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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
Commission file number 333-52442
----------------------------
TRAVELCENTERS OF AMERICA, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3856519
- ------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24601 Center Ridge Road, Suite 200
Westlake, OH 44145-5639
(Address of principal executive offices, including zip code)
(440) 808-9100
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
----- -----
As of July 31, 2003, there were outstanding 6,929,498 shares of our common
stock, par value $0.00001 per share. The outstanding shares of our common stock
were issued in transactions not involving a public offering. As a result, there
is no public market for our common stock.
TRAVELCENTERS OF AMERICA, INC.
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause our actual results to differ from future
performance suggested herein. In the context of forward-looking information
provided in this Form 10-Q and in other reports, please refer to the discussion
of risk factors detailed in, as well as the other information contained in, our
filings with the Securities and Exchange Commission.
INDEX PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet as of December 31, 2002
(restated) and June 30, 2003 (unaudited)............................ 2
Unaudited Consolidated Statement of Operations and
Comprehensive Income for the three months and six months
ended June 30, 2002 (restated) and 2003............................. 3
Unaudited Consolidated Statement of Cash Flows for the six
months ended June 30, 2002 (restated) and 2003...................... 4
Unaudited Statement of Nonredeemable Stockholders' Equity
for the six months ended June 30, 2002 (restated) and 2003.......... 5
Selected Notes to Unaudited Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 25
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................................... 35
Item 4. Controls and Procedures............................................. 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 36
Item 4. Submission of Matters to a Vote of Security Holders................. 36
Item 5. Other Information................................................... 36
Item 6. Exhibits and Reports on Form 8-K.................................... 36
SIGNATURE........................................................................................ 37
1
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, JUNE 30,
2002 2003
(RESTATED) (UNAUDITED)
------------------------------
ASSETS (IN THOUSANDS OF DOLLARS)
Current assets:
Cash.............................................................................. $ 14,047 $ 25,304
Accounts receivable (less allowance for doubtful accounts of $2,025 for 2002 and
$1,982 for 2003)............................................................... 44,295 56,094
Inventories....................................................................... 61,937 57,547
Deferred income taxes............................................................. 4,222 3,728
Other current assets.............................................................. 8,164 6,677
---------- ----------
Total current assets......................................................... 132,665 149,350
Property and equipment, net.......................................................... 444,197 445,338
Goodwill............................................................................. 23,585 24,236
Deferred financing costs, net........................................................ 27,452 25,781
Deferred income taxes................................................................ 17,781 16,880
Other noncurrent assets.............................................................. 15,087 15,338
---------- ----------
Total assets................................................................. $ 660,767 $ 676,923
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................................. $ 3,460 $ 3,345
Accounts payable.................................................................. 58,512 66,843
Other accrued liabilities......................................................... 51,339 54,812
---------- ----------
Total current liabilities.................................................... 113,311 125,000
Commitments and contingencies........................................................
Long-term debt (net of unamortized discount)......................................... 523,934 522,881
Deferred income taxes................................................................ 2,107 2,151
Other noncurrent liabilities......................................................... 6,209 8,575
---------- ----------
645,561 658,607
Redeemable equity.................................................................... 681 648
Nonredeemable equity:
Common stock and other stockholders' equity....................................... 217,293 217,706
Accumulated deficit............................................................... (202,768) (200,038)
---------- ----------
Total nonredeemable equity................................................... 14,525 17,668
---------- ----------
Total liabilities, redeemable equity and nonredeemable stockholders' equity.. $ 660,767 $ 676,923
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
2
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2003 2002 2003
(RESTATED) (RESTATED)
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Revenues:
Fuel............................................. $ 302,293 $ 360,256 $ 556,309 $ 774,449
Nonfuel.......................................... 159,354 166,843 297,973 313,066
Rent and royalties............................... 3,997 3,500 7,987 7,015
---------- ---------- ---------- ----------
Total revenues............................. 465,644 530,599 862,269 1,094,530
Cost of goods sold (excluding depreciation):
Fuel............................................. 276,578 330,975 506,683 719,637
Nonfuel.......................................... 65,911 68,673 122,092 128,210
---------- ---------- ---------- ----------
Total cost of goods sold (excluding
depreciation)........................... 342,489 399,648 628,775 847,847
---------- ---------- ---------- ----------
Gross profit (excluding depreciation)............... 123,155 130,951 233,494 246,683
Operating expenses.................................. 82,397 86,505 163,070 169,350
Selling, general and administrative expenses........ 9,851 10,215 19,279 20,305
Depreciation and amortization expense............... 15,039 14,626 29,132 29,200
(Gain) loss on sales of property and equipment...... (21) (261) (14) (293)
---------- ---------- ---------- -----------
Income from operations.............................. 15,889 19,866 22,027 28,121
Interest and other financial costs, net............. (13,072) (11,525) (26,012) (23,288)
---------- ---------- ---------- ----------
Income (loss) before income taxes and the
cumulative effect of a change in accounting
principle........................................ 2,817 8,341 (3,985) 4,833
Provision (benefit) for income taxes................ 850 3,080 (1,205) 1,850
---------- ---------- ---------- ----------
Income (loss) before the cumulative effect of a
change in accounting principle................... 1,967 5,261 (2,780) 2,983
Cumulative effect of a change in accounting
principle, net of related taxes (Note 2)......... - - - (253)
---------- ---------- ---------- ----------
Net income (loss)................................... 1,967 5,261 (2,780) 2,730
Other comprehensive income (expense), net of
tax (Note 3):
Unrealized gain on derivative instruments....... 283 - 901 -
Foreign currency translation adjustments........ - 399 - 632
---------- ---------- ---------- ----------
Comprehensive income (loss)......................... $ 2,250 $ 5,466 $ (1,879) $ 3,168
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
---------------------------------
2002 2003
(RESTATED)
--------------- -------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (2,780) $ 2,730
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Cumulative effect of a change in accounting principle.......................... - 253
Depreciation and amortization expense.......................................... 29,132 29,200
Amortization of deferred financing costs....................................... 1,480 1,671
Deferred income tax provision.................................................. (1,519) 1,345
Provision for doubtful accounts................................................ 500 500
(Gain) on sales of property and equipment...................................... (14) (293)
Changes in assets and liabilities, adjusted for the effects of business
acquisitions:
Accounts receivable......................................................... (12,276) (12,711)
Inventories................................................................. 2,394 5,116
Other current assets........................................................ 1,435 1,504
Accounts payable and other accrued liabilities.............................. 34,692 12,323
Other, net..................................................................... (2,257) (952)
-------- --------
Net cash provided by operating activities..................................... 50,787 40,686
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions......................................................... (3,063) (8,302)
Proceeds from sales of property and equipment................................. 2,535 1,378
Capital expenditures.......................................................... (23,739) (21,236)
-------- ---------
Net cash used in investing activities......................................... (24,267) (28,160)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in checks drawn in excess of bank balances................ (9,275) 696
Revolving loan borrowings (repayments), net................................... (10,600) 11,100
Long-term debt repayments..................................................... (863) (13,014)
Repurchase of common stock.................................................... - (252)
Issuance of common stock...................................................... 39 -
Merger and recapitalization expenses paid..................................... (150) -
-------- --------
Net cash used in financing activities......................................... (20,849) (1,470)
-------- --------
Effect of exchange rate changes on cash....................................... - 201
-------- --------
Net increase (decrease) in cash........................................... 5,671 11,257
Cash at the beginning of the period.................................................. 19,888 14,047
-------- --------
Cash at the end of the period........................................................ $ 25,559 $ 25,304
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
TRAVELCENTERS OF AMERICA, INC.
