ITEM 1. BUSINESS
BUSINESS OVERVIEW
TravelCenters of America, Inc. (the "Company") owns, operates and franchises more full-service travel centers in the United States than any of its competitors, with 158 network sites located in 40 states nationwide, including 118 Company operated locations (the "Network"). The Company's travel centers are full service facilities offering a broad range of fuel and nonfuel products, services and amenities to trucking fleets, professional truck drivers and other motorists. In addition to diesel fuel and gasoline, the travel centers provide truck maintenance and repair services and products, full service and quick serve restaurant ("QSR") dining, travel and convenience stores, telecommunications services and various hospitality and rest-related amenities. This broad range of products and services distinguishes the travel centers from traditional truckstops, which focus on the sale of diesel fuel, and provides diverse revenue sources for the Company. In addition, the Company is the only industry participant with a centralized procurement, warehousing and distribution system. The Company owns 147 of the sites in its Network and the other eleven sites are owned by independent franchisees.
The Company's broad range of products and services, together with its comprehensive geographic coverage, has enabled the Company to become a leading supplier of diesel fuel to many of the largest long-haul trucking fleets in the United States. Management believes the Company's position as a leading supplier of diesel fuel to major trucking fleets positions it to continue to increase its sales of higher margin nonfuel products and services to fleets and their drivers as well as to independent drivers.
The travel centers feature a variety of well recognized national brands which attract professional truck drivers, motorists and other customers who often satisfy both fuel and nonfuel needs at the same stop. The Company's nationally recognized QSR and motel brands include Burger King, Popeye's Chicken, Dunkin' Donuts, Pizza Hut, Sbarro, Subway, Taco Bell, DayStop, HoJo Inn, Rodeway and Travelodge. The Company also offers such well recognized gasoline brands as Amoco, Arco, BP, Chevron, Conoco, Exxon, Mobil, Shell and Unocal 76. This portfolio of brands strongly appeals to what market research indicates are customers' priorities of quality, convenience and consistency of product offerings, as well as cleanliness and safety.
HISTORY AND ORGANIZATION
The Company was formed in 1992 by an institutional investor group (the "Investor Group") led by The Clipper Group, L.P. ("Clipper"), as well as certain then prospective franchisees and individuals who at the time were members of the Company's management. The Company was originally incorporated as National Auto/Truckstops Holdings Corporation but changed its name in March 1997. The Company is a holding company whose sole assets consist of the stock of its four direct wholly-owned subsidiaries: TA Operating Corporation, d/b/a TravelCenters of America ("TA"), National Auto/Truckstops, Inc. ("National"), TA Franchise Systems, Inc. ("TAFSI") and TA Licensing, Inc. ("TA Licensing"). TA has one wholly-owned subsidiary, TA Travel, L.L.C. ("TA Travel"). Prior to March 1997, the Company had two wholly-owned subsidiaries, National and TA Holdings Corporation ("TA Holdings"). TA Holdings was the parent of TA, which itself was the parent of TAFSI. In March 1997, a restructuring was completed whereby the current structure was effected and TA Holdings was merged into the Company. TA Travel was organized in October 1997. TA Licensing was acquired in June 1999.
The Company's operations are conducted through three distinct types of travel centers: sites owned or leased by the Company and operated by the Company ("Company-operated Sites"), sites owned or leased by the Company and leased to independent lessee-franchisees ("Operators") of the Company who operate the sites ("Leased Sites") and sites owned or leased and operated by independent franchisees ("Franchisee-Owners") of the Company ("Franchisee-Owner Sites").
In April 1993, the Company acquired (the "National Acquisition") the truckstop network assets (the "National Network") of a subsidiary of Unocal Corporation (together with its subsidiaries "Unocal") in a series of asset purchase transactions. The National Network included a total of 139 facilities, of which 95 were Leased Sites, 42 were Franchisee-Owner Sites, and two sites were Company-operated Sites. As part of the National Acquisition, Unocal agreed to indemnify the Company against certain environmental liabilities occurring prior to 1993 (the "Unocal Environmental Agreement," see "-Regulation-Environmental Regulation"), entered into a noncompetition agreement for a ten-year period terminating on April 13, 2003, granted the Company a license to use certain Unocal trademarks, and granted the Company a royalty-free license to use the ACCESS on-line information retrieval and credit card system. The National Network, which operates under the licensed "Unocal 76" and related trademarks, has been providing quality products and services for over 35 years and until 1997 had been the largest chain of full service travel centers or truckstops, based on number of locations in the United States. Pure Oil Company ("Pure") founded the National Network and Unocal acquired the National Network in connection with Unocal's merger with Pure in 1965.
In December 1993, the Company acquired (the "TA Acquisition") the truckstop network assets (the "TA Network") of certain subsidiaries of The British Petroleum Company p.l.c. (together with its subsidiaries "BP"). The TA Network included 38 Company-operated Sites and six Franchisee-Owner Sites. As part of the TA Acquisition, BP agreed to indemnify the Company against certain environmental liabilities with respect to which claims are made prior to December 11, 2004 or December 11, 1996 (the relevant date depending upon the nature of the underlying claim) ( the "BP Environmental Agreement," see "-Regulation-Environmental Regulation"), entered into a noncompetition agreement for a seven-year period commencing on December 10, 1993 and granted the Company the right, title and interest in and to certain copyrights, trademarks, service marks and other intellectual property, including, "Truckstops of America," "TA" and "Country Pride." The TA Network, which now operates under the Company-owned "TravelCenters of America" and "TA" trademarks, has been providing quality products and services to the trucking industry and to nonprofessional travelers for over 30 years, and is now the largest chain of full service travel centers or truckstops, based on number of locations in the United States. BP, through its subsidiary formerly known as The Standard Oil Company of Ohio ("Sohio"), acquired TA from Ryder System, Inc. ("Ryder") in 1984. Ryder founded the TA Network in 1973.
In December 1998, the Company acquired (the "Burns Acquisition") substantially all of the truckstop network assets (the "Burns Network") of Burns Bros., Inc. and certain of its affiliates (collectively "Burns"). Specifically, the Company acquired from Burns the land, buildings, equipment and inventories at 17 of the 19 sites comprising the Travel Stops division of Burns (the two remaining sites were closed by Burns); the equipment and inventory used in Burns' fuel wholesaling and transportation businesses and certain accounts receivable related to the acquired assets. The 17 acquired sites are located in 9 western and north western states.
Effective June 1, 1999, the Company entered into a merger agreement pursuant to which the Company acquired (the "TPOA Acquisition") 100% of the stock of Travel Ports of America, Inc. ("TPOA"). TPOA operated a network (the "TPOA Network") of 16 travel centers in seven states, primarily in the northeastern U.S. Upon consummation of the merger, TPOA's subsidiary, Travel Ports Systems Inc. (now known as TA Licensing), became a direct subsidiary of the Company by way of a dividend to the Company and TPOA was merged into TA.
In July 1999, the Company signed an agreement with Freightliner Corporation ("Freightliner") to become an authorized provider of express service, minor repair work and a specified menu of warranty repairs to Freightliner's customers (the "ServicePoint Program"). Under the agreement, the Company's truck repair facilities are being added to Freightliner's 24-hour customer assistance center database to be 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 the leading heavy truck manufacturer in North America. Freightliner also acquired a minority ownership interest in the Company.
COMBINATION PLAN AND CAPITAL PROGRAM
Historically, under the Company's ownership, each of the TA and National Networks (the "Existing Networks") was separately managed and financed. However, in January 1997 the Company's Board of Directors approved a management proposal (the "Combination Plan") to integrate the Existing Networks into a single network (the "Network") to be operated under the TA trademark under the leadership of a single management team.
From 1997 through 1999 the Company, pursuant to the Combination Plan, significantly reshaped the composition of the Existing Networks as follows:
- 32 Leased Sites were converted to Company-operated Sites, five during 1998 and 27 during 1997,
- 27 Franchisee-Owner Sites were terminated, all during 1997,
- 22 Company-Owned Sites were sold, five during 1999, two during 1998 and 15 during 1997,
- All National Network Company-operated Sites were converted to TA Network Company-operated Sites during 1997,
- Operators of 30 National Network Leased Sites terminated their franchise agreements with National and signed franchise agreements with TAFSI, one in 1999 and 29 in 1997.
Consequently, and giving effect to the Burns Acquisition and the TPOA Acquisition, as of December 31, 1999, the Company's Network was comprised of 158 sites, of which only one continued to operate under a National franchise agreement.
In 1997, the Company initiated a capital program to upgrade, rebrand and reimage the Network's travel centers and to build new travel centers (the "Capital Program"). Under this Capital Program, as revised as a result of the Burns Acquisition and the TPOA Acquisition, the Company intends to invest approximately $340 million in the Network's sites by the end of 2001, with $237 million having been spent by the end of 1999. The Operators and Franchisee-Owners will also be investing additional amounts for reimaging and other projects at the sites they operate.
The following table summarizes the changes in the composition of the Network since the Combination Plan and Capital Program were implemented.
REFINANCINGS
To facilitate the Combination Plan and Capital Program, in March 1997 the Company refinanced the existing indebtedness of TA and National with new borrowings by the Company (the "1997 Refinancing"). The Company issued $125 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2007, entered into a Credit Agreement through which it obtained an $80 million senior secured term loan facility (the "Term Loan") and a $40 million revolving credit facility, redeemed all of the then outstanding Subordinated Notes of TA and National, respectively, and a portion of the Senior Notes of TA (the "TA Old Senior Notes"), and, pursuant to a Senior Secured Note Exchange Agreement, exchanged $85.5 million aggregate principal amount of Senior Secured Notes ($35.5 million of Series I Senior Secured Notes and $50 million of Series II Senior Secured Notes) of the Company for the Senior Notes of National and the unredeemed TA Old Senior Notes.
In order to complete the Burns Acquisition and facilitate future Network growth and development, including the TPOA Acquisition, in December 1998 the Company increased the Term Loan by $150 million (the "1998 Refinancing"). Of the total amount borrowed, $50 million was utilized to retire the Company's Series II Senior Secured Notes and $42 million was utilized during 1999 to partially fund the TPOA Acquisition and to fund other planned capital expenditures. See "Liquidity and Capital Resources" in Item 7 for further discussion of the 1998 Refinancing.
SUPPLY
The Company purchases fuel from various suppliers at rates that fluctuate with market prices and reset daily, and resells fuel to certain franchisees and to the public at prices that the Company establishes daily. By contracting for only a portion of its monthly diesel fuel requirements and by establishing supply relationships with an average of four or five alternate suppliers per location, the Company has been able effectively to create competition for the Company's business among the Company's various diesel fuel suppliers on a daily basis. This flexibility has improved the Company's purchasing position and helped it partially to offset the decline in retail diesel fuel margins. Other than pipeline tenders, fuel purchases made by the Company are delivered directly from suppliers' terminals to the travel centers. The Company operates a small fleet of tankers to haul fuel to certain of its own sites and to deliver supply to a select number of wholesale customers, but contracts with common carriers for the majority of its fuel hauling needs. The Company does not keep substantial quantities of fuel in inventory and is therefore susceptible to price increases and interruptions in supply. In the western United States the Company utilizes pipeline tenders and leased terminal space to mitigate the risk of supply disruptions, while in the eastern United States the Company owns and operates its own product terminal for this purpose. The Company currently engages in only minimal hedging in connection with its fuel purchases.
CENTRALIZED PURCHASING AND DISTRIBUTION
The TA Network maintains a dedicated distribution and warehouse center (the "Distribution Center"). The Distribution Center is the only dedicated purchasing, warehousing and distribution center in the travel center and truckstop industry. The Distribution Center is located in Nashville, Tennessee and has approximately 85,000 square feet of storage space.
COMPETITION
The travel center and truckstop industry is highly competitive and fragmented. Based on industry data, the Company believes that there are approximately 2,500 travel centers and truckstops nationwide, of which only approximately 830 are sites within the 10 chains that operate 25 or more sites and are therefore capable of providing at least regional coverage to trucking fleet customers. In the United States, there are generally two types of facilities designed to service the trucking industry: pumper-only truckstops, which provide fuel, typically at discounted prices, with limited additional services, and full service travel centers, such as those in the Company's networks, which offer a broad range of products and services to fleet and independent truck drivers and nontruck traffic, including fuel products, fast food and casual dining restaurants; truck maintenance and repair products and services; other driver amenities; and secure parking areas. Of the 2,500 sites across the nation, only approximately 500 are considered full-service facilities. Fuel and nonfuel products and services can be obtained by long-haul truck drivers from a wide variety of sources other than the Company, including regional full service travel center and pumper-only truckstop chains, independently owned and operated truckstops, some large service stations and fleet-operated fueling terminals.
