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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, 2004
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, 2005, there were outstanding 6,937,003 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................... 15
Item 6. Selected Financial Data........................................................ 17
Item 7. Management's Discussion and Analysis........................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 36
Item 8. Financial Statements and Supplementary Data.................................... 38
Item 9. Changes in and Disagreements With Accountants.................................. 78
Item 9A. Controls and Procedures........................................................ 78
Item 9B. Other Information.............................................................. 78
PART III
Item 10. Our Directors and Executive Officers........................................... 78
Item 11. Executive Compensation......................................................... 78
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters....................................................... 79
Item 13. Certain Relationships and Related Transactions................................. 79
Item 14. Principal Accounting Fees and Services......................................... 79
PART IV
Item 15. Exhibits, Financial Statement Schedules........................................ 80
SIGNATURES................................................................................... 82
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 North
American 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, 2004, our geographically diverse network consisted of 160 sites
located in 41 states and the province of Ontario, Canada. Our operations are
conducted through three distinct types of travel centers:
- sites operated by us, which we refer to as company-operated
sites;
- sites owned by us and leased to independent
lessee-franchisees, which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we
refer to as franchisee-owned sites.
Our travel centers are located at key points along the U.S.
interstate highway system and in Canada, 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, more than 20 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. 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.
- In January 2003, we began operating in Canada through the
acquisition of a travel center located in Ontario.
- In December 2004, we acquired eleven company-operated travel
centers from Rip Griffin Truck Service Center, Inc., which
assets we refer to as the Rip Griffin network. These eleven
sites are located in seven states, primarily in the
southwestern 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
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of whom is an affiliate of certain of our former shareholders.
Since that time, certain of these investors have sold their
shares to other investors, including affiliates of certain of
the Other Investors. Such sales of our shares are not frequent
but could occur in the future.
- We redeemed all shares of our common and preferred stock
outstanding prior to the closing of the merger, with the
exception of 473,064 shares of common stock with a market
value at that time of $15.0 million that were retained by
continuing stockholders, and cancelled all then outstanding
common stock options and warrants, for cash payments totaling
$263.2 million.
- We repaid all amounts outstanding under our then existing debt
agreements.
- We borrowed $328.3 million under a secured credit agreement
with a group of lenders and issued units consisting of Senior
Subordinated Notes due 2009 with a face amount of $190.0
million and initial warrants and contingent warrants that in
the aggregate could be exercised in exchange for 277,165
shares of our common stock.
- We merged National Auto/Truckstops, Inc. with and into TA
Operating Corporation.
Prior to the closing of the transactions described above, we issued
137,572 shares of common stock for cash proceeds of $3.7 million upon the
exercise of stock options held by existing shareholders, which shares remained
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, 2004, 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 had the following direct or indirect
wholly owned subsidiaries:
- TA Licensing, Inc.
- TA Travel, L.L.C.
- 3073000 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;
- 11 company-operated sites were acquired from Rip Griffin in 2004;
- 48 leased sites were converted to company-operated sites, two during
2004, six during 2003, five during 2002, three during 2000, five
during 1998 and 27 during 1997;
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- 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;
- six sites were razed and rebuilt, two in 1999, two in 2000, one in
2001 and one in 2003;
- five company-operated sites were added to our network through
individual site acquisitions or management agreements, one during
2004, two during 2003 and two during 2000;
- franchise agreements covering 28 franchisee-owned sites were
terminated, one in 2000 and 27 in 1997;
- 36 sites we owned were sold, two during 2004, three during 2003,
three during 2002, four during 2001, two during 2000, five during
1999, two during 1998 and 15 during 1997;
- three franchisee-owned sites were added to our network, one in 2002,
one in 1999 and one in 1998; and
- three company-operated sites were closed, one during 2003 (for which
our selling effort continues), and two during 1999 (both of which
have been sold - one in 2004 and one in 2002).
In 1997, we initiated a capital program to upgrade, rebrand and
re-image our travel centers and to build new travel centers. Through December
31, 2004, we had completed full re-image projects at 37 of our sites at an
average investment of $2.2 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 67 sites at an average cost of $0.3
million. In addition to improving our existing sites, we have identified several
new interstate areas available for our network's expansion. We have designed a
"prototype" facility and a smaller "protolite" facility to standardize our
travel centers and expand our network 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 eight prototype facilities and three
protolite facilities. Further, we are currently developing one prototype
facility, which we expect to open in 2006, and one protolite facility, which we
expect to open in 2006. 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.
REFINANCINGS
2000 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 an amended and restated credit agreement (which we
refer to as the 2000 Credit Agreement) that consisted of a fully-drawn $328
million term loan facility and a $100 million revolving credit facility. The
proceeds from these borrowings, along with proceeds from the issuance of common
stock and other cash on hand, were used to:
- pay for the tender offer and consent solicitation for our 10 1/4%
Senior Subordinated Notes due 2007, including accrued interest,
premiums and a prepayment penalty;
- repay all amounts, including accrued interest, then outstanding
under our existing amended and restated credit agreement;
- redeem in full all of our then existing senior secured notes and pay
related accrued interest and prepayment penalties;
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- 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.
2004 Refinancing. On December 1, 2004, we completed a refinancing,
which we refer to as the "2004 Refinancing." In the 2004 Refinancing, we
borrowed $500 million under an Amended and Restated Credit Agreement that we
refer to as the 2004 Credit Agreement. The 2004 Credit Agreement included a
fully-drawn $475 million term loan facility and a $125 million revolving credit
facility under which $25 million was drawn at closing. The proceeds from these
borrowings were utilized to:
- repay all amounts, including accrued interest, outstanding under the
existing amended and restated credit agreement into which we had
entered in November 2000 and which we refer to as the 2000 Credit
Agreement;
- pay for the acquisition of the assets acquired from Rip Griffin;
- terminate the master lease facility under which since 1999 we built
eight travel centers on land we owned, thereby gaining ownership of
the improvements at those eight sites; and
- pay fees and expenses related to the financing and the acquisition
transactions.