UNAUDITED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY
SIX MONTHS ENDED
JUNE 30,
------------------------------
2002
(RESTATED) 2003
---------- ----------
(IN THOUSANDS OF DOLLARS)
COMMON STOCK:
Balance at beginning and end of period............................................ $ 3 $ 3
========= =========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period.................................................... $ 217,290 $ 217,290
Accretion of redeemable equity................................................ - (219)
--------- ---------
Balance at end of period.......................................................... $ 217,290 $ 217,071
========= =========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of period.................................................... $ (1,920) $ -
Change in fair value of interest rate protection agreement, net of tax........ 901 -
Foreign currency translation adjustments, net of tax.......................... - 632
--------- ---------
Balance at end of period......................................................... $ (1,019) $ 632
========= =========
ACCUMULATED DEFICIT:
Balance at beginning of period.................................................... $(204,039) $(202,768)
Net income (loss)............................................................. (2,780) 2,730
--------- ---------
Balance at end of period.......................................................... $(206,819) $(200,038)
========= =========
5
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
We are a holding company which, through our wholly owned subsidiaries,
owns, operates and franchises travel centers along the United States interstate
highway system to serve long-haul trucking fleets and their drivers, independent
truck drivers and general motorists. At June 30, 2003, our geographically
diverse nationwide network of full-service travel centers consisted of 153 sites
located in 41 states and the province of Ontario, Canada. Our operations are
conducted through three distinct types of travel centers: (1) sites owned or
leased and operated by us, which we refer to as company-operated sites; (2)
sites owned by us and leased to independent lessee-franchisees, which we refer
to as leased sites; and (3) sites owned and operated by independent franchisees,
which we refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system, typically on 20- to 25-acre sites. Operating under the
"TravelCenters of America" and "TA" brand names, our nationwide network provides
our customers with diesel fuel and gasoline as well as non-fuel products and
services such as truck repair and maintenance services, full-service
restaurants, 20 different brands of fast food restaurants, travel and
convenience stores with a selection of over 4,000 items and other driver
amenities. We also collect rents and franchise royalties from the franchisees
who operate the leased sites and franchisee-owned sites and, as a franchisor,
assist our franchisees in providing service to long-haul trucking fleets and
their drivers, independent truck drivers and general motorists.
The consolidated financial statements include the accounts of
TravelCenters of America, Inc. and its wholly owned subsidiaries, TA Operating
Corporation and TA Franchise Systems Inc., as well as TA Licensing, Inc., TA
Travel, L.L.C., TravelCenters Realty, L.L.C., TravelCenters Properties, L.P.,
3073000 Nova Scotia Company, TravelCentres Canada Inc., and TravelCentres Canada
Limited Partnership, which are all direct or indirect wholly owned subsidiaries
of TA Operating Corporation. Intercompany accounts and transactions have been
eliminated. With only one of our 153 travel centers located in Canada, the
amounts of revenues and long-lived assets located in Canada are not material.
The accompanying unaudited, consolidated financial statements as of
June 30, 2003 and for the three- and six-month periods ended June 30, 2002 and
2003 have been prepared in accordance with generally accepted accounting
principles. Accordingly, these statements should be read in conjunction with our
audited financial statements as of and for the year ended December 31, 2002. As
further discussed in Note 11, our audited financial statements for the year
ended December 31, 2002 have been restated. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments, all of which were of a normal recurring nature, necessary to
present fairly, in all material respects, our consolidated financial position at
June 30, 2003, our results of operations for the three- and six-month periods
ended June 30, 2002 and 2003, and our changes in nonredeemable stockholders'
equity and cash flows for the six-month periods ended June 30, 2002 and 2003,
and are not necessarily indicative of the results to be expected for the full
year.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
FAS 143. As of January 1, 2003, we began recognizing the future costs
to remove our underground storage tanks over the estimated useful lives of each
tank in accordance with the provisions of Statement of Financial Accounting
Standards (FAS) No. 143, "Accounting for Asset Retirement Obligations." A
liability for the fair value of an asset retirement obligation with a
corresponding increase to the carrying value of the related long-lived asset is
recorded at the time an underground storage tank is installed. We will amortize
the amount added to property and equipment and recognize accretion expense in
connection with the discounted liability over the remaining life of the
respective underground storage tank. The estimated liability is based on
historical experiences in removing these tanks, estimated tank useful lives,
external estimates as to the cost to remove the tanks in the future and
regulatory requirements. The liability is a discounted liability using a
credit-adjusted risk-free rate of approximately 12.8%. Revisions to the
liability could occur due to changes in tank removal costs, tank useful lives or
if new regulations regarding the removal of such tanks are enacted.
6
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Upon adoption of FAS 143, we recorded a discounted liability of
$589,000, increased property and equipment by $172,000 and recognized a one-time
cumulative effect charge of $253,000 (net of deferred tax benefit of $164,000).
The pro forma effect for the three months ended March 31, 2002, assuming the
adoption of FAS 143 as of January 1, 2002, was not material.
A reconciliation of our asset retirement obligation liability, which is
included within other noncurrent liabilities in our consolidated balance sheet,
for the six months ended June, 2003 was as follows (in thousands of dollars):
Balance at January 1, 2002................................................ $ 589
Liabilities incurred...................................................... 10
Liabilities settled....................................................... -
Accretion expense......................................................... 38
Revisions to estimates.................................................... -
-----
$ 637
=====
FIN 46. In January 2003, the Financial Accounting Standards Board
(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, we will be required to consolidate into our consolidated financial
statements the entity that is the lessor under our master lease program (see
Note 7) covering eight of our sites. 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 will not result in a violation of our
debt covenants or have an effect on our liquidity. We adopted the disclosure
requirements of FIN 46 in our consolidated financial statements for 2002.