The Company believes that it experiences substantial competition from pumper-only truckstop chains and that such competition is based principally on diesel fuel prices. In the pumper-only truckstop segment, the largest networks (based on number of facilities and gallons of diesel fuel sold) are Marathon Ashland Petroleum LLC, selling primarily under the Speedway and SuperAmerica brandnames, and Pilot Corporation. Additional substantial competition is experienced from major full service networks and independent chains and is based principally on diesel fuel prices, nonfuel product and service offerings and customer service. In the full service travel center
segment, the largest networks (other than the Company) are operated by Flying J Inc. ("Flying J") and Petro Stopping Centers, L.P.; however, only some of Flying J's sites offer full service. The Company's vehicle products and truck maintenance and repair service operations compete with regional full service travel center and truckstop chains, full service independently owned and operated truckstops, fleet maintenance terminals, independent garages, truck dealerships and auto parts service centers. The Company's travel centers compete with a variety of establishments located within walking distance of its sites, including full service restaurants, QSRs and electronics, drug, health and beauty aid and travel and convenience stores.
A significant portion of all intercity diesel fuel consumption by 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. Such terminals often provide facilities for truck maintenance and repair. The Company's pricing decisions for diesel fuel and repair services cannot be made without considering the existence of these operations and their capacity for expansion. However, the Company believes that a trucking industry trend has been to reduce the use of such terminals and to outsource fuel and repair services in order to maximize the benefits of competitive fuel pricing, superior driver amenities and reduced environmental compliance expenditures.
RELATIONSHIPS WITH THE OPERATORS AND FRANCHISEE-OWNERS
Pursuant to the Combination Plan, the Company offered a new TAFSI franchise agreement (the "Network Franchise Agreement") and a new lease agreement (the "Network Lease Agreement" or "Network Lease" and, together with the Network Franchise Agreement, the "Network Agreements") to certain of National's then existing Operators, and in connection therewith, upon such franchisee's acceptance of such offer, terminated the then existing National lease (the "National Lease Agreement") and National franchise agreement (the "National Franchise Agreement," and, together with the National Lease Agreement, the "National Agreements") at those locations. During 1997, 29 former National Operators signed Network Agreements with the Company. During 1999, one of the two remaining National Operators signed a Network Franchise Agreement with the Company. Existing TA Franchisee-Owners will be allowed to continue their franchises under the Network Franchise Agreement upon expiration of their existing TA franchise agreements (the "Existing TA Franchise Agreements"), which have an average remaining term of approximately seven years.
TA Licensing licenses its trademarks to the Company, TA and TAFSI. The Company enters into its franchise agreements with Operators and Franchisee-Owners of travel centers in the TA Network through TAFSI, and TAFSI collects franchise fees and royalties under such agreements. TAFSI's assets consist primarily of the rights under the Existing TA Franchise Agreements, the Network Franchise Agreements and its trademark licenses from TA Licensing. TAFSI has no significant tangible assets. The National Franchise Agreement is between National and the respective Operator.
REGULATION
Franchise Regulation. The relationship between National and the National Network Operator is governed by the Petroleum Marketing Practices Act (the "PMPA"), 15 U.S.C. Section 2801 et.seq. The relationship between TAFSI and the TA Network Operators and Franchisee-Owners is not governed by the PMPA because TAFSI does not license its franchisees to sell fuel under a refiner's brand. Among other things, the PMPA limits the circumstances under which franchisors such as National may terminate or fail to renew a franchise agreement, and it imposes notification and other requirements in those cases where termination or nonrenewal is permissible.
National and TAFSI are also subject to state franchise laws, some of which require National and TAFSI to register with the state before it may offer a franchise, require National and TAFSI to deliver specified disclosure documentation to potential franchisees, and impose special regulations upon petroleum franchises. Some state franchise laws also impose restrictions on National's and TAFSI's 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.
The PMPA, which applies to the National Network Operator, preempts state laws with respect to termination or nonrenewal unless such laws are consistent with the PMPA. 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 Company is subject to regulation under the Federal Trade Commission ("FTC") rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures," and the FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration.
The Company cannot predict the effect of any future federal, state, or local legislation or regulation on its franchising operations.
Environmental Regulation. The Company's operations and properties are subject to extensive regulation pursuant to federal, state and local laws, regulations and ordinances ("Environmental Laws") that (i) govern activities and operations that may have adverse environmental effects, such as discharges to air, soil and water, as well as handling, storage and disposal practices for petroleum products and other hazardous and toxic substances ("Hazardous Substances") or (ii) impose liability and damages for the costs of cleaning up sites affected by, and for damages resulting from, past spills and disposal or other releases of Hazardous Substances.
The Company owns and uses underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") at Company-operated Sites and Leased Sites to store petroleum products and waste. 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 from a UST or AST into the environment. At certain locations, the Company also is subject to Environmental Laws relating to vapor recovery and discharges to water. The Company has made necessary upgrades to USTs to comply with federal regulations that took effect on December 22, 1998, and believes that all of its travel centers, including those acquired in the Burns Acquisition and the TPOA Acquisition, are in material compliance with applicable requirements of Environmental Laws.
The Company has received notices of alleged violations of Environmental Laws, or is aware of the need to undertake corrective actions to comply with Environmental Laws, at Company-owned travel centers in a number of jurisdictions. The Company does not expect that any financial penalties associated with these alleged violations, instances of noncompliance, or compliance costs incurred in connections therewith, will be material to the Company's results of operations or financial condition. The Company is conducting investigatory and/or remedial actions with respect to releases and/or spills of Hazardous Substances that have occurred subsequent to the National Acquisition and the TA Acquisition. While the Company cannot precisely estimate the ultimate costs it will incur in connection with the investigation and remediation of these properties, based on its current knowledge, the Company does not expect that the costs to be incurred at these properties, individually or in the aggregate, will be material to the Company's results of operations or financial condition. While the aforementioned matters are, to the best knowledge of the Company, the only proceedings for which the Company is 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 additional network properties, or that material liability will not be imposed in the future. If additional environmental problems arise or are discovered, or if additional environmental requirements are imposed by government agencies, increased environmental compliance or remediation expenditures may be required, which could have a material adverse effect on the Company.
In connection with the National Acquisition, Phase I environmental assessments of the then 97 Company-owned National Network properties were conducted. Pursuant to the Unocal Environmental Agreement, Phase II environmental assessments of all such National properties were completed by Unocal by December 31, 1998. The Unocal Environmental Agreement provides that Unocal is responsible for all costs incurred for remediation of environmental contamination (the remediation must achieve compliance with the Environmental Laws in effect on the date the remedial action is completed) and for otherwise bringing the properties into compliance with
Environmental Laws (as in effect at the date of the National Acquisition) with respect to environmental contamination or non-compliance identified in the Phase I or Phase II environmental assessments, which environmental contamination or non-compliance existed on or prior to the date of the National Acquisition. Under the terms of the Unocal Environmental Agreement, Unocal also must indemnify the Company against any other environmental liabilities that arise out of conditions at, or ownership or operations of, the National Network prior to the date of the National Acquisition. Pursuant to the Unocal Environmental Agreement, Unocal is obligated to indemnify the Company for claims made before 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 National Network after the date of the National Acquisition. There can be no assurance that, if additional environmental claims or liabilities were to arise under the Unocal Environmental Agreement, Unocal would not dispute the Company's claims for indemnification thereunder.
Prior to the TA Acquisition, all of the then 38 TA locations were subject to Phase I and Phase II environmental assessments, undertaken at BP's expense. The BP Environmental Agreement 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 such environmental contamination (the remediation must achieve compliance with the Environmental Laws in effect on the date the remedial action is completed) and for otherwise bringing the properties into compliance with Environmental Laws (as in effect at the date of the TA Acquisition). The BP Environmental Agreement further provides that BP must indemnify the Company against any other environmental liabilities that arise out of conditions at, or ownership or operations of, the TA locations prior to the date of the TA Acquisition. With respect to liabilities relating to the investigation and remediation of environmental contamination, BP is obligated to indemnify the Company for liabilities with respect to which claims are made before December 11, 2004. With respect to liabilities otherwise relating to non-compliance with Environmental Laws (for example, equipment), BP is obligated to indemnify the Company for liabilities with respect to 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 TA Network after the date of the TA Acquisition. There can be no assurance that, if additional environmental claims or liabilities were to arise under the BP Environmental Agreement, BP would not dispute the Company's claims for indemnification thereunder.
In connection with the Burns Acquisition, all of the 17 sites acquired were subject to Phase I environmental assessments. 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 (the "Burns Agreement"), the Company released Burns from any environmental liabilities that may have existed as of the Burns Acquisition date, other than certain non-waived environmental claims as specified in the Burns Agreement.
In connection with the TPOA Acquisition, all of the 16 sites acquired were subject to Phase I environmental assessments. 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.
Other Regulation. The Company, the Operators and the Franchisee-Owners are required to comply with federal, state and local government regulations applicable to service station and lubrication operations and consumer food services businesses generally, including those relating to the preparation and sale of food, minimum wage requirements, overtime, working, health, fire, safety and sanitation conditions, mandated health insurance coverage and citizenship requirements, as well as regulations relating to zoning, construction, business licensing and employment. The Company believes that it is in material compliance with the provisions applicable to it and has no knowledge of material violations of these provisions by its Operators and Franchisee-Owners.
EMPLOYEES
As of December 31, 1999, the Company employed approximately 11,000 people on a full- or part-time basis. Of this total, approximately 10,630 are employees at the Company-operated Sites and in fuel transportation, approximately 300 perform managerial, operational or support services at the headquarters or elsewhere and approximately 70 employees staff the Distribution Center. All of the Company's employees are non-union.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal executive offices are leased and are located at 24601 Center Ridge Road, Suite 200, Westlake, Ohio 44145-5634. The Distribution Center is a leased 85,000 square foot facility located at 1450 Gould Boulevard, LaVergne, Tennessee 37086-3535.
Of the 158 Network locations as of December 31, 1999, 118 are Company-operated Sites, 29 are Leased Sites and the remaining 11 sites are not owned by the Company. In addition to these operating travel center locations, the Company has two closed travel center facilities being held for sale and one closed site being held for future development. Of these total 147 owned sites, the land and improvements at nine are leased, the improvements but not the land at four are leased, three are subject to ground leases of the entire site and seven are subject to ground leases of portions of such sites. The Company considers its facilities suitable and adequate for the purposes for which they are used.
Each of the Company's travel centers is a full service facility located on or near an interstate highway and identified with TA, Unocal 76, Burns Bros. Travel Stops or Travel Port signage. As part of the Combination Plan and Capital Program, substantially all National Network, Burns Network and TPOA Network travel centers that have been added to the Network have been rebranded under the TA trademark or will be so rebranded during 2000. All fuel and nonfuel products and services are generally available 24 hours per day and 365 days per year at all Network locations.
Property. The layouts of the Company-owned travel centers vary from site to site. Generally, the Company-owned facilities are located on properties averaging 22 acres, of which an average of approximately 19 acres are developed. The majority of the developed acres contain the main building, housing one or more restaurants, a travel and convenience store and driver amenities, a truck maintenance and repair shop, separate truck and car fuel islands, separate truck and car paved parking and, in some cases, motels. The remaining developed acres contain landscaping and access roads.
Fuel Islands. Company sites have diesel fuel islands that accommodate ten pumps on average, most of which are dual fill pumps that can fill each of a typical truck's two tanks simultaneously. In addition, travel centers generally have a gasoline island which can accommodate four to eight automobiles simultaneously. Certain locations also have one and sometimes two additional convenience stores located at the fuel islands.
Truck Maintenance and Repair Shop. Other than at the Burns Network and TPOA Network sites, virtually all of the Company's travel centers have truck maintenance and repair shops which operate 24 hours per day and 365 days per year. Currently, only five Burns Network sites and 11 TPOA Network sites include truck maintenance and repair shops. The typical travel center repair shop has between two and four service bays, a parts storage room and fully trained mechanics on duty at all times. These shops offer extensive maintenance and emergency repair and road services, 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.
In July 1999, TA entered into an operating agreement with Freightliner to brand the TA truck repair shops as Freightliner ServicePoint facilities. As ServicePoint facilities, the TA shops are authorized to perform a limited menu of warranty repairs on trucks purchased from Freightliner and are being added to Freightliner's 24-hour customer assistance center database to be a major supplier of emergency and roadside repairs. TA shop employees
also have access to Freightliner's parts distribution, service and technical information systems. This program is being implemented in a phased approach over several months and is expected to be fully implemented by the end of 2000. As part of the implementation at a TA site, the TA shop employees are trained at Freightliner's training center, the necessary Freightliner systems software and hardware are installed and the ServicePoint signage is installed. At December 31, 1999, there were 37 TA sites operating in the ServicePoint program.
Main Building. The main building at each travel center contains a full service restaurant and, in many instances, one or more QSRs; a travel and convenience store; a fuel desk; driver amenity areas, including a lounge, television room, private showers and laundry; and ATM machines, as well as office space and training rooms for the employees of the travel center.
Full Service and Fast Food Restaurants. Substantially all Company travel centers have full service restaurants that offer seating for an average of approximately 140 customers. The Network has associated its full service restaurants with the Company-owned "Country Pride," "Buckhorn Family Restaurants" and "Mrs. B's" brand names. The Company has also promoted the installation of nationally branded fast food restaurants, such as Burger King, Popeye's Chicken, Dunkin' Donuts, Pizza Hut, Sbarro, Subway and Taco Bell at its travel centers. The Company generally attempts to locate QSR offerings within the main travel center building (as opposed to constructing stand-alone buildings). As of December 31, 1999, 89 of the 147 Company-owned travel centers offered at least one branded QSR.