See "Liquidity and Capital Resources" in Item 7 for further
discussion of our outstanding indebtedness.
OUR TRAVEL CENTERS
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 138 company-operated sites as of December
31, 2004, we offered branded gasoline at 105 sites and unbranded
gasoline at 21 sites. Twelve company-operated sites do not sell
gasoline.
- 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," "Country Fare" and "Fork in the Road"
proprietary brands, offer "home style" meals through menu table
service and buffets. We also offer more than 20 different brands of
QSRs, including Arby's, Burger King, Pizza Hut,
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Popeye's Chicken & Biscuits, Sbarro, Starbuck's Coffee, Subway and
Taco Bell. We generally attempt to locate QSRs within the main
travel center building, as opposed to constructing stand-alone
buildings. As of December 31, 2004, we had 172 QSRs in our
company-operated sites, and 108 of our network travel centers
offered at least one branded QSR.
- Truck Repair and Maintenance Shops. All but six 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. 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, 2004, all but
nine of our network sites that have truck repair and maintenance
shops were participating in the Freightliner ServicePoint Program.
Each of these nine sites was acquired from Rip Griffin in December
2004 and is expected to be added to the Freightliner ServicePoint
Program during 2005.
- 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, and music and video
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. Most 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 15 to 20
pay telephones. 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. Seventeen of these motels are
operated under franchise grants from nationally branded motel
chains, including Days Inn, HoJo Inn, Knight's Inn, Rodeway and
Travelodge.
OPERATIONS
Fuel Supply. We purchase diesel fuel from various suppliers at rates
that fluctuate with market prices and generally 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.
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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 hold less than
three days of diesel fuel inventory at our sites. 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
may engage, from time to time, in a minimal level of hedging of our fuel
purchases with futures and other derivative instruments that primarily are
traded on the New York Mercantile Exchange.
The Environmental Protection Agency has promulgated regulations to
decrease the sulfur content of diesel fuel by 2006. The enactment of these
regulations could reduce the supply and/or increase the cost of diesel fuel. A
material decrease in the volume of diesel fuel sold for an extended period of
time or instability in the prices of diesel fuel could have a material adverse
effect on us.
Non-fuel products supply. There are many sources for the large
variety of non-fuel products that we purchase and sell. We have developed
strategic relationships with several suppliers of key non-fuel products,
including Freightliner LLC for truck parts, Bridgestone/Firestone Tire Sales
Company for truck tires, and ExxonMobil for Mobil 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 2004, the distribution center shipped
approximately $50.3 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. 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.
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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 250 sites, Flying J Inc., with approximately 165 sites, and Love's
Travel Stops & Country Stores, Inc., with approximately 100 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 61 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,
truck quick-lube facilities and auto parts service centers. We also compete with
a variety of establishments located within walking distance of our travel
centers, including full-service restaurants, QSRs, electronics stores,
drugstores and travel and convenience stores.
A significant portion of all intercity diesel fuel consumption by
trucking fleets and companies with their own trucking capability occurs through
self-fueling at both dedicated terminals and at fuel depots strategically
located across the country. These terminals often provide facilities for truck
repair and maintenance. Our pricing decisions for diesel fuel and truck repair
and maintenance services cannot be made without considering the existence of
these operations and their capacity for expansion. We believe that a long-term
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. However, during the past few years of historically high
fuel prices, this long-term trend has been somewhat slowed, at least
temporarily, as trucking fleets have utilized their existing terminals to supply
an increased level of their fuel and repair service needs.
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. State
governments that want to earn additional revenues from these rest areas have
repeatedly requested that the federal government allow for commercialization.
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 will increase the
number of outlets competing with us for the business of highway travelers. It is
possible we may have an opportunity to play a role in these commercialization
efforts, which would reduce any negative effects of such commercialization on
our travel center business. As of early 2005, language in the pending highway
reauthorization bill clearly sets forth a continued ban on commercialization of
state-owned interstate rest areas.
RELATIONSHIPS WITH THE OPERATORS AND FRANCHISEE-OWNERS
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 license
from TA Licensing. TA Franchise Systems has no tangible assets.
Network Franchise Agreement
As of December 31, 2004, there were 16 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
9
terms and conditions are not satisfied by the franchisee. The average remaining
term of these agreements, including all renewal periods, is approximately 18
years. The initial terms of the current network franchise agreements expire in
July 2012 through October 2014.
Protected Territory. Subject to specified exceptions, including
existing operations, so long as the franchisee is not in default under the
network franchise agreement, we agree not to operate, or allow another person to
operate, a travel center or travel center business that uses the "TA" brand,
within 75 miles in either direction along the primary interstate on which the
franchised site is located.
Restrictive Covenants. Except for the continued operation of
specified businesses identified by the franchisee at the time of execution of
the network franchise agreement, the franchisee cannot, during the term of the
agreement, operate any travel center or truck stop-related business under a
franchise agreement, licensing agreement or marketing plan or system of 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 default by TA Franchise System, 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
10
- if we own the franchise premises, we make a good faith determination
to sell the premises or convert it to a use other than for a truck
stop or travel center.