FAS 150. In May 2003, the FASB issued FAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." FAS
150 was effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, which for us is the third quarter ending
September 30, 2003. Under FAS 150, we will be required to present the balance of
our redeemable common stock as a liability instead of as an item between
liabilities and equity as we have historically presented it. We are currently
evaluating the other effects of adopting FAS 150. Adopting FAS 150 may require
us to recognize as interest expense each quarter any dividends paid with respect
to the redeemable shares and the change during that quarter in the estimated
amount of cash payments that would be necessary to repurchase the redeemable
stock. However, adopting FAS 150 will not affect our cash payments or liquidity.
3. COMPREHENSIVE INCOME
Income tax provision (benefit) related to other comprehensive income
(loss) consisted of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2002 2003 2002 2003
(RESTATED) (RESTATED)
------------ ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
Related to gain or loss on derivative instruments....... $ 146 $ - $ 465 $ -
Related to foreign currency translation adjustments..... - 100 - 256
---------- ---------- ---------- ----------
Total................................................. $ 146 $ 100 $ 465 $ 256
========== ========== ========== ==========
7
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, JUNE 30,
2002 2003
------------------------------
(IN THOUSANDS OF DOLLARS)
Nonfuel merchandise............................................................... $ 55,460 $ 52,210
Petroleum products................................................................ 6,477 5,337
------------ ------------
Total inventories............................................................. $ 61,937 $ 57,547
============ ============
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the six-month
periods ended June 30, 2002 and 2003 were as follows:
SIX MONTHS ENDED
JUNE 30,
----------------------------
2002 2003
-------------- -------------
(IN THOUSANDS OF DOLLARS)
Balance as of beginning of period.................................................. $ 19,343 $ 23,585
Goodwill recorded during the period................................................ 3,654 651
----------- -----------
Balance as of end of period........................................................ $ 22,997 $ 24,236
=========== ===========
During the six months ended June 30, 2002, we recorded $3,654,000 of
goodwill as a result of the business acquisitions we completed in connection
with converting three leased sites to company-operated sites. During the six
months ended June 30, 2003, we recorded $651,000 of goodwill as a result of the
business acquisitions we completed in connection with converting two leased
sites to company-operated sites.
The net carrying amount of intangible assets is included within other
noncurrent assets in our consolidated balance sheet. Intangible assets, net
consisted of the following:
DECEMBER 31, JUNE 30,
2002 2003
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
Amortizable intangible assets:
Noncompetition agreements..................................................... $ 17,200 $ 17,200
Leasehold interest............................................................ 1,724 1,724
Other......................................................................... 849 866
------------ ------------
Total amortizable intangible assets....................................... 19,773 19,790
Less - accumulated amortization............................................... 18,848 19,438
------------ ------------
Net carrying value of amortizable intangible assets....................... 925 352
Net carrying value of trademarks..................................................... 1,398 1,398
------------ ------------
Intangible assets, net.................................................... $ 2,323 $ 1,750
============ ============
Total amortization expense for our amortizable intangible assets for
the six-month periods ended June 30, 2002 and 2003 were $948,000 and $590,000,
respectively. The estimated aggregate amortization expense for our amortizable
intangible assets for the year ending December 31, 2003 and each of the two
succeeding fiscal years are $683,000 for 2003; $181,000 for 2004 and $77,000 for
2005. Our amortizable intangible assets will be fully amortized by December 31,
2005.
8
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. STOCK-BASED EMPLOYEE COMPENSATION
We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. For granted options
that vest over time, no compensation expense is reflected in net income, as all
of those options had an exercise price equal to or greater than the market value
of the underlying common stock at the date of grant. For granted options that
vest based on attaining certain measures of performance, compensation expense is
recognized when it becomes probable that the performance triggers for such
options will be achieved. The following table illustrates the effect on net
income (loss) if we had applied the fair value recognition provisions of FAS No.
123 to stock-based employee compensation.
SIX MONTHS ENDED
JUNE 30,
------------------------------
2002
(RESTATED) 2003
------------------------------
(IN THOUSANDS OF DOLLARS)
Net income (loss), as reported (2002 amount restated)........................... $ (2,780) $ 2,730
Add back - Stock-based employee compensation expense, net of related tax
effects, included in net income (loss) as reported.......................... - -
Deduct - Total stock-based employee compensation expense determined under fair
value based methods for all awards, net of related tax effects.............. (352) (327)
---------- ---------
Pro forma net income (loss)..................................................... $ (3,132) $ 2,403
========== ==========
The fair value of these options used to calculate the pro forma
compensation expense amounts was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: a risk-free interest rate of 5.5%, a dividend yield of 0.0%, a
volatility factor of 0.0001%, and an expected life of the options of ten years.
7. COMMITMENTS AND CONTINGENCIES
Guarantees
In the normal course of business we periodically enter into agreements
that incorporate indemnification provisions. While the maximum amount to which
we may be exposed under such agreements cannot be estimated, it is the opinion
of management that these indemnifications are not expected to have a material
adverse effect on our consolidated financial position or results of operations.
We also offer a warranty of our workmanship in our truck maintenance and repair
shops, but the annual warranty expense and corresponding liability are
immaterial.
Lease Commitments
We have entered into lease agreements covering certain of our travel
center locations, warehouse and office space, computer and office equipment and
vehicles. Most long-term leases include renewal options, escalation clauses and,
in certain cases, purchase options. Certain operating leases specify scheduled
rent increases over the lease term. The effects of those scheduled rent
increases, which are included in minimum lease payments, are recognized in rent
expense over the lease term on a straight-line basis. Future minimum lease
payments required under operating leases that had remaining noncancelable lease
terms in excess of one year, as of December 31, 2002, were as follows:
9
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDING MINIMUM LEASE
DECEMBER 31, PAYMENTS
- ------------ -------------------------
(IN THOUSANDS OF DOLLARS)
2003................................................................................... $ 17,622
2004................................................................................... 18,488
2005................................................................................... 17,793
2006................................................................................... 59,538
2007................................................................................... 9,175
Thereafter............................................................................. 75,604
-----------
$ 198,220
===========
The amount in the above table for minimum lease payments for 2006
assumes we will not renew the master lease program described below and will
instead pay to the lessor the $44,077,000 residual guarantee amount. Currently,
we would expect to attempt to renew and extend the lease at that time and not
expend this amount.
On September 9, 1999, we entered into a master lease program with a
lessor that has been used to finance the construction of eight travel centers on
land we own. The initial term of the lease expires on September 9, 2006, at
which time, if the lease is not renewed and extended, we have the option to
purchase the improvements for approximately $58,188,000. Alternatively, we could
return the travel centers to the lessor. In this case, we would be required to
make a residual value guarantee payment to the lessor of $44,077,000. However,
the lessor would be required to remit to us any portion of the payment which,
when combined with the net sale proceeds of the property, exceeded the lessor's
$58,188,000 investment in the property.
