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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number 333-52442
TRAVELCENTERS OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3856519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24601 Center Ridge Road, Suite 200
Westlake, OH 44145-5639
(Address of principal executive offices, including zip code)
(440) 808-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of March 15, 2003, there were outstanding 6,939,498 shares of common stock,
par value $0.00001 per share. The outstanding shares of our common stock were
issued in transactions not involving a public offering. As a result, there is no
public market for our common stock.
INDEX
PART I
Item 1. Business........................................................... 2
Item 2. Properties......................................................... 15
Item 3. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters....... 16
Item 6. Selected Financial Data............................................ 19
Item 7. Management's Discussion and Analysis............................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......... 38
Item 8. Financial Statements and Supplementary Data........................ 39
Item 9. Changes in and Disagreements With Accountants...................... 82
PART III
Item 10. Our Directors and Executive Officers............................... 82
Item 11. Executive Compensation............................................. 82
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 82
Item 13. Certain Relationships and Related Transactions..................... 82
Item 14. Controls and Procedures............................................ 82
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 83
SIGNATURES....................................................................... 85
CERTIFICATIONS................................................................... 86
1
PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. Our network is the largest, and only
nationwide, full-service travel center network in the United States. At December
31, 2002, our geographically diverse network consisted of 152 sites located in
40 states. In January 2003, we began operating in Canada through the acquisition
of a travel center located in Woodstock, Ontario. Our operations are conducted
through three distinct types of travel centers:
- sites owned or leased and operated by us, which we refer to as
company-operated sites;
- sites owned by us and leased to independent lessee-franchisees,
which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we
refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system, typically on 20- to 25-acre sites. Most of our network
properties were developed more than 20 years ago when prime real estate
locations along the interstate highway system were more readily available than
they are today, making a network such as ours difficult to replicate. Operating
under the "TravelCenters of America" and "TA" brand names, our nationwide
network provides an advantage to long-haul trucking fleets by enabling them to
reduce the number of their suppliers by routing their trucks within our network
from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, 22 different brands of fast food restaurants, which we
refer to as quick service restaurants, or QSRs, travel and convenience stores
and other driver amenities.
The U.S. travel center and truck stop industry in which we operate
consists of travel centers, truck stops, diesel fuel outlets and similar
facilities designed to meet the needs of long-haul trucking fleets and their
drivers, independent truck drivers and general motorists. According to the
National Association of Truck Stop Operators, or "NATSO," the travel center and
truck stop industry is highly fragmented, with in excess of 3,000 travel centers
and truck stops located on or near interstate highways nationwide, of which we
consider approximately 500 to be full-service facilities. Further, only eight
chains in the United States have 25 or more travel center and truck stop
locations on the interstate highways, which we believe is the minimum number of
locations needed to provide even regional coverage to truck drivers and trucking
fleets.
HISTORY AND ORGANIZATION
We were formed in December 1992 by a group of institutional investors.
We were originally incorporated as National Auto/Truckstops Holdings Corporation
but changed our name to TravelCenters of America, Inc. in March 1997. We
primarily have created our network through the following series of acquisitions:
- In April 1993, we acquired the truckstop network assets of a
subsidiary of Unocal Corporation, which sites we refer to as the
"Unocal network." The Unocal network included a total of 139
facilities, of which 95 were leased sites, 42 were
franchisee-owned sites and two sites were company-operated sites.
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- In December 1993, we acquired the truckstop network assets of
certain subsidiaries of The British Petroleum Company p.l.c.,
which assets we refer to as the "BP network." The BP network
included 38 company-operated sites and six franchisee-owned
sites.
- In December 1998, we acquired substantially all of the truckstop
network assets of Burns Bros., Inc. and certain of its
affiliates, which assets we refer to as the Burns Bros. network.
The Burns Bros. network included 17 company-operated sites,
located in nine western and northwestern states.
- In June 1999, we acquired the travel center and truck stop
network assets of Travel Ports of America, Inc. through the
acquisition of 100% of the stock of Travel Ports. The Travel
Ports network consisted of 16 company-operated sites in seven
states, primarily in the northeastern region of the United
States.
Historically, until 1997, the Unocal network operated principally as a
fuel wholesaler and franchisor, with relatively few company-operated sites. In
contrast to the Unocal network, the BP network operated principally as an
owner-operator of travel centers. In January 1997, we instituted a plan to
combine the Unocal network and the BP network, which had been previously managed
and financed separately, into a single network to be operated under the
"TravelCenters of America" and "TA" brand names under the leadership of a single
management team. Prior to combining the Unocal and BP networks, the Unocal
network was operated through National Auto/Truckstops, Inc. and the BP network
was operated through TA Operating Corporation, each of National Auto/Truckstops,
Inc. and TA Operating Corporation being a wholly owned subsidiary of ours. At
the time we approved the plan to combine our networks, there were 122 sites
operating in the Unocal network and 49 sites operating in the BP network. In
November 2000, National Auto/Truckstops, Inc. merged with and into TA Operating
Corporation.
In July 1999, we signed an agreement with Freightliner LLC to become an
authorized provider of express service, minor repair work and a specified menu
of warranty repairs to Freightliner's customers through the Freightliner
ServicePoint Program. Under the agreement, our truck repair facilities have been
added to Freightliner's 24-hour customer assistance center database as a major
referral point for emergency and roadside repairs and also have access to
Freightliner's parts distribution, service and technical information systems.
Freightliner, a DaimlerChrysler company, is a leading manufacturer of heavy
trucks in North America. Freightliner also acquired a minority ownership
interest in us at that time.
On May 31, 2000, we and shareholders owning a majority of our voting
stock entered into a recapitalization agreement and plan of merger, as amended,
with TCA Acquisition Corporation, a newly created corporation formed by Oak Hill
Capital Partners, L.P. and its affiliates ("Oak Hill"), under which TCA
Acquisition Corporation agreed to merge with and into us. This merger was
completed on November 14, 2000. Concurrent with the closing of the merger, we
completed a series of transactions to effect a recapitalization and a
refinancing that included the following:
- TCA Acquisition Corporation issued 6,456,698 shares of common
stock to Oak Hill and a group of other institutional investors,
which we refer to as the Other Investors, for proceeds of $205.0
million and then merged TCA Acquisition Corporation with and into
us. At the time of the merger, the Other Investors were Olympus
Growth Fund III, L.P., Olympus Executive Fund, L.P., Monitor
Clipper Equity Partners, L.P., Monitor Clipper Equity Partners
(Foreign), L.P., UBS Capital Americas II, LLC, Credit Suisse
First Boston LFG Holdings 2000, L.P. and Credit Suisse First
Boston Corporation, each of whom is an affiliate of certain of
our former shareholders. Since that time, certain of these
investors have sold their shares to other investors, including
affiliates of certain of the Other Investors. Such sales of our
shares are not frequent but could occur in the future.
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- We redeemed all shares of our common and preferred stock
outstanding prior to the closing of the merger, with the
exception of 473,064 shares of common stock with a market value
at that time of $15.0 million that were retained by continuing
stockholders, and cancelled all then outstanding common stock
options and warrants for cash payments totaling $263.2 million.
- We repaid all amounts outstanding under our then existing debt
agreements.
- We borrowed $328.3 million under a secured credit agreement with
a group of lenders and issued units consisting of Senior
Subordinated Notes due 2009 with a face amount of $190.0 million
and initial warrants and contingent warrants that in the
aggregate could be exercised in exchange for 277,165 shares of
our common stock.
- We merged National Auto/Truckstops, Inc. with and into TA
Operating Corporation.
Prior to the closing of the transactions described above, we issued
137,572 shares of common stock for cash proceeds of $3.7 million upon the
exercise of stock options held by existing shareholders, which shares remain
outstanding. After the transactions described above, Oak Hill owned 60.5% of our
outstanding common stock, the Other Investors owned, in the aggregate, 32.7% of
our outstanding common stock, Freightliner owned 4.3% of our outstanding common
stock and certain members of our management owned 2.5% of our outstanding common
stock. The total market value of our equity capitalization after these
transactions was $220.0 million.
At December 31, 2002, we had two wholly owned subsidiaries, TA
Operating Corporation, which is our primary travel center operating entity, and
TA Franchise Systems Inc, which maintains our franchise agreements and
relationships. TA Operating Corporation has the following direct or indirect
wholly owned subsidiaries:
- TA Licensing, Inc.
- TA Travel, L.L.C.
- TravelCenters Properties, L.P.
- TravelCenters Realty, L.L.C.
In January 2003, we formed three wholly-owned Canadian entities through
which our Canadian operations are conducted:
- 3703000 Nova Scotia Company
- TravelCentres Canada Inc.
- TravelCentres Canada Limited Partnership
NETWORK DEVELOPMENT
Due to historical competition between the Unocal and BP networks, there
were certain markets in which each of these networks had an existing site at the
time we instituted our plan to combine these two networks. Likewise, there was
competition in certain markets between our networks and the networks of Burns
Bros. and of Travel Ports. In addition, there were certain franchisee-owned
sites in the Unocal network that were not considered to be in strategic
locations. Further, there were, and continue to be, locations on the interstate
highway system that we consider to be strategic but in which we do not have an
adequate presence. As a result, since 1997 we have significantly reshaped the
composition of our network through the following:
- 17 company-operated sites were acquired from Burns Bros. in 1998;
- 16 company-operated sites in the Travel Ports network were acquired
in 1999;
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- 40 leased sites were converted to company-operated sites, five
during 2002, three during 2000, five during 1998 and 27 during
1997;
- one franchisee-owned site was converted to a company-operated site
during 2000;
- five new network sites were constructed, one in 2002, one in 2001,
one in 2000 and two in 1999;
- two company-operated sites were added to our network through
individual site acquisitions during 2000 (one additional site was
acquired in January 2003);
- franchise agreements covering 28 franchisee-owned sites were
terminated, one in 2000 and 27 in 1997;
- 31 sites we owned were sold, three during 2002, four during 2001,
two during 2000, five during 1999, two during 1998 and 15 during
1997 (one additional site was sold in January 2003);
- three franchisee-owned sites were added to our network, one in
2002, one in 1999 and one in 1998; and
- two company-operated sites were closed during 1999 (one was sold
during 2002 and our selling efforts are continuing for the other).
