sale that had been impaired. The other three sites we had been holding for sale were not sold within the one-year period required by FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and so will no longer be accounted for as assets to be disposed of but as assets held for use. In the fourth quarter of 2002, we recognized a charge to depreciation expense of $0.2 million for the depreciation expense related to these unsold sites that had not been recognized during 2002 when these sites were being accounted for as held for sale.
As a result of adopting FAS 142, "Goodwill and Other Intangible Assets," effective January 1, 2002, our goodwill and trademark intangible assets are no longer amortized. Pursuant to FAS 142, intangible assets must be periodically tested for impairment. During the first quarter of 2002, we completed our transitional impairment review of our trademark intangible assets and determined that there was no impairment. During the second quarter of 2002 we completed the transitional impairment review of goodwill and determined that there was no impairment. We also adopted FAS 144 effective January 1, 2002. The adoption of FAS 144 did not have a material effect on our consolidated results of operations.
Income from Operations. We generated income from operations of $52.8 million for the year ended December 31, 2002, compared to income from operations of $41.5 million for the same period in 2001. This increase of $11.3 million, or 27.2%, was primarily attributable to the increase in gross profit that was partially offset by the increase in operating expenses. The net decrease in depreciation and amortization expense and in gains on sales of property and equipment also contributed to the increase in operating income. EBITDA for the year ended December 31, 2002 was $113.6 million, as compared to EBITDA of $105.0 million for the year ended December 31, 2001. This increase of $8.6 million, or 8.1%, occurred despite a $0.7 million decrease in gains on sales of property and equipment in 2002 as compared to 2001 and was primarily attributable to the increase in gross profit that was partially offset by increased operating expenses. EBITDA, as used here, is based on the definition for EBITDA in our debt agreements and consists of net income plus the sum of (a) income taxes, (b) interest and other financial costs, net, (c) depreciation, amortization and other noncash charges, which includes stock compensation expense, and (d) transition expense.
Interest and Other Financial Costs--Net. Interest and other financial costs, net, for the year ended December 31, 2002 decreased by $6.5 million, or 11.3%, compared to 2001. This decrease resulted from the decline in interest rates during 2001 and 2002 as well as from the decrease in our indebtedness.
Income Taxes. Our effective income tax benefit rates for the years ended December 31, 2002 and 2001 were 33.5% and 39.6%, respectively. These rates differed from the federal statutory rate due primarily to state income taxes and nondeductible expenses, partially offset by the effect of certain tax credits. The change between years in the effective tax rate was primarily the result of the swing from a taxable loss incurred in 2001 as compared to a relatively low level of pre-tax income earned in 2002, as well as an estimated adjustment of prior year tax liabilities in 2002. As a result of the relatively low level of pre-tax earnings in 2002, permanent differences had a larger effect on the effective rate in 2002 than in 2001. 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 $58.0 million of future taxable income to fully realize our net deferred tax assets. Our existing level of pretax earnings for financial reporting purposes, as represented by our 2002 results, would not be sufficient to generate that amount of future
taxable income. However, we believe we will generate sufficient future taxable income to realize our net deferred tax assets for the reasons, and based on the estimates, described below. Different assumptions as to our future expected taxable income could lead to revisions in the estimated amount of valuation allowance required to be recognized against our deferred tax assets.
- We expect to increase our profitability as compared to that generated in 2002, which reflected an increase over 2001. Earnings from the significant capital improvements made to our network sites over the past few years are expected to increase as these assets fully mature. We intend to add new company-operated and franchisee-owned travel centers to our network. We also intend to increase the earnings capability of our existing sites through other capital investments, such as for site re-image projects, additional truck and maintenance repair shop capacity, expanded QSR offerings, expanded parking areas and other similar projects. We also expect to benefit from a strengthening United States economy during and after 2003.
- We expect that in succeeding years, as was the case during 2002, our interest expense will decline as we begin to reduce the level of our indebtedness, through scheduled repayments, reducing our outstanding revolver borrowings and making required excess cash flow prepayments in future years as our available cash flow increases while we maintain a relatively lower level of capital expenditures.
- We have made significant capital investments in our business since our formation, especially in 1993 and in 1998 through 2000. Many of these assets, which typically have depreciable lives of five to 15 years, are at or near the ends of their depreciable lives. As our level of capital expenditures is anticipated to remain at a relatively lower level than these periods, we expect our depreciation expense to decline. This is particularly so for tax depreciation due to the double-declining balance depreciation method we followed for our tax returns. For our 2001 and 2002 property and equipment additions, we have elected to use the alternative depreciation system, which generally depreciates assets on a straight-line basis over longer depreciable lives than those we have been using, decreasing the annual depreciation deductions over the next several years relative to what they otherwise would have been.
- We have available to us tax planning strategies we could employ to increase our taxable income. The principal tax planning strategy we could undertake is the sale/leaseback of certain of our travel centers. The sale/leaseback transaction would be expected to generate a sufficient taxable gain in the year consummated to fully utilize any expiring unused net operating loss carryforwards and could be expected to increase our taxable income in subsequent years as lower interest expense and depreciation deductions would, in all likelihood, more than offset the additional operating lease expense. Although we would not ordinarily execute this tax planning strategy, we would do so to prevent our net operating loss carryforwards from expiring unused in 2020 and subsequent years.
The following table sets forth the historical relationship between pretax earnings for financial reporting purposes and taxable income for income tax purposes.
Of our total net operating loss carryforwards at December 31, 2002 of $72.9 million, the $45.0 million remaining carryforward generated in 2000 expires in 2020 and the $27.9 million remaining carryforward generated in 2001 expires in 2021. United States tax law limits the amount of the $49.3 million net operating loss carryforward we generated in 2000 that can be utilized each year to approximately $12 million. As a total of $4.4 million of the 2000 net operating loss was utilized in 2002, the usage of the net operating loss generated in 2000 will be limited to approximately $31.6 million for 2003. We do not anticipate a need to use more than this amount in our federal tax return for 2003. Use of the net operating loss generated in 2001 is unlimited.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Our consolidated revenues for the year ended December 31, 2001 were $1,935.0 million, which represents a decrease from the year ended December 31, 2000 of $125.0 million, or 6.1%. This decrease was primarily the result of a decrease in our fuel revenue, largely due to decreased fuel commodity prices. Our level of sales during the first eight months of 2001 was adversely affected by the worsening United States economy that began to weaken during 2000. The September 11, 2001 terrorist attacks on the United States disrupted the financial markets and consumer confidence, further exacerbating the adverse effect of the economic slowdown on our sales levels.
Fuel revenue for the year ended December 31, 2001 decreased by $153.9 million, or 10.4%, from 2000. The decrease was attributable principally to decreases in diesel fuel average selling prices. This decrease was also caused by a decline in the average selling prices of gasoline and a slight decrease in diesel fuel sales volume, partially offset by increased gasoline sales volume. Average diesel fuel and gasoline sales prices for the year ended December 31, 2001 decreased by 11.0% and 11.6%, respectively, as compared to the same period in 2000, primarily reflecting decreases in commodity prices but also reflecting our more competitive fuel pricing. Diesel fuel and gasoline sales volumes for the year ended December 31, 2001 decreased 1.1% and increased 23.3%, respectively, as compared to the year ended December 31, 2000. For the year ended December 31, 2001, we sold 1,369.3 million gallons of diesel fuel and 125.9 million gallons of gasoline, as compared to 1,384.8 million gallons of diesel fuel and 102.1 million gallons of gasoline for the year ended December 31, 2000. The diesel fuel sales volume decrease resulted from a decline in our wholesale diesel fuel sales of 53.2 million gallons, or 50.7%, as a result of a planned retrenchment in this area and reduced sales volumes at sites we sold during 2000 and 2001, partially offset by increased sales volume on a same-site basis and at new sites acquired or constructed during 2000 and 2001. The gasoline sales volume increase was due to increased sales volume on a same-site basis and at new sites acquired or constructed during 2000 and 2001, partially offset by reduced sales volumes at sites sold during 2000 and 2001. Same-site diesel fuel sales volume for 2001 reflected a 4.3% increase from 2000 and same-site gasoline sales volume for 2001 reflected a 24.1% increase from 2000. We believe the same-site diesel fuel sales volume increase was a result of our more competitive retail fuel pricing posture adopted in July 2000, in combination with the September 2000 introduction of our enhanced customer loyalty program, which we refer to as the RoadKing Club. We believe the same-site increase in gasoline sales volume resulted primarily from increased general motorist visits to our sites as a result of our gasoline and QSR offering upgrades and additions under our capital program, as well as our more competitive retail gasoline pricing.
Non-fuel revenues for the year ended December 31, 2001 of $585.7 million reflected an increase of $30.2 million, or 5.4%, from the year ended December 31, 2000. The increase was attributable to both same-site sales increases and the increased sales at the company-operated sites added to our network in 2000 and 2001. On a same-site basis, non-fuel revenue increased 3.3% for the year ended December 31, 2001 versus the same period in 2000. We believe the same-site increase reflected increased customer traffic resulting, in part, from both 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, and our more competitive fuel prices, partially offset by the weakening of the United States economy throughout 2001.
Rent and royalty revenues for the year ended December 31, 2001 reflected a $1.3 million, or 6.9%, decrease from the same period in 2000. This decrease was primarily attributable to the rent and royalty revenue lost as a result of the conversions of three leased sites to company-operated sites; the termination of the franchise agreements with the franchisees of one franchisee-owned site that was converted to a company-operated site and one leased site that was sold; and the termination of the franchise agreement covering one franchisee-owned site that left our network. This decrease was partially offset by a 1.1% increase in same-site royalty revenue and a 3.0% increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the year ended December 31, 2001 was $467.3 million, compared to $448.7 million for the same period in 2000, an increase of $18.5 million, or 4.1%. The increase in our gross profit was primarily due to increases in gasoline and non-fuel sales volume that were partially offset by a decrease in diesel fuel volume, a reduced level of diesel fuel and gasoline margins per gallon and decreased rent and royalty revenue.
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 $17.2 million, or 5.6%, to $325.7 million for the year ended December 31, 2001 compared to $308.5 million for the year ended December 31, 2000. This increase reflected both increased non-fuel sales volume and a $2.8 million increase in utility expenses that resulted from significantly higher electricity prices and relatively colder weather in early 2001 as compared to 2000. On a same-site basis, operating expenses as a percentage of non-fuel revenues for the year ended December 31, 2001 were 54.0%, compared to 53.7% for the same period in 2000, reflecting the increased utility costs, partially offset by the results of our cost-cutting measures at our sites.
Our selling, general and administrative expenses for the year ended December 31, 2001 were $38.3 million, as compared to $38.2 million for the year ended December 31, 2000. This increase of $0.1 million, or 0.1%, was attributable to increased salary expense almost completely offset by decreases in travel costs, professional fees and other costs.