If we do not renew the network franchise agreement due to any of the
three foregoing reasons, we may not enter into another network franchise
agreement relating to the same franchised premises with another party within 180
days of the expiration date on terms materially different from those offered to
the prior franchisee, unless the prior franchisee is offered the right, for a
period of 30 days, to accept a renewal of the network franchise agreement on
those different terms. If we do not renew the network franchise agreement
because we make a good faith determination to withdraw from the marketing of
fuel in the area of the franchised premises, we may not sell the franchised
premises or franchised business for 90 days following the expiration of the
network franchise agreement. The prior franchisee does not have a right of first
refusal on the sale of the franchised premises.
Network Lease Agreement
In addition to franchise fees, we also collect rent from those
franchisees that operate a travel center owned by us. As of December 31, 2004,
there were 12 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 18
years. The initial terms of the current network lease agreements expire in July
2012 through December 2012.
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 six 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
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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. The average remaining term of these agreements is approximately five
years.
Protected Territory. So long as the franchisee is not in default
under the franchise agreement, we agree not to operate, or allow another person
to operate, a 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.
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REGULATION
Franchise Regulation. State franchise laws apply to TA Franchise
Systems, and some of these laws require TA Franchise Systems to register with
the state before it may offer a franchise, require TA Franchise Systems to
deliver specified disclosure documentation to potential franchisees, and impose
special regulations upon petroleum franchises. Some state franchise laws also
impose restrictions on TA Franchise Systems' ability to terminate or not to
renew its respective franchises, and impose other limitations on the terms of
the franchise relationship or the conduct of the franchisor. Finally, a number
of states include, within the scope of their petroleum franchising statutes,
prohibitions against price discrimination and other allegedly anticompetitive
conduct. These provisions supplement applicable antitrust laws at the federal
and state levels.
The Federal Trade Commission, or the FTC, regulates us under their
rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising
and Business Opportunity Ventures." Under this rule, the FTC requires that
franchisors make extensive disclosure to prospective franchisees but does not
require registration. We believe that we are in compliance with this rule.
We cannot predict the effect of any future federal, state or local
legislation or regulation on our franchising operations.
Environmental Regulation. Our operations and properties are
extensively regulated by Environmental Laws that:
- govern operations that may have adverse environmental effects, such
as discharges to air, soil and water, as well as the management of
Hazardous Substances or
- impose liability for the costs of cleaning up sites affected by, and
for damages resulting from disposal or other releases of Hazardous
Substances.
We own and use underground storage tanks and aboveground storage
tanks to store petroleum products and waste at our facilities. These tanks must
comply with requirements of Environmental Laws regarding tank construction,
integrity testing, leak detection and monitoring, overfill and spill control,
release reporting, financial assurance and corrective action in case of a
release. At some locations, we must also comply with Environmental Laws relating
to vapor recovery and discharges to water. We have completed necessary upgrades
to underground storage tanks to comply with federal regulations that took effect
on December 22, 1998, and believe that all of our travel centers are in material
compliance with applicable requirements of Environmental Laws.
We have received notices of alleged violations of Environmental
Laws, or are otherwise aware of the need to undertake corrective actions to
comply with Environmental Laws, at travel centers owned by us in a number of
jurisdictions. We do not expect that any financial penalties associated with
these alleged violations, or instances of noncompliance, or compliance costs
incurred in connection with these violations or corrective actions, will be
material to our results of operations or financial condition. We are conducting
investigatory and/or remedial actions with respect to releases of Hazardous
Substances that have occurred subsequent to the acquisition of the BP network
and also regarding historical contamination at certain of the former Unocal,
Burns Bros., Travel Ports and Rip Griffin 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, we cannot
be certain 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. We have estimated the current
ranges of remediation costs at currently active sites and what we believe will
be our ultimate share for those costs and, as of December 31, 2004, we had a
13
reserve of $13.2 million for unindemnified environmental matters for which we
are responsible, a receivable for estimated recoveries of these estimated future
expenditures of $3.7 million and $5.3 million of cash in an escrow account to
fund certain of these estimated expenditures, leaving an estimated net amount of
$4.1 million to be funded from future operating cash flows. In addition, we have
obtained environmental insurance of up to $35.0 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 environmental indemnification 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 environmental
agreement, Unocal was responsible for all costs incurred for:
- remediation of environmental contamination, and
- otherwise bringing the properties into compliance with Environmental
Laws as in effect at the date of the acquisition of the Unocal
network,
with respect to the matters identified in the Phase I or Phase II environmental
assessments, which matters existed on or prior to the date of the acquisition of
the Unocal network. Under the terms of this agreement, Unocal also was required
to 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. In January 2004, a Buy-Out
Agreement between Unocal and us became effective and Unocal's obligations to us
under the April 1993 environmental agreement were terminated. In consideration
for releasing Unocal from its obligations under the environmental agreement,
Unocal paid us $2.6 million of cash, funded an escrow account with $5.4 million
to be drawn by us as we incur related remediation costs, and purchased insurance
policies that cap our total future expenditures and provide protection against
significant unidentified matters that existed prior to April 1993. We are now
responsible for all remediation at the former Unocal sites that we still own. We
estimated the costs of the remediation activities for which we assumed
responsibility from Unocal in January 2004 to be approximately $8.2 million at
that time, which amount we expect will be fully covered by the cash received
from Unocal and reimbursements from state tank funds.
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. The
time period for making new claims for indemnification from BP ended on 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 be
certain that BP, if additional environmental claims or liabilities were to arise
under the environmental agreement, would not dispute our claims for
indemnification.
14
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. As part of the Rip Griffin
acquisition, Phase I environmental assessments were conducted on all eleven
sites acquired. Under the asset purchase agreement with Rip Griffin we released
Rip Griffin from any environmental liabilities that may have existed as of the
Rip Griffin acquisition date, other than specified non-waived environmental
claims as described in the agreement with Rip Griffin.