In 1997, we initiated a capital program to upgrade, rebrand and
re-image our travel centers and to build new travel centers. This capital
program was substantially completed during 2002. Under this capital program, as
revised as a result of the Burns Bros. acquisition and the Travel Ports
acquisition, we invested approximately $407 million in our sites by the end of
2002. Through December 31, 2002, we had completed full re-image projects at 36
of our sites at an average investment of $2.1 million per site. These full
re-image projects typically include expanding the square footage of the travel
and convenience store, adding a fast food court with two or three QSRs,
upgrading showers and restrooms and updating the full-service restaurant. We
also had completed smaller scale re-image projects at another 60 sites at an
average cost of $0.3 million. During 2003, we intend to continue our re-imaging
program for the company-operated sites by completing full re-image projects at
an additional three sites at an aggregate cost of approximately $5.3 million.
After 2003, we will have only eight company-operated sites at which a re-image
project may be completed some time in the future. In addition to improving our
existing sites, we have identified several new interstate areas available for
our network's expansion. We have designed a "protoype" facility and a smaller
"protolite" facility to standardize our travel centers and expand our brand name
into new geographic markets while also increasing our appeal to motorists. The
prototype and protolite designs combine an improved and efficient facility
layout with nationally branded QSRs and gasoline brands as well as expanded
product and service offerings. Since May 1999, we have completed construction of
seven prototype facilities and three protolite facilities. Further, we are
currently developing two protolite facilities, one of which is a rebuilding of a
current site. Most of our future expansion will be with the protolite format,
which requires significantly less land and capital investment than the prototype
design and enables us to quickly and cost efficiently gain a presence in smaller
markets. We also intend to pursue strategic acquisitions and additional
franchisee-owned sites. Our franchisees will also continue to invest additional
amounts of their own capital for reimaging and other projects at the sites they
operate.
REFINANCING
As part of the transactions we completed to consummate our merger with
TCA Acquisition Corporation and the related recapitalization, we completed a
refinancing of our indebtedness, which refinancing transactions we refer to as
the "2000 Refinancing." In the 2000 Refinancing, we issued $190 million of
senior subordinated notes due 2009 and borrowed $328.3 million under our amended
and restated senior credit facility that consists of a fully-drawn $328 million
term loan facility and a $100 million revolving credit facility. The proceeds
from these borrowings, along with proceeds from the issuance of common stock and
other cash on hand, were used to:
- pay for the tender offer and consent solicitation for our 10 1/4%
Senior Subordinated Notes due 2007, including accrued interest,
premiums and a prepayment penalty;
5
- repay all amounts, including accrued interest, then outstanding
under our existing amended and restated credit agreement;
- redeem in full all of our then existing senior secured notes and
pay related accrued interest and prepayment penalties;
- make cash payments to certain of our then current equity owners,
whose shares and unexercised stock options and warrants were
redeemed and cancelled pursuant to the recapitalization agreement
and plan of merger; and
- pay fees and expenses related to the financings and the merger and
recapitalization transactions.
The $190 million of Senior Subordinated Notes were issued as part of
units that also included warrants exercisable for 277,165 shares of our common
stock. See "Liquidity and Capital Resources" in Item 7 for further discussion of
the 2000 Refinancing.
OUR TRAVELCENTERS
Our travel centers are designed to appeal to drivers seeking either a
quick stop or a more extended visit. Substantially all of our travel centers are
full-service facilities located on or near an interstate highway and offer fuel
and non-fuel products and services 24 hours per day, 365 days per year.
Property. The layouts of the travel centers we own vary from site to
site. The facilities we own are located on properties averaging 22 acres, of
which an average of approximately 19 acres are developed. The majority of the
developed acreage consists of truck and car fuel islands, separate truck and car
paved parking and the main building, which contains a full-service restaurant
and one or more QSRs, a travel and convenience store and driver amenities and a
truck maintenance and repair shop. The remaining developed acreage contains
landscaping and access roads.
Product and Service Offerings. We have developed an extensive and
diverse offering of products and services to complement our diesel fuel
business, which includes:
- Gasoline. We sell nationally recognized branded gasoline,
consistently offering one of the top three gasoline brands in each
geographic region. Of our 122 company-operated sites as of December
31, 2002, we offered branded gasoline at 93 sites and unbranded
gasoline at 17 sites.
- Full-Service and Fast Food Restaurants. Most of our travel centers
have both full-service restaurants and QSRs that offer customers a
wide variety of nationally recognized brand names and food choices.
Our full-service restaurants, branded under our "Country Pride,"
"Buckhorn Family Restaurants" and "Fork in the Road" proprietary
brands, offer "home style" meals through menu table service and
buffets. We also offer nationally branded QSRs such as Arby's,
Burger King, Dunkin' Donuts, Pizza Hut, Popeye's Chicken &
Biscuits, Sbarro, Subway, Taco Bell and 14 other brands. We
generally attempt to locate QSRs within the main travel center
building, as opposed to constructing stand-alone buildings. As of
December 31, 2002, we had 159 QSRs in our company-operated sites,
and 101 of our network travel centers offered at least one branded
QSR.
- Truck Repair and Maintenance Shops. All but eight of our network
travel centers have truck repair and maintenance shops. The typical
repair shop has between two and four service bays, a parts storage
room and trained mechanics on duty at all times. These shops, which
generally operate 24 hours per day, 365 days per year, offer
extensive maintenance and emergency repair and road services,
ranging from basic services such as oil changes and tire repair to
specialty services such as diagnostics and repair of air
conditioning, air brake and electrical systems. Our work is backed
by a warranty honored at all of our repair and maintenance
facilities. As of December 31, 2002, all but two of our network
sites that have truck repair and maintenance shops were
participating in the Freightliner ServicePoint Program.
6
- Travel and Convenience Stores. Each travel center has a travel and
convenience store that caters to truck drivers, motorists,
recreational vehicle operators and bus drivers and passengers. Each
travel and convenience store has a selection of over 4,000 items,
including food and snack items, beverages, non-prescription drug
and beauty aids, batteries, automobile accessories, music and audio
products. In addition to complete travel and convenience store
offerings, the stores sell items specifically designed for the
truck driver's on-the-road lifestyle, including laundry supplies
and clothing as well as truck accessories. Many stores also have a
"to go" snack bar installed as an additional food offering.
- Additional Driver Services. We believe that fleets can improve the
retention and recruitment of truck drivers by directing them to
visit high-quality, full-service travel centers. We strive to
provide a consistently high level of service and amenities to
drivers at all of our travel centers, making our network an
attractive choice for trucking fleets. Most of our travel centers
provide truck drivers with access to specialized business services,
including an information center where drivers can send and receive
faxes, overnight mail and other communications and a banking desk
where drivers can cash checks and receive fund transfers from fleet
operators. Most sites have installed telephone rooms with 25 to 30
pay telephones with AT&T long distance service. The typical travel
center also has a video game room and designated "truck driver
only" areas, including a television room with a VCR and comfortable
seating for drivers, a laundry area with washers and dryers and an
average of six to 12 private showers.
Additionally, we offer truck drivers a loyal fueler program, which
we call the RoadKing Club, that is similar to the frequent flyer
programs offered by airlines. Drivers receive a point for each
gallon of diesel fuel purchased and can redeem their points for
discounts on non-fuel products and services at any of our travel
centers.
- Motels. Twenty of our company-operated travel centers offer motels,
with an average capacity of 40 rooms. Sixteen of these motels are
operated under franchise grants from nationally branded motel
chains, including Days Inn, HoJo Inn, Super 8, Rodeway and
Travelodge.
OPERATIONS
Fuel Supply. We purchase diesel fuel from various suppliers at rates
that fluctuate with market prices and are reset daily, and resell fuel to our
customers at prices that we establish daily. By establishing supply
relationships with an average of four to five alternate suppliers per location,
we have been able to effectively create competition for our purchases among
various diesel fuel suppliers on a daily basis. We believe that this positioning
with our suppliers will help our sites avoid product outages during times of
diesel fuel supply disruptions. We have a single source of supply for gasoline
at most of our sites that offer branded gasoline. Sites selling unbranded
gasoline do not have exclusive supply arrangements.
Other than pipeline tenders, fuel purchases made by us are delivered
directly from suppliers' terminals to our travel centers. We do not contract to
purchase substantial quantities of fuel for our inventory and are therefore
susceptible to price increases and interruptions in supply. We use pipeline
tenders and leased terminal space to mitigate the risk of supply disruptions.
The susceptibility to market price increases for diesel fuel is substantially
mitigated by the significant percentage of our total diesel fuel sales volume
that is sold under pricing formulae that are indexed to market prices, which
reset daily. We do not engage in any fixed-price contracts with customers. We
sell a majority of our diesel fuel on the basis of a daily industry index of
average fuel costs plus a pumping fee and we hold less than three days of diesel
fuel inventory at our sites. We engage in only a minimal level of hedging of our
fuel purchases with futures and other derivative instruments that primarily are
traded on the New York Mercantile Exchange.
7
The Environmental Protection Agency has promulgated regulations to
decrease the sulfur content of diesel fuel by 2006. The enactment of these
regulations could reduce the supply and/or increase the cost of diesel fuel. A
material decrease in the volume of diesel fuel sold for an extended period of
time or instability in the prices of diesel fuel could have a material adverse
effect on us.
Non-fuel products supply. There are many sources for the large variety
of non-fuel products that we purchase and sell. We have developed strategic
relationships with several suppliers of key non-fuel products, including
Freightliner LLC for truck parts, Bridgestone/Firestone Tire Sales Company for
truck tires, and Equilon Enterprises LLC for Shell brand lubricants and oils. We
believe that our relationships with these and our other suppliers are
satisfactory and that supply of the non-fuel products we require is adequate.
