<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
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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 300
Westlake, OH 44145-5634
(Address of principal executive offices, including zip code)
(440) 808-9100
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS HISTORICAL INFORMATION AND
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED
IN THIS FORM 10-Q PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THEY INVOLVE KNOWN AND UNKNOWN
RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
FROM FUTURE PERFORMANCE SUGGESTED HEREIN. IN THE CONTEXT OF FORWARD-LOOKING
INFORMATION PROVIDED IN THIS FORM 10-Q AND IN OTHER REPORTS, PLEASE REFER TO
THE DISCUSSION OF RISK FACTORS DETAILED IN, AS WELL AS THE OTHER INFORMATION
CONTAINED IN, THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
INDEX PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Introduction to the Consolidated 3
Financial Statements
Consolidated Balance Sheet 4
Consolidated Statement of Income
and Retained Earnings 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of
Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURE
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRAVELCENTERS OF AMERICA, INC.
INTRODUCTION TO THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
TravelCenters of America, Inc. (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures are adequate to make
the information presented not misleading when read in conjunction with the
Company's consolidated financial statements and notes included therein for
the year ended December 31, 1996.
The financial information presented reflects all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented. The results for interim periods are not necessarily indicative of
results to be expected for the year.
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TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------- ------------
(In Thousands of Dollars)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 76,816 $ 23,779
Accounts receivable (net of allowance for doubtful
accounts of $4,405 for 1997 and $3,502 for 1996) 64,680 54,371
Inventories 32,491 29,082
Deferred income taxes 3,877 3,877
Other current assets 8,774 10,530
--------- ---------
Total current assets 186,638 121,639
Notes receivable, net 594 1,835
Property and equipment, net 264,523 269,366
Intangible assets 21,342 19,657
Deferred financing costs 12,162 8,379
Other assets 2,653 5,013
--------- ---------
TOTAL ASSETS $487,912 $425,889
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loans $ -- $ 14,000
Current maturities of long-term debt 500 17,250
Accounts payable 21,118 37,201
Other accrued liabilities 51,324 29,422
--------- ---------
Total current liabilities 72,942 97,873
Commitments and contingencies (Note 6)
Long-term debt (net of unamortized discount) 289,750 193,185
Deferred income taxes 9,452 9,452
Other long-term liabilities 3,609 5,914
--------- ---------
TOTAL LIABILITIES 375,753 306,424
Mandatorily redeemable senior convertible
participating preferred stock (Note 7) 59,463 53,885
Other preferred stock, common stock and
other shareholders' equity 47,037 50,743
Retained earnings 5,659 14,837
--------- ---------
52,696 65,580
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $487,912 $425,889
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Fuel $166,572 $117,564 $540,988 $346,306
Nonfuel 77,133 15,778 214,759 42,628
Rent 6,607 10,430 24,555 31,750
-------- -------- -------- --------
TOTAL REVENUES 250,312 143,772 780,302 420,684
Cost of revenues (excluding depreciation) 180,537 120,249 585,226 354,531
-------- -------- -------- --------
GROSS PROFIT (EXCLUDING DEPRECIATION) 69,775 23,523 195,076 66,153
Operating expenses 43,136 7,387 118,681 20,023
Selling, general and administrative expenses 9,390 6,369 30,070 18,600
Refinancing, transition and development costs 3,867 1,384 10,958 1,500
Depreciation and amortization 5,777 3,538 20,073 10,273
(Gain) loss on sales of property and equipment (7,409) (84) (5,945) (125)
Other operating (income) expense, net 1,100 -- 1,100 --
Income of subsidiary held for disposition -- (3,070) -- (5,255)
-------- -------- -------- --------
INCOME FROM OPERATIONS 13,914 7,999 20,139 21,137
Interest (expense), net (5,987) (3,540) (16,954) (10,047)
-------- -------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 7,927 4,459 3,185 11,090
(Benefit) provision for income taxes 3,069 1,757 1,231 4,360
-------- -------- -------- --------
(Loss) income before extraordinary item 4,858 2,702 1,954 6,730
Extraordinary item (less applicable
income tax benefit of $3,608) -- -- (5,554) --
-------- -------- -------- --------
NET (LOSS) INCOME 4,858 2,702 (3,600) 6,730
Less: preferred dividends (1,941) (1,704) (5,579) (4,895)
Retained earnings - beginning of the period:
As previously reported 6,749 18,582 17,647 16,997
Adjustments (Note 7) (4,007) (1,842) (2,809) (1,091)
As restated 2,742 16,740 14,838 15,903
-------- -------- -------- --------
Retained earnings - end of the period $5,659 $ 17,738 $ 5,659 $ 17,738
-------- -------- -------- --------
-------- -------- -------- --------
(Loss) income before extraordinary item per
common share and common share equivalent $0.34 $0.11 $(3.19) $ 0.21
Extraordinary item -- -- (4.89) --
-------- -------- -------- --------
Net loss per common share and common
share equivalent (Note 2) $ 0.34 $ 0.11 $ (8.08) $ 0.21
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares and
common share equivalents (in thousands) 8,639 8,896 1,136 8,940
-------- -------- -------- --------
-------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
----- -----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,600) $ 6,730
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Net income of subsidiary held for disposition -- (3,153)
Extraordinary item 5,554 --
Depreciation and amortization 20,073 10,261
Provision for doubtful accounts 1,404 840
(Gain) loss on sales of property and equipment (5,945) (125)
Changes in assets and liabilities, adjusted for the effects of
acquisitions of network assets
Accounts receivable 16,208 250
Inventories (1,558) (68)
Other current assets 1,756 (7,358)
Accounts payable (16,083) 7,450
Other current liabilities 25,509 4,145
Other, net 1,520 1,566
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,538 20,538
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of network assets (11,069) (3,107)
Proceeds from sales of property and equipment 20,099 --
Capital expenditures (19,372) (10,239)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (10,342) (13,346)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loan borrowings 3,750 10,000
Revolving loan repayments (17,750) --
Long-term debt borrowings 205,000 --
Long-term debt repayments (126,550) (8,750)
Repurchase of common stock (3,706) (126)
Debt issuance costs (12,903) --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 47,841 1,124
-------- --------
Net increase in cash 53,037 8,316
Cash at the beginning of the period 23,779 3,191
-------- --------
Cash at the end of the period $ 76,816 $11,507
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
1. BASIS OF PRESENTATION
The Company is a holding company which, through its wholly-owned
subsidiaries, TA Operating Corporation ("TA") and National
Auto/Truckstops, Inc. ("National"), owns, operates and franchises more
travel centers in the United States than any of its competitors with 146
network sites nationwide, including 125 Company-owned locations. TA
currently operates a network (the "TA Network") of 49 travel centers in
27 states under the "TravelCenters of America" or "TA" brand name and
National currently operates a network (the "National Network") of 97
travel centers in 36 states under the licensed "Unocal 76" and related
brand names.
The Company was formed in December 1992 to facilitate the acquisition by
the Company of the National Network (the "National Acquisition") in April
1993 from a subsidiary of Unocal Corporation ("Unocal"). In December
1993, the Company acquired the TA Network (the "TA Acquisition") from
subsidiaries of the British Petroleum Company Plc ("BP"). In connection
with the TA Acquisition, a group of institutional investor shareholders
(the "Investor Group") and certain members of TA's management granted an
option to the Company whereby the Company could repurchase its equity
held by such Investor Group and management members in exchange for
consideration consisting of cash and all of the equity of TA (the
"Repurchase"). If the Repurchase had been consummated, the Company and
the National Network would have been owned by the operator and
franchisee-owner stockholders of the Company and certain members of
National's management, and TA would have been owned by the Investor Group
and certain members of TA's management. During the nine months ended
September 30, 1996, TA and National were separately managed and financed
and in the Company's consolidated financial statements TA was presented
as net assets of subsidiary held for disposition and TA's results of
operations were included in the Company's consolidated financial
statements as a single amount. Effective September 30, 1996, the
decision was made to retain TA, and, subsequently, the Company chose to
pursue the combination of the TA and National networks (the "Combination
Plan"). After September 30, 1996, TA was no longer carried as net assets
of subsidiary held for disposition and TA's results of operations were
consolidated with the Company's.