EMPLOYEES
As of December 31, 2004, we employed 11,510 people on a full- or
part-time basis. Of this total, 11,094 were employees at our company-operated
sites, 362 performed managerial, operational or support services at our
headquarters or elsewhere and 54 employees staffed the distribution center.
Except for eleven employees at one site, all 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 138 company-operated sites and 12 leased sites in operation
as of December 31, 2004, the land and improvements at 12 are leased, six sites
are subject to ground leases of the entire site, five sites are subject to
ground leases of portions of these sites, and one site is operated pursuant to a
management agreement. We consider our facilities suitable and adequate for the
purposes for which they are used. In addition to these 150 sites, we own two
sites that will be developed as travel centers 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 2004.
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 December 31, 2004, the outstanding shares of our
common stock were held of record by 36 stockholders.
15
Dividends. We have never paid or declared any cash dividends on our
common stock. 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 2002 and 2003, 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.
In a series of sales to management, we sold the following:
- In 2002, we sold 7,302 shares at $31.75 per share. The proceeds from
these sales were used for general corporate purposes.
- In 2003, we sold 10,000 shares at $30.26 per share. These shares had
been purchased from the estate of a deceased former management
stockholder at this same price. The proceeds from these sales were
used to fund the related purchase.
Summary of Equity Compensation Plans. The following table sets forth
information about all our equity compensation plans in effect as of December 31,
2004, 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 available for
securities to be (B) future issuance
issued upon Weighted-average of 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..................... 939,375 $ 31.75 -
Equity compensation plans
not approved by
stockholders................... - - -
------------------- ---------------- -------------------
Total............................ 939,375 $ 31.75 -
=================== ================ ===================
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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 also be
read in conjunction with "Management's Discussion and Analysis" and our audited
consolidated financial statements included elsewhere in this annual report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2000(1) 2001 2002(2) 2003 2004(3)(4)
------------ ----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT GALLONAGE AND SITE COUNT AMOUNTS)
INCOME STATEMENT DATA:
Revenues:
Fuel................................ $ 1,485,732 $ 1,331,807 $ 1,237,989 $ 1,513,648 $ 1,959,239
Non-fuel............................ 554,219 585,314 617,342 649,502 707,958
Rent and royalties.................. 18,822 17,491 15,539 13,080 10,667
------------ ----------- ----------- ----------- -----------
Total revenues.................... 2,058,773 1,934,612 1,870,870 2,176,230 2,677,864
Gross profit (excluding depreciation)... 447,853 466,859 481,190 501,464 530,837
Income from operations.................. (3,919) 39,949 51,937 59,977 69,285
Net income (loss)....................... (38,673) (10,054) 1,271 8,891 14,862
BALANCE SHEET DATA (END OF PERIOD):
Total assets............................ $ 736,301 $ 679,940 $ 660,767 $ 650,567 $ 897,729
Long-term debt (net of unamortized
discount)........................... 546,166 547,534 523,934 502,033 682,892
Redeemable equity....................... 527 565 681 1,909 1,864
Working capital......................... 38,093 27,366 19,354 19,630 47,784
OTHER FINANCIAL AND OPERATING DATA:
Total diesel fuel sold (in thousands of
gallons)............................ 1,384,759 1,369,251 1,349,741 1,341,125 1,338,020
Capital expenditures, excluding business
acquisitions........................ $ 68,107 $ 54,490 $ 42,640 $ 44,196 $ 122,919
Cash flows (used in) provided by:
Operating activities................ 65,106 30,381 75,574 77,324 97,146
Investing activities................ (77,115) (46,234) (42,110) (50,486) (235,220)
Financing activities................ 22,988 6,722 (39,305) (26,086) 168,918
Adjusted EBITDA(5)...................... 102,755 105,189 113,561 121,921 131,488
NUMBER OF SITES (END OF PERIOD):
Company-operated sites.................. 122 119 122 126 138
Leased sites............................ 26 25 20 14 12
Franchisee-owned sites.................. 9 9 10 10 10
------------ ----------- ----------- ----------- -----------
Total network sites............... 157 153 152 150 160
============ =========== =========== =========== ===========
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Notes to Selected Financial Data
(1) 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 and by
$20,910,000 of losses from the early extinguishment of debt related to the
recapitalization. Prior to 2003, the loss from the early extinguishment of
debt was classified, net of the related income tax benefits, as an
extraordinary loss in our statement of operations and comprehensive
income. Statement of Financial Accounting Standards No. 145, "Rescission
of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical
Corrections as of April 2002," which was issued in April 2002, required
the reclassification into income from operations of the amount previously
presented as an extraordinary loss.
(2) Beginning in 2002, as a result of adopting a new accounting pronouncement,
we ceased amortization of our goodwill and trademark intangible assets.
(3) Reflects the operating results of 11 sites we acquired from Rip Griffin on
December 1, 2004, beginning on the acquisition date.
(4) The capital expenditures amount for 2004 includes $65,162,000 invested to
acquire the improvements at eight sites we had been leasing under the
master lease facility we terminated in December 2004 in connection with
the 2004 Refinancing. The amounts of cash flows used in investing
activities and provided by financing activities for 2004 include the
effects of the 2004 Refinancing as well as the Rip Griffin acquisition and
the termination of the master lease facility.
(5) Adjusted EBITDA, as used here, is based on the definition of "EBITDA" in
our bank debt agreement and consists of net income plus the sum of (a)
income taxes, (b) interest expense, net, (c) depreciation, amortization
and other noncash charges, (d) transition expense, (e) extraordinary
losses and cumulative effects of accounting changes and (f) the costs of
the merger and recapitalization transactions. We have included this
information concerning Adjusted EBITDA because Adjusted EBITDA is a
primary component for calculating the two key financial ratio covenants in
our debt agreements, the interest coverage ratio and the leverage ratio.