Travel and Convenience Store. Each travel center has a travel and convenience store that caters to truck drivers, motorists, recreational vehicle and bus customers. The travel and convenience stores sell food and snack items, beverages, non-prescription drug and beauty aids, batteries, automobile accessories, music and audio products. In addition to complete convenience store offerings, the travel and convenience stores also sell items specifically designed for the truck driver's on-the-road lifestyle, including laundry supplies and clothing as well as truck accessories. The typical Company-owned store averages approximately 1,700 square feet.
Motels. Twenty-one of TA's travel centers currently have Company-owned motels, with an average capacity of 35 rooms. Fifteen of these motels are operated under franchise grants from nationally branded motel chains, including DayStop, HoJo Inn, Super 8, Rodeway and Travelodge. The remaining six motels are TA branded motels.
Additional Services. Most TA travel centers provide professional 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 funds transfers from fleet operators. Most sites have installed telephone rooms with 20 to 25 pay telephones with AT&T long distance service. To meet the personal needs of truck drivers, the typical travel center has designated "truck driver only" areas, including a television room with a VCR and comfortable seating for drivers, a barber shop, a laundry area with washers and dryers, 6 to 12 private showers and dressing rooms. Certain travel centers located in Louisiana, Nevada and Oregon also feature gaming operations. All travel centers have truck scales.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in various routine legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of its business. Management believes the Company is not now involved in any litigation, individually, or in the aggregate, which could have a material adverse effect on the Company's 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 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market information. The outstanding shares of Common Stock of the registrant were issued in transactions not involving a public offering. As a result, there is no public market for the registrant's Common Stock.
(b) Holders. As of March 15, 2000, the outstanding shares of Common Stock were held of record by 52 stockholders, of which 26 stockholders have their shares included in a voting trust (see Item 13 - "Certain Relationships and Related Transactions").
(c) Dividends. The registrant's senior indebtedness prohibits, except in very limited circumstances, the payment of cash dividends on, and sets limits on redemptions and repurchases of, the registrant's Common Stock. In addition, the indenture to which the registrant is a party prohibits, prior to April 1, 2007, the payment of cash dividends on, and sets limits on redemptions and repurchases of, the registrant's Common Stock. The registrant has not paid any cash dividends to holders of Common Stock and does not expect to declare or pay cash dividends to holders of Common Stock in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the Company. Such data presents the Company's investment in TA as net assets of subsidiary held for disposition until September 30, 1996. Such data should be read in conjunction with "Management's Discussion and Analysis" and the audited financial statements of the Company included elsewhere in this Report. The results of operations and other financial and operating data of the 17 sites acquired in the Burns Acquisition and the 16 sites acquired in the TPOA Acquisition are included in the Company's consolidated financial statements beginning on December 4, 1998 and June 1, 1999, respectively.
Notes to Selected Financial Data
(1) For the period from January 1, 1994 to September 30, 1996, the Company's investment in TA was presented as net assets of subsidiary held for disposition and TA's results of operations were excluded from the Company's consolidated results of operations until December 31, 1994 and subsequently included therein as a single amount in the Company's consolidated income statement through September 30, 1996. Effective September 30, 1996, the decision was made to retain TA and, subsequently, the Company chose to pursue the Combination Plan. Accordingly, at such time TA was no longer carried as net assets of subsidiary held for disposition. At that date, the carrying value of the Company's investment in TA of $44.6 million was allocated to the identifiable assets and liabilities and was based on the estimated current fair values at that date. In addition, the results of operations and cash flows of TA are included in the consolidated results of operations and cash flows of the Company from October 1, 1996.
(2) The Company completed the Burns Acquisition effective December 4, 1998 and the TPOA Acquisition effective June 1, 1999. The results of operations and cash flows from the sites acquired in the Burns Acquisition and the TPOA Acquisition are included beginning on those dates.
(3) "Mandatorily redeemable preferred stock" is comprised of two series of convertible preferred stock which accumulate dividends semi-annually at a compound annual rate of 13.5%. Both series are mandatorily redeemable in 2008 and are held by certain members of the Investor Group.
(4) "EBITDA" is defined herein as income from operations plus the sum of (a) depreciation, amortization and other noncash charges, (b) transition expense, and (c) gains and losses on sales of property and equipment, and is presented because it is commonly used by certain investors and analysts to analyze and compare operating performance, and to determine a company's ability to service and incur debt. EBITDA should not be considered in isolation from, or 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 or as a measure of profitability or liquidity. The EBITDA amounts herein present the Company's results as though TA had not been accounted for as a subsidiary held for disposition and had, instead, been fully consolidated (see Note 1 above).
(5) The ratio of EBITDA to interest expense, net set forth is different than the Consolidated Coverage Ratio (as defined in the indenture related to the Company's 10 1/4% Senior Subordinated Notes due 2007). The Consolidated Coverage Ratios for the years ended December 31, 1999, 1998 and 1997 were 2.56, 2.21 and 2.08, respectively.
(6) The number of sites data shown for all years reflects the total number of Company sites, regardless of the brand names under which they are operating.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the audited financial statements.
OVERVIEW
The Company is a holding company which, through its wholly-owned subsidiaries, owns, operates and franchises more full-service travel centers in the United States than any of its competitors with 158 network sites nationwide, including 147 Company-owned locations. The Company was formed in December 1992 to facilitate the National Acquisition in April 1993. In December 1993, the Company acquired the TA Network. In December 1998, the Company acquired the Burns Network and in June 1999 the Company acquired the TPOA Network. Historically, under the Company's ownership, National operated principally as a fuel wholesaler and franchisor, with relatively few Company-operated sites. As a result, its revenues consisted primarily of wholesale diesel fuel sales to Operators and Franchisee-Owners, rent from Operators of Leased Sites and nonfuel franchise royalty payments. In contrast, TA operated principally as an owner-operator of travel centers, as did Burns and TPOA. Consequently, while TA derived the majority of its revenues from retail diesel fuel sales, the majority of its gross profit has been derived from, and its principal strategic focus has been, the sale of higher margin nonfuel products and services.
COMBINATION PLAN
There are three primary elements to the Combination Plan that was adopted in January 1997 and has been executed by the Company from 1997 through 1999: (1) integrating the management of the TA and National Networks, (2) converting the Existing Network sites to one Network, and (3) rationalizing and further developing the Company's Network. As a result of implementing the Combination Plan, and integrating the Burns Network and TPOA Network sites, for the years ended December 31, 1999, 1998 and 1997, the Company incurred approximately $4.0 million, $3.6 million and $15.2 million, respectively, of expense, included in transition expense in the Company's consolidated financial statements. These expenses relate to, among other things, (i) employee separations, (ii) the costs to convert National Network, Burns Network and TPOA Network travel centers to 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 various networks into the Network, including relocation, travel, training, and legal expenses. Transition expenses are expected to aggregate approximately $23.5 million, with the remainder of the expenses to be incurred in 2000.
Integrating Management of the Existing Networks
As part of the Combination Plan, the Company's headquarters was moved from the National headquarters in Nashville, TN to the TA headquarters in Westlake, OH and management of the Existing Networks was centralized under the TA management team. Offers of employment in Westlake were made to several National corporate-level employees, but most opted to remain in Nashville and, accordingly, most of National's corporate-level employees were terminated. In January 1997, certain of National's executive officers resigned and related severance costs of $0.8 million were recognized. In May 1997, management finalized its plans regarding employee terminations and, accordingly, the related costs of $1.8 million were recognized. Termination benefits of approximately $2.0 million and $0.6 million were paid to the 111 terminated National employees in the years ended December 31, 1997 and 1998, respectively. All such payments were made by March 31, 1998.
Rationalizing and Developing the Network
At the time the Combination Plan was approved, there were 122 sites operating in the National Network (19 Company-operated Sites, 76 Leased Sites and 27 Franchisee-Owner Sites) and 48 sites operating in the TA Network (40 Company-operated Sites and eight Franchisee-Owner Sites). As a result of their history as competitors, there were markets in which each of the Existing Networks had a site. Certain markets can support such coverage, but others cannot, so the Company reviewed its networks in order to rationalize the total number of sites and reduce oversaturation in certain markets. As a result, the Company identified up to 23 National Network Company-owned sites to be sold and a minimum of 23 National Network Franchisee-Owner Sites to be terminated.
During 1997, 15 National Network Leased Sites were sold to the operators of those sites for a net gain on sale of $11.9 million and all 27 of the National Network Franchisee-Owner Sites were terminated. In 1998, two Company-operated Sites were sold for a net gain on sale of $0.7 million. In 1999, five Company-owned sites (including three sites obtained in the Burns Acquisition or TPOA Acquisition) were sold for a net gain on sale of $1.5 million. At December 31, 1999, two closed sites were being held for sale. The net carrying value of these two sites at December 31, 1999 is $1.5 million and the Company expects them to be sold for a gain.
In addition to the sites held for sale, the Company may sell other operating sites. As the Company acquires additional sites, such as in the Burns Acquisition and TPOA Acquisition, new market overlaps are created, thus providing the opportunity to sell sites if buyers offering sufficient amounts can be identified. Further, the Company's agreements with its franchisees provide the franchisees with limited protected territories in which the Company may not operate TA branded facilities. In such cases, sales of sites within those territories may become necessary or economically attractive.
In addition to the site sales and terminations, the Combination Plan, as well as the Company's strategic plan, contemplates further development and expansion of the Network into key markets where the Network is not adequately represented, which involves constructing or acquiring new sites as well as improving existing sites. Pursuant to the Capital Program, as adjusted for the Burns Acquisition and the TPOA Acquisition, a significant amount of the capital expenditures planned for 1999 through 2001 are for improvements at existing sites such as reimaging, rebranding, constructing new QSRs, expanding the travel stores and convenience stores, expanding existing and constructing additional shop bays, and rebranding and upgrading the gasoline islands. Further, the Company expects to continue developing its Network through the construction of sites in new markets and the rebuilding of older sites.
To continue the Company's growth and amplify its national brand identity, in 1995 the Company embarked on a project to design a prototype travel center. The Company conducted extensive market research in order to design a travel center that would appeal to the needs of the Company's core fleet customer base and better position itself to capture more "four wheel" consumer traffic, and developed a prototype travel center design (the "Prototype"). In addition to the Prototype, the Company has designed a smaller format ("Protolite") to better match facility offering to market size in smaller markets. The Prototype or Protolite designs will be used for all new travel centers constructed. The Prototype design concepts are also being utilized in all of the Company's site re-imaging projects. The first three newly constructed Prototype travel centers opened for business in May, October and December of 1999, and the first Protolite travel center opened in December 1999. At December 31, 1999, there were two additional Prototype travel centers under construction that are expected to open in the first half of 2000. During 2000 and 2001, the Company intends to begin construction of at least five additional Prototype or Protolite travel centers. Excluding land, the average costs of a Prototype travel center and a Protolite travel center are approximately $8.0 million and $5.0 million, respectively. To date, the completed and planned new or rebuilt sites are being funded through a combination of capital expenditures and build-to-suit operating leases.
Converting the Existing Networks into One Network
As described above, there were 122 sites in the National Network at the outset of the Combination Plan and a key component of the Combination Plan is to integrate the Existing Networks into one. This task was partially completed by the sales of 17 Leased Sites and the termination of 27 Franchisee-Owner sites during 1997 and 1998. A second step was the conversion of all National Network Company-operated Sites to TA Network Sites. This conversion involved significant costs for activities such as hiring and training employees at the sites, installing TA's store, shop and accounting systems and programs, implementing TA management, marketing, operations, safety and training programs, relocating site management employees and rebranding the sites as TA sites. The remaining step was conversion of the Leased Sites, which has been accomplished in two ways: acquiring the leasehold interests of the Operators at 32 Leased Sites (five in 1998 and 27 in 1997) and negotiating Network Agreements with the Operators at 30 Leased Sites (one in each of 1999 and 1998 and 28 in 1997), one of which was sold to the operator during 1999. One Operator of a Leased Site who had signed the Network Agreements sold his leasehold interest to the Company during 1998. As a result of the above, at December 31, 1999, there remained only one site operating under the National Agreements.
The process of converting Leased Sites from the National Agreements to the Network Agreements included rebranding of the travel centers, installation of TA's store and shop programs, training of the franchisees in TA's operating procedures and revisions to the franchise and lease agreements that reduced the fixed rent payable by the Operators but increased the royalties to be paid by the Operators (calculated as a percentage of nonfuel revenues and a rate per gallon of fuel sold). Converting to the Network Agreements has resulted in reduced revenue in the short term, but the Company believes that, in the long term, total revenue will be increased as a result of the increased royalty rates and increased franchisee fuel sales volume and nonfuel revenues.