These lease transactions were evaluated for lease classification in
accordance with FAS 13. We have not consolidated the lessor because the owners
of the lessor have maintained a substantial residual equity investment of at
least three percent that is at risk during the entire term of the lease. In
January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest
Entities." We must adopt this accounting guidance by July 1, 2003. Under FIN 46,
we will be required to consolidate the lessor in our consolidated financial
statements. 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 will not result in a violation of our debt covenants or have an
effect on our liquidity.
Environmental Matters
Our operations and properties are extensively regulated through
environmental laws and regulations ("Environmental Laws") that (i) govern
operations that may have adverse environmental effects, such as discharges to
air, soil and water, as well as the management of petroleum products and other
hazardous substances ("Hazardous Substances"), or (ii) impose liability for the
costs of cleaning up sites affected by, and for damages resulting from, disposal
or other releases of Hazardous Substances. We own and use underground storage
tanks and aboveground storage tanks to store petroleum products and waste at our
facilities. We must comply with requirements of Environmental Laws regarding
tank construction, integrity testing, leak detection and monitoring, overfill
and spill control, release reporting, financial assurance and corrective action
in case of a release from a storage tank into the environment. At some
locations, we must also comply with Environmental Laws relating to vapor
recovery and discharges to water. We believe that all of our travel centers are
in material compliance with applicable requirements of Environmental Laws.
We have received notices of alleged violations of Environmental Laws,
or are aware of the need to undertake corrective actions to comply with
Environmental Laws, at company-owned travel centers in a number of
jurisdictions. We do not expect that any financial penalties associated with
these alleged violations, or compliance costs incurred in connection with these
violations or corrective actions, will be material to our results of operations
10
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
or financial condition. We are conducting investigatory and/or remedial actions
with respect to releases of Hazardous Substances that have occurred subsequent
to the acquisitions 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 environmental indemnities
obtained as part of the Unocal and BP acquisitions, we cannot assure you that
additional contamination does not exist at these or additional network
properties, or that material liability will not be imposed in the future. If
additional environmental problems arise or are discovered, or if additional
environmental requirements are imposed by government agencies, increased
environmental compliance or remediation expenditures may be required, which
could have a material adverse effect on us. As of June 30, 2003, we had a
reserve for these matters of $3,474,000 and a receivable for estimated
recoveries of these estimated future expenditures of $1,451,000. We estimate
that the cash outlays related to the matters for which we have accrued this
reserve will be approximately $1,806,000 in the remainder of 2003; $852,000 in
2004; $491,000 in 2005; $119,000 in 2006; $119,000 in 2007 and $87,000
thereafter. While it is not possible to quantify with certainty the
environmental exposure, in our opinion, the potential liability, beyond that
considered in the reserve, for all environmental proceedings, based on
information known to date, will not have a material adverse effect on our
financial condition, results of operations or liquidity.
Pending Litigation
We are involved from time to time in various legal and administrative
proceedings and threatened legal and administrative proceedings incidental to
the ordinary course of our business. We believe that we are not now involved in
any litigation, individually, or in the aggregate, which could have a material
adverse affect on our business, financial condition, results of operations or
cash flows.
8. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2002 2003
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
Revolving loan borrowings......................................................... $ 242,500 $ 269,000
Revolving loan repayments......................................................... (253,100) (257,900)
----------- -----------
Revolving loan borrowings (repayments), net..................................... $ (10,600) $ 11,100
=========== ===========
Cash paid during the period for:
Interest........................................................................ $ 23,487 $ 23,343
Income taxes (net of refunds)................................................... $ 275 $ 335
During the six-month period ended June 30, 2002, we acquired $1,494,000
of inventory, property and equipment and goodwill in settlement of accounts and
notes receivable as part of the conversions of leased sites to company-operated
sites and received $250,000 of notes as partial consideration for inventories
sold in connection with the sales of two company-operated sites. During the
six-month period ended June 30, 2003, we acquired $419,000 of inventory in
settlement of accounts receivable as part of the conversions of leased sites to
company-operated sites.
11
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. OTHER INFORMATION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------
2002 2002 2003
(RESTATED) 2003 (RESTATED)
------------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
Interest and other financial costs consists of the following:
Cash interest expense.................................. $ (12,031) $ (10,271) $ (23,942) $ (20,912)
Cash interest income................................... 47 23 71 42
Amortization of discount on debt....................... (336) (381) (659) (747)
Amortization of deferred financing costs............... (752) (850) (1,480) (1,671)
---------- ---------- ---------- ----------
Interest and other financial costs, net................ $ (13,072) $ (11,525) $ (26,010) $ (23,288)
========== ========== ========== ==========
10. RELATED PARTY TRANSACTIONS
During the six-month periods ended June 30, 2002 and 2003, we made
purchases of diesel fuel in the amount of $82,851,000 and $118,504,000,
respectively, from a company in which we have a minority investment and made
sales of diesel fuel in the amount of $1,581,000 and $1,690,000, respectively,
to this affiliate. We also lease a travel center from this affiliate. Rent paid
with respect to this site for the six-month periods ended June 30, 2002 and 2003
was $204,000 and $204,000, respectively. At December 31, 2002 and June 30, 2003,
our receivables from this affiliate were $151,000 and $110,000, respectively,
while our payables to this affiliate were $357,000 and $28,000, respectively.
Certain members of our senior management have purchased common stock
pursuant to management subscription agreements. As a result of such purchases,
we have notes and related interest receivable from the management stockholders
totaling $1,497,000 and $1,450,000 at December 31, 2002 and June 30, 2003,
respectively.
11. RESTATEMENT
The accompanying balance sheet as of December 31, 2002, the
accompanying statements of operations and comprehensive income for the three-and
six-month periods ended June 30, 2002 and the accompanying statements of cash
flows and nonredeemable stockholders' equity for the six-month period ended June
30, 2002 have been restated. The adjustments related to the following:
Operating lease rent expense. We have revised our accounting for
certain of our operating leases that contain scheduled rent increases or for
which rent payments are based on a variable interest rate to recognize rent
expense on a straight-line basis over the lease term, regardless of the actual
rent payments we are required by the lease to make each period. We were not
properly accruing rent expense for such leases in accordance with FAS 13,
"Accounting for Leases," FAS 29, "Determining Contingent Rentals," and related
pronouncements. Under these pronouncements, we are required to recognize rent
expense on a straight-line basis over the lease term.