Transition Expenses. Transition expenses were the costs incurred in combining the Unocal, BP, Burns Bros. and Travel Ports networks. As the integration of sites from our acquisitions was completed during 2000, we did not incur transition expenses in 2001.
Depreciation and Amortization Expense. Depreciation and amortization expense for the year ended December 31, 2001 was $63.5 million, compared to $62.8 million for the year ended December 31, 2000. The increase in depreciation and amortization expense was attributable to a larger base of depreciable assets due to our capital expenditures during 2000 and 2001, $2.5 million of impairment charges we recognized during 2001 with respect to sites we are holding for sale, and partially offset by reduced depreciation expense resulting from a change in the estimated useful lives of certain types of our assets that extended the estimated lives by five years. This change, which was effective as of April 1, 2001, decreased depreciation expense for the year ended December 31, 2001 by approximately $8.5 million from what it would have been.
Merger and Recapitalization Expenses. Merger and recapitalization expenses were the costs we incurred during 2000 in completing a recapitalization and a merger with TCA Acquisition Corporation, a newly created company formed by Oak Hill Capital Partners, L.P. and its affiliates. These costs principally consisted of legal, accounting, investment banker and other consultants' fees as well as bonus payments to certain members of our management, and totaled $22.0 million during 2000. We incurred no such costs during 2001.
Income from Operations. We generated income from operations of $41.5 million for the year ended December 31, 2001, compared to income from operations of $19.1 million for the same period in 2000. The most significant reason for this increase of $22.4 million, or 117.3%, was the lack of merger and recapitalization expenses in 2001 as compared to $22.0 million of such expenses in 2000. The increase in gross profit was also attributable to the variations in gross profit and expenses described above, as well as a $0.3 million increase in gain on sales of property and equipment and our recognizing no stock compensation expense or benefit in 2001 as compared to a $1.4 million benefit for stock compensation in 2000.
EBITDA for the year ended December 31, 2001 was $105.0 million, as compared to EBITDA of $103.5 million for the year ended December 31, 2000, an increase of $1.5 million, or 1.4%. 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 and other financial costs, net, (c) depreciation, amortization and other noncash charges, which includes stock compensation expense and (d) transition expense. EBITDA for the year ended December 31, 2001 increased over the year ended December 31, 2000 primarily as a result of the increases in gross profit, partially offset by the increase in operating expenses.
Interest and Other Financial Costs--Net. Interest and other financial costs, net, for the year ended December 31, 2001 increased by $10.7 million, or 22.7%, compared to the year ended December 31, 2000. This increase resulted from the increased debt levels associated with the refinancing we completed in November 2000 as part of our merger and recapitalization transactions. In addition, we recognized an increase in amortization of debt discount and of deferred financing costs as a result of the debt discount and deferred financing costs incurred as part of our refinancing in November 2000. These increases were partially offset by reduced interest rates on our term loan and revolving credit agreement borrowings as a result of the decline in market interest rates.
Income Taxes. Our effective income tax benefit rates for the years ended December 31, 2001 and 2000 were 39.6% and 14.6%, 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 recognizing the differences between the estimated and actual amounts of non-deductible merger and recapitalization expenses incurred in 2000 and a decrease in the amount of nondeductible expenses incurred in 2001 as compared to 2000.
Extraordinary Loss. During the fourth quarter of 2000 we recognized an extraordinary loss of $13.8 million in connection with the early extinguishment of indebtedness. This amount was net of the applicable income tax benefits of $7.1 million. This extraordinary loss consisted of (a) the write off of $7.6 million of unamortized deferred financing costs we had incurred when we had issued the extinguished indebtedness, (b) $11.6 million of tender offer and consent solicitation premium and related fees related to redeeming our then outstanding Senior Subordinated Notes due 2007, (c) $0.8 million of prepayment penalties related to redeeming our then outstanding senior secured notes and (d) $0.9 million to exit an interest rate swap agreement related to the extinguished debt. We incurred no extraordinary items during 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements are to meet our working capital and capital expenditure needs, including expenditures for acquisitions and expansion, and to service the payments of principal and interest on outstanding indebtedness. Our principal source of liquidity to meet these requirements is operating cash flows. The revolving credit facility of our Senior Credit Facility provides us a secondary source of liquidity, primarily to better match the timing of cash expenditures to the timing of our cash receipts primarily due to effects of changes in petroleum product prices, the uneven level of capital expenditures throughout the year and the timing of debt and interest payments. The primary risks we face with respect to the expected levels of operating cash flows are a decrease in the demand of our customers for our products and services, increases in crude oil and/or petroleum product prices and increases in interest rates. It is reasonably likely that the United States economy could either worsen, or make a slower recovery than expected. Similarly, it is reasonably likely that interest rates and petroleum
product prices will increase during 2003 from levels that existed during 2002, possibly to levels greater than that contemplated in our expectations. The uncertainty surrounding each of the economy, interest rates and petroleum product prices is exacerbated by the possibility of war in Iraq and by the labor unrest within the Venezuelan petroleum industry. 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 $4.2 million. A significant increase in diesel fuel and gasoline prices increases our cash investment in working capital and can also have a depressing effect on our sales volumes and fuel margins per gallon. The primary risk we face with respect to the expected availability of borrowing under our revolving credit facility are the limitations imposed upon us by the covenants contained in our Senior Credit Facility. Should our level of sales volume or interest rate and petroleum products price levels vary adversely and significantly from expectations, it is reasonably likely that we would need to reduce our capital expenditures or be effectively barred from further revolving credit facility borrowings in order to maintain compliance with our debt covenants, in the absence of a debt covenant waiver or an amendment to the related agreement. We were in compliance with all of our debt covenants throughout 2002 and as of December 31, 2002 and we expect to remain in compliance with all of our debt covenants throughout 2003.
We anticipate that we will be able to fund our 2003 working capital requirements and capital expenditures primarily from funds generated from operations, supplemented, to the extent necessary, from borrowings under our revolving credit facility. Our long-term liquidity requirements, including capital expenditures, are expected to be financed by a combination of internally generated funds, borrowings and other sources of external financing as needed. Our ability to fund our capital investment requirements, interest and principal payment obligations and working capital requirements and to comply with all of the financial covenants under our debt agreements depends on our future operations, performance and cash flow. These are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.
The amounts we have invested for capital improvements have declined each year from 2000 to 2002. The declining level of cash investments is in line with our development plans and reflects our response to the slowing and then stagnant U.S. economy throughout 2000, 2001 and 2002. Our capital investment program to re-image, rebrand and upgrade our network has been substantially completed. Since 1997, we have invested approximately $407 million to maintain, re-image, rebrand, upgrade and expand our network. We also invested $115 million to acquire the travel center networks of Burns Bros. and Travel Ports during that period. We now are positioned to spend only approximately $15 million to $20 million annually for sustaining capital projects and then to discriminately choose the growth-related projects that will compose the remainder of our annual capital expenditure plans. These growth-related projects include expenditures to construct and/or acquire additional sites, re-image sites, add additional non-fuel offerings, such as truck maintenance and repair shops and QSRs at existing sites, and purchase, install and upgrade our information systems. The capital expenditures budget for 2003 is approximately $42 million. Given our forecasted level of cash flows from operations for 2003 and our planned level of capital expenditures, we expect that during 2003 we will make our scheduled debt payments of $3.5 million, make a mandatory term loan prepayment of $11.3 million and will also repay an additional amount of outstanding borrowings under our term loan and revolving credit facilities, barring a further decline in the U.S. economy and/or an extended conflict in the Middle East or some other factor that leads to significantly increased petroleum product prices.
HISTORICAL CASH FLOWS
Net cash provided by operating activities totaled $61.5 million in 2002, $37.1 million in 2001 and $66.0 million in 2000. The $24.4 million increase in cash provided by operations in 2002 as compared to 2001 primarily resulted from the $11.3 million increase in operating income, the $6.5 million decrease in interest and other financial costs and a $3.9 million reduction in the amount of cash invested in working capital. The $28.9 million decrease in cash provided by operating activities in 2001 as compared to 2000 was primarily attributable to two factors: interest expense increased by $10.7 million and cash from working capital decreased by $22.5 million. In 2001, we invested $10.3 million in working capital while in 2000 we generated $12.2 million of cash from working capital.
Net cash used in investing activities for 2002 was $42.1 million, as compared to $46.2 million in 2001 and $77.1 million in 2000. During 2002, we made capital expenditures of $42.6 million, invested $4.2 million to convert five leased sites to company-operated sites and generated proceeds from the sales of assets of $4.8 million. During 2001, we invested $54.5 million of capital expenditures into our network and generated $8.3 million of proceeds from sales of assets for net capital expenditures of $46.2 million. During 2000, we invested $9.7 million to convert three leased sites to company-operated sites, to convert one franchisee-owned site to a company-operated site, to acquire two new company-operated sites and to acquire a minority interest in a related business.
We used $25.2 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. For the year ended December 31, 2001, cash flows from financing activities were negligible. We made net borrowings of $3.6 million under our revolving credit facility, paid $3.3 million of costs of our merger and recapitalization transactions of November 2000, and had net payments of $0.3 million for other financing activities. Net cash flows provided by financing activities were $22.1 million in 2000. During 2000, we had net borrowings under our revolving credit facilities of $25.3 million. We also completed the 2000 Refinancing in connection with our merger and recapitalization transactions, which included proceeds from new debt borrowings of $511.0 million, proceeds from the issuances of stock of $208.7 million, repurchases of equity securities of $263.2 million, repayments of indebtedness of $423.6 million and payment of various related fees, expenses and prepayment penalties of $67.1 million. We also made $1.8 million of scheduled debt payments during 2000.
DESCRIPTION OF INDEBTEDNESS
The Senior Credit Facility provides senior secured financing of up to $428.0 million, consisting of a $328.0 million term loan facility with a maturity of eight years and a $100.0 million revolving credit facility with a maturity of six years. We have pledged substantially all of our assets as collateral under the Senior Credit Facility. At December 31, 2002, we had outstanding borrowings and issued letters of credit of $22.4 million and $20.9 million, respectively, leaving $56.7 million of our $100 million revolving credit facility available for borrowings. The term loan facility and the revolving credit facility bear interest at a rate equal to:
- in the case of the revolving credit facility, Adjusted LIBOR plus a margin of 2.75% or, at our election, the alternate base rate plus a margin of 1.75%; or
- in the case of the term loan facility, Adjusted LIBOR plus a margin of 3.25% or, at our election, the alternate base rate plus a margin of 2.25%.