NETWORK COMPOSITION
The change in the number of sites within the Company's network is the most significant factor driving the changes from the prior year in the Company's results of operations. During the second and third quarters of 1998, the Company converted five Leased Sites to Company-operated Sites and sold one closed site. In December 1998, the Company acquired 17 Company-operated Sites in the Burns Acquisition. In June 1999, the Company acquired 16 Company-operated Sites in the TPOA Acquisition. Also during 1999, the Company sold three Company-operated Sites, sold one Leased Site to the Operator who signed a franchise agreement to brand the site as a Franchisee-owner Site, sold one closed site, closed two Company-operated Sites now held for sale, and opened two newly-constructed Company-operated Sites.
The following table sets forth the number and type of ownership and management of the travel centers operating in the Company's networks.
(1) Excludes three closed sites at December 31, 1999 and two closed sites at December 31, 1998.
RESULTS OF OPERATIONS
The results of operations of the 17 sites acquired in the Burns Acquisition and the 16 sites acquired in the TPOA Acquisition are included in the following beginning December 4, 1998, and June 1, 1999, respectively, the dates of the Burns Acquisition and TPOA Acquisition, respectively.
(1) "EBITDA" is defined as set forth in Note 4 to Selected Financial Data in Item 6.
1999 COMPARED TO 1998
Revenues
The Company's consolidated revenues for 1999 were $1,454.6 million, which represents an increase over the prior year of $530.8 million, or 57.5%. This increase results from large increases in fuel and nonfuel revenues and a small decrease in rent and royalty revenue.
Fuel revenue for 1999 increased by $400.4 million, or 72.2%, from 1998. The increase is attributable to increases in diesel and gasoline sales volumes as well as an increase in average pump prices. Diesel and gasoline sales volumes increased 40.7% and 53.9%, respectively, between years, due in large part to the increased number of Network sites, but also due to increased sales volumes over 1998 on a same-site basis of 11.4% for diesel fuel and 8.9% for gasoline. For the year ended December 31, 1999, the Company sold 1,370.0 million gallons of diesel and 84.5 million gallons of gasoline. Average fuel sales prices for 1999 increased 21.8% over 1998. The increase in average retail prices corresponds with the decreasing crude oil prices experienced throughout 1998 and the increasing crude oil prices beginning in March 1999.
Nonfuel revenue in 1999 of $479.1 million reflects an increase of $131.6 million, or 37.9%, from 1998. The increase primarily results from the increased number of Company-operated Sites in the Network. Further, on a same-site basis, nonfuel revenue increased 8.8% in 1999 versus 1998, reflecting the effects of the significant capital investments the Company has made in the Network pursuant to the Capital Program.
Rent and royalty revenue for 1999 reflects a $1.0 million, or 4.7%, decrease from the prior year. This decrease is attributable to the rent and royalty revenue lost as a result of the five conversions of Leased Sites to Company-operated Sites during 1998 and the sale of one Leased Site in 1999, somewhat offset by a same-site rent increase of 0.8% and a same-site increase of 5.7% in royalty revenue as a result of improved franchisee sales levels.
Gross Profit
The Company's gross profit for 1999 was $403.5 million, compared to $296.7 million for 1998, an increase of $106.8 million, or 36.0%. The increase in the Company's gross profit was primarily due to increases in nonfuel revenues, fuel margins and royalty revenue, partially offset by decreased rent revenue, as discussed above.
Operating and Selling, General and Administrative Expenses
Operating expenses include the direct expenses of Company-operated Sites and the ownership and franchising-related costs of Leased Sites. Selling, general and administrative expenses ("SG&A") include corporate overhead and administrative costs.
The Company's operating expenses for 1999 increased by $73.4 million, or 37.9%, versus the prior year. This increase reflects the increased number of Company-operated Sites and the increased level of nonfuel revenues on a same-site basis. On a same-site basis, operating expenses as a percentage of nonfuel revenues for 1999 were 54.0%, an improvement from the 54.7% for 1998.
The Company's SG&A increased over 1998 by $4.2 million, or 12.2%, to $38.5 million in 1999. The increased SG&A primarily reflects increased staffing and other expenses (such as travel, insurance and advertising) to support the Company's growth from the Burns Acquisition and the TPOA Acquisition.
Transition Expense
Transition expense for 1999 increased from $3.6 million in 1998 to $4.0 million in 1999. The 1999 costs were incurred in substantially completing the integration of the National Network, Burns Network and TPOA Network sites into the Company's Network. The 1998 costs were incurred to continue the combination of National and TA, as well as expenses incurred in beginning the integration of the Burns Network into the Network. The Company anticipates less than $1.0 million of such costs to be incurred in 2000, primarily related to integrating and converting the TPOA Network sites.
Depreciation and Amortization
Depreciation and amortization of $53.2 million for 1999 increased $8.5 million from 1998. The increase in depreciation and amortization is primarily attributable to the increased level of property and equipment and intangible assets resulting from the Burns Acquisition and the TPOA Acquisition as well as the significant capital additions made in 1999 and 1998. In addition, an impairment reserve of $0.6 million recorded in 1997 with respect to certain sites being held for sale was completely reversed in 1998 due to increases in the estimated sales prices of the respective sites. These increases are offset by a one-time depreciation charge recognized in 1998.
During the first quarter of 1998, the estimated useful lives of certain machinery, equipment, furniture and fixtures were revised downward from 10 years to five years. The effect of this change in estimate resulted in a $9.5 million charge to depreciation expense and reductions in income before extraordinary items, net income and earnings per share of $9.5 million, $5.7 million and $9.08 per share, respectively. This change resulted in these assets becoming fully depreciated at March 31, 1998.
Income From Operations
Income from operations was $38.4 million for 1999, compared to $19.1 million for 1998, an increase of $19.3 million or 101.0%. In addition to the increased size of the Network and the other contributing factors discussed above, the increase is affected by a $1.4 million increase in gains on sales of property and equipment and a $2.5 million increase in stock compensation expense.
EBITDA (defined as income from operations plus the sum of (a) depreciation, amortization and other non-cash charges, (b) transition expense and (c) gains and losses from sales of property and equipment) for the Company for 1999 was $98.0 million, compared to $68.7 million for 1998. The increased EBITDA reflects the significant increase in gross margin offset by increases in operating expenses and SG&A, all of which is largely derived from the increase in the size of the Network but also from an increase in same-site EBITDA of $8.4 million or 12.0%.
Interest Expense, net
Interest expense for 1999 was $37.2 million, $11.8 million higher than for 1998. This is a result of increased levels of indebtedness and interest rates after completing the 1998 Refinancing, increased debt from completing the TPOA Acquisition (both as discussed in Liquidity and Capital Resources below), and a general increase in interest rates throughout the credit markets.
Income taxes
The Company's effective income tax rate for 1999 was 91.6%, which differs from the federal statutory rate due primarily to state income taxes and nondeductible expenses, partially offset by the benefit of certain tax credits.
1998 COMPARED TO 1997
Revenues
The Company's consolidated revenues for 1998 were $923.8 million, which represents a decrease from the prior year of $115.5 million, or 11.1%.
Fuel revenue for 1998 reflects a decrease from 1997 of $153.9, or 21.7%. The decrease resulted from an approximately 21.9% decrease in average retail prices and a decrease of 1.7 million gallons sold (0.2%). The decrease in average retail prices primarily results from decreased crude oil prices and also from competitive pressures. The slight volume decrease is the net of increases in volumes at sites in operation in both 1997 and 1998 of 10.3%, offset by reductions for sites sold in 1997.
Nonfuel revenue in 1998 increased 18.3% from 1997 primarily as a result of an increased number of Company-operated Sites offering nonfuel products and services. There were 27 Leased Sites converted to Company-operated Sites throughout 1997, resulting in a full year of operations for these sites in 1998. An additional five Leased Sites were converted to Company-operated Sites during 1998. Further, on a same-site basis, nonfuel revenue increased 5.8% in 1998 versus 1997.
Rent and royalty revenue for 1998 decreased $15.3 million as a result of (i) conversions of Leased Sites to Company-operated Sites, (ii) sales of Leased Sites and (iii) the rent reductions that became effective when former National franchisees signed Network Agreements with the Company. These changes occurred primarily throughout 1997, and the decreases in 1998 reflect the full year effects of these changes. The new franchise and lease agreements provide for reduced fixed rents but increased franchise royalty rates to be applied to nonfuel revenues generated by the franchisees' operations. On a same-site basis, rent revenue for 1998 reflects a decrease of $1.8 million, or 11.6%, from 1997, while royalty revenue for 1998 reflects an increase of $2.2 million, or 55.3%, over 1997.
Gross Profit
The Company's gross profit for 1998 was $296.7 million, compared to $266.2 million for 1997, an increase of $30.5 million, or 11.5%. The increase in the Company's gross profit was primarily due to increases in nonfuel revenues, diesel fuel margins, and royalty revenue, partially offset by decreased rent revenue as discussed above.
Operating and Selling, General and Administrative Expenses
Operating expenses include the direct expenses of Company-operated Sites and selling, general and administrative expenses ("SG&A") include corporate overhead and administrative costs.
The Company's operating expenses increased by $27.4 million, or 16.3%, to $195.8 million for 1998, as compared to 1997. The increase reflects a full year of operations for the 27 Leased Sites that were converted to Company-operated Sites during 1997, as well as increases from the five Leased Sites converted to Company-operated Sites during 1998. In addition, the growth in nonfuel revenue requires an increase in operating expenses, particularly labor, to support the revenue growth.
The Company's SG&A decreased 3.7% from $35.6 million in 1997 to $34.3 million in 1998 as a result of continued synergy savings as a result of the Combination Plan.
Transition Expense
Transition expense for 1998 decreased from $15.2 million in 1997 to $3.6 million in 1998. The 1998 costs were incurred in continuing to effect the combination of National and TA, as well as expenses incurred in beginning the combination of the Burns Network into the Network. The decrease from 1997 reflects the relative level of effort in 1998 versus 1997 on transition activities at the former National Network sites.
Depreciation and Amortization
Depreciation and amortization of $44.7 million for 1998 increased $8.9 million from 1997. During the first quarter of 1998, the useful lives of certain machinery, equipment and furniture were revised downward from 10 years to five years to conform National's estimated useful lives to those of TA. The effect of this change in estimate resulted in reductions in income before extraordinary items, net income and earnings per share of $9.5 million, $5.7 million and $9.08 per share, respectively. In addition, an impairment charge of $0.6 million recorded in the 1997 fourth quarter with respect to certain sites being held for sale was completely reversed in the 1998 second quarter. This reversal was based on increases in the estimated sales prices of the respective sites. In 1997, impairment charges related to goodwill and certain sites being held for sale of approximately $7.5 million were included in depreciation and amortization. Exclusive of the above amounts, depreciation and amortization increased approximately $8.1 million between years, primarily due to the significant level of capital expenditures in 1998 and 1997.
Income From Operations
Income from operations for the Company was $19.1 million for 1998 as compared to $22.3 million in 1997, which is a decrease of $3.2 million, or 14.3%. The decrease is attributable to the increase in depreciation and amortization and operating expenses and the decrease in gains on sales or property and equipment and rent and royalty revenues, partially offset by increased nonfuel sales margins, increased diesel margins and headquarters synergies. EBITDA for the Company for 1998 was $68.7 million, compared to $63.6 million for 1997. The increased EBITDA for 1998 is largely derived from increased gross profit as a result of a greater number of Company-operated Sites and increased diesel margins, partially offset by the increased operating expenses incurred by the increased revenue levels and reductions in rent and royalty revenues.
Interest Expense, net
Interest expense for 1998 was $25.4 million, $2.5 million higher than 1997. This is a result of the increased net debt balance after completing the 1998 Refinancing and a full year of interest expense on the increased net debt balance from the 1997 Refinancing (both as discussed in Liquidity and Capital Resources below).
Other Items
The extraordinary loss of $3.9 million results from the 1998 Refinancing and represents the write-offs of the then remaining unamortized balance of deferred financing costs related to the extinguished indebtedness ($5.9 million) and approximately $15.8 thousand of break funding fees paid to holders of redeemed senior notes. The reported amount of the extraordinary loss is net of the applicable income tax benefit of $2.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of working capital needs, payments of principal and interest on outstanding indebtedness and capital expenditures, including expenditures for acquisitions, expansion and environmental upgrades and compliance.
Net cash provided by operating activities totaled $44.7 million in 1999, $48.5 million in 1998, and $41.7 million in 1997. The decrease in net cash flows from operating activities for 1999 versus 1998 primarily results from a $29.3 million increase in EBITDA that is more than offset by an $11.8 million increase in interest expense and a $22.3 million increase in working capital requirements. The increase in net cash flows provided by operating activities in 1998 versus 1997 is primarily attributable to increased EBITDA partially offset by growth in working capital requirements primarily resulting from the increased number of Company-operated sites and increased interest expense as a result of the 1998 Refinancing.