Centralized Purchasing and Distribution. We maintain a distribution and
warehouse center that services our network. The distribution center is located
near Nashville, Tennessee and has approximately 85,000 square feet of storage
space. Approximately every two weeks, the distribution center delivers products
to our network sites using a combination of contract carriers and our fleet of
trucks and trailers. In 2002, the distribution center shipped approximately
$43.5 million of products. We believe the distribution center provides us with
cost savings by using its consolidated purchasing power to negotiate volume
discounts with third-party suppliers. The distribution center is also able to
obtain further price reductions from suppliers in the form of reduced shipping
charges, as suppliers need only deliver their products to the distribution
center warehouse, as opposed to each site individually.
COMPETITION
The U.S. travel center and truck stop industry in which we operate
consists of travel centers, truck stops, diesel fuel outlets and similar
facilities designed to meet the needs of long-haul trucking fleets and their
drivers, independent truck drivers and general motorists. The travel center and
truck stop industry is highly competitive and fragmented. According to NATSO,
there are in excess of 3,000 travel center and truck stops located on or near
highways nationwide, of which we consider approximately 500 to be full-service
facilities. Further, only eight chains in the United States have 25 or more
travel center and truck stop locations on the interstate highways, which we
believe is the minimum number of locations needed to provide even regional
coverage to truck drivers and trucking fleets. There are generally two types of
facilities designed to serve the trucking industry:
- full-service travel centers, such as those in our network, which
offer a broad range of products and services to long-haul trucking
fleets and their drivers, independent truck drivers and general
motorists, such as diesel fuel and gasoline; full-service and fast
food dining; truck repair and maintenance; travel and convenience
stores; secure parking areas and other driver amenities; and,
- pumper-only truck stops, which provide diesel fuel, typically at
discounted prices, with a more limited mix of additional services
than a full-service travel center.
Fuel and non-fuel products and services can be obtained by long-haul
truck drivers from a wide variety of sources other than us, including regional
full-service travel center and pumper-only truck stop chains, independently
owned and operated truck stops, some large service stations and fleet-operated
fueling terminals.
We believe that we experience substantial competition from pumper-only
truck stop chains and that this competition is based principally on diesel fuel
prices. In the pumper-only truck stop segment, the largest networks, based on
the number of facilities, are Pilot Travel Centers LLC, with approximately 296
sites, Flying J Inc., with approximately 153 sites, and Love's Travel Stops &
Country Stores, Inc., with approximately 75 sites. We experience additional
substantial competition from major full-service travel center networks and
independent chains, which is based principally on diesel fuel prices, non-fuel
product and service offerings and customer service. In the full-service travel
center segment, the only large network, other than ours, is operated by Petro
Stopping Centers, L.P., with approximately 60 sites. Our truck repair and
maintenance shops compete with regional full-service travel center and truck
stop chains, full-service independently owned and operated truck stops, fleet
maintenance terminals, independent garages, truck dealerships and auto parts
service centers. We also compete with a variety of
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establishments located within walking distance of our travel centers, including
full-service restaurants, QSRs, electronics stores, drugstores and travel and
convenience stores.
A significant portion of all intercity diesel fuel consumption by
trucking fleets and companies with their own trucking capability occurs through
self-fueling at both dedicated terminals and at fuel depots strategically
located across the country. These terminals often provide facilities for truck
repair and maintenance. Our pricing decisions for diesel fuel and truck repair
and maintenance services cannot be made without considering the existence of
these operations and their capacity for expansion. However, we believe that a
trucking industry trend has been to reduce the use of these terminals and to
outsource fuel, repair and maintenance services to maximize the benefits of
competitive fuel pricing, superior driver amenities and reduced environmental
compliance expenditures.
A potential additional source of competition in the future could result
from the possible commercialization of state-owned interstate rest areas.
Historically, these rest areas have been precluded from offering for sale fuel
and non-fuel products and services, similar to that of a travel center. In
response to repeated requests over the past several years from state governments
that want to earn additional revenues from these rest areas, recent federal
legislation provides for limited tests for commercializing these rest areas.
Past attempts for such commercialization historically have been successfully
opposed by a group of opponents that includes NATSO, fast food restaurant
operators and others. If commercialized, these rest areas, and any additional
rest area commercialized in ensuing years, will increase the number of outlets
competing with us for the business of highway travelers. It is possible we may
obtain the opportunity to play a role in these commercialization efforts, which
would reduce any negative effects of such commercialization on our travel center
business.
RELATIONSHIPS WITH THE OPERATORS AND FRANCHISEE-OWNERS
TA Licensing, Inc., a wholly owned subsidiary of TA Operating
Corporation, licenses its trademarks to us, TA Operating Corporation and TA
Franchise Systems. We enter into franchise agreements with operators and
franchisee-owners of travel centers through TA Franchise Systems, and TA
Franchise Systems collects franchise fees and royalties under these agreements.
TA Franchise System's assets consist primarily of the rights under the original
franchise agreements, the network franchise agreements and its trademark
licenses from TA Licensing. TA Franchise Systems has no tangible assets.
Network Franchise Agreement
As of December 31, 2002, there were 22 sites operating under network
franchise agreements. The more significant provisions of the network franchise
agreement are described in the following paragraphs.
Initial Franchise Fee. The initial franchise fee for a new franchise is
$100,000.
Term of Agreement. The initial term of the network franchise agreement
is ten years. The network franchise agreement provides for two five-year
renewals on the terms being offered to prospective franchisees at the time of
the franchisee's renewal. We reserve the right to decline renewal under certain
circumstances or if specified terms and conditions are not satisfied by the
franchisee. The average remaining term of these agreements, including all
renewal periods, is approximately 20 years. The initial terms of the current
network franchise agreements expire in July 2012 through January 2013.
Protected Territory. Subject to specified exceptions, including
existing operations, so long as the franchisee is not in default under the
network franchise agreement, we agree not to operate, or allow another person to
operate, a travel center or travel center business that uses the "TA" brand,
within 75 miles in either direction along the primary interstate on which the
franchised site is located.
Restrictive Covenants. Except for the continued operation of specified
businesses identified by the franchisee at the time of execution of the network
franchise agreement, the franchisee cannot, during the term of the
9
agreement, operate any travel center or truck stop-related business under a
franchise agreement, licensing agreement or marketing plan or system of its own
or another person or entity. If the franchisee owns the franchised premises, the
franchisee may continue to operate a travel center at the franchised premises
after termination of the franchise agreement, but if the termination is for any
reason other than a termination at the expiration of the term of the agreement,
the franchisee is restricted for a two-year period from re-branding the facility
with any other truck stop or travel center company or other organization
offering similar services and/or fleet billing services.
Royalty Payments. Franchisees are required to pay us a continuing
services and royalty fee generally equal to 3.75% of all non-fuel revenues. If
branded fast food is sold from the franchised premises, the franchisee must pay
us 3% of all net revenues earned directly or indirectly in connection with those
sales after deduction of royalties paid to the fast food franchisor.
Advertising, Promotion and Image Enhancement. The network franchise
agreement requires the franchisees to contribute 0.6% of their non-fuel revenues
and net revenues from fast food sales to partially fund system-wide advertising,
marketing and promotional expenses we incur. We are required to match the
amounts of the franchisees' contributions.
Fuel Purchases and Sales. Under the network franchise agreement for
those franchisees operating leased sites, we agree to sell to franchisees, and
franchisees agree to buy from us, 100% of their requirements of diesel fuel.
Those franchisees operating franchisee-owned sites are not required to purchase
their diesel fuel from us. The franchisee agrees to purchase gasoline from only
those suppliers that we approve in writing. The franchisee generally must pay a
$0.03 per gallon royalty fee to us on all gallons of gasoline sold.
Non-fuel Product Offerings. Franchisees are required to operate their
sites in conformity with guidelines that we establish and offer any products and
services that we deem integral to the network.
Termination/Nonrenewal. We may terminate the network franchise
agreement for the following reasons, among others:
- the default of the franchisee;
- our withdrawal from the marketing of motor fuel in the state,
county or parish where the franchise is located; or
- the default or termination of the lease.
The foregoing reasons also constitute grounds for nonrenewal of the
network franchise agreement. In addition, we can decline to renew the network
franchise agreement for the following reasons, among others:
- we and the operator fail to agree to changes or additions to the
network franchise agreement;
- we make a good faith determination not to renew the network
franchise agreement because it would be uneconomical to us; or
- if we own the franchise premises, we make a good faith
determination to sell the premises or convert it to a use other
than for a truck stop or travel center.
If we do not renew the network franchise agreement due to any of the
three foregoing reasons, we may not enter into another network franchise
agreement relating to the same franchised premises with another party within 180
days of the expiration date on terms materially different from those offered to
the prior franchisee, unless the prior franchisee is offered the right, for a
period of 30 days, to accept a renewal of the network franchise agreement on
those different terms. If we do not renew the network franchise agreement
because we make a good faith determination to withdraw from the marketing of
fuel in the area of the franchised premises, we may not sell the franchised
premises or franchised business for 90 days following the expiration of the
network franchise agreement. The prior franchisee does not have a right of first
refusal on the sale of the franchised premises.
10
Network Lease Agreement
In addition to franchise fees, we also collect rent from those
franchisees that operate a travel center owned by us. As of December 31, 2002,
there were 20 leased sites. Each operator of a leased site that enters into a
network franchise agreement also must enter into a network lease agreement. The
more significant provisions of the network lease agreement are described in the
following paragraphs.
Term of Agreement. The lease agreements we have with our franchisees
have a term of ten years and allow for two renewals of five years each. We
reserve the right to decline renewal under certain circumstances or if specified
terms and conditions are not satisfied by the operator. The average remaining
term of these agreements, including all renewal periods, is approximately 20
years. The initial terms of the current network lease agreements expire in July
2012 through January 2013.
Rent. Under the network lease, an operator must pay annual fixed rent
equal to the sum of
- base rent agreed upon by the operator and us, plus
- improvement rent, if any, which is defined as an amount equal to
14% of the cost of all capital improvements we fund that we and the
operator mutually agree will enhance the value of the leased
premises and which cost in excess of $2,500, plus
- an annual inflator equal to the percentage increase in the consumer
price index.