2. RECAPITALIZATION AND RESTRUCTURING
On March 27, 1997, the Company was recapitalized and restructured
pursuant to a series of transactions in which (i) the Company's
subsidiaries were restructured such that the Company directly owns its
three subsidiaries, TA, TA Franchise Systems, Inc. ("TAFSI") and National
(the Company's former subsidiary, TA Holdings Corporation ("TAHC"), was
liquidated as of such date), (ii) the Company's indebtedness under the
old National and TA debt agreements was refinanced, and (iii) TA and
National guaranteed the Company's indebtedness under its new credit
facilities.
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TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Consequent to the early extinguishment of the Company's prior
indebtedness, the Company recognized extraordinary losses, net of
applicable income taxes, of $5,554,000 as a result of writing off the
then remaining unamortized balances of deferred financing costs and debt
discount related to those prior borrowings of approximately $7,847,000
and $1,315,000, respectively. The approximately $12,903,000 of financing
costs associated with the Company's new borrowings have been capitalized
and will be amortized over the lives of the related new debt instruments.
As a result of the combination of the Company's two networks under the
existing TA management, most of National's corporate-level employees have
been or will be terminated. In January 1997, certain of National's
executive officers resigned and related severance costs of approximately
$774,000 were recognized. In May 1997 management finalized its plans
regarding employee terminations and, accordingly, the related expense of
approximately $1,833,000 was recognized. The severance expense, which
totalled approximately $2,607,000 for the nine month period ended
September 30, 1997, is included in the income statement within
refinancing, transition and development costs. Pursuant to the Company's
plans, 111 employees have been or will be terminated. Through September
30, 1997, approximately $1,329,000 of termination benefits had been paid
to the 83 employees actually terminated. At September 30, 1997, the
remaining accrual for termination benefits, which will be substantially
paid by year-end with the final payments made by March 1998, was
approximately $1,278,000.
3. EARNINGS PER SHARE
Earnings per common share and common share equivalent were computed by
subtracting preferred dividends from net income and dividing the
resulting amount by the weighted average number of shares of common stock
and common stock equivalents outstanding during the period, provided the
common stock equivilents are not antidilutive. The Mandatorily Redeemable
Senior Participating Preferred Stock Series I and II and Convertible
Preferred Stock Series I and II are considered to be equivalents of common
stock as are the outstanding common stock warrants and the number of shares
issuable on the exercise of vested stock options when the formula price
of the common stock exceeds the exercise price of the options. The increase
in the number of common shares is reduced by the number of common shares
which are assumed to have been purchased with the proceeds from the exercise
of the options.
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
4. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
(IN THOUSANDS)
Nonfuel merchandise $29,727 $26,090
Petroleum products 2,764 2,992
------- -------
Total inventories $32,491 $29,082
------- -------
------- -------
5. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 1997, the Company extinguished
$85,500,000 of senior secured notes through the issuance of new senior
secured notes of an equal face amount. For the nine months ended
September 30, 1997 and 1996, the Company received $4,495,000 and
$1,400,000 respectively, of inventory and property and equipment in
liquidation of trade accounts receivable.
6. MATERIAL CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to extensive federal,
state and local laws, regulations and ordinances relating to
environmental matters that (i) govern activities and operations that may
have adverse environmental effects, such as discharges to air, soil and
water, as well as handling, storage and disposal practices for petroleum
products and solid and hazardous substances or (ii) impose liability and
damages for the cost of remediating sites affected by, and damage
resulting from, past spills and disposal of other releases of petroleum
products and hazardous substances.
The Company owns and uses underground storage tanks (USTs) and
above-ground storage tanks (ASTs) at company-operated and operator
locations to store petroleum products and waste oils. These tanks must
comply with statutory and regulatory requirements regarding tank
construction, integrity testing, leak detection and monitoring,
overfilling and spill control, release reporting, financial assurance and
corrective action in case of a release from a UST or AST into the
environment. To meet minimum federal requirements, all existing USTs
owned by the Company must conform to certain construction requirements,
have installed tank leak detection systems, and have installed corrosion
protection and spill-overfill prevention equipment by December 22, 1998.
The Company has established a program of tank replacement and equipment
installation to meet the requirements by that time.
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
While the costs of compliance for these matters have not had a material
adverse impact on the Company, it is impossible to predict accurately the
ultimate effect these changing laws and regulations may have on the
Company in the future. The Company incurred capital expenditures,
maintenance, remediation and other environmental related costs of
approximately $2,213,000 and $4,665,000 for the nine months ended
September 30, 1997 and 1996, respectively.
The Company is in the process of resolving alleged violations of
wastewater discharge permits in several states relating to travel center
operations and is conducting investigatory and/or remedial actions with
respect to petroleum product releases that have occurred at approximately
25 travel centers. Remediation activities have been completed at other
travel centers and the Company anticipates no further actions to be
required by the respective state agencies in regard to those matters at
those locations. Most of the wastewater discharge notices have been
resolved by the Company without penalty. However, given the status of
the proceedings with respect to matters still pending, ultimate
investigative and remediation costs cannot accurately be predicted. The
Company expects that some or all of any fines paid or costs incurred in
connection with the wastewater discharge violations noted above will be
paid by Unocal and BP pursuant to the environmental agreements.
The Company has estimated the current ranges of remediation costs at
currently active sites and what it believes will be its ultimate share
for such costs after required indemnification and remediation is
performed by Unocal and BP under the environmental agreements and has a
reserve for such matters at September 30, 1997, of $933,000. While it is
not possible to quantify with certainty the environmental exposure, in
the opinion of management, the potential liability, beyond that
considered in the reserve, for all environmental proceedings, based on
information known to date, will not have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
PENDING LITIGATION
In connection with the acquisition of the Network, the Company acquired
six travel centers located in California that are currently members of
the Network. In January 1993, the operators of four of these travel
centers (the "California Plaintiffs") commenced litigation against
Unocal, The Clipper Group, L.P. ("Clipper") and the Company in California
state court seeking, among other things, specific performance by Unocal
of their alleged rights, either under the California Business and
Professions Code (the "California Statute") or, in the alternative,
pursuant to alleged statements made by Unocal, to purchase their travel
centers at a fair market price and seeking compensatory and punitive
damages against the Company and others for both tortious interference
with the California Plaintiffs' alleged rights and civil conspiracy. The
operator of a fifth California travel center also asserted a purchase
right, but never filed suit. This property, together with the four
properties operated by the California Plaintiffs, are referred to herein
as the "California Properties".
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Under the asset purchase agreements pursuant to which the Company
acquired the California Properties from Unocal, and related agreements,
(i) the Company purchased the California Properties for $39 million and
(ii) Unocal agreed to indemnify the Company for, among other things,
claims arising under the California Statute arising out of or resulting
from the sale of the California Properties, including any amounts
("Excess Amounts") by which the original purchase price paid by the
Company for the California Properties exceeds the price at which the
Company might be ordered by a court to resell such properties. Pursuant
to such agreements, Unocal is not required to indemnify the Company for
awards of punitive damages. The Company cannot predict whether it
ultimately will be required to resell any or all of the California
Properties to the California operators. However, in such event, the
Company would seek indemnification from Unocal for any Excess Amounts.
The Company believes that the claims asserted by the operators of the
California Properties against the Company are without merit and has
engaged in a vigorous defense.
During 1995, the trial commenced and two of the California Plaintiffs
elected to settle their portion of the litigation with Unocal and the
Company. In resolution, the Company entered into an agreement whereby
the Company acquired the assets and operations of one of the related
travel centers and paid approximately $900,000 for the operations and
certain assets used in the operations. The other operator's issues were
resolved at no cost to the Company and that operator continues to operate
the travel center under the existing lease agreement.
On May 1, 1995, the jury rendered a verdict in favor of the two remaining
California Plaintiffs and against Unocal and the Company. The jury
determined that the two remaining California Plaintiffs were entitled to
total compensatory damages of $4,012,000. On May 3, 1995, the jury
rendered a verdict assessing punitive damages against Unocal, Clipper and
the Company in the amounts of $7,000,000, $1,600,000 and $1,500,000,
respectively. On May 30, 1995, the California State Court rendered a
decision in favor of Unocal and the Company on the equitable claims
asserted by the California Plaintiffs and denying Plaintiffs' request for
rescission of the asset purchase agreements for the related California
Properties. The Company filed motions with the trial court to enter
judgement in its favor on plaintiff's damages claims notwithstanding the
verdict, or in the alternative, to order a new trial. On August 1, 1995,
the California court denied the motion for judgement notwithstanding the
verdict, but granted the Company's motion for a new trial on all issues.