See further discussion of our debt covenant compliance and a
reconciliation of net income (loss) to Adjusted EBITDA in the "Liquidity
and Capital Resources" section of Management's Discussion and Analysis
under the heading "Adjusted EBITDA and Debt Covenant Compliance." We also
use Adjusted EBITDA as a basis for determining bonus payments to our
corporate and site-level management employees and as a key component in
the formula for calculating the fair value of our redeemable common stock
and stock options. Adjusted EBITDA should not be considered in isolation
from, or as a substitute for, net income, income from operations, cash
flows from operating activities or other consolidated income or cash flow
statement data prepared in accordance with generally accepted accounting
principles. While the non-GAAP measures "EBITDA" and "Adjusted EBITDA" are
frequently used by other companies as measures of operations and/or
ability to meet debt service requirements, Adjusted EBITDA as we use the
term is not necessarily comparable to similarly titled captions of other
companies due to differences in methods of calculation. See further
discussion and disclosure concerning Adjusted EBITDA under the heading
"Adjusted EBITDA and Debt Covenant Compliance" in Item 7, Management's
Discussion and Analysis. For 2004, the Adjusted EBITDA amount for debt
covenant purposes was adjusted for the historical results of the sites
acquired from Rip Griffin and the termination of the master lease
agreement, each of which was funded through the 2004 Refinancing. The pro
forma Adjusted EBITDA amount used in this calculation for 2004 was
$153,802,000.
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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,
self-insured reserves, environmental liabilities, income tax accounting, and
recognition of stock compensation expense related to stock options and
redeemable common stock held by employees.
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 write-off 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.
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 significantly different
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 are partially self-insured, paying our own general liability,
workers' compensation, and group health benefits claims, up to stop-loss amounts
ranging from $150,000 to $500,000 on a per-occurrence basis. Provisions
established under these partial self insurance programs are made for both
estimated losses on known claims and claims incurred but not reported, based on
claims history.
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.
19
As part of the process of preparing our consolidated financial
statements, we are required to estimate income taxes in each of the
jurisdictions in which we operate. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from
differing treatment of items for financial statement and tax purposes. These
timing differences result in deferred tax assets and liabilities, which are
included in our consolidated balance sheet. We are required to record a
valuation allowance to reduce our deferred tax assets if we are not able to
conclude that it is more likely than not they will 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 nonredeemable stockholders' equity. Such a charge to nonredeemable
stockholders' equity 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.
OVERVIEW
We are a holding company which, through our wholly owned
subsidiaries, owns, operates and franchises travel centers along the North
American 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, 2004, our geographically diverse network consisted of 160 sites
located in 41 states in the United States and in the province of Ontario,
Canada. Our operations are conducted through three distinct types of travel
centers:
20
- sites operated by us, which we refer to as company-operated sites;
- sites owned by us and leased to independent lessee-franchisees,
which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer
to as franchisee-owned sites.
Our travel centers are located at key points along the U.S.
interstate highway system 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, more than 20 different brands of fast food
restaurants, travel and convenience stores and other driver amenities.
The non-fuel products and services we offer to our customers
complement our fuel business and provide us a means to increase our revenues and
gross profit despite price pressure on fuel as a result of competition and
volatile crude oil and petroleum product prices. For the years ended December
31, 2002, 2003, and 2004, our revenues and gross profit were composed as
follows:
YEAR ENDED
DECEMBER 31,
---------------------------
2002 2003 2004
----- ----- -----
Revenues:
Fuel ................................................ 66.2% 69.5% 73.2%
Non-fuel ............................................ 33.0% 29.9% 26.4%
Rent and royalties .................................. 0.8% 0.6% 0.4%
----- ----- -----
Total revenues ................................ 100.0% 100.0% 100.0%
===== ===== =====
Gross profit (excluding depreciation):
Fuel ................................................ 21.1% 20.9% 19.2%
Non-fuel ............................................ 75.7% 76.5% 78.8%
Rent and royalties .................................. 3.2% 2.6% 2.0%
----- ----- -----
Total gross profit (excluding depreciation).... 100.0% 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 December 31, 2004:
21
COMPANY- FRANCHISEE-
OPERATED LEASED OWNED TOTAL
SITES SITES SITES SITES
------- ------ ----------- -----
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
---- ---- ---- ----
2003 Activity:
New sites ............................. 2 - - 2
Sales of sites ........................ (3) - - (3)
Closed sites .......................... (1) - - (1)
Conversions of leased sites to
company-operated sites .............. 6 (6) - -
---- ---- ---- ----
Number of sites at December 31, 2003 ..... 126 14 10 150
---- ---- ---- ----
2004 Activity:
New sites ............................. 12 - - 12
Sales of sites ........................ (2) - - (2)
Conversions of leased sites to
company-operated sites .............. 2 (2) - -
---- ---- ---- ----
Number of sites at December 31, 2004 ..... 138 12 10 160
==== ==== ==== ====
During 2004, we entered into a franchise agreement with a franchisee
under which we expect to add one franchisee-owned location to our network in the
second quarter of 2005. In February 2005, we sold one of our company-operated
sites. We expect to convert one leased site to a company-operated site on March
31, 2005 upon the termination of the lease and franchise agreements covering
that site.
SAME-SITE RESULTS COMPARISONS
As part of our discussion and analysis of operating results we refer
to increases and/or decreases in results on a same-site basis. For purposes of
these comparisons, we include a site in the same-site comparisons only for the
period for which it was open for business under the same method of operation
(company-operated, leased or franchisee-owned) in both years being compared.