Net cash used in investing activities for 1999 was $136.0 million versus $125.5 million in 1998 and $38.0 million in 1997. The cash used in investing activities in 1999 includes $87.4 million for capital expenditures pursuant to the Capital Program and $57.8 million for the TPOA Acquisition. These outlays are partially offset by $9.1 million of cash proceeds from sales of property and equipment, which primarily consist of the sales of five travel center sites during 1999. The amount of net cash used in investing activities in 1998 reflects $65.7 million of capital expenditures in accordance with the Capital Program and consistent with 1997, as well as $6.4 million for the conversions of five leased sites to Company-operated Sites and approximately $56.8 million for the Burns Acquisition. These uses of cash are partially offset by $3.4 million of proceeds from sales of property and equipment comprised primarily of the sales of two Company-operated sites and condemnation proceeds related to a third Company-operated Site. The amount for 1997 reflects $75.9 million of expenditures related to capital additions and conversions of Leased Sites to Company-operated Sites, as contemplated by the Capital Program, partially offset by $38.0 million of proceeds from sales of property and equipment primarily relating to the sales of 15 Leased Sites to the respective Operators.
Net cash flows provided by financing activities were $20.1 million in 1999, $94.4 million in 1998 and $44.3 million in 1997. The cash provided during 1999 was the result of a $6.7 million capital investment and net borrowings of $15.0 million under the Company's revolving credit facility. The Company made $1.6 million of scheduled debt repayments during 1999. The increased cash flows from investing activities in 1998 versus 1997 reflects the 1998 Refinancing. The financing activities cash flows in 1997 primarily related to the 1997 Refinancing.
In order to provide for its growth, the Company, among other things, has completed refinancings in each of 1998 and 1997. In the 1997 Refinancing, completed on March 27, 1997, the Company repaid or exchanged all of its previously existing indebtedness and issued $125 million principal amount of Senior Subordinated Notes, $85.5 million principal amount of Senior Secured Notes ($35.5 million of fixed-rate Series I and $50.0 million of floating-rate Series II), and an $80 million term loan facility which was fully borrowed. The Company also has a $40.0 million revolving credit facility. In the 1998 Refinancing, completed on December 3, 1998, the Company increased the term loan facility, and its borrowings under the facility, by $150.0 million. The proceeds of the borrowing were used to redeem the Series II Senior Secured Notes ($50.0 million), fund the Burns Acquisition (approximately $56.8 million), and prefund $42.0 million of planned capital expenditures and business acquisitions, with the remainder used for costs of the 1998 Refinancing and accrued interest. The $42.0 million for prefunded capital expenditures and business acquisitions was required to be maintained in a cash collateral account and to be used only for such expenditures. Provisions of the debt agreements required the Company to use $30.0 million of the cash collateral account balance for a business acquisition, or to repay the $30.0 million in the event the Company did not enter a definitive purchase agreement prior to March 31, 1999, and complete the acquisition by December 31, 1999. The Company utilized the $30.0 million to partially fund the TPOA Acquisition. The Senior Notes have no amortization requirements until 2001, the Senior Subordinated Notes are due in 2007 and the Term Loan facility has annual amortization requirements of $1.4 million until 2003, when the annual amortization requirements increase significantly. The interest rate on the Term Loan was increased by a percentage point to LIBOR plus 3.75%. At December 31, 1999, the Company had available $23.5 million of its $40 million revolving credit facility.
The Company expects to invest approximately $340 million in the Network between 1997 and the end of 2001 (with $237 million of this amount having been spent by the end of 1999) in connection with the Capital Program to upgrade, rebrand, reimage and increase the number of travel centers. Approximately $50 million of the capital expenditures intended to be made represents normal ongoing maintenance and related capital expenditures. The Company has budgeted additional expenditures in order to add new sites, rebrand and reimage sites, add additional nonfuel offerings (such as QSR offerings) at existing sites, make required environmental improvements, and purchase, install and upgrade its information systems. The capital expenditures budget for 2000 is approximately $65 million.
The Company anticipates that it will be able to fund its 2000 working capital requirements and capital expenditures primarily from funds generated from operations, funds generated from asset sales, and, to the extent necessary, from borrowings under the revolving facility. The Company's 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.
FREIGHTLINER RELATIONSHIP
In July 1999, the Company signed an agreement with Freightliner to enter into the ServicePoint Program. Under the agreement, the Company's truck repair facilities are being added to Freightliner's 24-hour customer assistance center database to be a major referral point for emergency and roadside repairs and also have access to Freightliner's parts distribution, service and technical information systems. The Company believes the ServicePoint Program, which will be implemented at substantially all of the Company's truck repair shops by the end of 2000, will generate an increase in nonfuel revenues in 2000 but will have a larger effect in 2001 and thereafter.
ENVIRONMENTAL MATTERS
The Company owns and operates USTs and ASTs at Company-operated Sites and Leased Sites which must comply with certain statutory and regulatory requirements that went into effect on December 22, 1998. The Company believes it is in material compliance with those requirements. During 1999, approximately $2.6 million of environmental-related expenditures were incurred with respect to remediation, maintenance, compliance, monitoring and capital items. In addition, the Company has estimated the current ranges of estimated remediation costs at currently active sites and what it believes will be its ultimate share for such costs after required indemnification and remediation is performed by Unocal and BP under the respective Environmental Agreements and has a reserve for such matters of $7.1 million as of December 31, 1999. While it is not possible to quantify with certainty the environmental exposure, in the opinion of management, the potential liability, beyond that considered in the reserve, for all environmental proceedings, based on information known to date and environmental laws currently enacted, will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
YEAR 2000 READINESS DISCLOSURE
The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does not expect any significant impact to its ongoing business as a result of the Year 2000 issue. However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, the Company could still be negatively impacted if its customers, its suppliers or the third party billing companies that service the trucking industry are adversely affected by the Year 2000 or similar issues. The Company currently is not aware of any significant year 2000 or similar problems that have arisen or are likely to arise for its customers, its suppliers or the third party billing companies. The incremental costs to the Company of the modifications to, and replacement of, software or hardware as a result of the Year 2000 issue was not material to the Company's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), which requires entities to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair values are required to be recognized in income when they occur, except for derivatives that qualify as hedges. For the Company, adoption of this standard, as subsequently amended, is required for the first quarter of 2001. At this time, the Company has not completed its analysis of the effect on its financial statements of adopting FAS 133. However, as the Company utilizes derivatives on a limited basis and only as hedges of either commodity price risk or interest rate risk, the effect of FAS 133 on the Company's statement of income is not expected to be material.
FORWARD-LOOKING STATEMENTS
The Company is making this statement in order to satisfy the "safe harbor" provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Moreover, from time to time the Company may issue other forward-looking statements. Such forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: competition from other travel center and truckstop operators, including additional or improved services or facilities of competitors; the economic condition of the trucking industry, which in turn is dependent on general
economic factors; diesel and gasoline fuel pricing; availability of fuel supply; and difficulties that may be encountered by the Company or its franchisees in implementing the Combination Plan, integrating the Burns Network and TPOA Network sites into the Network, and implementing the ServicePoint Program. The forward-looking statements should be considered in light of these factors.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to commodity price risk and interest rate risk. The Company's fuel purchase contracts provide for purchase prices based on average market prices for diesel and gasoline, exposing the Company to commodity price risk. The Company mitigates this risk exposure in a few ways, but primarily by maintaining only a few days of inventory on hand and selling a large portion of its fuel volume under "cost plus" pricing formulae, which minimize the effect on the Company's margins of sudden sharp changes in commodity market prices. The Company manages the price exposure related to sales volumes not covered by cost plus arrangements through the use, on a limited basis, of derivative instruments designated by management as hedges of anticipated purchases. The total volume covered by open derivative contracts at any point in time during 1999 and at December 31,1999 was immaterial. The interest rate risk faced by the Company results from the highly-leveraged position of the Company and its level of variable rate indebtedness, the rates for which are based on short-term lending rates, primarily the London Interbank Offered Rate. The Company uses interest rate swap agreements to reduce its 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 currently due to or from interest rate swap counterparties are recorded in interest expense in the period in which they accrue. At December 31, 1999, the Company was involved in interest rate swap agreements with a notional principal amount of $160,250,000. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the determination of cash settlements under the agreements. The Company is exposed to credit losses from counterparty nonperformance, but does not anticipate any loses from its agreements, all of which are with a major financial institution.
The following table summarizes information about the Company's 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Cleveland, Ohio March 10, 2000
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 INCOME AND RETAINED EARNINGS (DEFICIT)
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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
The Company is a nationwide marketer of truck and auto fuel and related products and services through 158 full-service travel centers in 40 states, primarily operating under the "TravelCenters of America" or "TA" trademarks. Of the network locations at December 31, 1999, the Company owns or leases 147 locations, 29 of which are leased to independent lessee-franchisees ("Operators") of the Company ("Leased Sites"), and 118 of which are operated by the Company ("Company-operated Sites"). Eleven locations are owned or leased and operated by independent franchisees ("Franchisee-Owners") of the Company ("Franchisee-Owner Sites"). The Company purchases and resells diesel fuel, gasoline and other travel center products and services to consumers, commercial fleets, operators and independent franchisees; provides fleet credit card and customer information services through its proprietary ACCESS billing system; conducts centralized purchasing programs; creates promotional programs; and, as a franchisor, assists the Operators and Franchisee-Owners in providing service to commercial fleets and the motoring public.
The Company was incorporated on December 2, 1992 as National/Auto Truckstops Holdings Corporation. The Company's name was changed to TravelCenters of America, Inc. in March 1997. In April 1993, the Company acquired (the "National Acquisition") the truckstop network assets (the "National Network") of a subsidiary of Unocal Corporation (together with its subsidiaries "Unocal") and in December 1993 acquired (the "TA Acquisition") the truckstop network assets (the "TA Network") of certain subsidiaries of The British Petroleum Company p.l.c. (together with its subsidiaries "BP"). In December 1998 the Company acquired (the "Burns Acquisition") the truckstop network assets (the "Burns Network") of Burns Bros., Inc., and certain of its affiliates (collectively "Burns"). In June 1999 the Company acquired (the "TPOA Acquisition") Travel Ports of America, Inc. ("TPOA"), which operated a network of truck stops (the "TPOA Network"). See Note 3 for disclosure regarding the Burns Acquisition and the TPOA Acquisition.
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 ("TA"), TA Franchise Systems Inc. ("TAFSI"), National Auto/Truckstops, Inc. ("National"), and TA Licensing, Inc., ("TA Licensing," formerly known as Travel Port Systems, Inc.) and TA Travel, L.L.C., a wholly owned subsidiary of TA. Intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
Sales revenues and related costs are recognized at the time of delivery of motor fuel to customers at either the terminal or the customer's facility for wholesale fuel sales and at the time of final sale to consumers at the Company-operated Sites for retail fuel and nonfuel sales.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Franchise and royalty revenues are recognized at the point such revenues are earned, typically when collectible and when the Company has fulfilled substantially all of its obligations under the related agreements.
INVENTORIES
Inventories are stated at cost, which approximates market value, cost being determined on the first in, first out basis for petroleum products and principally as the weighted average costs for nonfuel merchandise.
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:
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 are removed from the accounts. Any resulting gains or losses are recognized in operations.
DEFERRED FINANCING COSTS AND INTANGIBLE ASSETS
Deferred financing costs were recorded in conjunction with issuing long-term debt and are being amortized on a basis approximating the interest method over the lives of the related debt instruments, ranging from five to ten years (see Note 12). The intangible assets are being amortized on a straight-line basis over their estimated lives, principally the terms of the related contractual agreements giving rise to them (see Note 9).
INTERNAL-USE SOFTWARE COSTS
During the application development stage of an internal-use computer software project, the Company capitalizes (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 accordance with Statement of Financial Accounting Standards No. (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," impairment charges are recognized when the carrying values of long-lived assets to be held and used in the business exceed the estimated undiscounted future cash flows of those assets, and when the carrying values of long-lived assets to be disposed of exceed the estimated fair value less cost to sell for those assets. 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
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
are performed at the individual travel center level. In addition, intangible assets are subjected to further evaluation in accordance with Accounting Principles Board Opinion 17, "Intangible Assets," and impairment charges are recognized when events and circumstances indicate the carrying value of the intangible asset exceeds the future benefit of the asset. Impairment charges are included in depreciation and amortization in the income statement.
CLASSIFICATION OF COSTS AND EXPENSES
Cost of revenues represents the costs of fuels and other products sold, including freight. Operating expenses consist primarily of labor, maintenance, supplies, utilities, warehousing, purchasing and occupancy costs. Transition expenses represent the nonrecurring costs incurred by the Company in integrating the TA Network, the National Network, the Burns Network and the TPOA Network into a single network under one management. See Note 4 for a discussion of the Combination Plan under which the majority of these costs have been incurred. Costs of advertising are expensed as incurred.
ENVIRONMENTAL REMEDIATION
The Company provides 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 behalf of the Company by Unocal and BP, at Unocal's and BP's sole expense (see Note 18).
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.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company grants credit to its customers and may require letters of credit or other collateral.