On October 22, 1997, the California Court of Appeal filed a decision
affirming the trial court's orders granting a new trial and denying
defendants' motions for judgment notwithstanding the verdict. The Court
of Appeal also reversed an order of the trial court granting a nonsuit on
plaintiffs' claims against the Company and Clipper for civil conspiracy.
The Company intends to petition the California Supreme Court to seek
review of the appeal court's decision. The Company's ultimate liability
in the disposition of this matter is difficult to estimate. However, it
is management's belief that the outcome, while potentially material to
the Company's results of operations, is not likely to have a material
adverse effect on the Company's financial position.
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
The Company believes all compensatory damages ultimately awarded and
legal fees incurred on this matter are covered under the indemnification
agreement with Unocal. Legal costs incurred by the Company through
September 30, 1997 total $5,042,000, of which Unocal has paid $1,000,000
to the Company to date. Unocal has stated that it may contest portions
of the Company's claims for such indemnification. However, the Company
believes that the effect on the financial statements of any amounts not
ultimately collected from Unocal will not be material.
In April 1996, a group of 11 National operators filed a complaint in the
Circuit Court of Berkeley County, West Virginia, which was later amended
in 1997. The amended complaint, brought on behalf of eighteen National
operators, alleges that the Company's fuel pricing policies and practices
violate the Petroleum Marketing Practices Act and the Uniform Commercial
Code and constitute breach of the contractual duty of good faith and fair
dealing and unjust enrichment. The amended complaint also asserts claims
of fraud and fraud in the inducement, apparently based on alleged
representations made by the Company concerning fuel pricing. The amended
complaint seeks actual and punitive damages in an unspecified sum. The
Company has removed the case to federal court and had it transferred to
federal court in Nashville, Tennessee. The Company, at an immaterial
cost, has entered into settlement agreements with four of the plaintiffs
pursuant to which the claims of those plaintiffs have been or will be
dismissed with prejudice. One additional plaintiff has withdrawn its
claim in the action without prejudice.
On March 31, April 1, and April 7, 1997, three of the plaintiffs filed
motions for a preliminary injunction. The motions sought an order
requiring, among other things, that the Company set its price for diesel
fuel sold to the movants at not more than two cents above the quoted
industry average price per gallon. In addition, on April 22, 1997, two
of the movants filed a motion seeking a temporary restraining order for
substantially the same relief. On May 21, 1997, the court denied the
plaintiffs' motions. Plaintiffs appealed the trial court's denial of
their motions to the United States Courts of Appeals for both the Fourth
and the Sixth Circuits. On September 11, 1997, the Fourth Circuit
dismissed plaintiffs' appeal for lack of jurisdiction. Plaintiffs'
appeal to the Sixth Circuit is pending. By order dated August 1, 1997,
all proceedings in the district court have been stayed pending the
completion of all appeals. The Company believes that the claims made in
the complaint and the amended complaint are baseless and intends to
defend this litigation vigorously. It is management's belief that the
outcome is not likely to have a material adverse effect on the Company's
results of operations, financial position or liquidity.
In addition to the above matters, the Company is the subject of, or party
to, a number of pending or threatened legal actions, contingencies and
commitments involving a variety of matters, including laws and
regulations relating to the environment. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material
to the Company's results of operations, but is not expected to be
material to the Company's financial position or liquidity.
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
7. PRIOR PERIOD ADJUSTMENTS
The balance of retained earnings at December 31, 1996 has been restated
from amounts previously reported to reflect the correction of errors that
had been made in the calculations of accrued dividends related to the
mandatorily redeemable senior convertible participating preferred stock
during the period from June 1994 through June 1997. These dividend
accruals do not enter into the determination of net income or loss. The
total adjustment amount at December 31, 1996, is $2,810,000, of which
$1,719,000 is applicable to 1996 and has been reflected as an increase in
preferred on the statement of income and retained earnings for that year,
with the balance of the adjustment amount of $1,091,000 applicable to
earlier periods reflected as a reduction in retained earnings at January
1, 1996. The preferred dividend amounts for the six month period ended
June 30, 1997, have also been restated through an increase in the
preferred dividends amount previously reported as $2,440,000 to
$3,637,000.
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth the consolidating balance sheets as of
September 30, 1997 and December 31, 1996, the consolidating statements of
income and retained earnings for the three months ended September 30,
1997 and 1996 and for the nine months ended September 30, 1997 and 1996,
and consolidating statements of cash flows for the nine months ended
September 30, 1997 and 1996. In the following schedules, "Parent
Company" refers to the unconsolidated balances of TravelCenters of
America, Inc., "Guarantor Subsidiaries" refers to the combined
unconsolidated balances of TA and National, and "Nonguarantor Subsidiary"
refers to the balances of TAFSI. "Eliminations" represent the adjustments
necessary to (a) eliminate intercompany transactions, (b) eliminate the
Company's investments in its subsidiaries and (c) present TAHC as a
subsidiary held for disposition until September 30, 1996. The Guarantor
Subsidiaries, TA and National, are wholly-owned subsidiaries of the
Company and have fully and unconditionally, jointly and severally,
guaranteed the Company's indebtedness. In the 10-Q filing, the Company
has not presented separate financial statements and other disclosures
concerning the Guarantor Subsidiaries because management has determined
such information is not material to investors.
-13-
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
BALANCE SHEET SCHEDULES:
SEPTEMBER 30, 1997
----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- ------------- ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash $ 45,526 $ 31,290 $ -- $ -- $ 76,816
Accounts receivable, net 2,491 79,724 208 (17,743) 64,680
Inventories -- 32,491 -- -- 32,491
Deferred income taxes -- 3,877 -- -- 3,877
Other current assets 476 51,087 988 (43,777) 8,774
-------- -------- ------- -------- --------
Total current assets 48,493 198,469 1,196 (61,520) 186,638
Notes receivable, net -- 594 -- -- 594
Property and equipment, net -- 268,376 -- (3,853) 264,523
Intangible assets -- 21,342 -- -- 21,342
Deferred financing costs 12,162 -- -- -- 12,162
Other assets -- 2,653 -- -- 2,653
Advances to subsidiaries 225,904 -- -- (225,904) --
Investments in subsidiaries 124,860 -- -- (124,860) --
-------- -------- ------- -------- --------
Total assets $411,419 $491,434 $ 1,196 ($416,137) $487,912
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term debt $ 500 $ -- $ -- $ -- $ 500
Accounts payable -- 21,118 -- -- 21,118
Other accrued liabilities 7,755 104,926 162 (61,519) 51,324
-------- -------- ------- -------- --------
Total current liabilities 8,255 126,044 162 (61,519) 72,942
Long-term debt (net of
unamortized discount) 289,750 -- -- -- 289,750
Deferred income taxes -- 9,452 -- -- 9,452
Advance from parent -- 225,904 -- (225,904) --
Other liabilities -- 3,609 -- -- 3,609
-------- -------- ------- -------- --------
Total liabilities 298,005 365,009 162 (287,423) 375,753
Mandatorily redeemable senior
convertible participating
preferred stock 59,463 -- -- -- 59,463
Other preferred stock, common stock
and other shareholders' equity 48,292 85,032 -- (86,287) 47,037
Retained earnings 5,659 41,393 1,034 (42,427) 5,659
-------- -------- ------- -------- --------
53,951 126,425 1,034 (128,714) 52,696
-------- -------- ------- -------- --------
Total liabilities and
shareholders' equity $411,419 $491,434 $ 1,196 ($416,137) $487,912
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
</TABLE>
-14-
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------- ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash $ -- $ 23,779 $ -- $ -- $ 23,779
Accounts receivable, net -- 54,294 1,051 (974) 54,371
Inventories -- 29,082 -- -- 29,082
Deferred income taxes -- 3,877 -- -- 3,877
Other current assets 499 10,236 2 (207) 10,530
-------- -------- -------- -------- --------