Sites are not excluded from the same-site comparisons as a result of expansions
in the square footage of the sites or in the amenities offered at the sites.
RELEVANCE OF FUEL REVENUES
Due to the market pricing of commodity fuel products and the pricing
arrangements we have with our fuel customers, fuel revenue is not a reliable
metric for analyzing our relative results from period to period. As a result
solely of changes in crude oil and refined products market prices, our fuel
revenue balances may increase or decrease significantly, in both absolute
amounts and on a percentage basis, without a comparable change in fuel sales
volumes or in gross margin per gallon.
22
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Revenues. Our consolidated revenues for the year ended December 31,
2004 were $2,677.9 million, which represents an increase from the year ended
December 31, 2003 of $501.6 million, or 23.1%, that is primarily attributable to
an increase in fuel revenue but also resulted from increased non-fuel revenues.
Fuel revenue for the year ended December 31, 2004 increased by
$445.6 million, or 29.4%, as compared to the year ended December 31, 2003. The
increase was attributable principally to increased average selling prices for
both diesel fuel and gasoline. Average diesel fuel and gasoline sales prices for
the year ended December 31, 2004 increased by 31.1% and 26.4%, respectively, as
compared to the year ended December 31, 2003, reflecting increases in commodity
prices that were attributable to higher crude oil costs due to increased
worldwide demand, refinery outages and other refined petroleum product supply
disruptions. The fuel revenues price variance increase was somewhat offset by
decreases in diesel fuel and gasoline sales volumes, primarily in wholesale fuel
sales. Diesel fuel and gasoline sales volumes for the year ended December 31,
2004 decreased 0.2% and 4.3%, respectively, as compared to the year ended
December 31, 2003. For the year ended December 31, 2004, we sold 1,338.0 million
gallons of diesel fuel and 182.9 million gallons of gasoline, as compared to
1,341.1 million gallons of diesel fuel and 191.1 million gallons of gasoline for
the year ended December 31, 2003. The diesel fuel sales volume decrease of 3.1
million gallons primarily resulted from a 9.9 million gallon decrease in
wholesale diesel fuel sales volume that was partially offset by a 0.6% increase
in same-site diesel fuel sales volumes and a net increase in sales volumes at
sites we added to or eliminated from our network during 2003 and 2004. The
gasoline sales volume decrease of 8.2 million gallons was primarily attributable
to a 16.9 million gallon decrease in wholesale gasoline sales volumes that was
partially offset by a 2.0% increase in same-site gasoline sales volumes and a
net increase in gasoline volumes at company-operated sites we added to or
eliminated from our network during 2003 and 2004. We believe the same-site
diesel fuel sales volume increase resulted from an improved freight market in
2004 and our retail diesel fuel pricing in response to intense price
competition, which factors were somewhat offset by an increase in the level of
freight carried by train instead of truck and an increase in trucking fleets'
self-fueling at their own terminals due to the wide fluctuations in, and high
levels of, diesel prices in 2004. We believe the same-site increase in gasoline
sales volume resulted primarily from increased general motorist visits to our
sites as a result of our more aggressive retail gasoline pricing program as well
as site improvements made as part of our capital investment program. We believe
the decreases in wholesale sales volumes for both diesel and gasoline result
from the sharp volatility in commodity prices during 2004 coupled with the high
level of commodity prices.
Non-fuel revenues for the year ended December 31, 2004 of $708.0
million reflected an increase of $58.5 million, or 9.0%, as compared to the year
ended December 31, 2003. The increase was primarily attributable to a 6.0%
increase in same-site non-fuel revenues and also attributable to the net
increase in sales at the company-operated sites we added to or eliminated from
our network during 2003 and 2004. We believe the same-site increase reflected
increased customer traffic resulting, in part, from the significant capital
improvements that we have made in the network under our capital investment
program to upgrade our travel centers, an improved freight market and also from
our fuel pricing strategy.
Rent and royalty revenues for the year ended December 31, 2004
reflected a $2.4 million, or 18.4%, decrease as compared to the year ended
December 31, 2003. This decrease was attributable to the rent and royalty
revenue lost as a result of the conversions of eight leased sites to
company-operated sites during 2003 and 2004. This decrease was partially offset
by a 3.5% increase in same-site royalty revenue and a 3.9% increase in same-site
rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the year
ended December 31, 2004 was $530.8 million, compared to $501.5 million for the
year ended December 31, 2003, an increase of $29.4 million, or 5.9%. The
increase in our gross profit was primarily due to the increase in non-fuel sales
volume that was partially offset by a decrease in diesel fuel sales volume,
decreased fuel margin per gallon and decreased rent and royalty revenue, as
discussed above.
23
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 $19.5 million, or 5.7%, to
$361.5 million for the year ended December 31, 2004 compared to $342.0 million
for the year ended December 31, 2003. This increase was primarily attributable
to a net increase resulting from company-operated sites we added to our network
or eliminated from our network during 2003 and 2004 and a 3.5% increase on a
same-site basis. On a same-site basis, operating expenses as a percentage of
non-fuel revenues for 2004 were 51.0%, compared to 52.3% for the year ended
December 31, 2003, reflecting the results of our cost-cutting measures at our
sites and an increased level of non-fuel sales relative to our fixed costs.
Our selling, general and administrative expenses for the year ended
December 31, 2004 were $43.2 million, which reflected a $2.6 million, or 6.5%,
increase from the year ended December 31, 2003 that was primarily attributable
to personnel costs.