The base rent will not be increased by the improvement rent if the
operator elects to pay for the capital improvements. If we and the operator
agree upon an amortization schedule for a capital improvement funded by the
operator, we will, upon termination of the network lease, reimburse the operator
for an amount equal to the unamortized portion of the cost of the capital
improvement. The operator is responsible for the payment of all charges and
expenses in connection with the operation of the leased sites, including
environmental registration fees and certain maintenance costs.
Use of the Leased Site. The operator must operate the leased site as a
travel center in compliance with all laws, including all environmental laws. The
operator must submit to quality inspections that we request and appoint a
manager that we approve, who is responsible for the day-to-day operations at the
leased site.
Termination/Nonrenewal/Transferability/Right of First Refusal. The
network lease agreement contains terms and provisions regarding termination,
nonrenewal, transferability and our right of first refusal which are
substantially the same as the terms and provisions of the network franchise
agreement.
Original Franchise Agreement with BP Network Independent Franchisees
There are eight sites that continue to operate under the franchise
agreements they had with TA Franchise Systems prior to the network franchise
agreement being revised to its current form in 2002. The terms of these
franchise agreements are generally the same as the network franchise agreement,
but they do not require the franchises to purchase their diesel fuel from us and
their provisions vary. At the expiration of these agreements, the respective
franchisees may be offered an option to renew their franchises under a form of
our then-current franchise agreement for franchisee-owned sites.
Term of Agreement. In general, the initial terms of the original
franchise agreements are 10 years. The original franchise agreements provide for
one or two renewals for an aggregate of 10 years. The original franchise
agreements offer no assurance that the terms of the renewal will be the same as
those of the initial franchise agreements. We may decline renewal under some
circumstances or if specified terms and conditions are not satisfied by the
franchisee. Excluding one franchise agreement that expired in January 2002 and
for which a network franchise agreement is currently being negotiated, the
average remaining term of these agreements is approximately five years.
11
Protected Territory. So long as the franchisee is not in default under
the franchise agreement, we agree not to operate, or allow another person to
operate, the travel center or travel center business that uses the "TA" brand,
within a specified area in either direction along one or more interstates at
which the franchised site is located.
Restrictive Covenants. Although the restrictive covenants in the
original franchise agreements may vary slightly from franchise to franchise,
each franchisee is subject to restrictions that prohibit two or more of the
following during the term of the franchise agreement and for two years after its
expiration:
- operation of any other truck stop or travel center within its
protected territory;
- operation of the franchise location under any national brand other
than "TA";
- operation of the branded facility within a certain distance of any
other TA facility; and
- operation of any competitive business or a business that trades
upon the franchise within the area adjacent to the franchise
location.
Royalty Payments. In general, we require franchisees to pay us a
continuing services and royalty fee generally equal to 4% of all revenues earned
directly or indirectly by the franchisee from any business conducted at or from
the franchised premises, excluding fuel sales and sales of branded fast food. As
part of the royalty fee, we generally require the franchisee to pay us $0.004
per gallon on all sales of qualified diesel fuel.
Advertising, Promotion and Image Enhancement. The network franchise
agreement requires the franchisees to contribute 0.25% of all revenues,
including revenues from fuel and fast food sales, to partially fund system-wide
advertising, marketing and promotional expenses we incur, and mandates certain
minimum franchisee expenditures on advertising. We are required to match the
amounts of the franchisees' contributions towards the system-wide expenses.
Fuel Purchases and Sales. We do not require franchisees to purchase
gasoline or diesel fuel from us. However, we charge royalty fees generally on
diesel fuel sales as described above.
Non-fuel Product Offerings. Franchisees are required to operate their
travel centers in conformity with our guidelines, participate in and comply with
all programs that we prescribe as mandatory and offer any products and services
we deem integral to the network.
Termination of an Original Franchise Agreement. We may terminate the
franchise agreement upon the occurrence of certain defaults, upon notice and
without affording the franchisee an opportunity to cure the defaults. When other
defaults occur, we may terminate the franchise agreement if, after receipt of a
notice of default, the franchisee has not cured the default within the
applicable cure period. The franchisee may terminate the franchise agreement
upon thirty days notice, if we are in material default under the franchise
agreement and we fail to cure or attempt to cure the default within a reasonable
period after notification.
REGULATION
Franchise Regulation. State franchise laws apply to TA Franchise
Systems, and some of these laws require TA Franchise Systems to register with
the state before it may offer a franchise, require TA Franchise Systems to
deliver specified disclosure documentation to potential franchisees, and impose
special regulations upon petroleum franchises. Some state franchise laws also
impose restrictions on TA Franchise Systems' ability to terminate or not to
renew its respective franchises, and impose other limitations on the terms of
the franchise relationship or the conduct of the franchisor. Finally, a number
of states include, within the scope of their petroleum franchising statutes,
prohibitions against price discrimination and other allegedly anticompetitive
conduct. These provisions supplement applicable antitrust laws at the federal
and state levels.
12
The Federal Trade Commission, or the FTC, regulates us under their rule
entitled "Disclosure Requirements and Prohibitions Concerning Franchising and
Business Opportunity Ventures." Under this rule, the FTC requires that
franchisors make extensive disclosure to prospective franchisees but does not
require registration. We believe that we are in compliance with this rule.
We cannot predict the effect of any future federal, state or local
legislation or regulation on our franchising operations.
Environmental Regulation. Our operations and properties are extensively
regulated by Environmental Laws that:
- govern operations that may have adverse environmental effects, such
as discharges to air, soil and water, as well as the management of
Hazardous Substances or
- impose liability for the costs of cleaning up sites affected by,
and for damages resulting from disposal or other releases of
Hazardous Substances.
We own and use underground storage tanks and aboveground storage tanks
to store petroleum products and waste at our facilities. These tanks must comply
with requirements of Environmental Laws regarding tank construction, integrity
testing, leak detection and monitoring, overfill and spill control, release
reporting, financial assurance and corrective action in case of a release. At
some locations, we must also comply with Environmental Laws relating to vapor
recovery and discharges to water. We have completed necessary upgrades to
underground storage tanks to comply with federal regulations that took effect on
December 22, 1998, and believe that all of our travel centers are in material
compliance with applicable requirements of Environmental Laws.
We have received notices of alleged violations of Environmental Laws,
or are otherwise aware of the need to undertake corrective actions to comply
with Environmental Laws, at travel centers owned by us in a number of
jurisdictions. We do not expect that any financial penalties associated with
these alleged violations, or instances of noncompliance, or compliance costs
incurred in connection with these violations or corrective actions, will be
material to our results of operations or financial condition. We are conducting
investigatory and/or remedial actions with respect to releases of Hazardous
Substances that have occurred subsequent to the acquisition of the Unocal and BP
networks and also regarding historical contamination at certain of the former
Burns Bros. and Travel Ports facilities. While we cannot precisely estimate the
ultimate costs we will incur in connection with the investigation and
remediation of these properties, based on our current knowledge, we do not
expect that the costs to be incurred at these properties, individually or in the
aggregate, will be material to our results of operations or financial condition.
While the matters discussed above are, to the best of our knowledge, the only
proceedings for which we are currently exposed to potential liability,
particularly given the Unocal and BP indemnities discussed below, we cannot
assure you that additional contamination does not exist at these or additional
network properties, or that material liability will not be imposed on us in the
future. If additional environmental problems arise or are discovered, or if
additional environmental requirements are imposed by government agencies,
increased environmental compliance or remediation expenditures may be required,
which could have a material adverse effect on us. As of December 31, 2002, we
had a reserve for those matters of $2.9 million. In addition, we have obtained
environmental insurance of up to $25.0 million for unanticipated costs regarding
certain known environmental liabilities and for up to $40.0 million regarding
certain unknown environmental liabilities.
As part of the acquisition of the Unocal network, Phase I environmental
assessments were conducted at the 97 Unocal network properties purchased by us.
Under an agreement with Unocal, Phase II environmental assessments of all Unocal
network properties were completed by Unocal by December 31, 1998. Under the
terms of this agreement, Unocal is responsible for all costs incurred for:
- remediation of environmental contamination, and
- otherwise bringing the properties into compliance with
Environmental Laws as in effect at the date of the acquisition of
the Unocal network,
13
with respect to the matters identified in the Phase I or Phase II environmental
assessments, which matters existed on or prior to the date of the acquisition of
the Unocal network. Under the terms of this agreement, Unocal also must
indemnify us against any other environmental liabilities that arise out of
conditions at, or ownership or operations of, the Unocal network prior to the
date of the acquisition of the Unocal network. The remediation must achieve
compliance with the Environmental Laws in effect on the date the remediation is
completed. We must make claims for indemnification prior to April 14, 2004.
Except as described above, Unocal does not have any responsibility for any
environmental liabilities arising out of the ownership or operations of the
Unocal network after the date of the acquisition of the Unocal network. We
cannot assure you that Unocal, if additional environmental claims or liabilities
were to arise under the agreement with Unocal, would not dispute our claims for
indemnification.
Prior to the acquisition of the BP network, all of the 38 company-owned
locations purchased by us were subject to Phase I and Phase II environmental
assessments, undertaken at BP's expense. The environmental agreement with BP
provides that, with respect to environmental contamination or non-compliance
with Environmental Laws identified in the Phase I or Phase II environmental
assessments, BP is responsible for:
- all costs incurred for remediation of the environmental
contamination, and
- for otherwise bringing the properties into compliance with
Environmental Laws as in effect at the date of the acquisition of
the BP network.
The remediation must achieve compliance with the Environmental Laws in
effect on the date the remedial action is completed. The environmental agreement
with BP requires BP to indemnify us against any other environmental liabilities
that arise out of conditions at, or ownership or operations of, the BP network
locations prior to the date of the acquisition of the BP network. We must make
claims for indemnification before December 11, 2004. BP must also indemnify us
for liabilities relating to non-compliance with Environmental Laws for which
claims were made before December 11, 1996. Except as described above, BP does
not have any responsibility for any environmental liabilities arising out of the
ownership or operations of the BP network after the date of the acquisition of
the BP network. We cannot assure you that BP, if additional environmental claims
or liabilities were to arise under the environmental agreement with BP, would
not dispute our claims for indemnification.