In addition to paying interest on outstanding principal under the Senior Credit Facility, we are required to pay a commitment fee to the lenders under the revolving credit facility equal to 0.50% per year of the unused commitments thereunder.
The Senior Credit Facility obligates us to make annual mandatory prepayments of term loan indebtedness equal to one-half of the Excess Cash Flow amount (as defined in the agreement) generated in the previous year. For the year ended December 31, 2002 we generated approximately $22.6 million of Excess Cash Flow and, therefore, are obligated to prepay $11.3 million of the term loan by April 15, 2003. This $11.3 million mandatory prepayment will reduce the amounts otherwise scheduled to be repaid in each quarter after the prepayment, on a pro rata basis. After giving effect to this prepayment, the term loan facility will amortize each year in quarterly amounts in the following approximate aggregate principal amounts for each year set forth below.
Principal amounts outstanding under the revolving credit facility are due and payable in full at maturity in November 2006.
The Senior Credit Facility contains a number of covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, repay other indebtedness, make certain restricted payments and dividends, create liens on assets, make investments, loans or advances, make certain acquisitions, engage in mergers or consolidations, engage in material businesses other than our current businesses, make capital expenditures, enter into sale and leaseback transactions, or engage in certain transactions with affiliates.
We have outstanding at December 31, 2002, 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, 2002, $4.3 million was outstanding under a note payable by us to a former operator of a site, which we refer to as the Santa Nella Note. The note bears interest at an annual rate of 5%, requires quarterly principal and interest payments of $98,000 through October 1, 2018 and is secured by the real estate and improvements located at the site.
OFF-BALANCE SHEET ARRANGEMENTS
On September 9, 1999, we entered into a master lease program with a lessor that has been used to finance the construction of eight travel centers on land we own. These lease transactions are evaluated for lease classification in accordance with FAS 13. We do not consolidate the lessor so long as the owners of the lessor maintain a substantial residual equity investment of at least three percent that is at risk during the entire term of the lease, which has been the case to date and is expected to remain the case. Consolidating the lessor would affect our consolidated balance sheet by increasing property and equipment, other assets and long-term debt and would affect our consolidated statement of operations by reducing operating expenses, increasing depreciation expense and increasing interest expense. Consolidating the lessor is not expected to result in a violation of our debt covenants. The initial term of the lease expires on September 9, 2006, at which time, if the lease is not renewed and extended,
we have the option to either purchase the improvements for an amount equal to the sum of (a) the outstanding indebtedness of the lessor and (b) the equity capital balance, or to make a termination payment to the lessor and abandon the travel centers. We anticipate that on September 9, 2006 we will renew and extend the lease agreement, but may either be unable to do so or elect not to do so and instead either pay approximately $58.2 million to acquire the leased assets or make the termination payment of approximately $44.1 million. As of December 31, 2002, the aggregate outstanding amount of the lessor's indebtedness and equity capital was $68.4 million.
Under the related lease agreement, our quarterly lease payments are based on the capitalization and weighted-average cost of capital of the lessor. The lessor was initially capitalized with $2.4 million of equity and entered into a loan and security agreement through which it borrowed $69.7 million. The lessor's equity holders receive a return on their contributed capital equal to LIBOR plus 10.75%, while the interest rate for the indebtedness is equal to LIBOR plus a spread that will decrease from 4.0% to 3.0% as our ratio of total debt to EBITDA (as defined in our bank debt agreement) improves. Our quarterly rent payments are calculated to equal the quarterly interest expense, return on equity and debt amortization requirements of the lessor, based on a straight-line amortization schedule that ensures 20% of the underlying indebtedness is repaid by the expiration of the initial lease term on September 9, 2006. We do not guarantee the indebtedness of the lessor and the lessor's creditors have no recourse against us beyond our obligation to continue our rent payments.
The following are additional amounts related to the master lease program (all amounts are as of or for the year ended December 31, 2002):
- The lessor's total capitalization of $68.4 million consisted of $66.0 million of a term loan secured by the related travel centers assets and underlying leasehold interests, and $2.4 million of general and limited partners' contributed capital.
- The lessor's assets related to the master lease program consisted of $67.5 million of tangible fixed assets, $1.7 million of capitalized interest and $2.9 million of deferred financing costs.
- During 2002, for the seven sites that were leased for the full year and the one site that opened in July during the year, we recognized and paid lease rent expense under this master lease program of $5.8 million. Excluding this rent expense, these eight sites generated income of $10.0 million for the year ended December 31, 2002.
- The depreciation expense and interest expense we would have recognized with respect to these leased travel centers if we had capitalized them and not leased them was approximately $5.1 million and $4.2 million, respectively, for the year ended December 31, 2002.
In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest Entities." We must adopt this accounting guidance by July 1, 2003. Under FIN 46, as the lessor with whom we have entered into our master lease program is currently capitalized and structured, we would be required to consolidate the lessor in our consolidated financial statements. We and the lessor are currently evaluating our alternatives with respect to the master lease facility and have not yet concluded on our course of action. Consolidating the lessor is not expected to result in a violation of our debt covenants.
SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our expected obligations to make future required payments under various types of agreements.
(1) Excludes interest.
(2) Assumes that the master lease facility is not renewed at the expiration of the initial lease term and the travel centers are acquired by us in 2006 for $58.2 million.
(3) We have an obligation to make future payments to redeem common stock of certain of our management employees upon the death, disability or scheduled retirement of the employees. Neither the timing nor the amounts of any such payments can be accurately estimated. As of December 31, 2002, 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 $3.5 million.
Our only commercial commitments of any significance are the $20.9 million of standby letters of credit we had outstanding as of December 31, 2002.
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, 2002, we had a reserve of $2.9 million for unindemnified environmental matters for which we are responsible. Under the environmental agreements entered into as part of the acquisition of the Unocal and BP networks, Unocal and BP are required to provide indemnification for, and conduct remediation of, certain pre-closing environmental conditions. In addition, we have obtained insurance of up to $25.0 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
In June 2001, the FASB issued FAS 143, "Accounting for Asset Retirement Obligations." FAS 143 requires recognition of the fair value of the liability associated with the legal obligation to retire long-lived assets in the period in which the obligation is incurred. At that time, an asset retirement cost of an equal amount is to be capitalized and subsequently allocated to expense using a systematic and rational approach over the estimated useful life of the related asset. We adopted FAS 143 effective January 1, 2003. We are currently evaluating the effects of adopting FAS 143, but do not anticipate that adopting FAS 143 will have a material effect on our results of operations or financial position. FAS 143 has no effect on our liquidity.
In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest Entities." We must adopt this accounting guidance by July 1, 2003. Under FIN 46, as the lessor with whom we have entered into our master lease program is currently capitalized and structured, we would be required to consolidate the lessor in our consolidated financial statements. We and the lessor are currently evaluating our alternatives with respect to the master lease facility and have not yet concluded on our course of action. Consolidating the lessor would affect our consolidated balance sheet by increasing property and equipment, other assets and long-term debt and would affect our consolidated statement of operations by reducing operating expenses, increasing depreciation expense and increasing interest expense. Consolidating the lessor is not expected to result in a violation of our debt covenants or to have an effect on our liquidity.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that, at the inception of a guarantee, the guarantor recognize a liability for the noncontingent portion of that guarantee, initially measured at fair value. FIN 45 also requires certain disclosures about guarantees. The initial recognition provisions of FIN 45 must be applied only on a prospective basis for guarantees issued after December 31, 2002, while we are required to
adhere, and have adhered, to the disclosure requirements in our financial statements for 2002. While we offer a warranty of our workmanship in our truck maintenance and repair shops, the annual warranty expense and corresponding liability are immaterial. We do not issue or provide guarantees and do not expect the initial recognition provisions of FIN 45 to have a material effect on our results of operations or financial position. Adopting FIN 45 will not affect our liquidity.
In June 2002, the FASB issued FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." This new accounting standard significantly changes how entities account for exit and disposal activities, including restructuring activities. The provisions of FAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Such activities, and the related costs, have not been significant for us in previous years and we do not expect them to be in future years.
In December 2002, the FASB issued FAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure (an amendment of FAS 123)." FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also amends the disclosure requirements of FAS 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the chosen method on reported results. We have not elected to change to the fair value based method of accounting for stock-based employee compensation and have made the required disclosures in our consolidated financial statements for 2002. For further discussion of stock-based employee compensation, see the footnotes to the consolidated financial statements included elsewhere in this annual report.
FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future prospects, developments and business strategies. The statements contained in this annual report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. We have used the words "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend" and similar expressions in this annual report to identify forward-looking statements. These forward-looking statements are made based on our expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by forward-looking statements. The following factors are among those that could cause our actual results to differ materially from the forward-looking statements:
- competition from other travel center and truck stop operators, including additional or improved services or facilities of competitors, and from the potential commercialization of state-owned interstate rest areas;
- the economic condition of the trucking industry, which in turn is dependent on general economic factors;
- increased environmental regulation;
- changes in governmental regulation of the trucking industry, including regulations relating to diesel fuel and gasoline;
- changes in interest rates;
- diesel fuel and gasoline pricing;
- availability of diesel fuel and gasoline supply; and
- availability of sufficient qualified personnel to staff company-operated sites.
All of our forward-looking statements should be considered in light of these factors and all other risks discussed from time to time in our filings with the Securities and Exchange Commission. We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.
ITEM 7A.
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, 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, 2002.
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. We 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. At December 31, 2002, we were involved in no interest rate protection agreements.
The following table summarizes information about our financial instruments that are subject to changes in interest rates:
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002.
PricewaterhouseCoopers LLP
Cleveland, Ohio March 7, 2003
TRAVELCENTERS OF AMERICA, INC. CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of these consolidated financial statements.
TRAVELCENTERS OF AMERICA, INC. CONSOLIDATED STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
TRAVELCENTERS OF AMERICA, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
TRAVELCENTERS OF AMERICA, INC. CONSOLIDATED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
We are a holding company which, through our wholly owned subsidiaries, owns, operates and franchises travel centers along the United States interstate highway system to serve long-haul trucking fleets and their drivers, independent truck drivers and general motorists. At December 31, 2002, our geographically diverse nationwide network of full-service travel centers consisted of 152 sites located in 40 states. Our operations are conducted through three distinct types of travel centers:
- sites owned or leased and operated by us, which we refer to as company-operated sites;
- sites owned by us and leased to independent lessee-franchisees, which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate highway system, typically on 20- to 25-acre sites. Operating under the "TravelCenters of America" and "TA" brand names, our nationwide network provides our customers with diesel fuel and gasoline as well as non-fuel products and services such as truck repair and maintenance services, full-service restaurants, fast food restaurants, travel and convenience stores and other driver amenities. We also collect rents and franchise royalties from the franchisees who operate the leased sites and franchisee-owned sites and, as a franchisor, assist our franchisees in providing service to long-haul trucking fleets and their drivers, independent truck drivers and general motorists.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of TravelCenters of America, Inc. and its wholly owned subsidiaries, TA Operating Corporation and TA Franchise Systems Inc., as well as TA Licensing, Inc., TA Travel, L.L.C., TravelCenters Realty, L.L.C. and TravelCenters Properties, L.P., which are all direct or indirect wholly owned subsidiaries of TA Operating Corporation. National Auto/Truckstops, Inc. was a wholly owned subsidiary of ours until November 14, 2000, at which time it was merged with and into TA Operating Corporation. Intercompany accounts and transactions have been eliminated.