DERIVATIVE INSTRUMENTS
On a limited basis, the Company engages in commodity risk management activities within the normal course of its business as an end-user of derivative instruments. These commodity-based instruments are used to manage exposure to price fluctuations related to the anticipated purchase of diesel fuel and gasoline. Changes in market value of derivative instruments are deferred and are subsequently recognized in income in the same period as the underlying transaction. Recorded deferred gains or losses are reflected within other current assets or other current liabilities. At December 31, 1999 the amount of open derivative contracts and the related fair market value and deferred gains and losses were immaterial. At December 31, 1998 there were no open derivative contracts.
The Company uses interest rate swap agreements to reduce its 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 currently due to or from interest rate swap counterparties are recorded in interest expense in the period in
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
which they accrue. At December 31, 1999, the Company was involved in interest rate swap agreements with a notional principal amount of $160,250,000. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the determination of cash settlements under the agreements. The Company is exposed to credit losses from counterparty nonperformance, but does not anticipate any loses from its agreements, all of which are with a major financial institution.
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 the Company's fixed-rate indebtedness that is publicly traded is estimated based on the quoted price for those notes. The fair value of the Company's fixed-rate indebtedness that is not publicly traded is estimated based on the current borrowing rates available to the Company for financings with similar terms and maturities. The fair values of the Company's variable-rate indebtedness approximates the carrying value of that indebtedness. (See Note 12.)
Interest Rate Swap Agreements: The fair value of the interest rate swap agreements is based on bank-quoted market prices.
RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to conform with the current year presentation.
3. ACQUISITIONS
All business acquisitions have been accounted for under the purchase method. The results of operations of the acquired businesses are included in the consolidated financial statements from the respective dates of the acquisitions.
TPOA Acquisition. Effective June 1, 1999, the Company consummated the TPOA Acquisition by acquiring 100 percent of the common stock of TPOA at a price of $4.30 per share. Under the terms of the related merger agreement and certain ancillary agreements, the Company paid cash of approximately $27,760,000 for all of TPOA's outstanding common shares and common stock equivalents except approximately 653,000 common shares that were exchanged for 85,000 shares of the Company's common stock. In addition, the Company paid cash of approximately $31,007,000 to retire all of TPOA's indebtedness outstanding as of the merger date. TPOA operated a network of 16 travel centers in seven states, primarily in the northeastern U.S., and a single fuel terminal in Pennsylvania. Upon consummation of the acquisition, TPOA was merged into TA.
The total cost of the acquisition was $86,003,000. This was comprised of cash paid to purchase the TPOA stock and repay the TPOA debt of $58,767,000, the value of the 85,000 shares of the Company's common stock issued in exchange for TPOA shares of $2,808,000, liabilities assumed of $22,124,000 and direct costs of the acquisition of $2,304,000. The cost was allocated to the assets and liabilities acquired on the basis of their estimated fair values at the acquisition date, including $27,585,000 of assets other than the property and equipment acquired. The excess of purchase price over the estimated fair values of the net assets acquired, in the amount of $9,907,000, has been recorded as goodwill and is being amortized on a straight-line basis over 15 years. The cash portion of the
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TPOA Acquisition was initially funded with $30,000,000 of the restricted cash provided by the 1998 Refinancing (see Note 12), $25,000,000 of borrowings under the Company's revolving credit facility and other available cash.
Burns Acquisition. On December 3, 1998, the Company completed the Burns Acquisition, whereby the Company acquired from Burns the land, buildings, equipment and inventories at 17 of the 19 sites comprising the Travel Stops division of Burns, the equipment and inventories used in Burns' fuel wholesaling and transportation businesses and certain accounts receivable related to the acquired assets.
The total cost of the assets acquired was $60,728,000, comprised of the cash consideration paid to Burns of $56,240,000, liabilities assumed of $3,920,000 and direct costs of the acquisition of $568,000. The cost was allocated to the assets and liabilities acquired on the basis of their estimated fair values at the acquisition date. The Burns Acquisition was funded with borrowings under the Company's long-term bank term loan facility as part of the 1998 Refinancing.
The following unaudited pro forma information presents the results of operations of the Company as if the TPOA Acquisition and the Burns Acquisition had each taken place on January 1, 1998.
These pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on January 1, 1998, or that may result in the future.
4. COMBINATION PLAN AND TRANSITION EXPENSE
In January 1997, the Company adopted a plan (the "Combination Plan") to combine the operations of the Company's two networks. There are three primary elements to the Combination Plan that have been implemented by the Company throughout 1998 and 1999: (1) integrating the management of the TA and National Networks, (2) converting the Existing Network sites to one Network, and (3) rationalizing and further developing the Company's Network. These expenses relate to, among other things, (i) employee separations, (ii) the costs to convert National Network travel centers to 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 Existing Networks into the Network, including relocation, travel, training, and legal expenses. In January 1997, certain of National's executive officers resigned and related severance costs of approximately $774,000 were recognized. In May 1997, management finalized its plans regarding the employee terminations and, accordingly, the related expense of approximately $1,833,000 was recognized.
The Company has also incurred transition expenses as a result of the Burns Acquisition and the TPOA Acquisition, primarily related to converting the acquired sites to Network travel centers. As a result of implementing the Combination Plan and integrating the Burns Network and TPOA Network sites, for the years ended December 31, 1999, 1998 and 1997, the Company incurred approximately $3,952,000, $3,648,000 and $15,212,000, respectively, of expense, included in transition expense in the Company's consolidated financial statements.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. EARNINGS PER SHARE
The computation of basic earnings per common share is based upon the weighted-average number of shares of common stock outstanding. A reconciliation of the income or loss and shares used in the computation follows:
The assumed conversion of stock options, warrants and convertible series of preferred stock would have an anti-dilutive effect on earnings per share for 1999, 1998 and 1997. Effective January 1, 2000, 175,000 options to purchase common stock were granted to management and non-employee directors.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. INVENTORIES
Inventories consist of the following:
7. NOTES RECEIVABLE
The Company has notes receivable agreements with certain Operators and Franchisee-Owners to finance on a long-term basis past due accounts receivable owed by those customers and, in one case, to finance the purchase of the related travel center site. Certain of these customers are related parties (see Note 17). The notes have terms ranging from six months to six years and principally accrue interest at a variable rate of the prime lending rate plus 2 percent. The Company also has notes receivable from management stockholders received as partial consideration for purchases of common stock (see Note 15). These notes have terms of nine years and accrue interest at fixed rates between 4.86 and 7.0 percent.
Notes receivable consists of the following:
The amount due within one year is included within other current assets on the balance sheet.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Pursuant to the Combination Plan, nine Company-operated Sites were being held for sale as of December 31, 1997. Based on the Company's estimated sales proceeds and costs of selling these sites, an impairment charge totalling $559,000 was recognized in 1997 with respect to two of the sites. This impairment charge is included in depreciation and amortization in the income statement. As a result of revised estimates of probable sale proceeds, this impairment reserve was reversed in the second quarter of 1998. During 1998, two of these sites were sold, and condemnation proceeds were received for a portion of a third site that was condemned by the state as part of a highway construction project. The Company re-evaluated the remaining seven sites and determined that it would no longer actively market for sale six of those sites. The remaining site was sold during the fourth quarter of 1999. At December 31, 1999, the Company was holding for sale two sites that had been closed during 1999. The total carrying value of the two sites held for sale at December 31, 1999 was $1,535,000. As of December 31, 1999, the estimated net sales proceeds of the two sites held for sale exceed the respective carrying values. During 1999, these two sites generated a loss from operations of $130,000.
During the first quarter of 1998, the estimated useful lives of certain machinery, equipment and furniture were revised downward from 10 years to five years in order to conform National's estimated useful lives to those of TA. The effect of this change in estimate resulted in reductions in income before extraordinary items, net income and earnings per share of $9.5 million, $5.7 million and $9.08, respectively. This change resulted in these assets becoming fully depreciated at March 31, 1998.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. INTANGIBLE ASSETS
Intangible assets consist of the following:
As part of the National and TA Acquisitions, the Company entered into noncompetition agreements with Unocal and BP pursuant to which Unocal and BP each agreed to refrain from re-entering the truckstop business for periods of ten and seven years, respectively, from the acquisition dates. The intangible assets related to these noncompetition agreements represent the present values of the estimated cash flows the Company would lose due to competition resulting from re-entry of Unocal or BP into the travel center market were they not constrained from doing so. These intangible assets are being amortized over the ten and seven year periods.
Leasehold interest represents the value, obtained through the TA Acquisition, of favorable lease provisions at one TA Network location, the lease for which extended 11 1/2 years from the TA Acquisition. The leasehold interest is being amortized over the 11 1/2 year period. Trademarks relates primarily to the Company's purchase of the "Truckstops of America" and "Country Pride" trademarks, service marks, trade names and commercial symbols. The trademarks are being amortized over their estimated economic life of 15 years.
Goodwill results from acquisitions of network assets, including the TPOA Acquisition in 1999 and the acquisitions of the businesses and operating assets related to Leased Sites in prior years, and represents the excess of amounts paid to the related sellers over the fair values of the tangible assets acquired. For the years ended December 31, 1999, 1998 and 1997, the Company recorded acquired goodwill of $11,679,000, $9,283,000, and $6,354,000, respectively. The goodwill recognized during 1999 includes both the excess purchase price from the TPOA Acquisition (see Note 3) and $1,772,000 of goodwill from prior acquisitions completed by TPOA prior to the TPOA Acquisition. This goodwill is amortized on a straight-line basis over fifteen years. During the fourth quarter of 1997, as a result of a review of the operations of the acquired travel centers, an impairment charge of $6,941,000 was recorded with respect to the goodwill. This charge is included in depreciation and amortization in the income statement.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
11. REVOLVING LOAN
The Company has available a revolving loan facility of $40,000,000 (see Note 12). The interest rate for borrowings under this revolving loan facility is based on either an alternate base rate (ABR) plus 1.75 percent or an adjusted London Interbank Offered Rate (LIBOR) plus 2.75 percent. Commitment fees are calculated as 1/2 of 1 percent of the daily average unused amount of the revolving loan commitment. At December 31, 1999, there were outstanding borrowings under this facility of $15,000,000, including $2,000,000 of swingline loans. There were no borrowings outstanding under the revolving loan facility at December 31, 1998. There were $1,529,000 of available borrowings reserved for letters of credit at both December 31, 1999 and 1998. The revolving loan facility matures in March 2004.
12. LONG-TERM DEBT
In March 1997 the Company completed a refinancing (the "1997 Refinancing"), whereby it refinanced the existing indebtedness of TA and National with new borrowings by the Company. The Company issued $125,000,000 aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2007, entered into a Credit Agreement through which it obtained an $80,000,000 senior secured term loan facility (the "Term Loan") and a $40,000,000 revolving credit facility, redeemed all of the outstanding Subordinated Notes of TA and National, respectively, and a portion of the Senior Notes of TA (the "TA Old Senior Notes"), and, pursuant to a Senior Secured Note Exchange Agreement, exchanged $85,500,000 aggregate principal amount of Senior Secured Notes ($35,500,000 of Series I Senior Secured Notes and $50,000,000 of Series II Senior Secured Notes) of the Company for the Senior Notes of National and the unredeemed TA Old Senior Notes.
In December 1998 the Company refinanced its indebtedness (the "1998 Refinancing") by increasing the Term Loan by $150,000,000. Of the total amount borrowed, $50,000,000 was utilized to retire the Company's Series II Senior Secured Notes and $42,000,000 was specified to prefund planned capital expenditures and business acquisitions and required to be placed in a cash collateral account until used for such expenditures. Provisions of the debt agreements required the Company to use $30,000,000 of the cash collateral account balance for a business acquisition, or to use the $30,000,000 to repay indebtedness in the event that an acquisition was not completed by December 31, 1999. The Company utilized the $30,000,000 to partially fund the TPOA Acquisition (see Note 3).
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following:
(a) On March 21, 1997, in connection with the 1997 Refinancing, the Company entered into a Credit Agreement with a group of lenders. On November 24, 1998, in connection with the 1998 Refinancing, the Company amended its Credit Agreement. The Credit Agreement consists of three components: Term Loans of a maximum $230,000,000 (increased from $80,000,000 in the 1998 Refinancing), swingline loans not to exceed $5,000,000, and revolving loans (see Note 11) not to exceed $40,000,000 (including any swingline loans outstanding and letters of credit issued). Payments of principal, interest and commitment fees related to the Credit Agreement are scheduled quarterly in installments of principal ranging from $362,000 to $34,000,000, with the first payment under the amended agreement due on December 31, 1998, and the last quarterly payment due on March 27, 2005. Optional prepayments are allowed under the Credit Agreement and, in addition, annual prepayments of principal may be required based, among other things, on excess cash flows generated by the Company.
(b) Interest accrues at variable rates based on either an ABR or an adjusted LIBOR. The rate at which interest accrues is calculated as either the ABR rate plus 2.75 percent or the LIBOR rate plus 3.75 percent. Management has the option to select which rate is to be applied at the beginning of each loan period, the term of which varies from one month to six months for LIBOR borrowings. The interest rate was set on December 3, 1999 at 9.875 percent for six months. The average effective interest rate for 1999 was 9.16 percent.