Total current assets 499 121,268 1,053 (1,181) 121,639
Notes receivable, net -- 1,835 -- -- 1,835
Property and equipment, net -- 273,216 -- (3,853) 269,366
Intangible assets -- 19,657 -- -- 19,657
Deferred financing costs -- 8,379 -- -- 8,379
Other assets 2,500 7,348 -- (4,835) 5,013
Investments in subsidiaries 121,818 -- -- (121,818) --
-------- -------- -------- -------- --------
Total assets $122,817 $431,706 $ 1,053 ($129,687) $425,889
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving loans $ -- $ 14,000 $ -- $ -- $ 14,000
Current maturities of
long-term debt -- 17,250 -- -- 17,250
Accounts payable 1,555 37,945 -- (2,299) 37,201
Other accrued liabilities 450 29,553 105 (686) 29,422
-------- -------- -------- -------- --------
Total current liabilities 2,005 98,748 105 (2,985) 97,873
Long-term debt (net of
unamortized discount) -- 193,185 -- -- 193,185
Deferred income taxes 92 9,891 -- (531) 9,452
Other liabilities 1 8,413 -- (2,500) 5,914
-------- -------- -------- -------- --------
Total liabilities 2,098 310,237 105 (6,016) 306,424
Mandatorily redeemable senior
convertible participating
preferred stock 53,885 -- -- -- 53,885
Other preferred stock, common
common stock and other
shareholders' equity 51,997 85,033 -- (86,287) 50,743
Retained earnings 14,837 36,436 948 (37,384) 14,837
-------- -------- -------- -------- --------
66,834 121,469 948 (123,671) 65,580
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $122,817 $431,706 $ 1,053 ($129,687) $425,889
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF INCOME AND RETAINED EARNINGS SCHEDULES:
THREE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- ------------- ----------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ -- $ 171,710 $ -- $ (5,138) $ 166,572
Nonfuel -- 76,735 398 -- 77,133
Rent -- 10,688 -- (4,081) 6,607
--------- --------- -------- --------- ---------
Total revenues -- 259,133 398 -- 250,312
Cost of revenues
(excluding depreciation) -- 185,675 -- (5,138) 180,537
--------- --------- -------- --------- ---------
Gross profit
(excluding depreciation) -- 73,458 398 (4,081) 69,775
Operating expenses -- 47,217 -- (4,081) 43,136
Selling, general and administrative
expenses 385 8,979 26 -- 9,390
Refinancing, transition and
development costs -- 3,630 237 -- 3,867
Depreciation and amortization (69) 5,846 -- -- 5,777
(Gain) loss on sales of property
and equipment -- (7,409) -- -- (7,409)
Other operating (income)
expense, net -- 1,100 -- -- 1,100
--------- --------- -------- --------- ---------
Income from operations (316) 14,095 135 -- 13,914
Interest income (expense), net (6,362) 375 -- -- (5,987)
Equity income (loss) 12,157 -- -- (12,157) --
--------- --------- -------- --------- ---------
(Loss) income before income
taxes 5,479 14,470 135 (12,157) 7,927
(Benefit) provision for income taxes 621 5,627 59 (3,238) 3,069
--------- --------- -------- --------- ---------
Net (loss) income 4,858 8,843 76 (8,919) 4,858
Less: preferred dividends (1,941) -- -- -- (1,941)
Retained earnings -
beginning of period 2,742 32,550 958 (33,508) 2,742
--------- --------- -------- --------- ---------
Retained earnings -
end of the period $ 5,659 $ 41,393 $ 1,034 ($ 42,427) $ 5,659
--------- --------- -------- --------- ---------
--------- --------- -------- --------- ---------
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THREE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ---------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ -- $190,931 $ -- ($73,367) $117,564
Nonfuel -- 64,709 380 (49,311) 15,778
Rent -- 10,430 -- -- 10,430
------- -------- ---- -------- --------
Total revenues -- 266,070 380 (122,678) 143,772
Cost of revenues
(excluding depreciation) -- 204,430 -- (84,181) 120,249
------- -------- ---- -------- --------
Gross profit
(excluding depreciation) -- 61,640 380 (38,497) 23,523
Operating expenses -- 33,865 -- (26,478) 7,387
Selling, general and administrative
expenses 664 9,443 157 (3,895) 6,369
Refinancing, transition and
development costs -- 1,384 -- -- 1,384
Depreciation and amortization -- 6,763 -- (3,225) 3,538
(Gain) loss on sales of property
and equipment -- (84) -- -- (84)
Income from subsidiary held for
disposition -- -- -- (3,070) (3,070)
------- -------- ---- -------- --------
Income (loss) from operations (664) 10,269 223 (1,829) 7,999
Interest (expense), net -- (5,369) -- 1,829 ( 3,540)
Equity income (loss) 7,782 -- -- (7,782) --
------- -------- ---- -------- --------
(Loss) income before
income taxes 7,118 4,900 223 (7,782) 4,459
(Benefit) provision for income taxes 4,416 2,482 93 (5,234) 1,757
------- -------- ---- -------- --------
Net (loss) income 2,702 2,418 130 (2,548) 2,702
Less: preferred dividends (1,704) -- -- -- (1,704)
Retained earnings-
beginning of the period 16,740 34,618 811 (35,429) 16,740
------- -------- ---- -------- --------
Retained earnings-
end of the period $17,738 $ 37,036 $941 ($37,977) $ 17,738
------- -------- ---- -------- --------
------- -------- ---- -------- --------
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ---------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ -- $546,126 $ -- $ (5,138) $540,988
Nonfuel -- 213,667 1,092 -- 214,759
Rent -- 28,636 -- (4,081) 24,555
------- -------- ---- -------- --------
Total revenues -- 788,429 1,092 -- 780,302
Cost of revenues
(excluding depreciation) -- 590,364 -- (5,138) 585,226
------- -------- ---- -------- --------
Gross profit
(excluding depreciation) -- 198,065 1,092 (4,081) 195,076
Operating expenses -- 122,762 -- (4,081) 118,681
Selling, general and administrative
expenses 639 28,705 726 -- 30,070
Refinancing, transition and
development costs -- 10,721 237 -- 10,958
Depreciation and amortization 741 19,332 -- -- 20,073
(Gain) loss on sales of property
and equipment -- (5,945) -- -- (5,945)
Other operating (income)
expense, net -- 1,100 -- -- 1,100
------- -------- ---- -------- --------
Income from operations (1,380) 21,390 129 -- 20,139
Interest (expense), net (12,721) (4,233) -- -- (16,954)
Equity income (loss) 8,199 75 -- 8,274 --
------- -------- ---- -------- --------
(Loss) income before income
taxes and extraordinary items (5,902) 17,232 129 -- 3,185
(Benefit) provision for income taxes (2,302) 6,721 50 (3,238) 1,231
------- -------- ---- -------- --------
(Loss) income before
extraordinary items (3,600) 10,511 79 (5,036) 1,954
Extraordinary items
(Less applicable income
tax benefit of $3,608) -- (5,554) -- -- (5,554)
------- -------- ---- -------- --------
Net (loss) income (3,600) 4,957 79 (5,036) (3,600)
Less: preferred dividends (5,579) -- -- -- (5,579)
Retained earnings-
beginning of the period 14,838 36,436 955 (37,391) 14,838
------- -------- ---- -------- --------
Retained earnings-
end of the period $ 5,659 $ 41,393 $1,034 ($42,427) $ 5,659
------- -------- ---- -------- --------
------- -------- ---- -------- --------
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NINE MONTHS ENDED SEPTEMBER 30, 1996
------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ -- $548,360 $ -- ($202,054) $346,306
Nonfuel -- 179,758 1,041 (138,171) 42,628
Rent -- 31,750 -- -- 31,750
------- -------- ---- -------- --------
Total revenues -- 759,868 1,041 (340,225) 420,684
Cost of revenues
(excluding depreciation) -- 587,970 -- (233,439) 354,531
------- -------- ---- -------- --------
Gross profit
(excluding depreciation) -- 171,898 1,041 (106,786) 66,153
Operating expenses -- 94,795 -- (74,772) 20,023
Selling, general and administrative
expenses 807 29,176 653 (12,036) 18,600
Refinancing, transition and
development costs -- 1,500 -- -- 1,500
Depreciation and amortization -- 19,405 -- (9,132) 10,273
(Gain) loss on sales of property
and equipment -- (125) -- -- (125)
Income from subsidiary held for
disposition -- -- -- (5,255) (5,255)
------- -------- ---- -------- --------
Income from operations (807) 27,147 388 (5,591) 21,137
Interest (expense), net -- (15,638) -- 5,591 (10,047)
Equity income (loss) 11,897 -- -- (11,897) --
------- -------- ---- -------- --------
(Loss) income before
income taxes 11,090 11,509 388 (11,897) 11,090
(Benefit) provision for income taxes 4,360 5,083 151 (5,234) 4,360
------- -------- ---- -------- --------
Net (loss) income 6,730 6,426 237 (6,663) 6,730
Less: preferred dividends (4,895) -- -- -- (4,895)
Retained earnings-
beginning of the period 15,903 30,610 704 (31,314) 15,903
------- -------- ---- -------- --------
Retained earnings-
end of the period $17,738 $ 37,036 $ 941 ($ 37,997) $ 17,738
------- -------- ---- -------- --------
------- -------- ---- -------- --------
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS SCHEDULES:
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- ------------- ----------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES: $ (590) $ 18,858 $ -- $ -- $ 15,538
--------- ---------- ---------- ---------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisitions of network assets -- (11,069) -- -- (11,069)
Proceeds from sales of property
and equipment -- 20,099 -- -- 20,099
Capital expenditures -- (19,372) -- -- (19,372)