We have entered into lease transactions of travel centers with a special purpose entity. These lease transactions are evaluated for lease classification in accordance with Statement of Financial Accounting Standards (FAS) No. 13, "Accounting for Leases." We do not consolidate the special purpose entity so long as the owners of the special purpose entity maintain a substantial residual equity investment of at least three percent that is at risk during the entire term of the lease, which has been the case to date (see Note 3).
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
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
Rent revenue is recognized monthly for the portion of each month that a lessee occupies one of our leased sites. 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 obligations under the related agreements. Franchise royalty revenues are collected and recognized monthly and are determined as a percentage of the franchisees' revenues.
Cash
For purposes of the statement of cash flows, we consider all highly liquid investments with an initial maturity of three months or less to be cash.
Inventories
Inventories are stated at the lower of cost or market value, cost being determined principally on the weighted average cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over the following estimated useful lives of the assets:
Buildings and site improvements.......... 15-20 years Pumps and underground storage tanks...... 5-10 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.
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 13).
Intangible Assets
Acquired intangible assets, other than goodwill, are initially recognized based on their fair value. Those intangible assets acquired in a business combination are initially recognized in accordance with FAS 141, "Business Combinations." FAS 141 requires an allocation of purchase price to all assets and liabilities acquired, including those intangible assets that arise from contractual or other legal rights or are otherwise capable of being separated or divided from the acquired entity (but excluding goodwill), based on the relative fair values of the acquired assets and liabilities. Any excess of acquisition cost over the fair value of the acquired net assets is recorded as goodwill. Costs of internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate lives or that are inherent in a continuing business and related to the entity as a whole are expensed as incurred. Intangible assets with finite lives are amortized on a straight-line basis over their estimated lives, principally the terms of the related contractual agreements giving rise to them. Until December 31, 2001 goodwill and intangible assets with indefinite lives were amortized. Effective January 1, 2002, we adopted the provisions of
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FAS 142, "Goodwill and Other Intangible Assets." Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Accordingly, effective January 1, 2002, we stopped amortizing our goodwill and our trademarks, which have indefinite lives. All of our intangible assets with indefinite lives are subject to the impairment tests required by FAS 142, which include an annual test completed as of January 1 of each year and tests throughout the year if circumstances indicate that the intangible assets may be impaired (see Note 10).
Internal-Use Software Costs
During the application development stage of an internal-use computer software project, we capitalize (i) the external direct costs of materials and services consumed in developing or obtaining the internal-use computer software, (ii) to the extent of time spent directly on the project, payroll costs of employees directly associated with and who devote time to the project, and (iii) related interest costs incurred. Internal and external costs incurred in the preliminary project stage and post-implementation stage, such as for exploring alternative technologies, vendor selection and maintenance, are expensed as incurred, as are all training costs. The costs of significant upgrades and enhancements that result in additional functionality are accounted for in the same manner as similar costs for new software projects. The costs of all other upgrades and enhancements are expensed as incurred.
Impairment of Long-Lived Assets
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS 144 supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." FAS 144 addresses financial reporting for the impairment or disposal of long-lived assets. We adopted FAS 144 effective January 1, 2002. Under FAS 144, impairment charges are recognized when the carrying value of a long-lived asset to be held and used in the business is not recoverable and exceeds its fair value, and when the carrying value of a long-lived asset to be disposed of exceeds the estimated fair value of the asset less the estimated cost to sell the asset. Such impairment charges are recognized in the period during which the circumstances surrounding an asset to be held and used have changed such that the carrying value is no longer recoverable, or during which a commitment to a plan to dispose of the asset is made. Such tests are performed at the individual travel center level. In addition, intangible assets are subjected to further evaluation and impairment charges are recognized when events and circumstances indicate the carrying value of the intangible asset exceeds the fair market value of the asset. Impairment charges are included in depreciation and amortization expense in our consolidated statement of operations.
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 expenses represent the nonrecurring costs we incurred in integrating the BP network, the Unocal network, the Burns Bros. network and the Travel Ports network into a single network under one management, including severance and relocation expenses, costs to convert acquired sites, costs to dispose of leased sites, convert leased sites to company-operated sites and terminate franchise agreements, and related travel and training expenses. See Note 5 for a discussion of the Combination Plan under which the majority of these costs have been incurred. Merger and recapitalization expenses represent the nonrecurring costs incurred in completing a recapitalization and a merger with TCA Acquisition Corporation. These costs principally consist of legal, accounting, investment banker and other consultants' fees as well as bonus payments to certain members of our management. See Note 4 for a discussion of the merger and recapitalization transactions. Costs of advertising are expensed as incurred.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Employee Compensation
We account for our stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. For granted options that vest over time, no compensation expense is reflected in net income, as all of those options had an exercise price equal to or greater than the market value of the underlying common stock at the date of grant. For granted options that vest based on attaining certain measures of performance, compensation expense is recognized when it becomes probable that the performance triggers for such options will be achieved. The following table illustrates the effect on net income (loss) if we had applied the fair value recognition provisions of FAS No. 123 to stock-based employee compensation.
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-Sholes option-pricing model with the following weighted average assumptions: a risk-free interest rate of 5.5%, a dividend yield of 0.0%, a volatility factor of 0.0001%, and an expected life of the options of ten years.
Environmental Remediation
We provide for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. If recoveries of remediation costs from third parties are probable, a receivable is recorded. Accruals are not recorded for the costs of remediation activities undertaken on our behalf by Unocal and BP, at Unocal's and BP's sole expense (see Note 18). 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.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Asset Retirement Obligations
In June 2001, the FASB issued FAS 143, "Accounting for Asset Retirement Obligations." FAS 143 requires recognition of the fair value of the liability associated with the legal obligation to retire long-lived assets in the period in which the obligation is incurred. At that time, an asset retirement cost of an equal amount is to be capitalized and subsequently allocated to expense using a systematic and rational approach over the estimated useful life of the related asset. We adopted FAS 143 effective January 1, 2003. We are currently evaluating the effects of adopting FAS 143, which primarily applies to us with respect to our underground storage tanks, but do not anticipate that adopting FAS 143 will have a material effect on our results of operations or financial position. FAS 143 has no effect on our liquidity.
Income Taxes
Deferred income tax assets and liabilities are established to reflect the future tax consequences of differences between the tax bases and financial statement bases of assets and liabilities. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance.
Concentration of Credit Risk
We grant credit to our customers and may require letters of credit or other collateral.
Derivative Instruments
We recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. We designate our derivatives based upon criteria established by FAS 133, "Accounting for Derivative Instruments and Hedging Activities." For a derivative designated as a fair value hedge, the change in fair value is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. We use derivatives to manage risk arising from changes in interest rates. Our objectives for holding derivatives are to decrease the volatility of earnings and cash flows associated with changes in interest rates. (See Note 19.)
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:
Cash and short-term investments, accounts receivable and accounts payable: 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.
Long-term debt: 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 13.)
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Protection Agreements: The fair values of our interest rate protection agreements are based on bank-quoted market prices. (See Note 13.)
3. RECENTLY ISSUED ACCOUNTING STANDARDS
FAS 142. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (FAS) No. 142, "Goodwill and Other Intangible Assets." Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives continue to be amortized over their useful lives. Our trademark intangible assets have been deemed to have indefinite lives. During the first quarter of 2002 we completed the transitional impairment test for our trademarks and determined that the estimated fair values of these intangible assets exceeded their respective carrying amounts. Accordingly, we did not recognize an impairment loss with respect to our trademark intangible assets. For purposes of testing goodwill for impairment under the transitional accounting provisions of FAS 142, goodwill must first be allocated to reporting units. FAS 142 requires us to compare the fair value of the reporting unit to its carrying value to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recognized to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value. For purposes of applying the provisions of FAS 142, we have determined that we are one reporting unit. The fair value of the reporting unit exceeded the carrying value of the reporting unit at January 1, 2002. Accordingly, we did not recognize an impairment loss with respect to our goodwill.
The following table provides a reconciliation of the prior-year periods' reported net income (loss) to adjusted net income (loss) had FAS 142 been applied as of the beginning of 2000.
FAS 144. Effective January 1, 2002, we adopted FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement amended previous accounting and disclosure requirements for impairments and disposals of long-lived assets, including with respect to discontinued operations. The provisions of FAS 144 are generally to be applied prospectively. Adoption of FAS 144 had an immaterial effect on our consolidated results of operations and financial position and had no effect on our liquidity.
FAS 143. In June 2001, the FASB issued FAS 143, "Accounting for Asset Retirement Obligations." FAS 143 requires recognition of the fair value of the liability associated with the legal obligation to retire long-lived assets in the period in which the obligation is incurred. At that time, an asset retirement cost of an equal amount is to be capitalized and subsequently allocated to expense using a systematic and rational approach over the estimated useful life of the related asset. We adopted FAS 143 effective January 1, 2003. We are currently evaluating the effects of adopting FAS 143, but do not anticipate that adopting FAS 143 will have a material effect on our results of operations or financial position. FAS 143 has no effect on our liquidity.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FIN 46. In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest Entities." We must adopt this accounting guidance by July 1, 2003. Under FIN 46, as the lessor with whom we have entered into our master lease program is currently capitalized and structured, we would be required to consolidate the lessor in our consolidated financial statements. We and the lessor are currently evaluating our alternatives with respect to the master lease facility and have not yet concluded on our course of action. Consolidating the lessor would affect our consolidated balance sheet by increasing property and equipment, other assets and long-term debt and would affect our consolidated statement of operations by reducing operating expenses, increasing depreciation expense and increasing interest expense. Consolidating the lessor is not expected to result in a violation of our debt covenants or to have an effect on our liquidity. We adopted the disclosure requirements of FIN 46 in our consolidated financial statements for 2002.