(c) Interest accrues at variable rates based on either an ABR or an adjusted LIBOR. The rate at which interest accrues is calculated as either the ABR rate plus 1.75 percent or the LIBOR rate plus 2.75 percent. Management has the option to select which rate is to be applied at the beginning of each loan period, the term of which varies from one month to six months for LIBOR borrowings. The interest rate was set on December 2, 1999 at 9.25 percent for one month for a $13,000,000 LIBOR borrowing and on December 29,1999 at 10.25 percent for a $2,000,000 swingline facility ABR borrowing. The average effective interest rate for 1999 was 8.2 percent.
(d) On March 21, 1997, in connection with the 1997 Refinancing, the Company issued $35,500,000 of Series I Senior Secured Notes. Interest payments on these notes are due semiannually on June 30 and December 31. Optional prepayments are allowed under the note purchase agreement, and required payments are due on June 30, 2001, December 31, 2001, June 30, 2002 and December 31, 2002 in the amount of $8,875,000 each, such amounts to be reduced by certain other prepayments. In the event of certain prepayments, the Company may be subject to the make-whole provision of the note agreement, which requires payment of a prepayment premium to the holders of the Series I Senior Secured Notes. In addition, annual prepayments of principal may be required based, among other things, on excess cash flows generated by the Company.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(e) On March 27, 1997, in connection with the 1997 Refinancing, the Company issued $125,000,000 of Senior Subordinated Notes. Interest payments on these notes are due semiannually on April 1 and October 1. Optional prepayments are allowed under certain circumstances under the note purchase agreement, any such payments reducing the required payment of $125,000,000 due April 1, 2007.
(f) On September 1, 1998, in connection with the purchase of the operating assets of a Leased Site, the Company 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. Upon the early extinguishment of the Company's prior indebtedness as a result of the 1997 Refinancing, the Company recognized an extraordinary loss, net of applicable income taxes, of $5,554,000. This extraordinary loss consisted of the write-off of the remaining unamortized balances of deferred financing costs and debt discount related to the prior indebtedness of $7,847,000 and $1,315,000, respectively. Approximately $12,904,000 of financing costs associated with the new indebtedness issued as part of the 1997 Refinancing were capitalized. As part of the 1998 Refinancing, the Company retired the Series II Senior Secured Notes and substantially modified the Credit Agreement, resulting in the early extinguishment of the outstanding balances of both the Series II Senior Secured Notes and the term loan facilities of the Credit Agreement. Accordingly, the deferred financing costs related to these borrowings were written off as an extraordinary loss, net of applicable income taxes, of $3,905,000. Approximately $4,360,000 of financing costs related to the Credit Agreement modification were incurred as part of the 1998 Refinancing.
Pledged Assets. The borrowings under the Credit Agreement and Senior Secured Note Exchange Agreement are secured by mortgages on substantially all of the Company's property and equipment in the manner described in the Master Collateral and Intercreditor Agreement negotiated between the lending banks under the Credit Agreement and the Senior Secured Note holders. 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.
Debt Covenants. Under the terms of the Credit Agreement and the Senior Secured Note Exchange Agreement, the Company is required to maintain certain affirmative and negative covenants, including minimum interest coverage, minimum consolidated net worth, minimum current ratio, maximum leverage ratio and maximum amounts of capital expenditures. The Company was in compliance with the covenants throughout 1999 and at December 31, 1999.
Under the terms of the Indenture for the Senior Subordinated Notes due 2007, the Company is required to maintain certain affirmative and negative covenants that, among other things, provide for a minimum coverage ratio. The Company was in compliance with the covenants throughout 1999 and at December 31, 1999.
Future Payments. Scheduled payments of long-term debt in the next five years are $1,601,000 in 2000; $19,359,000 in 2001; $19,367,000 in 2002; $65,628,000 in 2003 and $138,854,000 in 2004.
Fair Value. Based on the borrowing rates currently available to the Company for bank loans and other indebtedness with similar terms and average maturities and the year-end quoted market price of the Senior Subordinated Notes, the fair value of long-term debt at December 31, 1999 and 1998 approximated the recorded value. Based on bank-quoted market prices, the fair value of the interest rate swap agreement the Company has in place as of December 31, 1999 was a liability of $3,000,000. There were no such agreements in place at December 31, 1998. These derivative instruments have no carrying value.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. LEASE COMMITMENTS
The Company has entered into lease agreements covering certain of its travel center locations, warehouse and office space, computer and office equipment and vehicles. Most long-term leases include renewal options 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, 1999, were as follows:
Total rental expenses on all operating leases were approximately $9,576,000, $6,743,000, and $5,658,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
14. MANDATORILY REDEEMABLE SENIOR CONVERTIBLE PARTICIPATING PREFERRED STOCK
Voting Rights. Holders of Series I Mandatorily Redeemable Senior Convertible Preferred Stock are entitled to vote on all matters, other than the election of directors (see Note 15-Common Stock-Voting Rights below), submitted to a vote of the Company's stockholders. Series II Mandatorily Redeemable Senior Convertible Preferred Stock is non-voting.
Dividends. Dividends accumulate on the original $10.00 per share purchase price at a rate of 13.5 percent per annum, compounded semi-annually, and are not paid currently but accumulate and increase the liquidation preference. Such dividends accrue whether or not declared by the Board of Directors. Accrued dividends totaled $43,589,000 and $33,824,000 at December 31, 1999 and 1998, respectively. Holders also participate pro rata, on a share for share basis, with the outstanding Convertible Preferred Stock and Common Stock, in dividends and distributions, other than liquidating distributions.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Conversion. The conversion rights of the holders are the same as those for holders of the Series I and Series II Convertible Preferred Stock, respectively, (see Note 15-Convertible Preferred Stock-Conversion below) except, if the Company consummates an underwritten public offering of Common Stock pursuant to which the net offering price per share is equal to or greater than the Trigger Price (defined as an amount equal to $10.00 plus interest at a rate of 13.5 percent per annum, compounded semi-annually, from the closing date of the TA Acquisition to the date of such public offering) and the net proceeds raised in the offering are at least $50 million, the Company will have the right to require that each share of Series I Mandatorily Redeemable Senior Convertible Participating Preferred Stock be converted into one share of Series I Convertible Preferred Stock and that each share of Series II Mandatorily Redeemable Senior Convertible Participating Preferred Stock be converted into one share of Series II Convertible Preferred Stock.
Liquidation Preference. Upon liquidation, holders are entitled to receive the Senior Liquidation Preference, defined as $10.00 plus the amount of all accrued and unpaid dividends to the liquidation date, before any payment is made to holders of Convertible Preferred Stock or Common Stock. Any remaining amounts available for distribution to the Company's equity holders will be distributed in the following order of priority:
(i) holders of Convertible Preferred Stock shall be entitled to receive $10.00 for each outstanding share,
(ii) holders of Common Stock shall be entitled to receive $10.00 for each outstanding share of Common Stock,
(iii) holders of Convertible Preferred Stock and Common Stock shall be entitled to receive an amount such that, including such amounts distributed in (i) and (ii) above, they have each received an amount equal to the Senior Liquidation Preference,
(iv) holders of Mandatorily Redeemable Senior Convertible Participating Preferred Stock, Convertible Preferred Stock and Common Stock shall be entitled to receive amounts such that the amount distributed in respect of each outstanding share of Mandatorily Redeemable Senior Convertible Participating Preferred Stock pursuant to this clause shall equal 50 percent of the amount distributed in respect of each outstanding share of Convertible Preferred Stock and Common Stock pursuant to this clause.
Optional Redemption. If the Company proposes to declare and pay any dividends or other distributions in respect of Convertible Preferred Stock or Common Stock, the Company shall first offer to utilize such proceeds to redeem shares of the Mandatorily Redeemable Senior Convertible Participating Preferred Stock at a redemption price per share equal to the Senior Liquidation Preference. Any portion not used to redeem shares of Mandatorily Redeemable Senior Convertible Participating Preferred Stock may be utilized by the Company to pay dividends pari passu to the holders of outstanding shares of Mandatorily Redeemable Senior Convertible Participating Preferred Stock, Convertible Preferred Stock and Common Stock.
Call Option. The Company may, at its option and at any time, call for redemption all (but not less than all) of the outstanding shares at a price per share equal to the Senior Liquidation Preference. The holders will be provided an opportunity to convert such shares into shares of Common Stock prior to the redemption.
Mandatory Redemption. The Company shall redeem all of the then outstanding shares on December 10, 2008, at a redemption price per share equal to the Senior Liquidation Preference.
15. OTHER PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
In April 1993, to partially fund the National Acquisition, the Company issued 1,167,750 shares of Common Stock, and 3,832,250 shares of Convertible Preferred Stock, which consists of 2,594,876 shares of Series I Convertible Preferred Stock and 1,237,374 shares of Series II Convertible Preferred Stock. In December 1993, to partially fund the TA Acquisition, the Company issued 165,520 shares of Common Stock and 3,615,000 shares of Mandatorily Redeemable Senior Convertible Participating Preferred Stock, which consists of 2,680,656 shares of Series I Mandatorily Redeemable Senior Convertible Participating Preferred Stock and 934,344 shares of Series II Mandatorily Redeemable Senior Convertible Participating Preferred Stock (see Note 14).
During the years ended December 31, 1999, 1998 and 1997 the Company issued 6,182; 3,864 and 35,339, respectively, shares of Common Stock to certain members of management for cash and notes receivable (see Note 17) aggregating $154,000, $77,000 and $655,000, respectively.
In June 1999, the Company issued 85,000 shares of Common Stock valued at $2,808,000 in exchange for common shares of TPOA as part of the TPOA Acquisition (see Note 3). In July 1999, the Company issued 200,000 shares of Common Stock to Freightliner for cash consideration of $6,660,000 and also issued to Freightliner an option to purchase an additional 100,000 shares at the same price per share.
CONVERTIBLE PREFERRED STOCK
Voting Rights. Each share of Series I Convertible Preferred Stock entitles the holder to one vote on all matters submitted to a vote of the Company's stockholders. Series II Convertible Preferred Stock is non-voting.
Dividends. See Common Stock-Dividends below.
Conversion. Each share of Series I Convertible Preferred Stock is convertible into a share of Common Stock at any time at the option of the holder.
Each share of Series II Convertible Preferred Stock is convertible at any time at the option of the holder into such number of shares of Common Stock that in the aggregate do not exceed the lesser of (i) one share of Common Stock for each share of Series II Convertible Preferred Stock converted or (ii) the number that equals 25 percent of the outstanding shares of Common Stock immediately following such conversion (a total of 293,686 at
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 for all Series II preferred shares). Following the conversion of at least 75 percent of the outstanding Convertible Preferred Stock into Common Stock, the Company is entitled to convert each remaining share of Convertible Preferred Stock into a share of Common Stock.
Liquidation Preference. See Note 14 - Liquidation Preference above.
COMMON STOCK
Voting Rights. Each share of Common Stock entitles the holder to one vote on all matters submitted to a vote of the Company's stockholders.
Dividends. Holders of Common Stock are entitled to receive dividends if, and when, declared by the Board of Directors of the Company. The Company is precluded from paying dividends or making distributions to the holders of any of its equity securities while any shares of Convertible Preferred Stock or Mandatorily Redeemable Senior Convertible Participating Preferred Stock are outstanding except for dividends and distributions of capital stock of the Company; unless (i) in any fiscal year the dividends and distributions do not exceed 50 percent of the Company's net income for the prior fiscal year and (ii) if immediately after payment of such dividends or the making of any such distributions, the value of the Company's stockholder equity would exceed the value of the aggregate liquidation preference of the outstanding shares of Convertible Preferred Stock and Mandatorily Redeemable Senior Convertible Participating Preferred Stock by at least one dollar.
Liquidation Preference. See Note 14 - Liquidation Preference above.
Warrants. In April 1993 the Company issued warrants with an exercise price of $0.01 per share which are exercisable for 128,206 shares of Common Stock.
Repurchase Rights. Certain members of the Company's senior management have purchased shares of the Company's Common Stock pursuant to individual management subscription agreements. The Company has the right to repurchase, and the employees have the right to require the Company to repurchase, at formula prices, the Common Stock upon termination of employment. The formula prices are based on the consolidated operating results and indebtedness of the Company. At December 31, 1999, 1998 and 1997, the formula prices were $33.30, $25.00 and $23.25 per share, respectively. Compensation expense recognized with regard to these shares during the years ended December 31, 1999, 1998 and 1997 was $96,000, $62,000 and $54,000, respectively.