Of the operating leases covering 30 of our sites, our headquarters and
our distribution center, we have eight leases that contain scheduled rent
increases during the lease term and we have the master lease facility covering
eight sites for which a component of the rent payments is based on interest
rates that reset quarterly. For all of our leases, prior to 2003, we recognized
rent expense to the extent of the amounts actually payable each period, but
failed to record an increase or decrease in rent expense for the difference
between the straight-line amount for each lease and the amounts actually
payable. For the leases with scheduled rent increases, because the rent payments
increase over time, we underaccrued rent expense by not recognizing the effect
of future rent payment increases. For our master lease agreement, for which
quarterly rent payments are based on a variable interest rate that adjusts each
quarter and a declining balance on which the interest component of rent is
determined, we overaccrued rent expense by not recognizing the effect of future
rent payment decreases. The net effect of these misstatements was an
understatement
12
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
of rent expense each year, resulting in an understatement of noncurrent
liabilities and an overstatement of nonredeemable stockholders' equity. For the
three- and six-month periods ended June 30, 2002, the adjustments to correct our
operating lease expense accounting resulted in decreases in operating expenses
of $99,000 and $241,000, respectively. For the year ended December 31, 2002, the
adjustments increased operating expenses by $605,000. Our accounting for all of
our operating leases was brought into compliance with the applicable
pronouncements beginning with the first quarter of 2003 and, accordingly, no
adjustment to our first quarter results as a result of this matter is required.
Debt discount amortization. Each of the Subordinated Notes we issued in
November 2000 was accompanied by four warrants to purchase our common stock,
three initial warrants that were exercisable in November 2001 and one contingent
warrant that could become exercisable based on a maximum leverage ratio at
December 31, 2002. In accounting for the issuance of the Notes and warrants, we
did not originally allocate value to the contingent warrants. As a result, the
recorded amount of debt discount and additional paid-in capital were both
understated at the time of issuance by $1,450,000 and the interest expense
related to debt discount amortization was understated for each of the years
ended December 31, 2000, 2001 and 2002. We had previously recorded this
additional amount of debt discount in March 2003 when the contingent warrants
became exercisable. In March 2003, we also previously recorded an additional
$283,000 of debt discount amortization to bring the debt discount to its proper
balance as of March 31, 2003. For the three- and six-month periods ended June
30, 2002, the effect on interest expense of the adjustments to correct our
accounting were increases of $33,000 and $66,000, respectively. For the year
ended December 31, 2002, the adjustments increased interest expense by $137,000,
decreased long-term debt by $1,198,000, and increased additional paid-in capital
by $1,450,000. For the three-month period ended March 31, 2003, the adjustments
decreased interest expense by $283,000.
Other adjustments. In addition, we have made certain other restatement
adjustments, including adjustments to the tax provision, that had not been
recorded in the years in which they arose and which were determined to be
immaterial to our consolidated financial statements taken as a whole in those
prior years. These restatement adjustments generally reflect timing errors
between years and most of the adjustments had been recorded in the year
following the year they arose. Accordingly, the primary effect of these other
adjustments was to present the amounts in the proper year or quarter. As of
December 31, 2002, the net effect of reflecting these other restatement
adjustments in the proper periods was a $0.9 million net reduction in our
accumulated deficit and total nonredeemable stockholders' equity, all of which
effect was related to previously unrecorded depreciation expense-related
adjustments.
Summary of Restatement Adjustments. The following tables summarize the
effects of the restatement adjustments on certain of our previously issued
financial statements by type of adjustment and by the affected captions in our
statement of operations and comprehensive income. The various adjustments
recorded to prior years as part of the restatement have no effect on our cash
flows and liquidity and do not result in a violation of our debt covenants for
any period. However, our restated statement of cash flows data included herein
reflects a reclassification, from inclusion in operating cash flows to inclusion
in financing cash flows, of the effect on cash of the increase or decrease each
period of the amount of checks drawn in excess of bank balances.
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2002 DECEMBER 31, 2002
--------------------------------------------------------
(IN THOUSANDS OF DOLLARS)
Summary of restatement adjustments by type -
increase (decrease) to income (loss)
before income taxes:
Straight-line lease rent expense............ $ 99 $ 241 $ (605)
Debt discount amortization.................. (33) (66) (137)
Other matters............................... (117) (206) 456
------- -------- ------
Net effect of restatement adjustments
income (loss) before income taxes -
increase (decrease) in income (loss)
before income taxes....................... $ (51) $ (31) $ (286)
======= ======= ======
13
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2002 DECEMBER 31, 2002
------------------- ---------------- -----------------
(IN THOUSANDS OF DOLLARS)
Summary of restatement adjustments by
caption - increase (decrease) to income
(loss) before income taxes
Total revenues.............................. $ (108) $ (538) $ 1,141
Operating expenses.......................... (4) 34 (2,017)
Selling, general and administrative expenses (24) 303 255
Depreciation and amortization Expense....... 118 236 472
Interest and other financial Costs, net..... (33) (66) (137)
----------- ----------- ----------
Net effect of restatement adjustments on
income (loss) before income taxes -
increase (decrease) in income (loss)...... $ (51) $ (31) $ (286)
========== ========== ==========
Summary of Restated Financial Data. The following tables present a
summary of our balance sheet, statement of operations and statement of cash
flows data as previously reported and as restated as a result of the restatement
adjustments summarized above.