FIN 45. In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that, at the inception of a guarantee, the guarantor recognize a liability for the noncontingent portion of that guarantee, initially measured at fair value. FIN 45 also requires certain disclosures about guarantees. The initial recognition provisions of FIN 45 must be applied only on a prospective basis for guarantees issued after December 31, 2002, while we are required to adhere, and have adhered, to the disclosure requirements in our consolidated financial statements for 2002. While we offer a warranty of our workmanship in our truck maintenance and repair shops, the annual warranty expense and corresponding liability are immaterial. We do not issue or provide guarantees and do not expect the initial recognition provisions of FIN 45 to have a material effect on our results of operations or financial position. Adopting FIN 45 will not affect our liquidity.
FAS 146. In June 2002, the FASB issued FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." This new accounting standard significantly changes how entities account for exit and disposal activities, including restructuring activities. The provisions of FAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Such activities, and the related costs, have not been significant for us in previous years and we do not expect them to be in future years.
FAS 148. In December 2002, the FASB issued FAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure (an amendment of FAS 123)." FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also amends the disclosure requirements of FAS 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the chosen method on reported results. We have not elected to change to the fair value based method of accounting for stock-based employee compensation and have made the required disclosures in our consolidated financial statements for 2002.
4. MERGER AND RECAPITALIZATION TRANSACTIONS
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 and a refinancing 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 $205,000,000 and then merged with and into us.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- 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.
- We repaid all amounts outstanding under our then existing debt agreements.
- We borrowed $328,300,000 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 $190,000,000 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 and formed two new wholly owned subsidiaries of TA Operating Corporation to maintain our real property in certain states.
Prior to the closing of the transactions described above, we issued 137,572 shares of common stock for cash proceeds of $3,752,000 upon the exercise of stock options held by existing shareholders, which shares remain 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 amount of our equity capitalization after these transactions, given the $31.75 per share merger consideration paid in our merger and recapitalization transactions, was $220,020,000. The transactions described above have been accounted for as a leveraged recapitalization (see Note 15). We have retained the historical cost basis of our assets and liabilities, due to the significance of the ownership interest in us that was retained by continuing stockholders. We incurred $22,004,000 of expenses charged against operations in connection with the merger and recapitalization transactions. We also recognized an extraordinary loss of $13,800,000 (which was net of $7,110,000 of applicable income tax benefits) as a result of the early extinguishment of indebtedness completed as part of these transactions.
5. COMBINATION PLAN AND TRANSITION EXPENSE
In January 1997, we adopted a plan (which we refer to as the "combination plan"), to combine the operations of the Unocal network and the BP network into one network under the TravelCenters of America brand. There were three primary elements to the combination plan: (1) integrating the management of the BP and Unocal networks, (2) converting the Unocal and BP network sites to one network, and (3) rationalizing and further developing our network. These expenses related to implementing the combination plan are referred to as transition expenses and included, among other things, (i) employee separations, (ii) the costs to convert Unocal network travel centers, (iii) the costs to dispose of travel centers or terminate lease or franchise agreements, and (iv) the costs of integrating the management and operations of the Unocal and BP networks, including relocation, travel, training, and legal expenses. The combination plan was substantially completed during 1999.
We have also incurred transition expenses as a result of the Burns Bros. acquisition and the Travel Ports acquisition, primarily related to integrating the acquired sites into our network. As a result of implementing the combination plan and integrating the Burns Bros. network and Travel Ports network sites, for the year ended December 31, 2000, we incurred approximately $996,000 of expense, included in transition expense in our consolidated financial statements. No such expenses were incurred during 2001 and 2002.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. COMPREHENSIVE INCOME
Comprehensive income (loss) consisted of the following:
In recognizing the gain (loss) related to the changes in fair value of the interest rate protection agreement, for the year ended December 31, 2001 we increased our deferred tax assets by $814,000, while for the year ended December 31, 2002 we decreased our deferred tax assets by $990,000.
7. INVENTORIES
Inventories consisted of the following:
8. NOTES RECEIVABLE
We have notes receivable agreements with certain parties that financed a portion of the purchases of travel center sites we have sold. The notes have original terms ranging from five to ten years and principally accrue interest at a variable rate of the prime lending rate plus 1% to 2%.
We also have full recourse notes receivable from management stockholders received as partial consideration for purchases of common stock (see Note 14). These notes accrue interest at fixed rates between 4.86% and 7.0%, compounded semi-annually. Accrued and unpaid interest together with unpaid principal, if not sooner paid, is due and payable on the earliest of:
- the date of cessation of employment of the employee;
- the date the employee is no longer the owner of the related shares of common stock; or
- generally, 14 1/2 years from the issuance date of the note.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Notes receivable consisted of the following:
The amount due within one year is included within other current assets in our balance sheet and the amount of notes receivable, net is included within other assets in our balance sheet. The amount due for stock purchases is included as a reduction to the redeemable equity balance in our balance sheet (see Note 14).
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
At December 31, 2001, we were holding for sale eight facilities, two of which had been closed during 1999. Based on the estimated sales proceeds and costs of selling these sites, impairment charges of $2,489,000 and $1,475,000 were recognized during the years ended December 31, 2001 and 2002, respectively. These charges were included in depreciation and amortization expense in our consolidated statement of operations and our consolidated statement of cash flows. During 2002, we sold four of these facilities, including one of the closed locations, and in January 2003 we sold another of these facilities. The other three sites for which we had been accounting as assets held for sale were not sold within the one-year period required by FAS 144. Accordingly, we will no longer account for these sites as assets held for sale. A charge of $231,000 was recorded in the fourth quarter to recognize the depreciation expense related to those sites that had not been depreciated throughout the year while these sites were being accounted for as held for sale.
Effective April 1, 2001, we changed our accounting estimates related to depreciation. Based upon our evaluation of our assets, our estimates of the useful lives for certain types of property and equipment were extended five years. These changes reduced depreciation expense by $8,514,000 and net loss by $5,142,000 for the year ended December 31, 2001.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. INTANGIBLE ASSETS
As part of acquisition of the Unocal network, we entered into a noncompetition agreement with Unocal pursuant to which Unocal agreed to refrain from re-entering the truckstop business for a period of ten years from the acquisition date. The intangible asset related to this noncompetition agreement represents the present value, at the time of the acquisition of the Unocal network, of the estimated cash flows we would lose due to competition resulting from re-entry of Unocal into the travel center market were they not constrained from doing so. The Unocal noncompetition agreement is being amortized over its ten year life, which expires in April 2003.
Leasehold interest represents the value, obtained through the BP acquisition, of favorable lease provisions at one location, the lease for which extended 11 1/2 years from the date of the BP acquisition. The leasehold interest is being amortized over the 11-1/2 year period.
Trademarks relate primarily to our purchase of the trademarks, service marks, trade names and commercial symbols from BP and Travel Ports. The trademarks were being amortized until our adoption of FAS 142 on January 1, 2002 (See Note 3).
Goodwill results from our business acquisitions and represents the excess of amounts paid to the sellers over the fair values of the tangible assets acquired and was being amortized until our adoption of FAS 142 on January 1, 2002 (see Note 3). For the years ended December 31, 2000, 2001 and 2002, we recorded goodwill of $3,030,000, $145,000 and $4,242,000, respectively, in connection with converting leased sites to company-operated sites.
Intangible assets consisted of the following:
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The changes in the carrying amount of goodwill for the years ended December 31, 2000, 2001 and 2002 were as follows:
Total amortization expense for our amortizable intangible assets for the years ended December 31, 2000, 2001 and 2002 was $3,234,000, $1,896,000 and $1,896,000, respectively. The estimated aggregate amortization expense for our amortizable intangible assets for each of the three succeeding fiscal years are $678,000 for 2003; $176,000 for 2004 and $70,000 for 2005. Our amortizable intangible assets will be fully amortized during the year ending December 31, 2005.
11. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
12. REVOLVING LOAN
We have available a revolving loan facility of $100,000,000 (see Note 13). The interest rate for borrowings under this revolving loan facility is based on either a prime rate-based alternate base rate plus 1.75% or an adjusted London Interbank Offered Rate (LIBOR) plus 2.75%. Commitment fees are calculated as 0.5% of the daily average unused amount of the revolving loan commitment. At December 31, 2001 and 2002, there were outstanding borrowings under our revolving credit facilities of $43,900,000 and $22,400,000, respectively. There were $20,948,000 of available borrowings reserved for letters of credit at December 31, 2002. The revolving loan facility matures in November 2006.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT
In November 2000, in connection with our recapitalization and merger transactions (see Note 4), we completed a refinancing, which we refer to as the "2000 Refinancing." In the 2000 Refinancing, we issued $190,000,000 of senior subordinated notes due 2009 and borrowed $328,300,000 under our amended and restated senior credit facility that consisted of a fully-drawn $328,000,000 term loan facility and a $100,000,000 revolving credit facility. The proceeds from these borrowings, along with proceeds from the issuance of common stock and other cash on hand, were utilized 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, outstanding under our existing amended and restated credit agreement;
- redeem in full all of our senior secured notes and pay related accrued interest and prepayment penalties;
- make cash payments to certain of our 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.
Long-term debt (net of unamortized discount) consisted of the following:
- ----------- (a) On November 14, 2000, in connection with the 2000 Refinancing, we entered into a $428,000,000 Amended and Restated Credit Agreement with a group of lenders, which borrowing we refer to as our Senior Credit Facility. The Senior Credit Facility consists of a $328,000,000 term loan facility, which was fully drawn at closing, and a $100,000,000 revolving credit facility (see Note 12). Principal payments are due at each quarter end. The term loan facility matures in November 2008.
(b) Interest accrues at variable rates based on either adjusted LIBOR plus 3.25% or, at our election, a prime rate-based alternate base rate plus 2.25%. We have the option to select which rate will be applied at the beginning of each loan period, the term of which, for LIBOR borrowings, varies, at our election, from one to six months and, for alternate base rate borrowings, extends until we elect to convert to LIBOR borrowings. The interest rate was set on December 20, 2002 at 4.67% for a 30 day period. 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.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(c) Interest accrues at variable rates based on either adjusted LIBOR plus 2.75% or, at our election, a prime rate-based alternate base rate plus 1.75%. We have the option to select which rate will be applied at the beginning of each loan period, the term of which, for LIBOR borrowings, varies, at our election, from one to six months and, for alternate base rate borrowings, extends until we elect to convert to LIBOR borrowings. At December 31, 2002 we had $16,000,000 of LIBOR borrowings at an average rate of 4.1875% for various 30-day periods ending in January 2002 and $6,400,000 of alternate base rate borrowings at 6.0%. Interest payments are due at each quarter end for interest related to alternate base rate borrowings and at the end of each loan period, but not less frequently than quarterly, for LIBOR borrowings.