--------- ---------- ---------- ---------- ---------
Net cash used in investing
activities -- (10,342) -- -- (10,342)
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loan borrowings -- 3,750 -- -- 3,750
Revolving loan repayments -- (17,750) -- -- (17,750)
Long-term debt borrowings 205,000 -- -- -- 205,000
Long-term debt repayments (250) (126,300) -- -- (126,550)
Advance from parent (138,900) 138,900 -- -- --
Debt issuance costs (12,903) -- -- -- (12,903)
Repurchase of common stock (3,706) -- -- -- (3,706)
--------- ---------- ---------- ---------- ---------
Net cash (used in) provided
by financing activities 49,366 (1,400) -- -- 47,841
-------- ----------- ---------- ---------- ---------
Net increase in cash 45,526 7,511 -- -- 53,037
Cash at beginning of the period -- 23,779 -- -- 23,779
-------- ----------- ---------- ---------- ---------
Cash at the end of the period $ 45,526 $ 31,290 $ -- $ -- $ 76,816
-------- ---------- ---------- ---------- ---------
-------- ---------- ---------- ---------- ---------
</TABLE>
-20-
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES: $ 126 $ 32,267 $ -- ($ 11,855) $ 20,538
--------- ---------- --------- ------------ ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisitions of network assets -- (3,107) -- -- (3,107)
Proceeds from sales of property
and equipment -- 322 -- (322) --
Capital expenditures -- (16,783) -- 6,544 (10,239)
--------- ---------- --------- ------------ ----------
Net cash used in investing
activities -- (19,568) -- 6,222 (13,346)
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loan borrowings -- 10,000 -- -- 10,000
Long-term debt repayments -- (12,500) -- 3,750 (8,750)
Repurchase of common stock (126) -- -- -- (126)
--------- ---------- --------- ------------ ----------
Net cash (used in) provided
by financing activities (126) (2,500) -- 3,750 1,124
--------- ---------- --------- ------------ ----------
Net increase in cash -- 10,199 -- (1,883) 8,316
Cash at the beginning of the period -- 15,617 -- (12,426) 3,191
--------- ---------- --------- ------------ ----------
Cash at the end of the period$ -- $ 25,816 $ -- ($ 14,309) $ 11,507
--------- ---------- --------- ------------ ----------
--------- ---------- --------- ------------ ----------
</TABLE>
-21-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
financial statements and with Management's Discussion and Analysis included
in the Company's Registration Statement on Form S-4 filed under the
Securities Act of 1933 (File No. 333-26497) on July 23, 1997.
OVERVIEW
The Company is a holding company which, through its wholly-owned
subsidiaries, TA and National, owns, operates and franchises more travel
centers in the United States than any of its competitors with 146 network
sites nationwide, including 125 Company-owned locations. TA currently
operates a network of 49 travel centers in 27 states under the "TravelCenters
of America" or "TA" brand names and National currently operates a network of
97 travel centers in 36 states under the licensed "Unocal 76" and related
brand names.
The Company was formed in December 1992 to facilitate the National
Acquisition in April 1993. In December 1993, the Company acquired the TA
Network. In connection with the TA Acquisition, the Investor Group and
certain members of TA's management granted an option to the Company whereby
the Company could repurchase its equity held by such Investor Group and
management members in exchange for consideration consisting of cash and all
of the equity of TA. If the Repurchase had been consummated, the Company and
the National Network would have been owned by the operator and
franchisee-owner stockholders of the Company and certain members of
National's management, and TA would have been owned by the Investor Group and
certain members of TA's management. During the nine months ended September
30, 1996, TA and National were separately managed and financed and in the
Company's consolidated financial statements TA was presented as net assets of
subsidiary held for disposition and TA's results of operations were included
in the Company's consolidated financial statements as a single amount.
Effective September 30, 1996, the decision was made to retain TA, and,
subsequently, the Company chose to pursue the combination of the TA and
National networks. After September 30, 1996, TA was no longer carried as net
assets of subsidiary held for disposition and TA's results of operations
were consolidated with the Company's.
Historically, under the Company's ownership, National operated principally as
a franchisor. As a result, its revenues consisted primarily of wholesale
diesel fuel sales to franchisees, rent from operators of leased sites and
nonfuel franchise royalty payments. Since early 1995, National has increased
its number of Company-operated sites as certain operators terminated their
franchise and lease agreements. In contrast, TA operated principally as an
owner-operator of travel centers. Consequently, while TA derived the
majority of its revenues from retail diesel fuel sales, the majority of its
gross profit has been derived from, and its principal strategic focus has
been, the sale of higher margin nonfuel products and services.
COMBINATION PLAN
During the three and nine month periods ended September 30, 1997, the Company
has incurred approximately $3.9 million and $11.0 million, respectively, of
expenses related to the Combination plan. These costs, identified as
transition expenses in the Company's consolidated financial statements, are
expected to total approximately $14.0 million, of which approximately $2.0
million is expected to be incurred in 1998. These
-22-
<PAGE>
expenses relate, among other things, to employee separations, costs to
convert National Network travel centers to TA Network travel centers, costs
to dispose of travel centers or terminate lease or franchise agreements, and
the costs of integrating the management and operations of the two networks
into a single network, including relocation, travel, training, and legal
expenses.
EMPLOYEE TERMINATIONS
As a result of the Combination Plan, which was approved by the Board of
Directors in January 1997, most of National's corporate-level employees have
been or will be terminated. In January 1997, certain of National's executive
officers resigned and related severance costs of $0.8 million were
recognized. In May 1997, management finalized its plans regarding employee
terminations and, accordingly, the related costs were recognized. This
expense totaled approximately $1.8 million. Pursuant to the Company's plans,
111 employees are to be terminated, 83 of which had been severed through
September 30, 1997. Through September 30, 1997, approximately $1.3 million of
termination benefits had been paid to such terminated employees. The
remaining accrual for termination benefits of approximately $1.3 million at
September 30, 1997 will be substantially paid by year-end with the final
payments scheduled by March of 1998.
NETWORK RATIONALIZATION
During the third quarter of 1997, the Company continued to refine and execute
its plans for improving the profitability of its combined network (the
"Network") through rebranding of its sites under the TA brand name and
rationalizing the number and locations of its travel centers. In the nine
months ended September 30, 1997, eight Company-owned National travel centers
were sold to the operators of those sites for gross proceeds of $19.7
million, resulting in a gain on sale of $5.6 million. An additional 15 such
sales are expected to close by the second quarter of 1998, providing expected
sales proceeds of an additional approximately $37.8 million. The Company
expects that it will recognize a gain from these sales. During the nine
months ended September 30, 1997, relationships with the owner/operators of
16 franchised National travel centers ("Franchisee-Owner Sites") were
terminated and agreements have been reached with, or appropriate notices
provided to, owner/operators of an additional 11 such sites, such that the
Company expects that all such Franchisee-Owner Sites will be terminated by
the end of 1997. Beginning in July 1997, those National Network franchisees
whose sites have been selected for inclusion in the Company's continuing
network began to convert their franchises to TA from National, a process
that includes rebranding of the travel centers, installation of TA's store
and shop programs, training of the franchisees in TA's operating procedures
and revisions to the franchise agreements and, where applicable, lease
agreements, such that there will be an increase in the royalty the Company
receives as a percentage of the franchisees' nonfuel revenues and a decrease
in fixed rent revenue. The Company expects these new agreements will result
in reduced revenue in the short term, but that in the long term increased
franchisee nonfuel revenues will result in a net increase in the Company's
revenue. At September 30, 1997, 24 National franchisees had signed TA
franchise agreements.