As part of the Burns Bros. acquisition, Phase I environmental
assessments were conducted on all 17 sites acquired. Based on the results of
those assessments, Phase II environmental assessments were conducted on nine of
the sites. The purchase price paid to Burns Bros. was adjusted based on the
findings of the Phase I and Phase II environmental assessments. Under the asset
purchase agreement with Burns Bros., we released Burns Bros. from any
environmental liabilities that may have existed as of the Burns Bros.
acquisition date, other than specified non-waived environmental claims as
described in the agreement with Burns Bros.
As part of the Travel Ports acquisition, Phase I environmental
assessments were conducted on all 16 sites acquired. Based on the results of
those assessments, Phase II environmental assessments were conducted on five of
these sites. The results of these assessments were taken into account in
recognizing the related environmental contingency accrual for purchase
accounting purposes.
14
EMPLOYEES
As of December 31, 2002, we employed approximately 10,000 people on a
full- or part-time basis. Of this total, approximately 9,630 were employees at
our company-operated sites, approximately 320 performed managerial, operational
or support services at our headquarters or elsewhere and approximately 50
employees staffed the distribution center. All but nine of our employees are
non-union. We believe that our relationship with our employees is satisfactory.
ITEM 2. PROPERTIES
Our principal executive offices are leased and are located at 24601
Center Ridge Road, Suite 200, Westlake, Ohio 44145-5639. Our distribution center
is a leased facility located at 1450 Gould Boulevard, LaVergne, Tennessee
37086-3535.
Of our 142 owned sites in operation as of December 31, 2002, the land
and improvements at 13 are leased, the improvements but not the land at eight
are leased, three are subject to ground leases of the entire site and seven are
subject to ground leases of portions of these sites. We consider our facilities
suitable and adequate for the purposes for which they are used. In addition to
these 142 sites, we own one site that will be developed as a travel center and
one site that is closed and held for sale.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in various legal and administrative
proceedings and threatened legal and administrative proceedings incidental to
the ordinary course of our business. We believe we are currently not involved in
any litigation, individually or in the aggregate, which could have a material
adverse effect on our business, financial condition, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2002.
15
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market information. The outstanding shares of our common stock were
issued in transactions not involving a public offering. As a result,
there is no public market for our common stock.
Holders. As of March 15, 2003, the outstanding shares of our common
stock were held of record by 38 stockholders.
Dividends. We have never paid or declared any cash dividends on our
common stock, and we do not anticipate paying any cash dividends in the
foreseeable future. We intend to retain our future earnings, if any, to
fund the development and growth of our business. Our future decisions
concerning the payment of dividends on the common stock will depend
upon our results of operations, financial condition and capital
expenditure plans, as well as other factors as the board of directors,
in its sole discretion, may consider relevant. In addition, our
existing indebtedness restricts, and we anticipate our future
indebtedness may restrict, our ability to pay dividends.
Recent sales of unregistered securities. During 2000, 2001 and 2002, we
sold or issued the unregistered securities described below. None of the
following transactions involved any public offering. All sales were
made in reliance on Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), Rule 701 promulgated under the
Securities Act and/or Regulation D promulgated under the Securities
Act. These sales were made without general solicitation or advertising.
The recipients in each such transaction represented their intention to
acquire the securities for investment only and not with a view to sell
or for sale in connection with any distribution thereof.
(1) In November 2000, in connection with our merger and
recapitalization transactions further described in number (5)
below, we sold 100,000 shares to Freightliner at $33.30 per
share.
(2) In a series of sales to management, we sold the following:
- In 2000, we sold 2,321 shares at $31.75 per share. The
proceeds from this sale were used for general corporate
purposes.
- In November 2000, in connection with our merger and
recapitalization transactions further described in number
(5) below, certain members of management exercised
options to purchase an aggregate of 37,572 shares for
aggregate proceeds of $421,726.
- In 2001, we sold 2,434 shares at $31.75 per share. The
proceeds from this sale were used for general corporate
purposes.
- In 2002, we sold 7,302 shares at $31.75 per share. The
proceeds from these sales were used for general corporate
purposes.
16
(3) We consummated an offering of Senior Subordinated Notes due
2009 to "qualified institutional buyers," as defined in Rule
144A under the Securities Act and to non-U.S. persons under
Regulation S of the Securities Act. The offering was
consummated on November 14, 2000 with the sale of 190,000
units, each unit consisting of one 12 3/4% Senior
Subordinated Note due 2009 of TravelCenters of America, Inc.
with a principal amount of $1,000, three initial warrants to
purchase 0.36469 shares of our common stock and one
contingent warrant to purchase 0.36469 shares of our common
stock. We filed an exchange offer registration statement on
December 21, 2000 with respect to a proposed exchange of the
outstanding notes for registered notes having substantially
the same terms as the outstanding notes. A second
registration statement was filed on December 21, 2000 to
register the warrants and the shares of common stock issuable
upon exercise of the warrants.
We received net proceeds of approximately $171.7 million from
the sale of the units, which included the sale of the
outstanding notes, the initial warrants and contingent
warrants, (after deducting discounts, commissions and certain
expenses of the offering of the notes). The net proceeds from
the unit sale, together with cash, borrowings under the
Senior Credit Facility and the proceeds from the sale of
common equity were used to:
- make cash payments totaling approximately $263.2 million
to certain of our then current equity owners, whose
shares and unexercised common stock options and warrants
were redeemed or canceled in connection with the
Transactions;
- pay $16.3 million for the merger transaction expense of
certain of our then current equity owners;
- repay all amounts outstanding under our Amended and
Restated Credit Agreement dated as of November 24, 1998;
- redeem in full all of our then existing senior secured
notes and pay a prepayment penalty;
- pay for the tender offer and consent solicitation for our
10 1/4% Senior Subordinated Notes due 2007, including
related premiums and a prepayment penalty; and
- pay other transaction fees and expenses.
The initial warrants may be exercised at any time on or after
November 14, 2001, and the contingent warrants may be
exercised at any time after March 31, 2003. However, holders
of warrants will be able to exercise their warrants only if
the shelf registration statement is effective or the exercise
of the warrants is exempt from the registration requirements
of the Securities Act and only if the shares of common stock
are qualified for sale or exempt from qualification under the
applicable securities laws of the states or other
jurisdictions in which the holders reside. Unless earlier
exercised, the warrants will expire on May 1, 2009.
17
Summary of Equity Compensation Plans. The following table sets forth
information about all our equity compensation plans in effect as of
December 31, 2002, which consisted solely of the 2001 Stock Incentive
Plan, which plan was approved by our stockholders during 2001. All of
our equity compensation plans currently in effect have been approved by
our stockholders.
Equity Compensation Plan Information
(C)
Number of
securities
(A) remaining
Number of available for
securities to be (B) future issuance
issued upon Weighted-average under equity
exercise of exercise price compensation
outstanding of outstanding plans (excluding
options, options, securities
warrants and warrants reflected in
Plan Category rights and rights column (A))
- --------------------------- ---------------- --------------- ----------------
Equity compensation
plans approved by
stockholders............... 944,881 $ 31.75 --
Equity compensation plans
not approved by
stockholders............. -- -- --
------- -------- ----
Total 944,811 $ 31.75 --
======= ======== ====
18
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial data for each of the last five fiscal years. Such data should be read
in conjunction with "Management's Discussion and Analysis" and our audited
consolidated financial statements included elsewhere in this annual report. The
results of operations and other financial and operating data of the 17 sites
acquired from Burns Bros. and the 16 sites acquired in the Travel Ports
acquisition are included in our consolidated financial statements beginning on
the dates we completed the acquisitions, December 3, 1998 and June 3, 1999,
respectively.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998(1) 1999(2) 2000 2001 2002(3)
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT GALLONAGE AND SITE COUNT AMOUNTS)
INCOME STATEMENT DATA:
Revenues:
Fuel.................................. $ 554,735 $ 955,105 $ 1,485,732 $ 1,331,807 $ 1,237,989
Non-fuel.............................. 347,531 479,059 555,491 585,717 616,919
Rent and royalties.................... 21,544 20,460 18,822 17,491 15,539
----------- ----------- ----------- ----------- -----------
Total revenues.................... 923,810 1,454,624 2,060,045 1,935,015 1,870,447
Gross profit (excluding depreciation)..... 296,661 403,544 448,725 467,262 480,767
Income from operations(4)................. 20,576 39,724 19,141 41,527 52,804
Extraordinary loss (net of applicable
income taxes)........................... (3,905) - (13,800) - -
Net income (loss)......................... (8,082) 99 (37,714) (9,842) 1,010
BALANCE SHEET DATA (END OF PERIOD):
Total assets.............................. $ 609,219 $ 651,716 $ 735,055 $ 679,856 $ 660,549
Long-term debt (net of unamortized
discount)........................... 390,865 404,369 547,607 548,869 525,131
Mandatorily redeemable preferred
stock(5)............................ 69,974 79,739 - - -
Working capital........................... 97,378 35,232 38,727 26,949 19,252
OTHER FINANCIAL AND OPERATING DATA:
Total diesel fuel sold (in thousands of
gallons)............................. 973,812 1,370,017 1,384,759 1,369,251 1,349,741
Capital expenditures, excluding business
acquisitions......................... $ 65,704 $ 87,401 $ 68,107 $ 54,490 $ 42,640
Cash flows (used in) provided by:
Operating activities.................. 48,521 44,712 65,952 37,106 61,512
Investing activities.................. (125,505) (136,016) (77,115) (46,234) (42,110)
Financing activities.................. 94,428 20,144 22,142 (3) (25,243)
EBITDA(6)................................. 68,708 97,976 103,547 105,035 113,577
NUMBER OF SITES (END OF PERIOD):
Company-operated sites.................... 105 118 122 119 122
Leased sites.............................. 30 29 26 25 20
Franchisee-owned sites.................... 10 11 9 9 10
---------- ----------- ------------ ----------- -----------
Total network sites................... 145 158 157 153 152
========== =========== ============ =========== ===========
19
Notes to Selected Financial Data
(1) Reflects the operating results of 17 sites we acquired from Burns Bros.
on December 3, 1998.