Transition Expense. Transition expense included the costs incurred
in converting the travel centers acquired from Rip Griffin to our operating
model and standards. In December 2004, we incurred $0.7 million of such costs,
primarily consisting of site training and deferred maintenance expenses. We
expect to incur an additional $1.3 million of transition expenses during 2005 in
connection with these sites.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 2004 was $58.8 million, compared to
$60.4 million for the year ended December 31, 2003, a decrease of $1.6 million,
or 2.7%, that was primarily due to an impairment charge of $0.9 million
recognized in 2003 and a $0.5 million decrease in amortization expense that
resulted from an intangible asset related to a noncompetition agreement becoming
fully amortized in April 2003.
(Gain) loss on asset sales. For the year ended December 31, 2004,
the gain on asset sales of $2.5 million primarily was generated from the sale of
two company-operated sites, one closed site and our fractional shares of three
aircraft, while the gain on asset sales of $1.5 million for the year ended
December 31, 2003 primarily was generated from the sale of three
company-operated sites.
Income from Operations. We generated income from operations of $69.3
million for the year ended December 31, 2004, compared to income from operations
of $60.0 million for the year ended December 31, 2003. This increase of $9.3
million, or 15.5%, as compared to the 2003 period was primarily attributable to
the increased level of non-fuel revenues and gross margin which was partially
offset by the decreased level of diesel fuel sales volumes and fuel margins per
gallon.
Gain on sale of investment. The gain on sale of investment of $1.6
million for the year ended December 31, 2004 resulted from the sale in April of
our investment in Simons Petroleum, Inc. for cash proceeds of $9.1 million. We
could receive an additional $2.0 million of proceeds if Simons achieves certain
earnings targets and certain other conditions are met and representations and
warranties are maintained. Due to the uncertainty surrounding the future
realization of these receivables, the gain on sale we recognized did not reflect
these amounts. We expect that these uncertainties will be resolved during 2005.
Interest and Other Financial Costs -- Net. Interest and other
financial costs, net, for the year ended December 31, 2004 decreased by $0.9
million, or 1.9%, compared to the year ended December 31, 2003. This decrease
primarily resulted from lower interest expense related to our Senior Credit
Facility that was somewhat offset by a $1.7 million charge to expense in
connection with the 2004 Refinancing. The reduction in interest expense related
to our Senior Credit Facility primarily resulted from our reduced level of
indebtedness for most of 2004 as compared to 2003 and was somewhat lessened by
rising interest rates throughout 2004. The charge
24
recognized in connection with the 2004 Refinancing was related to a portion of
the legal and other fees incurred in completing the 2004 Refinancing as well as
the write-off of a portion of the deferred financing costs incurred in
connection with the 2000 Refinancing. The increase in our debt level and
reduction in our interest rate spread as a result of the 2004 Refinancing
completed on December 1, 2004 had a slight favorable net effect on our interest
expense that would equate to approximately $1.0 million annually.
Income Taxes. Our effective income tax rates for the years ended
December 31, 2004 and 2003 were 36.3% and 34.0%, respectively. These rates
differed from the federal statutory rate due primarily to state and foreign
income taxes and certain nondeductible expenses, partially offset by the benefit
of certain tax credits.
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 $31.4 million of future taxable income to fully realize our
net deferred tax assets. The existing level of pre-tax earnings generated in
2004 would be sufficient to generate enough future taxable income to fully
realize our net deferred tax assets. 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,
-----------------------------------------
2002 2003 2004
--------- --------- ---------
(IN MILLIONS OF DOLLARS)
Pretax earnings for financial
reporting purposes.............................. $ 1.2 $ 13.5 $ 23.2
State income tax expense............................. (1.2) (1.1) (2.3)
Accelerated tax depreciation......................... (1.5) (5.3) (27.8)
Benefit of tax credits............................... 0.6 0.6 0.6
Non-deductible expenses.............................. 0.5 0.7 0.9
Temporary differences, net........................... 5.1 (0.4) 9.9
--------- ---------- ---------
Federal taxable income............................... $ 4.7 $ 8.0 $ 4.5
========= ========= =========
The following table sets forth the composition of our federal net
operating loss carryforwards by their expiration dates.
AMOUNT OF NET
YEAR OF EXPIRATION OPERATING LOSS
- -------------------------------------------- ----------------------
(IN MILLIONS OF DOLLARS)
2020........................................ $ 26.6
2021........................................ 27.9
2022........................................ 0.2
2023........................................ 0.1
2024........................................ 0.1
------------
Total net operating loss carryforward....... $ 54.9
============
Cumulative Effect of a Change in Accounting Principle. Effective
January 1, 2003, we adopted FAS 143, "Accounting for Asset Retirement
Obligations" and recognized a one-time cumulative effect charge of $0.3 million.
There was no similar accounting principle change during 2004.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. Our consolidated revenues for the year ended December 31,
2003 were $2,176.2 million, which represents an increase from the year ended
December 31, 2002 of $305.4 million, or 16.3%, that is primarily attributable to
an increase in fuel revenue.