SITE CONVERSIONS
During the three months ended September 30, 1997, the Company converted six
National Network travel centers from Company-owned and leased locations
("Leased Sites") to Company-owned and operated
-23-
<PAGE>
locations by acquiring the travel center operations from the related
operators, bringing the total of such conversions during 1997 to 23. One
additional such conversion was completed in each of October and November
1997. These two fourth quarter conversions are expected to be the final such
conversions, although the continuing negotiations with the operators of
Leased Sites to whom the Company intends to sell the respective sites could
lead to additional conversions, as could the continuing negotiations with
those National franchisees to whom the TA franchise agreement has been
offered. Through September 30, 1997, a total of 26 travel centers have been
converted to Company-operated sites since September 30, 1996. Such
conversions typically result in decreased rent revenue and increased
operating expenses, offset to varying degrees for each individual site by
increased fuel and nonfuel revenues.
Management expects that, over time, the increased revenues will exceed the
decreases in rent revenue and increases in operating expenses, especially as
TA management, marketing, operations, safety and training programs are fully
implemented at the former National company-operated sites converted to TA
operation. In June 1997, 14 of the National Company-operated travel centers
were converted to TA Company-operated sites, and in July 1997, the then
remaining 21 National Company-operated locations were so converted. National
Leased Sites subsequently converted to company-operated sites were converted
to TA company operations at the time of the acquisitions of the site
operations from the respective operators. During the first few months of
operation after both the conversion from a leased site and the conversion to
a TA branded site (with respect to all former National travel centers), the
operating results of each converted travel center are adversely affected by
the costs (such as for maintenance and supplies) of bringing the travel
centers into compliance with TA's standards. In addition, the Company has
chosen to increase the number of employees at the converted sites in order to
improve customer service and, as a consequence, employees were hired in
anticipation of expected revenue increases. For these reasons, the Company
anticipates that the operating results of these converted travel centers will
improve in the fourth quarter of 1997 and into 1998.
The following table sets forth the number and type of ownership and
management of the travel centers operating in each of the Company's networks.
TA NATIONAL
AS OF SEPT. 30, AS OF SEPT. 30,
--------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
Company-owned and operated sites 40 40 42 16
Company-owned and leased sites -- -- 43 79
---- ---- ---- ----
Company-owned sites 40 40 85 95
Franchisee-owner sites 9 8 12 28
---- ---- ---- ----
Total 49 48 97 123
---- ---- ---- ----
---- ---- ---- ----
At the conclusion of the Combination Plan, assuming the Combination Plan is
completed as expected by management, the Network will consist of 122 travel
centers, 75 of which will be Company-owned and operated, 37 of which will be
Leased Sites and 10 of which will be Franchisee-Owner Sites, although the
achievement of the Combination Plan as currently envisioned is not ensured.
-24-
<PAGE>
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations presents detail on the Company's combined results,
which differ from the Company's consolidated results reflected in the
unaudited financial statements for the three and nine month periods ended
September 30, 1996, as a result of the presentation of TA as assets of
subsidiary held for disposition during those periods. The following table
presents the Company's consolidated results of operations for the 1996
periods as though TA had not been held for disposition and had instead been
fully consolidated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------ ------ ----- -----
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
REVENUES:
Fuel $166.6 $167.2 $541.0 $524.6
Nonfuel 77.1 65.0 214.8 180.7
Rent 6.6 10.5 24.6 31.8
-------- ------- ------- -------
TOTAL REVENUES 250.3 242.7 780.4 737.1
Cost of revenues (excluding depreciation) 180.5 176.2 585.2 559.7
-------- ------- ------- -------
GROSS PROFIT (EXCLUDING DEPRECIATION) 69.7 66.5 195.2 177.4
Operating expenses 43.1 33.8 118.7 94.7
Selling, general and administrative expenses 9.4 12.8 30.1 33.2
Refinancing, transition and development costs 3.9 1.3 11.0 1.4
Depreciation and amortization 5.8 6.8 20.1 19.4
(Gain) loss on sales of property and equipment (7.4) (0.1) (5.9) (0.1)
Other operating (income) expense, net 1.1 -- 1.1 --
-------- ------- ------- -------
INCOME FROM OPERATIONS 13.8 11.9 20.1 28.8
Interest (expense), net (6.0) (5.4) (17.0) (15.6)
-------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS 7.8 6.5 3.1 13.2
Provision (benefit) for income taxes 3.1 1.4 1.2 4.0
-------- ------- ------- -------
Income (loss) before extraordinary items 4.7 5.1 1.9 9.2
Extraordinary items (net of taxes) -- -- (5.6) --
-------- ------- ------- -------
Net (loss) income $ 4.7 $ 5.1 $ (3.7) $ 9.2
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
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<PAGE>
RESULTS OF OPERATIONS FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER
30, 1997 AND 1996
REVENUES
The Company's consolidated revenues for the three and nine month periods
ended September 30, 1997 were $250.3 million and $780.4 million,
respectively, which represent increases over the prior year periods of $7.6
million, or 3.1%, for the three month period and $43.3 million, or 5.9%, for
the nine month period.
Fuel revenue for the nine months ended September 30, 1997 reflects an
increase over the 1996 period of $16.4 million, or 3.1%. For the third
quarter, the 1997 amount reflects a decrease from the same period in 1996 of
$0.6 million, or 0.4%. The increase for the year to date period results from
both an increase in diesel gallons sold of 15.5 million gallons and an
approximately 2.0% increase in average retail diesel prices. The decrease
for the 1997 third quarter as compared to the 1996 third quarter is due to a
decrease in diesel gallons sold of 3.8 million gallons, primarily due to the
reduction in the total number of locations during 1997, coupled with a
decrease of approximately 2.5% in average retail diesel prices.
Nonfuel revenue in both 1997 periods has increased over the same periods in
the prior year, primarily due to the increased number of Company-operated
sites offering nonfuel products and services: from September 30, 1996 through
September 30, 1997 there have been 26 additional converted National sites.
In addition, a new TA site was opened in September 1996 and two stand-alone
TA shops were opened in mid-1996.
Rent revenue for both 1997 periods has decreased from the same periods in
1996 as a result of (a) conversions of leased sites to Company-operated
sites, (b) sales of Leased Sites and (c) the rent reductions that are
effective when franchisees sign new franchise and lease agreements with the
Company. Rent revenue is expected to continue to decline in the fourth
quarter as additional sites are converted to Company-operated sites or sold
and as additional franchisee-lessees sign new franchise and lease agreements
with the Company. The new franchise and lease agreements provide for reduced
fixed rents but increased franchise royalty rates to be applied to nonfuel
revenues generated by the franchisees' operations. The decline in rent
revenue is expected to cease in 1998 as the network rationalization is
expected to be substantially complete as regards franchisee-lessees by the
end of 1997.
GROSS PROFIT
The Company's gross profit for the third quarter of 1997 was $69.7 million,
compared to $66.5 million for 1996, an increase of $3.2 million, or 4.8%.
For the nine months of 1997, the Company's gross profit was $195.2 million,
an increase of $17.8 million, or 10.0%, from 1996. The increase in the
Company's gross profit was primarily due to increases in nonfuel revenues and
diesel fuel margins, partially offset by decreased rent revenue, resulting
from the conversions of travel centers from Leased Sites to Company-operated
sites.
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<PAGE>
OPERATING AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating expenses include the direct expenses of Company-operated travel
centers and selling, general and administrative expenses ("SG&A") include
corporate overhead and administrative costs.