(2) Reflects the operating results of 16 sites we acquired as part of our
acquisition of Travel Ports on June 3, 1999.
(3) Beginning in 2002, as a result of adopting a new accounting
pronouncement, we ceased amortization of our goodwill and trademark
intangible assets.
(4) For the year ended December 31, 2000, income from operations was
reduced by $22,004,000 of merger and recapitalization expenses incurred
in connection with the transactions we completed to consummate our
merger with TCA Acquisition Corporation and related recapitalization.
(5) "Mandatorily redeemable preferred stock" was comprised of two series of
convertible preferred stock that were redeemed as part of our merger
and recapitalization transactions in November 2000.
(6) "EBITDA," as used here for years after 1999, is based on the definition
for EBITDA in our bank debt agreement and consists of net income plus
the sum of (a) income taxes, (b) interest expense, net, (c)
depreciation, amortization and other noncash charges, which includes
stock compensation expense, (d) transition expense and (e) costs of the
merger and recapitalization transactions. For years prior to 2000,
gains or losses on sales of property and equipment were also adjusted
out of net income to determine EBITDA, as this was the definition for
EBITDA in our prior bank debt agreement. We have included certain
information concerning EBITDA because management believes that EBITDA
is generally accepted by our security holders as providing useful
information regarding a company's ability to service and/or incur debt.
Further, EBITDA is a key measure monitored by our stockholders and
lenders and, importantly, is a primary component of the financial ratio
covenants in our debt agreements. EBITDA should not be considered in
isolation from, or as a substitute for, net income, cash flows from
operating activities or other consolidated income or cash flow
statement data prepared in accordance with generally accepted
accounting principles. While EBITDA is frequently used by other
companies as a measure of operations and ability to meet debt service
requirements, EBITDA as we use the term is not necessarily comparable
to similarly titled captions of other companies due to differences in
methods of calculation.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial position and results of
operations is based upon, and should be read in conjunction with, our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. Management believes the
critical accounting policies and areas that require the most significant
judgments and estimates to be used in the preparation of our consolidated
financial statements are the allowance for doubtful accounts, asset impairment,
environmental liabilities, income tax accounting, recognition of stock
compensation expense related to stock options and redeemable common stock held
by employees, and consolidation of special purpose entities.
Allowances for doubtful accounts and notes receivable are maintained
based on historical payment patterns, aging of accounts receivable, periodic
review of our customers' financial condition, and actual writeoff history. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
We record impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying value of those assets, and when the carrying value of a long-lived
asset to be disposed of exceeds the estimated fair value of the asset less the
estimated cost to sell the asset. The net carrying value of assets not
recoverable is then reduced to fair value. Our estimated cash flows are based on
historical results adjusted to reflect the best estimate of future market and
operating conditions. The estimates of fair value represent the best estimate
based on industry trends and reference to market rates and transactions. If
these estimates or their underlying assumptions change in the future, we may be
required to record additional impairment charges for these assets or to reverse
previously recognized impairment charges.
For purposes of assessing our goodwill for impairment, we have
determined that we are one reporting unit and that the estimated fair value of
that reporting unit, based on a discounted cash flow analysis, exceeded its
carrying value. With respect to our trademark intangible assets, the estimated
fair value, based on a discounted cash flow analysis, exceeded the carrying
value. Accordingly, we have not recognized an impairment charge with respect to
any of our intangible assets. A number of assumptions and methods are used in
preparing the valuations underlying these impairment tests, including estimates
of future cash flows and discount rates. Applying other assumptions or valuation
methods could result in different results of these impairment tests. Similarly,
defining the reporting unit differently could lead to a different result for
goodwill. Our goodwill and trademark intangible assets will be assessed for
impairment annually as of January 1 of each year.
We establish an environmental contingency reserve when the
responsibility to remediate is probable and the amount of associated costs is
reasonably determinable. The estimates of these costs are based on our best
estimates of our future obligations given current and pending laws and the
currently available facts concerning each environmental incident, as well as our
estimate of amounts recoverable under indemnification agreements and/or state or
private insurance plans. Should the actual costs to remediate an incident differ
from our estimates, or should new facts come to light or laws become enacted
that modify the scope of our remediation projects, revisions to the estimated
environmental contingency reserve would be required.
As part of the process of preparing our consolidated financial
statements, we are required to estimate income taxes in each of the
jurisdictions in which we operate. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from
differing treatment of items for financial statement and tax purposes. These
timing differences result in deferred tax assets and liabilities, which are
included
21
in our consolidated balance sheet. We are required to record a valuation
allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized, although we have not to date recognized such a
valuation allowance as we believe realization of our deferred tax assets is more
likely than not. Increases in the valuation allowance would result in additional
expenses to be reflected within the tax provision in the consolidated statement
of operations. For further discussion regarding the realization of our deferred
tax assets, see the "Results of Operations - Income Taxes" section of this
"Management's Discussion and Analysis."
Certain members of our senior management have purchased shares of our
common stock pursuant to individual management subscription agreements. We have
the right to repurchase, and the employees have the right to require us to
repurchase, subject to certain limitations, at fair market value, these shares
of common stock upon termination of employment due to death, disability or a
scheduled retirement. These shares are classified as redeemable equity in our
consolidated balance sheet. Prior to an initial public offering of our common
stock, the fair market value is determined by a formula set forth in the
agreement that can be modified by the Board of Directors. At the point in time
that redemption of shares of redeemable common stock becomes probable, the fair
value of the shares will be accreted to their estimated redemption value by a
charge to retained earnings. Such a charge to retained earnings will occur only
if our value, and therefore the fair value of our common stock, has increased.
Our policy is to consider redemption of an individual stockholder's shares
probable at the time that the stockholder provides notice of his or her
intention to retire, dies or is declared disabled. In addition to these
redeemable shares of common stock purchased by management employees, we have
granted to certain of our executives non-qualified stock options to purchase
944,881 shares of our common stock under a stock incentive plan. Each option
grant consists of 41.67% time options and 58.33% performance options. Time
options become exercisable with the passage of time, while performance options
become exercisable if certain investment return targets are achieved. Time
options generally vest 20% per year over a period of five years. Performance
options vest if Oak Hill achieves specified internal rates of return on
specified measurement dates. The time options are subject to fixed plan
accounting and, accordingly, no charge to earnings will be required with respect
to them since the exercise price equaled the fair value at the date of grant.
The performance options are subject to variable plan accounting and,
accordingly, a non-cash charge to earnings will be required when it becomes
probable that the performance triggers for such options will be achieved.
Because our common stock is privately held, determining its value is subject to
estimates and to factors, such as multiples being paid in the mergers and
acquisitions market at the time of the measurement and/or the state of the
capital markets at that time, that are not easily forecasted or controlled and
which may not have a direct relationship to our financial results or condition.
It is not possible to determine at this time, nor may it be possible until close
to the end of the five-year performance period, whether it will be probable that
we will achieve the performance triggers. It is not possible to predict whether
any such required non-cash charge will be material to our results for the period
in which the charge is recognized, as we expect that the performance triggers
can only be attained as a result of a significant increase in our results of
operations.
We have entered into lease transactions of travel centers with a
special purpose entity. These lease transactions are evaluated for lease
classification in accordance with Statement of Financial Accounting Standards
(FAS) No. 13, "Accounting for Leases." We do not consolidate the lessor entity
so long as the owners of the special purpose entity maintain a substantial
residual equity investment of at least three percent that is at risk during the
entire term of the lease, which has been the case to date. In January 2003, the
FASB issued FASB Interpretation No. (FIN) 46 "Consolidation of Variable Interest
Entities." We must adopt this accounting guidance by July 1, 2003. Under FIN 46,
as the lessor with whom we have entered into our master lease program is
currently capitalized and structured, we would be required to consolidate the
lessor in our consolidated financial statements. We and the lessor are currently
evaluating our alternatives with respect to the master lease facility and have
not yet concluded on our course of action. Consolidating the lessor would affect
our consolidated balance sheet by increasing property and equipment, other
assets and long-term debt and would affect our consolidated statement of
operations by reducing operating expenses, increasing depreciation expense and
increasing interest expense. Consolidating the lessor is not expected to result
in violation of our debt covenants.
22
OVERVIEW
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. Our network is the largest, and only
nationwide, full-service travel center network in the United States. Our
geographically diverse network consists of 152 sites located in 40 states in the
United States and, effective January 2003, in the province of Ontario, Canada.
Our operations are conducted through three distinct types of travel centers:
- sites owned or leased and operated by us, which we refer to as
company-operated sites;
- sites owned by us and leased to independent lessee-franchisees,
which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we
refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system and in Canada, typically on 20- to 25-acres sites. Most of our
network properties were developed more than 22 years ago when prime real estate
locations along the interstate highway system were more readily available than
they are today, making a network such as ours difficult to replicate. Operating
under the "TravelCenters of America" and "TA" brand names, our nationwide
network provides an advantage to long-haul trucking fleets by enabling them to
route their trucks within a single network from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, 22 different brands of fast food restaurants, travel
and convenience stores and other driver amenities.