(d) On November 14, 2000, in connection with the 2000 Refinancing, we issued Senior Subordinated Notes with an aggregate face amount of $190,000,000. These notes were issued at a discount of 3.704% and each $1,000 note was accompanied by detachable warrants (see Note 15). The warrants had an aggregate fair value at issuance of $6,600,000. The original issue discount and the fair value of the warrants were initially recognized as unamortized debt discount in our balance sheet and are being amortized into interest expense using the effective interest method. 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.
(e) On September 1, 1998, in connection with the purchase of the operating assets of a leased site, we issued a note payable to the former operator of the site for $4,919,000. The note bears interest at 5% and requires quarterly payments of principal and interest of $98,000 thru October 1, 2018. The note was recorded net of a discount of $1,875,000. This note is secured by a mortgage interest in the related travel center.
Debt Extinguishments and Issuance Costs. As part of the 2000 Refinancing, we retired all of our outstanding indebtedness under the Amended and Restated Credit Agreement, all of our Series I Senior Secured Notes and all of our outstanding Senior Subordinated Notes due 2007, resulting in the early extinguishment of $423,557,000 of debt. As a result, in 2000 we recognized an extraordinary loss, net of the applicable income tax benefits of $7,110,000, of $13,800,000. This extraordinary loss consisted of (a) the write off of $7,632,000 of unamortized deferred financing costs incurred when issuing the extinguished indebtedness, (b) $11,629,000 of tender offer and consent solicitation premium and related fees related to redeeming the Senior Subordinated Notes due 2007, (c) $750,000 of prepayment penalties related to redeeming the Series I Senior Secured Notes, and (d) $899,000 to exit an interest rate swap agreement related to the extinguished debt. We capitalized as deferred financing costs $32,932,000 of costs associated with issuing the Senior Credit Facility and the Senior Subordinated Notes due 2009.
Pledged Assets. The borrowings under the Senior Credit Facility are secured by mortgages on substantially all of our property and equipment, liens on all of our accounts receivable and inventories and security agreements related to our cash balances and significant operating contracts.
Change of Control. In the event of a change in control (as defined in the relevant instruments) of the company, the total amount outstanding under the debt agreements described above may be declared immediately due and payable.
Mandatory Prepayments. The Senior Credit Facility obligates us to make annual mandatory prepayments of term loan indebtedness equal to one-half of the Excess Cash Flow (as defined in the agreement) amount generated in the previous year. We generated no Excess Cash Flow during the years ended December 31, 2000 and 2001. For the year ended December 31, 2002 we generated approximately $22,627,000 of Excess Cash Flow and, therefore, are obligated to prepay $11,314,000 of the term loan by April 15, 2003. This $11,314,000 payment will reduce our scheduled future quarterly payments on a pro rata basis.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Debt Covenants. Under the terms of the Senior Credit Facility, we are required to maintain certain affirmative and negative covenants, that, among other things, limit the amount of indebtedness we can incur, limit the amount of lease payments we can make, limit the amount of dividend payments and debt prepayments we can make, limit the amount of capital expenditures we can make and require us to maintain a minimum interest coverage ratio and a maximum leverage ratio. We were in compliance with the covenants throughout 2002 and at December 31, 2002.
Under the terms of the Indenture for the Senior Subordinated Notes due 2009, we are required to maintain certain affirmative and negative covenants that, among other things, limit our ability to incur indebtedness, pay dividends, redeem stock or sell assets or subsidiaries. We were in compliance with the covenants throughout 2002 and at December 31, 2002.
Future Payments. Scheduled payments of long-term debt in the next five years, including the mandatory prepayment based on Excess Cash Flow generated in the year ended December 31, 2002, are $14,688,000 in 2003; $3,354,000 in 2004; $3,364,000 in 2005; $25,774,000 in 2006 and $77,772,000 in 2007. Although we are obligated to make a $11,314,000 mandatory prepayment of the term loan, based on our intent and ability to finance this short-term obligation with borrowings under the revolving credit facility that does not mature until 2006, we have continued to classify this $11,314,000 within the long-term debt balance in our consolidated balance sheet as of December 31, 2002.
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, 2001 and 2002 was $576,242,000 and $551,391,000, respectively.
14. REDEEMABLE EQUITY
At December 31, 2001 and 2002, there were 175,498 and 182,800 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, 2001 and 2002, the aggregate principal amount of such notes due us from the management employees was $956,000 and $1,072,000, respectively (see Note 8), and is reflected as a reduction to the redeemable common stock balance.
Under the terms of the management subscription agreements and other agreements governing the management shares, the management employees have rights to require us to repurchase the management shares at fair market value upon the employee's termination of employment due to death, disability or scheduled retirement. Repurchase will generally be for cash at the fair market value on the date of termination if termination is due to death or disability or scheduled retirement at or after age 62, or for cash in installments over a period of years at fair market value each year if termination is due to scheduled retirement prior to age 62. Prior to an initial public offering of our common stock, the fair market value is determined by a formula set forth in the agreement that can be modified by the Board of Directors. The formula to calculate the fair market value is (A) the product of (1) a multiplier (currently 6.5) and (2) EBITDA (as defined in our bank debt agreement) for the most recent four consecutive full fiscal quarters, plus (B) consolidated cash and cash equivalents in excess of $10,000,000, minus (C) consolidated indebtedness, divided by (D) the total number of shares of common stock outstanding on a fully diluted basis assuming full conversion and exercise of all common stock equivalents and similar stock rights.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
If there is a change of control of us which involves the sale by stockholders of their equity interest to a third party during the time that installments are being paid to the management employees, we will accelerate the installment payments at the time of the close of the change of control. In other cases of termination, we will have call rights at fair market value that generally will be exercised for cash, although in limited circumstances the call rights may be exercised by promissory note. In all cases, repurchase rights are restricted under law, credit agreements, financing documents and other contracts, and our board's good faith determination that repurchases would not cause undue financial strain on us. The Senior Credit Facility and the Senior Subordinated Notes limit our ability to repurchase the management shares. The amount paid upon repurchase of any management shares will be reduced by the principal balance of and unpaid accrued interest on the related notes receivable. At the point in time that redemption of shares of redeemable common stock becomes probable, the fair value of the shares will be accreted to their estimated redemption value by a charge to retained earnings. Such a charge to retained earnings 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:
The numbers of outstanding shares of common stock in the table include the redeemable shares owned by certain of our management employees as discussed in Note 14.
MERGER AND RECAPITALIZATION
On May 31, 2000, we and shareholders owning a majority of our voting stock entered into a recapitalization agreement and plan of merger, as subsequently amended, with TCA Acquisition Corporation, a newly created corporation formed by Oak Hill Capital Partners, L.P. and its affiliates, under which TCA Acquisition Corporation agreed to merge with and into us. This merger was completed on November 14, 2000. Concurrent with the closing of the merger, we completed a series of transactions to effect a recapitalization that included the following.
* TCA Acquisition Corporation issued 6,456,698 shares of common stock to Oak Hill and other institutional investors for proceeds of $205,000,000 and then merged with and into us. We incurred $3,015,000 of fees and expenses related to the issuance of these shares of common stock. These stock issuance costs were charged against additional paid-in capital.
* We redeemed all shares of our common and preferred stock outstanding prior to the closing of the merger, with the exception of 473,064 shares of common stock with a market value at that time of $15,020,000 that were retained by continuing stockholders, and cancelled all outstanding common stock options and warrants for cash payments totaling $263,153,000.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
* 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 years ended December 31, 2000, 2001 and 2002, we issued 39,893, 2,434 and 7,302 respectively, shares of common stock to certain members of management for cash and notes receivable (see Notes 8, 14 and 17) aggregating $495,000, $77,000 and $232,000, respectively.
In November 2000, Freightliner exercised an option to purchase 100,000 shares of common stock for cash consideration of $3,330,000.
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.
COMMON STOCK
Voting Rights. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of our stockholders.
Dividends. Holders of common stock are entitled to receive dividends if, as and when declared by our board of directors out of funds legally available. Our debt agreements limit the amount of dividends we are able to pay.
Liquidation Rights and Other Rights. Upon our liquidation, dissolution or winding up, the holders of our common stock will be entitled to share pro rata in the distribution of all of our assets remaining after satisfaction of all of our liabilities and the payment of the liquidation preference of any outstanding preferred stock. The holders of our common stock do not have any conversion, redemption or preemptive rights.
Repurchase Rights. Certain members of our senior management have purchased shares of our common stock pursuant to individual management subscription agreements. We have the right to repurchase, and the
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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).
Treasury Shares. From time to time we have acquired shares of our common stock from former stockholders. For the year ended December 31, 2000, we purchased 7,995,138 treasury shares. These shares were recorded at their acquisition cost of $253,649,000. As part of our recapitalization, we cancelled all of the treasury shares we owned, and since then we have acquired no treasury stock.
REGISTRATION RIGHTS
Under a stockholders' agreement to which all of our stockholders are party, certain of our stockholders have the right, under certain circumstances, to require us to register under the Securities Act of 1933 shares of our common stock held by them and allow them to include shares of common stock held by them in a registration under the Securities Act commenced by us.
COMMON STOCK WARRANTS
In connection with the issuance of our Senior Subordinated Notes due 2009 as part of our merger and recapitalization transactions, we issued warrants exercisable for shares of our common stock. The warrants were issued under a warrant agreement between us and State Street Bank and Trust Company, as warrant agent. We originally issued initial warrants in connection with a private placement of 190,000 units, each unit consisting of one Senior Subordinated Note due 2009, three initial warrants and one contingent warrant. Each warrant, whether initial or contingent, entitles its holder to purchase 0.36469 shares of our common stock at an exercise price of $0.001 per share, subject to anti-dilution adjustments under some circumstances. We have no warrants outstanding other than the 570,000 initial warrants and the 190,000 contingent warrants.
Initial Warrants. The initial warrants entitle the holders to purchase 207,874 shares of our common stock at an exercise price of $0.001 per share.
Contingent Warrants. The contingent warrants entitle the holders to purchase 69,291 shares of common stock at an exercise price of $0.001 per share. Since consummation of the private placement in November 2000, the contingent warrants have been held in escrow under an escrow agreement between us and State Street Bank and Trust Company, as escrow agent and, subject to some conditions that have been met, will be released from escrow and distributed to holders of the initial warrants on March 31, 2003, the contingent warrant release date. The contingent warrants were to be released from escrow and delivered to us for cancellation only if, as of December 31, 2002:
* the Consolidated Leverage Ratio, as defined in the indenture governing the notes, is equal to or less than 4.5 to 1.0 and our chief financial officer delivers a certificate to that effect to the escrow agent prior to the contingent warrant release date, or
* all of the notes have been repaid, redeemed or repurchased by us.