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2002 DECEMBER 31, 2002
-------------------------- --------------------------- ------------------------
AS AS AS
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- ------------ ---------- -----------
(IN THOUSANDS OF DOLLARS)
Statement of operations data:
- ----------------------------
Total revenues................... $ 465,752 $ 465,644 $ 862,807 $ 862,269 $1,870,447 $1,871,588
Cost of goods sold (excluding
depreciation).................. 342,489 342,489 628,775 628,775 1,389,680 1,389,680
---------- ---------- ---------- ---------- ---------- ----------
Gross profit (excluding
depreciation).................. 123,263 123,155 234,032 233,494 480,767 481,908
Operating expenses............... 82,393 82,397 163,105 163,070 330,206 332,223
Selling, general and
administrative expenses........ 9,827 9,851 19,582 19,279 38,073 37,818
Depreciation and amortization
expense........................ 15,157 15,039 29,369 29,132 60,773 60,301
Gain on sales of property and
equipment...................... (21) (21) (14) (14) (1,089) (1,089)
---------- ---------- ---------- ---------- ---------- ----------
Income from operations........... 15,907 15,889 21,990 22,027 52,804 52,655
Interest and other financial
costs, net..................... (13,039) (13,072) (25,944) (26,012) (51,286) (51,423)
Provision (benefit) for income
taxes.......................... 869 850 (1,193) (1,205) 508 (39)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ 1,999 $ 1,967 $ (2,761) $ (2,780) $ 1,010 $ 1,271
========== ========== ========== ========== ========== ==========
Accumulated deficit at beginning
of period...................... $ (206,348) $ (208,786) $ (201,588) $ (204,039) $ (201,588) $ (204,039)
========== ========== ========== ========== ========== ==========
14
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2002
------------------------ ------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
---------- ----------- ---------- -----------
(IN THOUSANDS OF DOLLARS)
Statement of cash flows data:
- ----------------------------
Cash provided by operating activities...................... $ 41,512 $ 50,787 $ 61,512 $ 75,574
Cash used in investing activities.......................... (24,267) (24,267) (42,110) (42,110)
Cash provided by (used in) financing activities............ (11,574) (20,849) (25,243) (39,305)
-------- -------- --------- --------
Net increase (decrease) in cash............................ $ 5,671 $ 5,671 $ (5,841) $ (5,841)
======== ======== ========= =========
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2002
------------------------- -------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
---------- ----------- ---------- -----------
(IN THOUSANDS OF DOLLARS)
Balance sheet data:
- ------------------
Cash....................................................... $ 25,559 $ 25,559 $ 14,047 $ 14,047
Accounts receivable, net................................... 54,542 55,542 44,295 44,295
Inventories................................................ 55,296 55,296 61,937 61,937
Deferred income taxes...................................... 4,839 4,348 4,221 4,222
Other current assets....................................... 6,916 6,916 8,164 8,164
---------- ---------- ---------- ----------
Total current assets..................................... 147,152 147,661 132,664 132,665
Property and equipment, net................................ 455,154 453,423 445,692 444,197
Goodwill................................................... 26,267 22,997 25,908 23,585
Deferred financing costs, net.............................. 28,722 28,722 27,452 27,452
Deferred income taxes...................................... 21,172 20,738 16,069 17,781
Other noncurrent assets.................................... 11,868 15,138 12,764 15,087
---------- ---------- ---------- ----------
Total assets............................................. $ 690,335 $ 688,679 $ 660,549 $ 660,767
========== ========== ========== ==========
Current maturities of long-term debt....................... $ 3,451 $ 3,451 $ 3,460 $ 3,460
Accounts payable........................................... 73,685 73,685 58,512 58,512
Other accrued liabilities.................................. 55,052 54,706 51,440 51,339
---------- ---------- ---------- ----------
Total current liabilities................................ 132,188 132,842 113,412 113,311
Long-term debt (net of unamortized discount)............... 537,957 536,688 525,131 523,934
Deferred income taxes...................................... 2,843 2,455 2,364 2,107
Other noncurrent liabilities............................... 6,268 8,635 3,696 6,209
---------- ---------- ---------- ----------
Total liabilities........................................ 679,256 678,620 644,603 645,461
Redeemable equity.......................................... 604 604 681 681
Common stock and other stockholders' equity................ 214,824 216,274 215,843 217,293
Accumulated deficit........................................ (204,349) (206,819) (200,578) (202,768)
---------- ---------- ---------- ----------
Total nonredeemable stockholders' equity................. 10,475 9,455 15,265 14,525
---------- ---------- ---------- ----------
Total liabilities and equity............................. $ 690,335 $ 688,679 $ 660,549 $ 660,767
========== ========== ========== ==========
15
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth our condensed consolidating balance
sheet schedules as of December 31, 2002 (restated) and June 30, 2003, our
condensed consolidating statement of operations schedules for the three- and
six-month periods ended June 30, 2002 (restated) and 2003 and our condensed
consolidating statement of cash flows schedules for the six-month periods ended
June 30, 2002 (restated) and 2003. In the following schedules, "Parent Company"
refers to the unconsolidated balances of TravelCenters of America, Inc.,
"Guarantor Subsidiaries" refers to the consolidated balances of TA Operating
Corporation and its domestic subsidiaries, but excluding its three Canadian
subsidiaries, and "Nonguarantor Subsidiaries" refers to the combined balances of
TA Franchise Systems Inc. and our three Canadian subsidiaries, which are
included only since January 2003. "Eliminations" represent the adjustments
necessary to (a) eliminate intercompany transactions and (b) eliminate
investments in subsidiaries.
The Guarantor Subsidiaries (TA Operating Corporation, TA Licensing,
Inc., TA Travel, L.L.C., TravelCenters Realty, L.L.C. and TravelCenters
Properties, L.P.) are direct or indirect wholly-owned subsidiaries of ours and
have fully and unconditionally, jointly and severally, guaranteed the
indebtedness of TravelCenters of America, Inc., which consists of the Senior
Credit Facility and the Senior Subordinated Notes due 2009.
16
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:
DECEMBER 31, 2002 (RESTATED)
-----------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------------- ------------- ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash...................................... $ - $ 14,047 $ - $ - $ 14,047
Accounts receivable, net.................. - 44,429 857 (991) 44,295
Inventories............................... - 61,937 - - 61,937
Deferred income taxes..................... - 4,182 40 - 4,222
Other current assets...................... 445 7,719 - - 8,164
---------- ---------- ---------- ---------- ----------
Total current assets................. 445 132,314 897 (991) 132,665
Property and equipment, net.................. - 444,197 - - 444,197
Goodwill..................................... - 23,585 - - 23,585
Deferred financing costs..................... 27,452 - - - 27,452
Deferred income taxes........................ 23,696 (5,915) - - 17,781
Other noncurrent assets.................... 996 14,091 - - 15,087
Investment in subsidiaries................... 241,515 - - (241,515) -
---------- ---------- ---------- ---------- ----------
Total assets......................... $ 294,104 $ 608,272 $ 897 $ (242,506) $ 660,767
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...... $ 3,280 $ 180 $ - $ - $ 3,460
Accounts payable.......................... - 58,354 158 - 58,512
Other accrued liabilities................. 2,979 48,211 1,141 (991) 51,339
---------- ---------- ---------- ---------- ----------
Total current liabilities............ 6,259 106,745 1,298 (991) 113,311
Long-term debt (net of unamortized discount). 521,243 2,691 - - 523,934
Deferred income taxes........................ - 2,107 - - 2,107