The non-fuel products and services we offer to our customers complement
our fuel business and provide us a means to increase our revenues and gross
profit despite price pressure on fuel as a result of competition and volatile
crude oil and petroleum product prices. For the years ended December 31, 2000,
2001, and 2002, our revenues and gross profit were composed as follows:
YEAR ENDED
DECEMBER 31,
-------------------------------
2000 2001 2002
----- ----- -----
Revenues:
Fuel.................................................. 72.1% 68.8% 66.2%
Non-fuel.............................................. 27.0% 30.3% 33.0%
Rent and royalties.................................... 0.9% 0.9% 0.8%
----- ----- -----
Total revenues.................................. 100.0% 100.0% 100.0%
===== ===== =====
Gross profit (excluding depreciation):
Fuel.................................................. 23.1% 22.1% 21.2%
Non-fuel.............................................. 72.7% 74.2% 75.6%
Rent and royalties.................................... 4.2% 3.7% 3.2%
----- ----- -----
Total gross profit (excluding depreciation)..... 100.0% 100.0% 100.0%
===== ===== =====
23
COMPOSITION OF OUR NETWORK
Since December 31, 1999, the changes in the number of sites within our
network and in their method of operation (company-operated, leased or
franchisee-owned) are significant factors influencing the changes in our results
of operations. The following table summarizes the changes in the composition of
our network from December 31, 1999 through December 31, 2002:
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
-------- ------ ----------- -----
Number of sites at December 31, 1999(1) 118 29 11 158
2000 Activity:
New sites............................... 2 - - 2
Sales of sites.......................... (2) - - (2)
Conversion of franchisee-owned site
to company-operated site.............. 1 - (1) -
Conversions of leased sites to
company-operated sites.............. 3 (3) - -
Termination of franchisee-owned site.... - - (1) (1)
----- ---- ---- ----
Number of sites at December 31, 2000(1).... 122 26 9 157
2001 Activity:
Sales of sites.......................... (3) (1) - (4)
----- ---- ---- ----
Number of sites at December 31, 2001....... 119 25 9 153
----- ---- ---- ----
2002 Activity:
New sites............................... 1 - 1 2
Sales of sites.......................... (3) - - (3)
Conversions of leased sites to
company-operated sites................ 5 (5) - -
----- ---- ---- ----
Number of sites at December 31, 2002....... 122 20 10 152
===== ==== ==== ====
(1) Includes one company-operated site held for development until its
construction was completed during 2001.
In January 2003, we acquired an operating travel center in Woodstock,
Ontario, Canada, our first location in Canada. We also sold one company-operated
site in January 2003.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues. Our consolidated revenues for the year ended December 31,
2002 were $1,870.4 million, which represents a decrease from the year ended
December 31, 2001 of $64.6 million, or 3.3%, that is primarily attributable to a
decrease in fuel revenue.
Fuel revenue for the year ended December 31, 2002 decreased by $93.8
million, or 7.0%, as compared to the same period in 2001. The decrease was
attributable principally to decreases in diesel fuel and gasoline average
selling prices. Average diesel fuel and gasoline sales prices for the year ended
December 31, 2002 decreased by 8.4% and 7.4%, respectively, as compared to the
same period in 2001, primarily reflecting decreases in commodity prices and also
reflecting our more competitive retail fuel pricing. The fuel revenue decline
also resulted from a decrease in our diesel fuel sales volumes that was
partially offset by an increase in gasoline sales volumes. Diesel fuel and
gasoline sales volumes for the year ended December 31, 2002 decreased 1.4% and
increased 27.5%,
24
respectively, as compared to the same period in 2001. For the year ended
December 31, 2002, we sold 1,349.7 million gallons of diesel fuel and 160.6
million gallons of gasoline, as compared to 1,369.3 million gallons of diesel
fuel and 125.9 million gallons of gasoline for the year ended December 31, 2001.
The diesel fuel sales volume decrease resulted from a 0.9% decrease in same-site
diesel fuel sales volumes and a net reduction in sales volumes at sites we added
to or eliminated from our network during 2001 and 2002 of 11.6 million gallons,
partially offset by an increase in our wholesale diesel fuel sales of 1.6
million gallons, or 2.7%. The gasoline sales volume increase was primarily
attributable to a 20.2% increase in same-site gasoline sales volumes and also
resulted from a 2.8 million net increase in gasoline sales volume at
company-operated sites we added to or eliminated from our network during 2001
and 2002, as well as an 8.2 million increase in wholesale gasoline sales volume.
We believe the same-site diesel fuel sales volume decrease resulted from a
decline in trucking activity in 2002 as compared to 2001, resulting from the
general condition of the United States economy, and occurred in spite of our
continued emphasis on competitively pricing our diesel fuel. The increased level
of wholesale diesel fuel sales volumes reflects our renewed efforts in this area
made possible by software and control process improvements we implemented during
2002. We believe the same-site increase in gasoline sales volume resulted
primarily from increased general motorist visits to our sites as a result of our
gasoline and QSR offering upgrades and additions under our capital program, as
well as our more competitive retail gasoline pricing.
Non-fuel revenues for the year ended December 31, 2002 of $616.9
million reflected an increase of $31.2 million, or 5.3%, from the same period in
2001. The increase was primarily attributable to an increase in non-fuel sales
on a same-site basis of 3.7% for the year ended December 31, 2002 versus the
same period in 2001. We believe the same-site increase reflected increased
customer traffic resulting, in part, from the significant capital improvements
that we have made in the network under our capital investment program to
re-image, re-brand and upgrade our travel centers. The increase was also
attributable to the net increase in sales at the company-operated sites added
to, or eliminated from, our network during 2001 and 2002.
Rent and royalty revenues for the year ended December 31, 2002
reflected a $2.0 million, or 11.2%, decrease from the same period in 2001. This
decrease was primarily attributable to the rent and royalty revenue lost as a
result of the conversions of leased sites to company-operated sites, partially
offset by a 2.0% increase in same-site royalty revenue that results from
increased levels of retail sales by our franchisees, and a 3.3% increase in
same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the year
ended December 31, 2002 was $480.8 million, compared to $467.3 million for the
same period in 2001, an increase of $13.5 million, or 2.9%. The increase in our
gross profit was primarily due to increased margin resulting from the increased
level of non-fuel sales, partially offset by the decline in rent and royalty
revenues and a decline in fuel margin that resulted from decreased diesel fuel
sales volumes and a 2.6% decrease in fuel margin per gallon.
Operating and Selling, General and Administrative Expenses. Operating
expenses included the direct expenses of company-operated sites and the
ownership costs of leased sites. Selling, general and administrative expenses
included corporate overhead and administrative costs.
Our operating expenses increased by $4.5 million, or 1.4%, to $330.2
million for the year ended December 31, 2002 compared to $325.7 million for the
same period in 2001. This increase was attributable to a $4.4 million net
increase resulting from company-operated sites we added to our network or
eliminated from our network during 2001 or 2002, partially offset by a 0.1%
decline in operating expenses on a same-site basis. On a same-site basis,
operating expenses as a percentage of non-fuel revenues for the year ended
December 31, 2002 were 52.9%, compared to 54.9% for the same period in 2001,
reflecting reduced utility costs and the results of our cost-control measures at
our sites.
25
Our selling, general and administrative expenses for the year ended
December 31, 2002 were $38.1 million, which reflected a decrease of $0.2
million, or 0.5% from the same period in 2001.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 2002 was $60.8 million, compared to
$63.5 million for the same period in 2001. This decrease was attributable to a
$1.8 million decrease in amortization of intangible assets, a $1.0 million
decrease in the amount of impairment charges recognized in 2002 as compared to
2001 and the change we made in depreciable lives of certain assets effective
April 1, 2001. During the year ended December 31, 2002 we recognized impairment
charges aggregating $1.5 million with respect to certain of the sites we were
holding for sale as a result of reductions in the estimated sales proceeds of
certain of those sites. During 2002, we sold four of the facilities that we were
holding for sale as of December 31, 2001. On January 3, 2003, we sold the one
remaining site held for sale that had been impaired. The other three sites we
had been holding for sale were not sold within the one-year period required by
FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and
so will no longer be accounted for as assets to be disposed of but as assets
held for use. In the fourth quarter of 2002, we recognized a charge to
depreciation expense of $0.2 million for the depreciation expense related to
these unsold sites that had not been recognized during 2002 when these sites
were being accounted for as held for sale.
As a result of adopting FAS 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002, our goodwill and trademark intangible assets
are no longer amortized. Pursuant to FAS 142, intangible assets must be
periodically tested for impairment. During the first quarter of 2002, we
completed our transitional impairment review of our trademark intangible assets
and determined that there was no impairment. During the second quarter of 2002
we completed the transitional impairment review of goodwill and determined that
there was no impairment. We also adopted FAS 144 effective January 1, 2002. The
adoption of FAS 144 did not have a material effect on our consolidated results
of operations.
Income from Operations. We generated income from operations of $52.8
million for the year ended December 31, 2002, compared to income from operations
of $41.5 million for the same period in 2001. This increase of $11.3 million, or
27.2%, was primarily attributable to the increase in gross profit that was
partially offset by the increase in operating expenses. The net decrease in
depreciation and amortization expense and in gains on sales of property and
equipment also contributed to the increase in operating income. EBITDA for the
year ended December 31, 2002 was $113.6 million, as compared to EBITDA of $105.0
million for the year ended December 31, 2001. This increase of $8.6 million, or
8.1%, occurred despite a $0.7 million decrease in gains on sales of property and
equipment in 2002 as compared to 2001 and was primarily attributable to the
increase in gross profit that was partially offset by increased operating
expenses. EBITDA, as used here, is based on the definition for EBITDA in our
debt agreements and consists of net income plus the sum of (a) income taxes, (b)
interest and other financial costs, net, (c) depreciation, amortization and
other noncash charges, which includes stock compensation expense, and (d)
transition expense.
Interest and Other Financial Costs--Net. Interest and other financial
costs, net, for the year ended December 31, 2002 decreased by $6.5 million, or
11.3%, compared to 2001. This decrease resulted from the decline in interest
rates during 2001 and 2002 as well as from the decrease in our indebtedness.
Income Taxes. Our effective income tax benefit rates for the years
ended December 31, 2002 and 2001 were 33.5% and 39.6%, respectively. These rates
differed from the federal statutory rate due primarily to state income taxes and
nondeductible expenses, partially offset by the effect of certain tax credits.
The change between years in the effective tax rate was primarily the result of
the swing from a taxable loss incurred in 2001 as compared to a relatively low
level of pre-tax income earned in 2002, as well as an estimated adjustment of
prior year tax liabilities in 2002. As a result of the relatively low level of
pre-tax earnings in 2002, permanent differences had a larger effect on the
effective rate in 2002 than in 2001. We have not recognized a valuation
allowance for our net deferred tax assets, as we believe we are more likely than
not to realize those assets. We need to generate $58.0 million of future taxable
income to fully realize our net deferred tax assets. Our existing level of
pretax earnings for financial reporting purposes, as represented by our 2002
results, would not be sufficient to generate that amount of future
26
taxable income. However, we believe we will generate sufficient future taxable
income to realize our net deferred tax assets for the reasons, and based on the
estimates, described below. Different assumptions as to our future expected
taxable income could lead to revisions in the estimated amount of valuation
allowance required to be recognized against our deferred tax assets.