The Company's operating expenses increased by $9.3 million, or 27.5%, and
$24.0 million, or 25.3%, respectively, to $43.1 million and $118.7 million
for the three and nine month periods ended September 30, 1997, as compared to
the corresponding prior year periods. These increases reflect the increased
number of Company-operated locations during 1997 as a result of the 1996
addition of three new-build TA sites (including the two stand-alone shops)
and the conversion through September 30, 1997 of 26 Leased Sites to
Company-operated sites since September 30, 1996.
The Company's SG&A for the third quarter decreased from $12.8 million in 1996
to $9.4 million in 1997, primarily as a result of personnel reductions at
National pursuant to the Combination Plan, partially offset by increased
staffing in the operational support and business development areas at TA.
For the nine month period, SG&A decreased by $3.2 million to $30.1 million
primarily due to the factors previously described.
REFINANCING, TRANSITION AND DEVELOPMENT COSTS
Refinancing, transition and development costs for the third quarter of 1997
increased from $1.3 million for 1996 to $3.9 million, while for the nine
months of 1997 such costs increased to $11.0 million from $1.4 million in
1996. The 1997 costs were incurred in effecting the combination of National
and TA, including recognition of employee termination benefits of $2.6
million, while the 1996 amount is primarily comprised of $1.3 million of
expenses incurred in a failed refinancing attempt by National.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the nine months of 1997 increased by $0.7
million from the corresponding 1996 period as a result of the capital
expenditures made during 1996 and 1997, as well as from increased
amortization of deferred financing costs stemming from the refinancing.
INCOME FROM OPERATIONS
Income from operations for the Company for the third quarter of 1997 was
$13.8 million as compared to $11.9 million in 1996, an increase of $1.9
million or 16.0%. For the nine months ended September 30, 1997, income from
operations reflects a decrease from 1996 of $8.7 million to $20.1 million.
The decrease for the year to date period is attributable to the transition
expenses incurred in 1997, as well as the effect of decreased rent revenue
and increased operating costs resulting from the conversions of Leased Sites
to Company-operated sites, partially offset by increased nonfuel sales
margins as a result of the site conversions, all of which is due to the
execution of the Combination Plan throughout 1997. The increase seen for the
third quarter is a result of the factors just described, although the
transition expense spending is slowing, further offset by the gains realized
on the sales of Leased Sites to operators during the 1997 third quarter.
EBITDA (defined as income from operations plus the sum of (a) depreciation,
amortization and other non-cash charges, (b) refinancing,
-27-
<PAGE>
transition and development costs and (c) gains or losses from sales of
property and equipment) for the Company for the three and nine month periods
ended September 30, 1997 was $17.2 million and $46.3 million, respectively,
as compared to $19.9 million and $49.5 million for the respective 1996
periods. The decreased EBITDA in 1997 is largely derived from reduced rent as
a result of the Combination Plan.
INTEREST (INCOME) EXPENSE - NET
Interest expense for the third quarter and nine months of 1997 was $0.6
million and $1.4 million higher, respectively, than for the same 1996 periods
as a result of the increased debt balance after consummation of the
refinancing (discussed in Liquidity and Capital Resources below) on March 27,
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of working capital needs,
payments of principal and interest on outstanding indebtedness and capital
expenditures, including expenditures for acquisitions, expansion and
environmental upgrades.
Net cash provided by operating activities totaled $15.5 million in the nine
months of 1997 and $32.4 million in 1996. The decrease in net cash flows
provided by operating activities in 1997 compared to 1996 was primarily due
to decreased operating income in 1997, as discussed previously, and growth in
working capital requirements as a result of the increased number of
Company-operated sites.
Net cash used in investing activities for the nine months ended September 30,
1997 was $10.3 million versus $19.6 million in 1996. The amount for 1997
reflects a $10.5 million increase in expenditures related to capital
additions and conversions of Leased Sites to Company-operated sites, offset
by a $19.8 million increase in proceeds from sales of property and equipment
resulting from the sales of eight Leased Sites to the respective operators.
Net cash flows provided by financing activities were $47.8 million in the
first nine months of 1997 while for the first nine months of 1996, the net
cash flows used in financing activities was $2.5 million . The change in the
amount of financing activity cash flows in 1997 from 1996 was due to the
Company's refinancing and recapitalization completed in March 1997.
On March 27, 1997, the Company was refinanced and currently has outstanding
$290.3 million of indebtedness, consisting of $125.0 million principal amount
of Senior Subordinated Notes, $85.5 million principal amount of Senior Notes
and a $79.8 million term loan facility. The Company also has a $40.0 million
revolving credit facility, which, except for $1.5 million used for letters of
credit, was not drawn upon at September 30, 1997. The Senior Notes have no
amortization requirements until 2001, the Senior Subordinated Notes are due
2007 and the term facility has annual amortization requirements of $500,000
until 2004.
The Company expects to invest up to approximately $220 million in the Network
between 1997 and the end of 2001 (with approximately $140 million of this
amount to be spent by the end of 1998) in connection with a capital program
to upgrade, rebrand, reimage and increase the number of travel centers.
Approximately $50
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<PAGE>
million of the $220 million intended to be spent represents normal ongoing
maintenance and related capital expenditures. The Company has budgeted
expenditures in order to add additional sites, rebrand and reimage sites, add
additional nonfuel offerings (such as fast food offerings) at existing sites,
make required environmental improvements, and purchase, install and upgrade
its information systems.
The Company anticipates that it will be able to fund its 1997 working capital
requirements and capital expenditures primarily from funds generated from the
refinancing, funds generated from operations, and, to the extent necessary,
from borrowings under the revolving facility. The Company's long-term
liquidity requirements, including capital expenditures, are expected to be
financed by a combination of internally generated funds, borrowings and other
sources of external financing as needed.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to various Environmental
Laws.
The Company owns and operates USTs and ASTs at Company-operated locations and
Leased Sites which must comply with certain statutory and regulatory
requirements by December 22, 1998. The Company is making necessary upgrades
to comply with those requirements. The Company expects to spend a total of
approximately $10 million to $15 million in 1997 and 1998 to complete the
upgrade of USTs and other environmental related costs. In addition, the
Company has estimated the current ranges of remediation costs at currently
active sites and what it believes will be its ultimate share for such costs
after required indemnification and remediation is performed by Unocal and BP
under the respective Environmental Agreements and has a reserve for such
matters of $0.9 million as of September 30, 1997. While it is not possible
to quantify with certainty the environmental exposure, in the opinion of
management, the potential liability, beyond that considered in the reserve,
for all environmental proceedings, based on information known to date, will
not have a material adverse effect on the financial condition, results of
operations or liquidity of the Company.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share
information for periods ending after December 15, 1997. The Company believes
that the basic earnings per share calculated amount under this standard will
exceed the amount of primary earnings per share presented herein while the
diluted earnings per share amount calculated under this standard will
approximate the amount of primary earnings per share presented herein.
FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not statements of historical
fact may include forward-looking statements that involve a number of risks
and uncertainties. Moreover, from time to time the Company may issue other
forward-looking statements. The following factors are among those that could
cause actual results to differ materially from the forward-looking
statements: competition from other travel center and truckstop operators,
including additional or improved services or facilities of competitors, the
economic condition of the
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<PAGE>
trucking industry (which in turn is dependent on general economic factors),
diesel and gasoline fuel pricing, availability of fuel supply and
difficulties that may be encountered by the Company or its franchisees in
implementing the Company's plan to combine its existing travel center
networks into a single network. The forward looking statements should be
considered in light of these factors.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to several litigation matters, described below,
involving certain of its franchisees. The Company does not expect any of
these matters to have a material adverse effect on the Company. From time to
time the Company is a party to litigation in the ordinary course of its
business involving negligence and other similar claims which are covered by
the Company's third party insurance policies. While claims for damages in
such litigation may in certain instances be in excess of the Company's
insurance coverage, the Company does not expect its existing litigation to
have a material adverse effect on the Company.