Intercompany advances........................ (249,859) 255,226 (5,367) - -
Other noncurrent liabilities................. - 6,209 - - 6,209
---------- ---------- ---------- ---------- ----------
Total liabilities.................... 277,643 372,978 (4,069) (991) 645,561
Redeemable equity............................ 681 - - - 681
Nonredeemable stockholders' equity:
Common stock and other stockholders'
equity.................................. 218,548 192,336 - (193,591) 217,293
Retained earnings (accumulated deficit)... (202,768) 42,958 4,966 (47,924) (202,768)
---------- ---------- ---------- ---------- ----------
Total nonredeemable stockholders'
equity............................ 15,780 235,294 4,966 (241,515) 14,525
---------- ---------- ---------- ---------- ----------
Total liabilities, redeemable equity
and nonredeemable stockholders'
equity............................ $ 294,104 $ 608,272 $ 897 $ (242,506) $ 660,767
========== ========== ========== ========== ==========
17
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
---------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash.................................... $ - $ 25,108 $ 196 $ - $ 25,304
Accounts receivable, net................ - 56,377 818 (1,101) 56,094
Inventories............................. - 57,414 133 - 57,547
Deferred income taxes................... - 3,688 40 - 3,728
Other current assets.................... 190 6,558 48 (119) 6,677
---------- ---------- ---------- ---------- ----------
Total current assets............... 190 149,145 1,235 (1,220) 149,350
Property and equipment, net................ - 439,233 6,105 - 445,338
Goodwill................................... - 24,236 - - 24,236
Deferred financing costs, net.............. 25,781 - - - 25,781
Deferred income taxes...................... 22,821 (5,941) - - 16,880
Other noncurrent assets.................... 928 18,532 - (4,122) 15,338
Investment in subsidiaries................. 252,382 1,689 - (254,071) -
---------- ---------- ---------- ---------- ----------
Total assets....................... $ 302,102 $ 626,894 $ 7,340 $ (259,413) $ 676,923
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.. $ 3,165 $ 180 $ - $ - $ 3,345
Accounts payable...................... - 66,659 184 - 66,843
Other accrued liabilities............. 1,485 53,122 1,425 (1,220) 54,812
---------- ---------- ---------- ---------- ----------
Total current liabilities........ 4,650 119,961 1,609 (1,220) 125,000
Long-term debt (net of unamortized discount) 520,222 2,659 4,122 (4,122) 522,881
Deferred income taxes.................... - 2,151 - - 2,151
Intercompany payable (receivable)........ (241,709) 247,164 (5,455) - -
Other noncurrent liabilities............. - 8,575 - - 8,575
---------- ---------- ---------- ---------- ----------
Total liabilities................ 283,163 380,510 276 (5,342) 658,607
Redeemable equity........................ 648 - - - 648
Nonredeemable stockholders' equity:
Common stock and other
stockholders' equity................. 218,329 192,732 2,052 (195,407) 217,706
Retained earnings
(accumulated deficit)................ (200,038) 53,652 5,012 (58,664) (200,038)
---------- ---------- ---------- ---------- -----------
Total nonredeemable stockholders'
equity........................ 18,291 246,384 7,064 (254,071) 17,668
---------- ---------- ---------- ---------- ----------
Total liabilities, redeemable
equity and nonredeemable
stockholders' equity.......... $ 302,102 $ 626,894 $ 7,340 $ (259,413) $ 676,923
========== ========== ========== ========== ==========
18
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:
THREE MONTHS ENDED JUNE 30, 2002 (RESTATED)
--------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 302,293 $ - $ - $ 302,293
Nonfuel................................ - 159,354 - - 159,354
Rent and royalties..................... - 3,610 1,534 (1,147) 3,997
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 465,257 1,534 (1,147) 465,644
Cost of goods sold (excluding depreciation) - 342,489 - - 342,489
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 122,768 1,534 (1,147) 123,155
Operating expenses........................ - 82,384 1,160 (1,147) 82,397
Selling, general and
administrative expenses............... 195 9,281 375 - 9,851
Depreciation and amortization expense..... - 15,039 - - 15,039
(Gain) on sales of property and equipment. - (21) - - (21)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (195) 16,085 (1) - 15,889
Interest and other financial costs, net... (8,540) (4,532) - - (13,072)
Equity income (loss)...................... 7,731 - - (7,731) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... (1,004) 11,553 (1) (7,731) 2,817
Provision (benefit) for income taxes...... (2,971) 3,821 - - 850
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 1,967 $ 7,732 $ (1) $ (7,731) $ 1,967
========== ========== ========== ========== ==========
19
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 357,783 $ 2,473 $ - $ 360,256
Nonfuel................................ - 165,978 865 - 166,843
Rent and royalties..................... - 3,120 1,481 (1,101) 3,500
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 526,881 4,819 (1,101) 530,599
Cost of goods sold (excluding depreciation) - 396,964 2,684 - 399,648
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 129,917 2,135 (1,101) 130,951
Operating expenses........................ - 85,936 1,670 (1,101) 86,505
Selling, general and
administrative expenses............... 201 9,775 239 - 10,215
Depreciation and amortization expense..... - 14,497 129 - 14,626
(Gain) on sales of property and equipment - (261) - - (261)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (201) 19,970 97 - 19,866
Interest and other financial costs, net... (6,017) (5,437) (71) - (11,525)
Equity income (loss)...................... 9,383 (104) - (9,279) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... 3,165 14,429 26 (9,279) 8,341
Provision (benefit) for income taxes...... (2,096) 5,132 44 - 3,080
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 5,261 $ 9,297 $ (18) $ (9,279) $ 5,261
========== ========== ========== ========== ==========
20
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 (RESTATED)
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 556,309 $ - $ - $ 556,309
Nonfuel................................ - 297,973 - - 297,973
Rent and royalties..................... - 7,199 2,959 (2,171) 7,987
--------- --------- --------- --------- ---------
Total revenues......................... - 861,481 2,959 (2,171) 862,269
Cost of goods sold (excluding depreciation) - 628,775 - - 628,775
--------- --------- --------- --------- ---------
Gross profit (excluding depreciation)..... - 232,706 2,959 (2,171) 233,494
Operating expenses........................ - 163,042 2,199 (2,171) 163,070
Selling, general and
administrative expenses............... 389 18,129 761 - 19,279
Depreciation and amortization expense..... - 29,132 - - 29,132
(Gain) on sales of property and equipment - (14) - - (14)
--------- --------- --------- --------- ---------
Income (loss) from operations............. (389) 22,417 (1) - 22,027
Interest and other financial costs, net... (16,969) (9,043) - - (26,012)
Equity income (loss)...................... 8,555 - - (8,555) -
--------- --------- --------- --------- ---------
Income (loss) before income taxes......... (8,803) 13,374 (1) (8,555) (3,985)
Provision (benefit) for income taxes...... (6,023) 4,818 - - (1,205)
---------- --------- --------- --------- ---------
Net income (loss)......................... $ (2,780) $ 8,556 $ (1) $ (8,555) $ (2,780)
========= ========= ========= ========= =========
21
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ----------
(IN THOUSANDS OF DOLLARS)
Revenues:
Fuel................................... $ - $ 769,911 $ 4,538 $ - $ 774,449
Nonfuel................................ - 311,587 1,479 - 313,066
Rent and royalties..................... - 6,241 2,839 (2,065) 7,015
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 1,087,739 8,856 (2,065) 1,094,530
Cost of goods sold (excluding depreciation) - 842,945 4,902 - 847,847
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 244,794 3,954 (2,065) 246,683
Operating expenses........................ - 168,402 3,013 (2,065) 169,350
Selling, general and
administrative expenses............... 401 19,413 491 - 20,305
Depreciation and amortization expense..... - 29,200 197 - 29,200
(Gain) on sales of property and equipment - (293) - - (293)
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (401) 28,269 253 - 28,121
Interest and other financial costs, net... (11,876) (11,293) (119) - (23,288)