As neither of these conditions were met on the contingent warrant release date, the contingent warrants will be distributed pro rata to all the registered holders of initial warrants determined as of the contingent warrant release date. To the extent an initial warrant is exercised prior to the contingent warrant release date, the last registered holder of the initial warrant will be treated as the registered holder of the initial warrant as of the contingent warrant release date for purposes of participating in the distribution of contingent warrants.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Exercise of Warrants. The initial warrants may be exercised at any time on or after November 14, 2001, and the contingent warrants may be exercised at any time after the contingent warrant release date. However, holders of warrants will be able to exercise their warrants only if the shelf registration statement is effective or the exercise of the warrants is exempt from the requirements of the Securities Act and only if the shares of common stock are qualified for sale or exempt from qualification under the applicable securities laws of the states or other jurisdiction in which the holders reside. Unless earlier exercised, the warrants will expire on May 1, 2009.
At our option, fractional shares of common stock may not be issued upon exercise of the warrants. If any fraction of a share of common stock would, except for the foregoing provision, be issuable upon the exercise of any warrants, we will pay an amount in cash equal to the current market value per share of common stock, as determined on the day immediately preceding the date the warrant is presented for exercise, multiplied by the fraction, computed to the nearest whole cent.
The exercise price and the number of shares of common stock issuable upon exercise of a warrant are both subject to adjustment in certain cases.
No Rights as Stockholders. The holders of unexercised warrants are not entitled, as such, to receive dividends, to vote, to consent, to exercise any preemptive rights or to receive notice as our stockholders of any stockholders meeting for the election of our directors or any other purpose, or to exercise any other rights whatsoever as our stockholders.
STOCK AWARD AND OPTION PLANS
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
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
As part of our merger and recapitalization transactions in November 2000, all of the then outstanding options to purchase shares of our common stock were required to be either exercised or cancelled. These options had been granted to certain members of management and nonemployee directors under the 1997 Stock Incentive Plan and the 1993 Stock Incentive Plan.
Stock Option Status Summary. The following table reflects the status and activity of options under our stock plans:
The weighted-average exercise price was $31.75 per share for those options granted during 2001 and for all outstanding options as of December 31, 2001 and 2002. The weighted-average exercise price was $33.30 for those options granted during 2000.
We account for our stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. For the years ended December 31, 2001 and 2002, 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. For the year ended December 31, 2000, the stock-based employee compensation cost recognized in relation to the options granted under the 1997 Stock Plan was based on the $31.75 fair market value per share reflected in the merger and recapitalization transactions and represented a benefit of $1,362,000 as a result of exercising or canceling, for a cash settlement, all outstanding options granted under the 1997 Stock Plan, which was cancelled as part of the recapitalization, at a decreased fair market value per share from 1999.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. INCOME TAXES
The (benefit) provision for income taxes was as follows:
The difference between taxes calculated at the U. S. federal statutory tax rate of 35% and our total income tax provision is as follows:
For 2000, income tax benefits of $7,110,000 allocated to the extraordinary loss of $20,910,000 differ from the amount calculated at the federal statutory rate of 35% by $209,000. This difference is due to graduated tax rates.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred income tax assets and liabilities resulted from the following:
At December 31, 2002, we had available to us a net operating loss carryforward of approximately $72,862,000 that consisted of $44,965,000 remaining carryforward generated in 2000 that expires in 2020 and $27,897,000 remaining carryforward generated in 2001 that expires in 2021. Internal Revenue Code Section 382 restricts our ability to utilize in the future the net operating loss that we generated in 2000 because of the change of control we experienced as a result of our merger and recapitalization transaction in November 2000. The amount of net operating loss we can utilize will be limited to approximately $12,000,000 per year and unused amounts of the annual Section 382 limitation can be carried forward to subsequent years within the carryforward period. As none of the 2000 net operating loss was utilized in 2001 and $4,370,000 was utilized in 2002, usage of the net operating loss generated in 2000 will be limited to approximately $31,630,000 for 2003. Usage of the net operating loss generated in 2001 is unlimited. Realization of our net deferred tax assets is dependent on future taxable income. We believe it is more likely than not such net deferred tax assets will be realized and, accordingly, we have not recognized a valuation allowance with respect to our net deferred tax assets. Most of our net operating loss carryforwards were generated as a result of our merger and recapitalization transactions in November 2000. The remainder of our net operating loss carryforwards result largely from depreciation and interest deductions and the trends for these items relative to operating income are expected to decline, enabling us to generate sufficient taxable income to utilize net operating loss carryforwards. The level of tax depreciation on our significant capital investments in 1993 and 1997 through 1999 began to diminish in 2002 and our level of capital investment in 2001, 2002 and future years as compared to prior years has been, and will be, reduced. The relative level of interest expense to operating income should diminish as the capital projects completed in 1999 through 2002 continue to mature and produce greater amounts of taxable income while our debt levels decrease or hold relatively steady, enabling us to keep our interest expense relatively constant or growing at a slower rate than operating income. Further, we could complete a sale/leaseback of certain of our travel centers. Although we would not ordinarily execute this tax planning strategy, we would do so to prevent our net operating loss carryforwards from expiring unused. The sale/leaseback would be expected to generate a sufficient taxable gain in the year consummated to fully utilize any expiring unused net operating loss carryforwards and could be expected to increase our taxable income in subsequent years as lower interest expense and depreciation deductions would, in all likelihood, more than offset the additional operating lease expense. However, ultimate realization of our net deferred tax assets could be negatively affected by market conditions and other variables not known or anticipated at this time.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Our federal income tax returns for 2001 through 2002 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 2002 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. RELATED PARTY TRANSACTIONS
We lease one of our travel centers from a realty company owned by two individuals, one of whom was a stockholder and director of ours during a portion of 2000. Rent expense related to this lease for the year ended December 31, 2000 was $450,000.
During 2000 certain of our former shareholders were paid fees aggregating $1,250,000 as consideration for their financial advisory services provided in completing the Burns Bros. acquisition, debt refinancings, the Travel Ports acquisition and the merger and recapitalization transactions. In addition, during 2000, Oak Hill and the Other Investors were paid fees aggregating $8,310,000 as consideration for their financial advisory services and other services provided as part of the merger and recapitalization transactions, including the related debt and equity financing transactions.
During the years ended December 31, 2000, 2001 and 2002, we made purchases of diesel fuel in the amounts of $200,190,000, $201,291,000 and $183,217,000, respectively, from a company in which we have a minority investment and made sales of diesel fuel in the amounts of $16,622,000, $12,742,000 and $2,888,000, respectively, to this affiliate. We also lease a travel center from this affiliate. Rent expense related to this site for the years ended December 31, 2000, 2001 and 2002 was $335,000, $408,000 and $408,000, respectively. At December 31, 2001 and 2002, our receivables from this affiliate were $789,000 and $151,000, respectively, while our payables to this affiliate were $944,000 and $357,000, respectively.
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 $1,310,000 and $1,497,000 at December 31, 2001 and 2002, respectively.
18. COMMITMENTS AND CONTINGENCIES
GUARANTEES
In the normal course of business we periodically enter into agreements that incorporate indemnification provisions. While the maximum amount to which we may be exposed under such agreements cannot be estimated, it is the opinion of management that these indemnifications are not expected to have a material adverse effect on our consolidated financial position or result of operations. We also offer a warranty of our workmanship in our truck maintenance and repair shops, but the annual warranty expense and corresponding liability are immaterial.
LEASE COMMITMENTS
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, escalation clauses and, in certain cases, purchase options. Future minimum lease payments required under operating leases that have remaining noncancelable lease terms in excess of one year, as of December 31, 2002, were as follows:
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The amount in the above table for minimum lease payments for 2006 assumes we will not renew this lease and will instead pay $58,188,000 to acquire the related assets. Currently, we would expect to renew and extend the lease at that time and not expend this amount.
On September 9, 1999, we entered into a master lease program with a lessor that has been used to finance the construction of eight travel centers on land we own. These lease transactions are evaluated for lease classification in accordance with FAS 13. We do not consolidate the lessor so long as the owners of the lessor maintain a substantial residual equity investment of at least three percent that is at risk during the entire term of the lease, which has been the case to date and is expected to remain the case. Consolidating the lessor would affect our consolidated balance sheet by increasing property and equipment, other assets and long-term debt and would affect our consolidated statement of operations by reducing operating expenses, increasing depreciation expense and increasing interest expense. The initial term of the lease expires on September 9, 2006, at which time, if the lease is not renewed and extended, we have the option to either purchase the improvements for an amount equal to the sum of (a) the outstanding indebtedness of the lessor and (b) the equity capital balance, or to make a termination payment to the lessor and abandon the travel centers. We anticipate that on September 9, 2006 we will renew and extend the lease agreement, but may either be unable to do so or elect not to do so and instead either pay approximately $58,188,000 to acquire the leased assets or make the termination payment of approximately $44,077,000. As of December 31, 2002, the aggregate outstanding amount of the lessor's indebtedness and equity capital was $68,397,000.
Under the related lease agreement, our quarterly lease payments are based on the capitalization and weighted-average cost of capital of the lessor. The lessor was initially capitalized with $2,380,000 of equity and entered into a loan and security agreement through which it borrowed $69,760,000. The lessor's equity holders receive a return on their contributed capital equal to LIBOR plus 10.75%, while the interest rate for the indebtedness is equal to LIBOR plus a spread that will decrease from 4.0% to 3.0% as our ratio of total debt to EBITDA (as defined in our bank debt agreement) improves. Our quarterly rent payments are calculated to equal the quarterly interest expense, return on equity and debt amortization requirements of the lessor, based on a straight-line amortization schedule that ensures 20% of the underlying indebtedness is repaid by the expiration of the initial lease term on September 9, 2006. We do not guarantee the indebtedness of the lessor and the lessor's creditors have no recourse against us beyond our obligation to continue our rent payments.
The following are additional amounts related to the master lease program (all amounts are as of or for the year ended December 31, 2002):
* The lessor's total capitalization of $68,397,000 consisted of $66,017,000 of a term loan secured by the related travel centers assets and underlying leasehold interests, and $2,380,000 of general and limited partners' contributed capital.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
* The lessor's assets related to the master lease program consisted of $67,502,000 of tangible fixed assets, $1,700,000 of capitalized interest and $2,938,000 of deferred financing costs.
* During 2002, for the seven sites that were leased for the full year and the one site that opened in July during the year, we recognized and paid lease rent expense under this master lease program of $5,846,000. Excluding this rent expense, these eight sites generated income of $9,999,000 for the year ended December 31, 2002.
* The depreciation expense and interest expense we would have recognized with respect to these leased travel centers if we had capitalized them and not leased them was approximately $5,063,000 and $4,170,000, respectively, for the year ended December 31, 2002.