TREASURY STOCK
From time to time the Company has acquired shares of its Common Stock from former members of management and Operator Stockholders. For the years ended December 31, 1999, 1998 and 1997, the Company purchased 10,000; 37,500 and 692,000 treasury shares, respectively. These shares were recorded at their acquisition costs of $170,000, $475,000 and $7,456,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
STOCK AWARD AND OPTION PLANS
1997 Stock Plan. During 1997, the Board of Directors approved the adoption of the 1997 Stock Incentive Plan (the "1997 Stock Plan"). The principal terms and conditions of the 1997 Stock Plan are as follows: a maximum of 750,000 shares of Common Stock (subject to adjustment) may be issued pursuant to options and stock appreciation rights granted to officers, non-employee directors and key employees of the Company designated by the Compensation Committee; the option exercise price for each option granted will be the stated market value of the stock on the respective grant date, such stated market value to be determined annually based on a formula, specified in the 1997 Stock Plan, that is, based on the consolidated operating results and indebtedness of the Company; the
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
options will vest on the December 31 of the year of grant upon the attainment of performance targets (outstanding options and options with respect to shares reserved for future awards will vest upon a "change of control" or "initial public offering" of the Company (as such terms are defined in the 1997 Stock Plan)), and remain exercisable for limited periods following termination of employment; shares of Common Stock acquired upon exercise of options are subject to call and put options upon termination of employment; if a change of control occurs within six months after termination of the employment of a former employee for "good reason," death, "disability" or termination other than for "cause" (as defined), an adjustment will be made to the amount paid upon exercise of any call options or put options (but, in the case of put options, only to the extent the proceeds received by the former employee upon exercise of the put option are used to repay indebtedness to the Company) so that the former employee will be able to receive any amounts in excess of the call or put price payable in the change of control transaction.
1993 Stock Plan. The 1993 Stock Incentive Plan (the "1993 Stock Plan") was approved by the Board of Directors and was effective as of December 10, 1993. The 1993 Stock Plan provided for the granting of stock options and other stock-based awards to employees and directors of the Company. Stock awards granted under the 1993 Stock Plan could be in the form of (i) stock options, (ii) stock appreciation rights related to an option ("SAR"), and (iii) unrelated SAR's. Stock options granted under the 1993 Stock Plan allow the purchase of Common Stock (formerly Class B Common Stock) at prices generally not less than fair market value at the time of the grant as determined by the Compensation Committee of the Board of Directors. The total number of shares of Common Stock with respect to which awards could be granted was 572,000. Common stock obtained as a result of the exercise of the options is subject to call and put rights at formula prices upon termination of employment. The formula prices are based on the consolidated operating results and indebtedness of the Company. A portion of the options vested at the end of each year in the five year period ending December 31, 1997, based on attainment of certain specified financial objectives at the end of each year, but no more quickly than ratably from the date of grant through December 31, 1996. Vested options must be exercised within 10 years of the date of grant. All unvested options under the 1993 Plan at December 31, 1996 were cancelled upon the adoption of the 1997 Stock Plan.
The purchase prices at December 31, 1999, 1998 and 1997 used to determine compensation expense related to options granted under the Company's stock plans were $33.30, $25.00 and $23.25, respectively. Based on these prices and the number of vested options in each year, compensation expense recognized in relation to these options for the years ended December 31, 1999, 1998 and 1997 were $4,966,000, $2,438,000 and $1,346,000, respectively.
The following table reflects the status and activity of options under the 1997 Stock Plan and the 1993 Stock Plan:
The weighted-average exercise price was $25.00 and $23.25 for those options granted during 1999 and 1998, respectively, and $21.35 and $19.74 for all outstanding options as of December 31, 1999 and 1998, respectively. The weighted-average exercise price of the options cancelled in 1997 and all outstanding options as of December 31, 1996, was $19.04 The weighted-average remaining contractual life of all options outstanding at December 31, 1999 was 6.9 years.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about options outstanding at December 31, 1999:
16. INCOME TAXES
The (benefit) provision for income taxes is as follows:
The difference between taxes calculated at the U. S. federal statutory tax rate of 35 percent and the Company's total income tax provision is as follows:
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For 1998, income tax benefits of $2,012,000 allocated to the extraordinary loss of $5,917,000 differ from the amount calculated at the federal statutory rate of 35 percent by $59,000. This difference is due to graduated tax rates. For 1997, income tax benefits of $3,608,000 allocated to the extraordinary loss of $9,162,000 differ from the amount calculated at the federal statutory rate of 35 percent by $401,000. This difference is the result of state tax benefits, net of the federal effect and graduated tax rates.
Deferred income tax assets and liabilities resulted from the following:
The tax returns of the Company for 1996 through 1999 are subject to examination by the Internal Revenue Service and state tax authorities. The Company believes it has made adequate provision for income taxes and interest that may become payable for years not yet examined.
17. RELATED PARTY TRANSACTIONS
The Company leases one of its travel centers from a realty company owned by two individuals, one of whom is a stockholder and director of the Company. This lease relationship commenced during 1999 and total rent expense related to this lease for the year ended December 31, 1999 was $263,000.
During 1999 and 1998 certain shareholders of the Company were paid fees aggregating $650,000 as consideration for their financial advisory services provided in completing the Burns Acquisition, the 1998 Refinancing and the TPOA Acquisition.
Certain members of the Company's senior management have purchased common stock of the Company pursuant to management subscription agreements (see Note 15 - Repurchase Rights). As a result of such purchases, the Company has notes and related interest receivable from the management stockholders totaling $1,062,000 and $967,000 at December 31, 1999 and 1998, respectively.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to extensive regulation pursuant to federal, state and local laws, regulations and ordinances ("Environmental Laws") that (i) govern activities and operations that may have adverse environmental effects, such as discharges to air, soil and water, as well as handling, storage and disposal practices for petroleum products and other hazardous and toxic substances ("Hazardous Substances") or (ii) impose liability and damages for the costs of cleaning up sites affected by, and for damages resulting from, past spills and disposal or other releases of Hazardous Substances.
The Company owns and uses underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") at Company-operated Sites and Leased Sites to store petroleum products and waste. 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 from a UST or AST into the environment. At certain locations, the Company also is subject to Environmental Laws relating to vapor recovery and discharges to water. The Company believes that all of its 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 the Company, it is impossible to predict accurately the ultimate effect these changing laws and regulations may have on the Company in the future. The Company incurred capital expenditures, maintenance, remediation and other environmental related costs of approximately $2,635,000, $6,721,000 and $8,867,000 in 1999, 1998 and 1997, respectively.
The Company has received notices of alleged violations of Environmental Laws, or is aware of the need to undertake corrective actions to comply with Environmental Laws, at Company-owned travel centers in a number of jurisdictions. The Company does not expect that any financial penalties associated with these alleged violations, instances of noncompliance, or compliance costs incurred in connection therewith, will be material to the Company's results of operation or financial condition. The Company is conducting investigatory and/or remedial actions with respect to releases and/or spills of Hazardous Substances. While the Company cannot precisely estimate the ultimate costs it will incur in connection with the investigation and remediation of these matters, based on its current knowledge, the Company does not expect that the costs to be incurred for these matters, individually or in the aggregate, will be material to the Company's results of operation or financial condition. While the aforementioned matters are, to the best knowledge of the Company, the only proceedings for which the Company is 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 additional Network properties, or that material liability will not be imposed in the future. If additional environmental problems arise or are discovered, or if additional environmental requirements are imposed by government agencies, increased environmental compliance or remediation expenditures may be required, which could have a material adverse effect on the Company.
The Company has estimated the current ranges of remediation costs at currently active sites and what it believes will be its ultimate share for such costs after required indemnification and remediation is performed by Unocal and BP under the environmental agreements and has a reserve of $7,125,000, for such matters. While it is not possible to quantify with certainty the environmental exposure, in the opinion of management, 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 the financial condition, results of operations or liquidity of the Company.
Pursuant to an environmental agreement entered into with Unocal at the time of the National Acquisition (the "Unocal Environmental Agreement"), Unocal is responsible for all costs incurred for remediation of environmental contamination (the remediation must achieve compliance with the Environmental Laws in effect on
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the date the remedial action is completed) and for otherwise bringing the properties into compliance with Environmental Laws (as in effect at the date of the National Acquisition) with respect to environmental contamination or non-compliance identified in the Phase I or Phase II environmental assessments conducted at each of the sites acquired from Unocal, which environmental contamination or non-compliance existed on or prior to the date of the National Acquisition. Under the terms of the Unocal Environmental Agreement, Unocal also must indemnify the Company against any other environmental liabilities that arise out of conditions at, or ownership or operations of, the National Network prior to the date of the National Acquisition. Pursuant to the Unocal Environmental Agreement, Unocal is obligated to indemnify the Company for claims made before 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 National Network after the date of the National Acquisition. There can be no assurance that, if additional environmental claims or liabilities were to arise under the Unocal Environmental Agreement, Unocal would not dispute the Company's claims for indemnification thereunder.
An environmental agreement entered into with BP at the time of the TA Acquisition (the "BP Environmental Agreement") provides that, with respect to environmental contamination or non-compliance with Environmental Laws identified in the Phase I or Phase II environmental assessments conducted at each of the sites acquired from BP, BP is responsible for all costs incurred for remediation of such environmental contamination (the remediation must achieve compliance with the Environmental Laws in effect on the date the remedial action is completed) and for otherwise bringing the properties into compliance with Environmental Laws (as in effect at the date of the TA Acquisition). The BP Environmental Agreement further provides that BP must indemnify the Company against any other environmental liabilities that arise out of conditions at, or ownership or operations of, the TA locations prior to the date of the TA Acquisition. With respect to liabilities relating to the investigation and remediation of environmental contamination, BP is obligated to indemnify the Company for liabilities with respect to which claims are made before December 11, 2004. With respect to liabilities otherwise relating to non-compliance with Environmental Laws (for example, equipment), BP is obligated to indemnify the Company for liabilities with respect to 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 TA Network after the date of the TA Acquisition. There can be no assurance that, if additional environmental claims or liabilities were to arise under the BP Environmental Agreement, BP would not dispute the Company's claims for indemnification thereunder.
PENDING LITIGATION
The Company is involved from time to time in various routine legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of its business. The Company is not involved in any litigation, individually, or in the aggregate, which could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
19. OPERATING LEASE COMMITMENTS
Thirty of the travel centers owned by the Company as of December 31, 1999, are leased to Operators under operating lease arrangements. Of these Leased Sites, 22 are leased to Operator Stockholders (see Note 17). The lease agreements offered to related parties are the same as those offered to unrelated parties. These cancelable lease arrangements generally are for terms of five years. Rent revenue from such operating lease arrangements totaled $13,023,000, $14,271,000 and $29,433,000 for 1999, 1998 and 1997, respectively.
TRAVELCENTERS OF AMERICA, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. OTHER INFORMATION
21. SUPPLEMENTAL CASH FLOW INFORMATION
In 1999, the Company issued $2,808,000 of Common Stock as part of the consideration for the TPOA Acquisition. During 1998, the Company issued a note payable for $3,044,000 (net of a discount of $1,875,000) in exchange for property and goodwill acquired (see Note 12). Pursuant to the 1997 Refinancing, the Company extinguished $85,500,000 of Senior Secured Notes through the issuance of Series I Senior Secured Notes and Series II Senior Secured Notes of an aggregate equal face amount (see Note 12).
22. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth the condensed consolidating balance sheet schedules of the Company as of December 31, 1999 and 1998 and condensed consolidating statement of income and retained earnings (deficit) schedules and condensed consolidating statement of cash flows schedules of the Company for the years ended December 31, 1999, 1998 and 1997. 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, National and TA Licensing, and "Nonguarantor Subsidiary" refers to the balances of TAFSI. "Eliminations" represent the adjustments necessary to (a) eliminate intercompany transactions and (b) eliminate the Company's investments in its subsidiaries.
The Guarantor Subsidiaries, (TA, National and TA Licensing), are wholly-owned subsidiaries of the Company and have fully and unconditionally, jointly and severally, guaranteed the Company's indebtedness. In the 10-K filing, the Company has not presented separate financial statements and other disclosures concerning the Guarantor Subsidiaries because management has determined such information is not material to investors.
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 INCOME AND RETAINED EARNINGS (DEFICIT) 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
QUARTERLY FINANCIAL DATA - UNAUDITED
(a) In the fourth quarter of 1998, the Company recognized an extraordinary loss, net of the applicable income tax benefit of $2,012,000, of $3,905,000 with respect to the early extinguishment of indebtedness.
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 the directors and executive officers of the Company 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 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 Report.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and management of the Company 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 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 Report.
PART IV
ITEM 14.
ITEM 14. 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 26.
2. Financial Statement Schedules
All 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 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, 1999.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy statement has been furnished to the registrant's security holders. The registrant shall furnish to the Commission for its information, at the time copies of such material are furnished to its security holders, four copies of every proxy statement, form of proxy or other proxy soliciting material sent to more than ten of the registrant's security holders with respect to the registrant's annual meeting. The foregoing material shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except to the extent that the registrant specifically incorporates 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.
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.
EXHIBIT INDEX
i
ii
(a) Incorporated herein by reference to exhibits filed with the Company's Registration Statement on Form S-4 (File No. 333-26497) effective July 17, 1997.
(b) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
(c) Incorporated herein by reference to an exhibit filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(d) Incorporated herein by reference to an exhibit filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(e) Incorporated herein by reference to exhibits filed with the Company's Schedule 13D dated as of February 26, 1999.
(f) Incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
(g) Incorporated herein by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
* Executive compensation plans.