Equity income (loss)...................... 10,865 (125) - (10,740) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... (1,412) 16,851 134 (10,740) 4,833
Provision (benefit) for income taxes...... (4,142) 5,904 88 - 1,850
---------- ---------- ---------- ---------- ----------
Income (loss) before the cumulative effect
of a change in accounting principle. 2,730 10,947 46 (10,740) 2,983
Cumulative effect of a change in
accounting principle, net of related
taxes............................... - (253) - - (253)
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 2,730 $ 10,694 $ 46 $ (10,740) $ 2,730
========== ========== ========== ========== ==========
22
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SCHEDULES:
SIX MONTHS ENDED JUNE 30, 2002 (RESTATED)
----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ (14,301) $ 65,015 $ 73 $ - $ 50,787
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (3,063) - - (3,063)
Proceeds from sales of property and
equipment........................... - 2,535 - - 2,535
Capital expenditures................... - (23,739) - - (23,739)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (24,267) - - (24,267)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - (9,275) - - (9,275)
Revolving loan borrowings
(repayments), net................... (10,600) - - - (10,600)
Long-term debt repayments........... (820) (43) - - (863)
Issuance of common stock............ 39 - - - 39
Merger and recapitalization
expenses paid.................... (150) - - - (150)
Intercompany advances............... 25,832 (25,759) (73) - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 14,301 (35,077) (73) - (20,849)
---------- ---------- ---------- ---------- ----------
Net increase in cash................ - 5,671 - - 5,671
Cash at the beginning of the period....... - 19,888 - - 19,888
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 25,559 $ - $ - $ 25,559
========== ========== ========== ========== ==========
23
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ -------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... $ (6,073) $ 44,702 $ 241 $ 1,816 $ 40,686
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.................. - (3,035) (5,267) - (8,302)
Proceeds from sales of property and
equipment........................... - 1,378 - - 1,378
Capital expenditures................... - (21,060) (176) - (21,236)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities........................ - (22,717) (5,443) - (28,160)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in checks drawn in
excess of bank balances............. - 696 - - 696
Revolving loan borrowings
(repayments), net................... 11,100 - - - 11,100
Long-term debt repayments.............. (12,925) (89) - - (13,014)
Issuance of common stock............... - - 1,816 (1,816) -
Repurchase of common stock............. (252) - - - (252)
Intercompany advances.................. 8,150 (11,531) 3,381 - -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.............. 6,073 (10,924) 5,197 (1,816) (1,470)
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on
cash.............................. - - 201 - 201
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash..... - 11,061 196 - 11,257
---------- ---------- ---------- ---------- ----------
Cash at the beginning of the period....... - 14,047 - - 14,047
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............. $ - $ 25,108 $ 196 $ - $ 25,304
========== ========== ========== ========== ==========
24
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and selected notes to unaudited
consolidated financial statements included herein, and the audited financial
statements and the Management's Discussion and Analysis included with our Form
10-K for the year ended December 31, 2002. Our results of operations for a
particular quarter may not be indicative of results expected during the other
quarters or for the entire year.
CRITICAL ACCOUNTING POLICIES
We have no material changes to the disclosure on this matter made in
our annual report on Form 10-K for the year ended December 31, 2002, except that
on January 1, 2003 we adopted FAS 143, "Accounting for Asset Retirement
Obligations." As of January 1, 2003, we recognize the future cost to remove an
underground storage tank over the estimated useful life of the storage tank. A
liability for the fair value of an asset retirement obligation with a
corresponding increase to the carrying value of the related long-lived asset is
recorded at the time an underground storage tank is installed. We will amortize
the amount added to property and equipment and recognize accretion expense in
connection with the discounted liability over the remaining life of the
respective underground storage tank. The estimated liability is based on
historical experiences in removing these tanks, estimated tank useful lives,
external estimates as to the cost to remove the tanks in the future and
regulatory requirements. The liability is a discounted liability using a
credit-adjusted risk-free rate of approximately 12.8%. Revisions to the
liability could occur due to changes in tank removal costs, tank useful lives or
if new regulations regarding the removal of such tanks are enacted. Upon
adoption of FAS 143, we recorded a discounted liability of $589,000, increased
property and equipment by $172,000 and recognized a one-time cumulative effect
charge of $253,000 (net of deferred tax benefit of $164,000).
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 153 sites located in 41 states and
Ontario, Canada. Our operations are conducted through three distinct types of
travel centers:
o sites owned or leased and operated by us, which we refer to as
company-operated sites;
o sites owned by us and leased to independent lessee-franchisees,
which we refer to as leased sites; and
o sites owned and operated by independent franchisees, which we
refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S. interstate
highway system, typically on 20- to 25-acres sites. Most of our network
properties were developed more than 20 years ago when prime real estate
locations along the interstate highway system were more readily available than
they are today, making a network such as ours difficult to replicate. Operating
under the "TravelCenters of America" and "TA" brand names, our nationwide
network provides an advantage to long-haul trucking fleets by enabling them to
route their trucks within a single network from coast to coast.
One of the primary strengths of our business is the diversity of our
revenue sources. We have a broad range of product and service offerings,
including diesel fuel and gasoline, truck repair and maintenance services,
full-service restaurants, more than 20 different brands of fast food
restaurants, travel and convenience stores with a selection of over 4,000 items
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, particularly in times of historically
high prices. For the six-month periods ended June 30, 2002 and 2003, our
revenues and gross profit were composed as follows:
25
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2003
(RESTATED)
----------- ---------
Revenues:
Fuel................................................................................ 64.5% 70.8%
Non-fuel............................................................................ 34.6% 28.6%
Rent and royalties.................................................................. 0.9% 0.6%
--------- ---------
Total revenues................................................................ 100.0% 100.0%
========= =========
Gross profit (excluding depreciation):
Fuel................................................................................ 21.3% 22.2%
Non-fuel............................................................................ 75.3% 74.9%
Rent and royalties.................................................................. 3.4% 2.8%
--------- ---------
Total gross profit (excluding depreciation)................................... 100.0% 100.0%
========= =========
COMPOSITION OF OUR NETWORK
The changes in the number of sites within our network and in their
method of operation (company-operated, leased or franchisee-owned) are
significant factors influencing the changes in our results of operations. The
following table summarizes the changes in the composition of our network from
December 31, 2001 through June 30, 2003:
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
-------- ------ ----------- -----
Number of sites at December 31, 2001....................