In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest Entities." We must adopt this accounting guidance by July 1, 2003. Under FIN 46, as the lessor with whom we have entered into our master lease program is currently capitalized and structured, we would be required to consolidate the lessor in our consolidated financial statements. We and the lessor are currently evaluating our alternatives with respect to the master lease facility and have not yet concluded on our course of action.
ENVIRONMENTAL MATTERS
Our operations and properties are extensively regulated through environmental laws and regulations ("Environmental Laws") that (1) govern operations that may have adverse environmental effects, such as discharges to air, soil and water, as well as the management of petroleum products and other hazardous substances ("Hazardous Substances") or (2) impose liability for the costs of cleaning up sites affected by, and for damages resulting from, disposal or other releases of Hazardous Substances.
We own and use underground storage tanks and aboveground storage tanks to store petroleum products and waste at our facilities. We must comply with requirements of Environmental Laws regarding tank construction, integrity testing, leak detection and monitoring, overfill and spill control, release reporting, financial assurance and corrective action in case of a release from a storage tank into the environment. At some locations, we must also comply with Environmental Laws relating to vapor recovery and discharges to water. We believe that all of our travel centers are in material compliance with applicable requirements of Environmental Laws. While the costs of compliance for these matters have not had a material adverse impact on us, it is impossible to predict accurately the ultimate effect changing laws and regulations may have on us in the future. We incurred capital expenditures, maintenance, remediation and other environmental related costs of approximately $3,363,000, $3,222,000 and $3,947,000 in 2000, 2001 and 2002, respectively.
We have received notices of alleged violations of Environmental Laws, or are otherwise aware of the need to undertake corrective actions to comply with Environmental Laws, at company-owned travel centers in a number of jurisdictions. We do not expect that any financial penalties associated with these alleged violations or instances of noncompliance, or compliance costs incurred in connection therewith, will be material to our results of operation or financial condition. We are conducting investigatory and/or remedial actions with respect to releases and/or spills of Hazardous Substances at a number of sites. While we cannot precisely estimate the ultimate costs we will incur in connection with the investigation and remediation of these matters, based on our current knowledge, we do not expect that the costs to be incurred for these matters, individually or in the aggregate, will be material to our results of operation or financial condition. While the aforementioned matters are, to the best of our knowledge, the only proceedings for which we are currently exposed to potential liability (particularly given the Unocal and BP indemnities discussed below), there can be no assurance that additional contamination does not exist at these or other of our properties, or that material liability will not be imposed in the future. If additional environmental problems arise or are discovered, or if additional environmental requirements are imposed by government agencies, increased
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
environmental compliance or remediation expenditures may be required, which could have a material adverse effect on us. As of December 31, 2002, we had a reserve for these matters of $2,924,000. We expect that the cash outlays related to the matters for which we have accrued this reserve will be paid out over a period of several years. While it is not possible to quantify with certainty the environmental exposure, in our opinion the potential liability, beyond that considered in the reserve, for all proceedings, based on information known to date, will not have a material adverse effect on our financial condition, results of operations or liquidity. However, it is reasonably possible that a material change in estimate will occur in the near term as new matters, or new facts regarding established matters, are identified and/or as Environmental Laws and other requirements of government agencies continue to evolve.
In connection with the acquisitions of the Unocal network, Phase I environmental assessments were conducted of the 97 Unocal network properties purchased by us. Pursuant to an agreement with Unocal, Phase II environmental assessments of all Unocal network properties were completed by Unocal by December 31, 1998. Under the terms of this agreement, Unocal is responsible for all costs incurred for (a) remediation of environmental contamination, and (b) otherwise bringing the properties into compliance with Environmental Laws as in effect at the date of the acquisition of the Unocal network, with respect to the matters 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 must also 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. The remediation must achieve compliance with the Environmental Laws in effect on the date the remediation is completed. We must make claims for indemnification prior to April 14, 2004. Except as described above, Unocal does not have any responsibility for any environmental liabilities arising out of the ownership or operations of the Unocal network after the date of the acquisition of the Unocal network. We cannot assure you that Unocal, if additional environmental claims or liabilities were to arise under the agreement with Unocal, would not dispute our claims for indemnification.
Prior to the acquisition of the BP network, all of the 38 company-owned locations purchased by us were subject to Phase I and Phase II environmental assessments, undertaken at BP's expense. The environmental agreement with BP provides that, with respect to environmental contamination or noncompliance with Environmental Laws identified in the Phase I or Phase II environmental assessments, BP is responsible for (a) all costs incurred for remediation of such environmental contamination, and (b) for otherwise bringing the properties into compliance with Environmental Laws as in effect at the date of the acquisition of the BP network.
The remediation must achieve compliance with the Environmental Laws in effect on the date the remedial action is completed. The environmental agreement with BP requires BP to indemnify us against any other environmental liabilities that arise out of conditions at, or ownership or operations of, the BP network locations prior to the date of the acquisitions of the BP network. We must make such claims for indemnification before December 11, 2004. BP must also indemnify us for liabilities relating to non-compliance with Environmental Laws for which claims were made before December 11, 1996. Except as described above, BP does not have any responsibility for any environmental liabilities arising out of the ownership or operations of the BP network after the date of the acquisition of the BP network. There can be no assurance that BP, if additional environmental claims or liabilities were to arise under the environmental agreement with BP, would not dispute our claims for indemnification thereunder.
In connection with the Burns Bros. acquisition, all of the 17 sites acquired were subject to Phase I environmental assessments, and, based on the results of those assessments, nine of the sites were subject to Phase II environmental assessments. The purchase price paid to Burns was adjusted based on the findings of the Phase I and Phase II environmental assessments. Under the asset purchase agreement with Burns Bros., we released Burns Bros. from any environmental liabilities that may have existed as of the Burns Bros. acquisition date, other than specified non-waived environmental claims as described in the agreement with Burns Bros.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Travel Ports acquisition, all of the 16 sites acquired were subject to Phase I environmental assessments, and, based on the results of those assessments, five of the sites were subject to Phase II environmental assessments. The results of these assessments were taken into account in recognizing the related environmental contingency accrual for purchase accounting purposes.
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.
19. 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 as of December 31, 2002.
To qualify for hedge accounting, derivative contracts must meet defined correlation and effectiveness criteria, be designated as hedges and result in cash flows and financial statement effects which substantially offset those of the position being hedged. Amounts receivable or payable under derivative financial instrument contracts, when recognized, are reported in our consolidated balance sheet. Pursuant to the provisions of FAS 133, we determined that the interest rate swap agreement was 100% effective and qualified for cash flow hedge accounting.
The fair value of the interest rate swap at the time of transition resulted in a reduction of accumulated other comprehensive income of $343,000 (net of tax), which was recorded as the cumulative effect of an accounting change in the first quarter of 2001. The decline in the fair value of the swap agreement for the year ended December 31, 2001, based on bank-quoted market prices, resulted in the recognition of a further decrease in other comprehensive income of $1,577,000 (net of tax), and a liability of $2,911,000 as of December 31, 2001. During the year ended December 31, 2002, the fair value of the swap agreement increased until its maturity on December 15, 2002, resulting in the recognition of an increase in other comprehensive income of $1,920,000 (net of tax).
20. OPERATING LEASES AS A LESSOR
Twenty-five of the travel centers we owned during the year ended December 31, 2002 were leased to franchisees under operating lease agreements. During 2002, five of these leases were mutually terminated, and, as a result, these sites were converted to company-operated sites. At December 31, 2002, we had such lease arrangements in place at 20 of our sites. Our lease agreements provide for initial terms of ten years with two renewal terms of five years each. Rent revenue from such operating lease arrangements totaled $11,808,000, $10,981,000 and $9,488,000 for the years ended December 31, 2000, 2001 and 2002, respectively. At December 31, 2002, the cost and accumulated depreciation of the assets covered by these lease agreements was $56,160,000 and $28,144,000, respectively.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21. OTHER INFORMATION
22. SUPPLEMENTAL CASH FLOW INFORMATION
In 2000, we assumed a note payable for $549,000 as part of the consideration in acquiring a travel center business and we recognized a receivable of $2,088,000 upon the sale of a travel center for the cash proceeds we did not receive from an escrow account until 2001.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance sheet schedules as of December 31, 2001 and 2002 and our condensed consolidating statement of operations schedules and condensed consolidating statement of cash flows schedules for the years ended December 31, 2000, 2001 and 2002. 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 subsidiaries and National Auto/Truckstops, Inc. (until its merger into TA Operating Corporation on November 14, 2000), and "Nonguarantor Subsidiary" refers to the balances of TA Franchise Systems Inc. "Eliminations" represent the adjustments necessary to (a) eliminate intercompany transactions and (b) eliminate our investments in our subsidiaries.
The Guarantor Subsidiaries, (TA Operating Corporation, National Auto/Truckstops, Inc. (until its merger into TA Operating Corporation on November 14, 2000), TA Licensing, Inc., TA Travel, L.L.C., TravelCenters Realty, L.L.C. and TravelCenters Properties, L.P.), are direct or indirect wholly-owned subsidiaries of ours and have fully and unconditionally, jointly and severally, guaranteed the indebtedness of TravelCenters of America, Inc., which consists of the Senior Credit Facility and Senior Subordinated Notes due 2009 (see Note 13).
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SCHEDULES:
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
PART III
ITEM 10.
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 heading "Directors and Officers of the Registrant" in Exhibit 99.1 to this annual report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation required by this item is incorporated by reference to the material appearing under the heading "Executive Compensation" in Exhibit 99.1 to this annual report.
ITEM 12.
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.
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.
ITEM 14. 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 a date within 90 days of the filing of this report, have concluded that our disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 (c)) were effective to ensure that information required to be disclosed by us in our reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "SEC").
(b) Changes in internal controls.
There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation of our internal controls.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Documents filed as part of this report:
1. Financial Statements
Financial statements filed as part of this report are listed in the Index to Consolidated Financial Statements and Supplementary Data on page 39 of this annual report.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(a) Amounts charged against gain on sale of property and equipment. (b) 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 i of this annual report.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 2002.
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.
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 26, 2003 By: /s/ James W. George - ---------------------- --------------------------------------------- (Date) Name: James W. George Title: Senior 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.
CERTIFICATIONS
I, Edwin P. Kuhn, certify that:
1. I have reviewed this annual report on Form 10-K of TravelCenters of America, Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13A-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ Edwin P. Kuhn ---------------------------------------- Name: Edwin P. Kuhn Title: Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)
I, James W. George, certify that:
1. I have reviewed this annual report on Form 10-K of TravelCenters of America, Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13A-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
f) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ James W. George ------------------------------------------- Name: James W. George Title: Senior Vice President, Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer)
EXHIBIT INDEX
i
ii
(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.
+ Filed herewith
* Executive compensation plans.
iii