25
Fuel revenue for the year ended December 31, 2003 increased by
$275.7 million, or 22.3%, as compared to the same period in 2002. The increase
was attributable principally to increases in diesel fuel and gasoline average
selling prices. Average diesel fuel and gasoline sales prices for the year ended
December 31, 2003 increased by 25.7% and 23.2%, respectively, as compared to the
same period in 2002, primarily reflecting increases in commodity prices. The
fuel revenue increase also resulted from an increase in our total fuel sales
volumes. Diesel fuel sales volumes decreased 8.6 million gallons, or 0.6%, while
gasoline sales volumes increased 30.5 million gallons, or 19.0%, as compared to
the same period in 2002. For the year ended December 31, 2003, we sold 1,341.1
million gallons of diesel fuel and 191.1 million gallons of gasoline, as
compared to 1,349.7 million gallons of diesel fuel and 160.6 million gallons of
gasoline for the year ended December 31, 2002. The diesel fuel sales volume
decrease resulted from a 4.5% decrease in same-site diesel fuel sales volumes,
partially offset by a net increase in sales volumes at company-operated sites we
added to or eliminated from our network during 2002 and 2003 of 24.0 million
gallons and an increase in our wholesale diesel fuel sales of 2.5 million
gallons, or 1.2%. The gasoline sales volume increase was primarily attributable
to a 9.6% increase in same-site gasoline sales volumes and also resulted from a
2.7 million gallon net increase in gasoline sales volume at company-operated
sites we added to or eliminated from our network during 2002 and 2003, as well
as an 11.6 million increase in wholesale gasoline sales volume. We believe the
same-site diesel fuel sales volume decrease resulted from a relatively flat
level of trucking activity in the United States in 2003 as compared to 2002, in
conjunction with an increase in the level of freight carried by train instead of
trucks and an increase in trucking fleets' self-fueling at their own terminals
due to the wide fluctuation in diesel costs this year and the absolute high
level of diesel fuel prices. 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 competitive retail gasoline pricing.
Non-fuel revenues for the year ended December 31, 2003 of $649.5
million reflected an increase of $32.2 million, or 5.2%, from the same period in
2002. The increase was primarily attributable to the net increase in sales at
the company-operated sites added to, or eliminated from, our network during 2002
and 2003, and also to an increase in non-fuel sales on a same-site basis of 2.4%
for the year ended December 31, 2003 versus the same period in 2002. 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.
Rent and royalty revenues for the year ended December 31, 2003
reflected a $2.5 million, or 15.8%, decrease from the same period in 2002. 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 2.5% increase in same-site royalty revenue that results from
increased levels of retail sales by our franchisees, and a 2.1% increase in
same-site rent revenue.
Gross Profit (excluding depreciation). Our gross profit for the year
ended December 31, 2003 was $501.5 million, compared to $481.2 million for the
same period in 2002, an increase of $20.3 million, or 4.2%. The increase in our
gross profit was due to increased total fuel sales volumes, increased non-fuel
sales, increased average total fuel margin per gallon and higher non-fuel profit
margin percentage, partially offset by the decline in rent and royalty revenues.
The increase in average total fuel margin per gallon resulted from unusually
high margins in certain months in the first half of 2003 and is not indicative
of an expected trend. On the contrary, fuel margins declined in the second half
of 2003.
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 $9.8 million, or 3.0%, to $342.0
million for the year ended December 31, 2003 compared to $332.2 million for the
same period in 2002. This increase was attributable to an $8.8 million net
increase resulting from company-operated sites we added to our network or
eliminated from our network during 2002 and 2003, and a 0.7% increase in
operating expenses on a same-site basis. The increases in
26
operating expenses were partially offset by the recognition of a $3.75 million
cash receipt upon the settlement of a legal claim in the fourth quarter of 2003.
On a same-site basis, operating expenses as a percentage of non-fuel revenues
for the year ended December 31, 2003 were 52.4%, compared to 53.3% for the same
period in 2002, reflecting the results of our cost-control measures at our
sites.
Our selling, general and administrative expenses for the year ended
December 31, 2003 were $40.5 million, which reflected an increase of $2.7
million, or 7.2% from the same period in 2002. This increase is primarily
attributable to increased insurance premiums and increased legal and audit fees,
as well as higher personnel costs driven largely by increased benefit costs.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the year ended December 31, 2003 was $60.4 million, compared to
$60.3 million for the same period in 2002. This increase of $0.1 million, or
0.1%, was attributable to depreciation of an increased level of depreciable
assets as compared to 2002 and an increase of $0.4 million related to asset
retirement obligations, partially offset by a $1.2 million decrease in
amortization of intangible assets and a $0.6 million decrease in the amount of
impairment charges recognized in 2003 as compared to 2002.
Income from Operations. We generated income from operations of $60.0
million for the year ended December 31, 2003, compared to income from operations
of $51.9 million for the same period in 2002. This increase of $8.0 million, or
15.5%, was primarily attributable to the increase in gross profit that was
partially offset by the increase in operating expenses and selling, general and
administrative expenses. The $0.4 million increase in gains on sales of property
and equipment also contributed to the increase in operating income.
Interest and Other Financial Costs -- Net. Interest and other
financial costs, net, for the year ended December 31, 2003 decreased by $4.5
million, or 8.8%, compared to 2002. This decrease resulted from the decline in
interest rates during 2002 and 2003 as well as from the decrease in our
indebtedness.
Income Taxes. Our effective income tax rates for the years ended
December 31, 2003 and 2002 were 34.0% and a 3.2% benefit, 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 change from a relatively low level of pre-tax income earned in
2002, as well as an adjustment in 2002 of estimated prior year tax liabilities,
to a higher level of taxable income in 2003. 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 2003.
Cumulative Effect of a Change in Accounting Principle. Effective
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 $0.6 million,
increased property and equipment by $0.2 million and recognized a one-time
cumulative effect charge of $0.3 million (net of deferred tax benefit of $0.2
million).
27
RIP GRIFFIN ACQUISITION - PRO FORMA INFORMATION
On December 1, 2004, we acquired from Rip Griffin Truck Service Center,
Inc. the assets related to eleven travel centers. The results from these eleven
sites were included in our results, as discussed above, from that date. The
following unaudited pro forma information presents our results of operations as
if the acquisition of the Rip Griffin sites had taken place on January 1, 2003.
YEAR ENDED DECEMBER 31,
-------------------------------
2003 2004
------------ ------------
(IN MILLIONS OF DOLLARS)
Total revenue..................................................... $ 2,361.3 $ 2,880.0
Gross profit.........