- We expect to increase our profitability as compared to that generated in
2002, which reflected an increase over 2001. Earnings from the
significant capital improvements made to our network sites over the past
few years are expected to increase as these assets fully mature. We
intend to add new company-operated and franchisee-owned travel centers to
our network. We also intend to increase the earnings capability of our
existing sites through other capital investments, such as for site
re-image projects, additional truck and maintenance repair shop capacity,
expanded QSR offerings, expanded parking areas and other similar
projects. We also expect to benefit from a strengthening United States
economy during and after 2003.
- We expect that in succeeding years, as was the case during 2002, our
interest expense will decline as we begin to reduce the level of our
indebtedness, through scheduled repayments, reducing our outstanding
revolver borrowings and making required excess cash flow prepayments in
future years as our available cash flow increases while we maintain a
relatively lower level of capital expenditures.
- We have made significant capital investments in our business since our
formation, especially in 1993 and in 1998 through 2000. Many of these
assets, which typically have depreciable lives of five to 15 years, are
at or near the ends of their depreciable lives. As our level of capital
expenditures is anticipated to remain at a relatively lower level than
these periods, we expect our depreciation expense to decline. This is
particularly so for tax depreciation due to the double-declining balance
depreciation method we followed for our tax returns. For our 2001 and
2002 property and equipment additions, we have elected to use the
alternative depreciation system, which generally depreciates assets on a
straight-line basis over longer depreciable lives than those we have been
using, decreasing the annual depreciation deductions over the next
several years relative to what they otherwise would have been.
- We have available to us tax planning strategies we could employ to
increase our taxable income. The principal tax planning strategy we could
undertake is the sale/leaseback of certain of our travel centers. The
sale/leaseback transaction would be expected to generate a sufficient
taxable gain in the year consummated to fully utilize any expiring unused
net operating loss carryforwards and could be expected to increase our
taxable income in subsequent years as lower interest expense and
depreciation deductions would, in all likelihood, more than offset the
additional operating lease expense. Although we would not ordinarily
execute this tax planning strategy, we would do so to prevent our net
operating loss carryforwards from expiring unused in 2020 and subsequent
years.
The following table sets forth the historical relationship between
pretax earnings for financial reporting purposes and taxable income for income
tax purposes.
YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
------ ------- ------
(IN MILLIONS OF DOLLARS)
Pretax earnings (loss) for financial
reporting purposes ............ $(48.9) $ (16.3) $ 1.5
State income tax expense ........... (0.8) (1.6) (1.2)
Accelerated tax depreciation ....... (8.0) (12.2) (1.0)
Benefit of tax credits ............. 0.8 0.9 0.6
Non-deductible expenses ............ 11.9 1.6 0.5
Temporary differences, net ......... (4.5) (7.4) 4.0
------ ------- ------
Federal taxable income (loss) ...... $(49.5) $ (35.0) $ 4.4
====== ======= ======
27
Of our total net operating loss carryforwards at December 31, 2002 of
$72.9 million, the $45.0 million remaining carryforward generated in 2000
expires in 2020 and the $27.9 million remaining carryforward generated in 2001
expires in 2021. United States tax law limits the amount of the $49.3 million
net operating loss carryforward we generated in 2000 that can be utilized each
year to approximately $12 million. As a total of $4.4 million of the 2000 net
operating loss was utilized in 2002, the usage of the net operating loss
generated in 2000 will be limited to approximately $31.6 million for 2003. We do
not anticipate a need to use more than this amount in our federal tax return for
2003. Use of the net operating loss generated in 2001 is unlimited.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Our consolidated revenues for the year ended December 31,
2001 were $1,935.0 million, which represents a decrease from the year ended
December 31, 2000 of $125.0 million, or 6.1%. This decrease was primarily the
result of a decrease in our fuel revenue, largely due to decreased fuel
commodity prices. Our level of sales during the first eight months of 2001 was
adversely affected by the worsening United States economy that began to weaken
during 2000. The September 11, 2001 terrorist attacks on the United States
disrupted the financial markets and consumer confidence, further exacerbating
the adverse effect of the economic slowdown on our sales levels.
Fuel revenue for the year ended December 31, 2001 decreased by $153.9
million, or 10.4%, from 2000. The decrease was attributable principally to
decreases in diesel fuel average selling prices. This decrease was also caused
by a decline in the average selling prices of gasoline and a slight decrease in
diesel fuel sales volume, partially offset by increased gasoline sales volume.
Average diesel fuel and gasoline sales prices for the year ended December 31,
2001 decreased by 11.0% and 11.6%, respectively, as compared to the same period
in 2000, primarily reflecting decreases in commodity prices but also reflecting
our more competitive fuel pricing. Diesel fuel and gasoline sales volumes for
the year ended December 31, 2001 decreased 1.1% and increased 23.3%,
respectively, as compared to the year ended December 31, 2000. For the year
ended December 31, 2001, we sold 1,369.3 million gallons of diesel fuel and
125.9 million gallons of gasoline, as compared to 1,384.8 million gallons of
diesel fuel and 102.1 million gallons of gasoline for the year ended December
31, 2000. The diesel fuel sales volume decrease resulted from a decline in our
wholesale diesel fuel sales of 53.2 million gallons, or 50.7%, as a result of a
planned retrenchment in this area and reduced sales volumes at sites we sold
during 2000 and 2001, partially offset by increased sales volume on a same-site
basis and at new sites acquired or constructed during 2000 and 2001. The
gasoline sales volume increase was due to increased sales volume on a same-site
basis and at new sites acquired or constructed during 2000 and 2001, partially
offset by reduced sales volumes at sites sold during 2000 and 2001. Same-site
diesel fuel sales volume for 2001 reflected a 4.3% increase from 2000 and
same-site gasoline sales volume for 2001 reflected a 24.1% increase from 2000.
We believe the same-site diesel fuel sales volume increase was a result of our
more competitive retail fuel pricing posture adopted in July 2000, in
combination with the September 2000 introduction of our enhanced customer
loyalty program, which we refer to as the RoadKing Club. We believe the
same-site increase in gasoline sales volume resulted primarily from increased
general motorist visits to our sites as a result of our gasoline and QSR
offering upgrades and additions under our capital program, as well as our more
competitive retail gasoline pricing.
Non-fuel revenues for the year ended December 31, 2001 of $585.7
million reflected an increase of $30.2 million, or 5.4%, from the year ended
December 31, 2000. The increase was attributable to both same-site sales
increases and the increased sales at the company-operated sites added to our
network in 2000 and 2001. On a same-site basis, non-fuel revenue increased 3.3%
for the year ended December 31, 2001 versus the same period in 2000. We believe
the same-site increase reflected increased customer traffic resulting, in part,
from both the significant capital improvements that we have made in the network
under our capital investment program to re-image, re-brand and upgrade our
travel centers, and our more competitive fuel prices, partially offset by the
weakening of the United States economy throughout 2001.
28
Rent and royalty revenues for the year ended December 31, 2001
reflected a $1.3 million, or 6.9%, decrease from the same period in 2000. This
decrease was primarily attributable to the rent and royalty revenue lost as a
result of the conversions of three leased sites to company-operated sites; the
termination of the franchise agreements with the franchisees of one
franchisee-owned site that was converted to a company-operated site and one
leased site that was sold; and the termination of the franchise agreement
covering one franchisee-owned site that left our network. This decrease was
partially offset by a 1.1% increase in same-site royalty revenue and a 3.0%
increase in same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the year
ended December 31, 2001 was $467.3 million, compared to $448.7 million for the
same period in 2000, an increase of $18.5 million, or 4.1%. The increase in our
gross profit was primarily due to increases in gasoline and non-fuel sales
volume that were partially offset by a decrease in diesel fuel volume, a reduced
level of diesel fuel and gasoline margins per gallon and decreased rent and
royalty revenue.
Operating and Selling, General and Administrative Expenses. Operating
expenses included the direct expenses of company-operated sites and the
ownership costs of leased sites. Selling, general and administrative expenses
included corporate overhead and administrative costs.
Our operating expenses increased by $17.2 million, or 5.6%, to $325.7
million for the year ended December 31, 2001 compared to $308.5 million for the
year ended December 31, 2000. This increase reflected both increased non-fuel
sales volume and a $2.8 million increase in utility expenses that resulted from
significantly higher electricity prices and relatively colder weather in early
2001 as compared to 2000. On a same-site basis, operating expenses as a
percentage of non-fuel revenues for the year ended December 31, 2001 were 54.0%,
compared to 53.7% for the same period in 2000, reflecting the increased utility
costs, partially offset by the results of our cost-cutting measures at our
sites.
Our selling, general and administrative expenses for the year ended
December 31, 2001 were $38.3 million, as compared to $38.2 million for the year
ended December 31, 2000. This increase of $0.1 million, or 0.1%, was
attributable to increased salary expense almost completely offset by decreases
in travel costs, professional fees and other costs.
Transition Expenses. Transition expenses were the costs incurred in
combining the Unocal, BP, Burns Bros. and Travel Ports networks. As the
integration of sites from our acquisitions was completed during 2000, we did not
incur transition expenses in 2001.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 2001 was $63.5 million, compared to
$62.8 million for the year ended December 31, 2000. The increase in depreciation
and amortization expense was attributable to a larger base of depreciable assets
due to our capital expenditures during 2000 and 2001, $2.5 million of impairment
charges we recognized during 2001 with respect to sites we are holding for sale,
and partially offset by reduced depreciation expense resulting from a change in
the estimated useful lives of certain types of our assets that extended the
estimated lives by five years. This change, which was effective as of April 1,
2001, decreased depreciation expense for the year ended December 31, 2001 by
approximately $8.5 million from what it would have been.
Merger and Recapitali