FORTY-NINER TRUCK PLAZA LITIGATION. This action was commenced in California
Superior Court, Sacramento County, on January 28, 1993 by four Operators of
National TravelCenters in California. The complaint asserts claims on behalf
of each of the plaintiffs against the Company, Clipper and Unocal Corporation
and its subsidiaries based upon alleged violations by Union Oil Company of
California and Unocal Corporation (together the "Unocal Entities") of the
California Business and Professions Code and of an alleged contract by
failing to provide them with a bona fide offer or right of first refusal to
purchase their truckstops in connection with the sale of the plaintiffs'
truckstops by Unocal to the Company. Two of the plaintiffs settled their
claims prior to commencement of the trial. The claims of two plaintiffs, who
are franchisees of National in Sacramento and Santa Nella, California, were
tried and the jury rendered a verdict awarding $4.0 million in compensatory
damages jointly and severally against the Company, the Unocal Entities and
Clipper, and assessing punitive damages against them in the amount of $1.5
million, $7.0 million and $1.6 million, respectively. On August 1, 1995, the
court granted the defendants' motions for a new trial on all issues, although
it denied defendants' motions for judgment notwithstanding the verdict. On
October 22, 1997, the California Court of Appeal filed a decision affirming
the trial court's orders granting a new trial and denying defendants' motions
for judgment notwithstanding the verdict. The Court of Appeal also reversed
an order of the trial court granting a nonsuit on plaintiffs' claim against
the Company and Clipper for civil conspiracy. The Company intends to
petition the California Supreme Court to seek review of the appeal court's
decision. Pursuant to the asset purchase and related agreements between the
Company and the Unocal Entities, the Company believes that the Unocal
Entities are required to indemnify it for attorneys' fees and compensatory
damages. The Unocal Entities may, however, contest the Company's claim for
indemnification. The indemnification agreement between the Unocal Entities
and the Company does not by its terms cover punitive damages. The Company
entered into an agreement indemnifying Clipper in connection with the
Company's purchase of the properties in the National Network, and Clipper has
asserted and the Company has concurred that this agreement obligates the
Company to pay any compensatory and punitive damages assessed against Clipper.
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<PAGE>
CHARLESTON, WEST VIRGINIA LITIGATION. This action was commenced on April 17,
1996 in the Circuit Court of Berkeley County, West Virginia. The amended
complaint, brought on behalf of eighteen National Operators, alleges that the
Company's fuel pricing policies and practices violate the PMPA and the
Uniform Commercial Code and constitute a breach of the contractual duty of
good faith and fair dealing and unjust enrichment. The amended complaint also
asserts claims of fraud and fraud in the inducement, apparently based on
alleged representations made by the Company concerning fuel pricing. The
amended complaint asserts claims against the Company, Clipper and certain
present and former directors and officers of the Company, and seeks actual
and punitive damages in an unspecified sum. The Company has removed the case
to federal court, and the court has granted the Company's motion to transfer
the case to federal court in Nashville, Tennessee.
The Company has entered into settlement agreements with four of the
plaintiffs pursuant to which the claims of those plaintiffs have been or will
be dismissed with prejudice. One additional plaintiff has withdrawn its
claims in the action without prejudice.
On March 31, April 1 and April 7, 1997, three of the plaintiffs filed motions
for a preliminary injunction. The motions sought an order requiring, among
other things, that the Company sell to the movants all of the movants'
requirements of diesel fuel at a price per gallon of not more than two cents
above the Oil Price Information Service average price under the terms of the
Company's existing lease and franchise agreements. In addition, on April 22,
1997, two of the movants filed a motion seeking a temporary restraining order
for substantially the same relief. On May 21, 1997, the court denied the
plaintiffs' motions. Plaintiffs appealed the trial court's denial of their
motions to the United States Courts of Appeals for both the Fourth and the
Sixth Circuits. On September 11, 1997, the Fourth Circuit dismissed
plaintiffs' appeal for lack of jurisdiction. Plaintiffs' appeal to the Sixth
Circuit is pending. By order dated August 1, 1997, all proceedings in the
district court have been stayed pending the completion of all appeals.
FOOD SYSTEMS LITIGATION. The Company filed this action on May 7, 1996, in
the U.S. District Court for the Middle District of Tennessee seeking, among
other things, a declaratory judgment that it was entitled to terminate the
franchise of the defendant, one of the Company's TravelCenter Operators, for
failure to pay rent and on other grounds. On June 11, 1996, the defendant
filed counterclaims for violation of the PMPA, for breach of contract and for
breach of implied contract, seeking actual and punitive damages in an
unspecified amount. On November 12, 1996, the defendant filed for relief
under Chapter 7 of the Bankruptcy Code, thereby staying all proceedings in
this action. The Company has recovered possession of the Salt Lake City site
through bankruptcy court proceedings. The Company has entered into a
settlement agreement with the defendant and certain of its principals which
is subject to approval by the United States Bankruptcy Court for the District
of Utah, Central Division. The settlement agreement provides for mutual
releases and the dismissal of all claims with prejudice.
Item 4. Submission of Matters to a Vote of Security Holders
On September 2, 1997, the Company commenced a consent solicitation (the
"Consent Solicitation") addressed to its non-management stockholders seeking
stockholder approval of all amounts and benefits to be provided under a
proposed stock option plan and certain proposed employment agreements to be
entered into with
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<PAGE>
senior management. The Consent Solicitation was approved by stockholders
representing more than the number of shares required to take stockholder
action without a stockholders' meeting. Of the 6,442,302 shares of Company
stock eligible to ratify the Consent Solicitation, stockholders representing
5,356,052 shares, or 83.3% of such eligible shares, ratified the Consent
Solicitation.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
Exhibit 10.1 1997 Stock Incentive Plan
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
During the three months ended September 30, 1997, the Company filed no
reports on Form 8-K.
-32-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRAVELCENTERS OF AMERICA, INC.
(Registrant)
Date: November 14, 1997 By: /S/ JAMES W. GEORGE
------------------------------------------
Name: James W. George
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
1997 STOCK INCENTIVE PLAN
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
1997 STOCK INCENTIVE PLAN
ARTICLE 1
GENERAL
1.1 PURPOSE. The purpose of this TravelCenters of America, Inc. 1997
Stock Incentive Plan (the "Plan") is to provide for certain officers, directors
and key employees of TravelCenters of America, Inc. (the "Company") and certain
of its Affiliates an equity-based incentive to maintain and enhance the
performance and profitability of the Company.
1.2 ADMINISTRATION.
(a) The Plan shall be administered by a committee (the
"Committee") which shall be either (i) the Board of Directors of the Company
(the "Board") or (ii) a committee composed of two or more members of the
Board designated by the Board to administer the Plan. It is expected
(although not required) that each director designated to serve on the
Committee be a "Non-Employee Director" (within the meaning of Rule 16b-3
promulgated under the Securities Exchange Act of 1934 (the "Act") or any
successor rule thereto, and an "outside director" (within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"))
during any period when, and to the extent that, Rule 16b-3 and Code section
162(m), respectively, are applicable to the Company and the Plan; provided,
however, that the mere fact that a Committee member shall fail to qualify
under either of the foregoing requirements shall not invalidate any award
made by the Committee which award is otherwise validly made under the Plan.
The members of the Committee shall be appointed by, and may be changed at any
time and from time to time in the discretion of, the Board.
(b) The Committee shall have the authority (i) to exercise all
of the powers granted to it under the Plan, (ii) to construe, interpret and
implement the Plan and any Plan agreements executed pursuant to the Plan,
(iii) to prescribe, amend and rescind rules relating to the Plan, (iv) to make
any determination necessary or advisable in administering the Plan, and (v) to
correct any defect, supply any omission and reconcile any inconsistency in the
Plan.
(c) The determination of the Committee on all matters relating
to the Plan or any Plan agreement shall be conclusive.
(d) No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any award
hereunder.
<PAGE>
2
1.3 PERSONS ELIGIBLE FOR AWARDS. Awards under the Plan may be made
to such officers, directors and executive, managerial, professional or other
employees ("key personnel") of the Company or its Affiliates, as the Committee
shall from time to time in its sole discretion select.
1.4 TYPES OF AWARDS UNDER PLAN.
(a) Awards may be made under the Plan in the form of (i) stock
options ("options"), (ii) stock appreciation rights related to an option
("related stock appreciation rights"), and (iii) stock appreciation rights not
related to any option ("unrelated stock appreciation rights"), all as more fully
set forth in Article II.
(b) Options granted under the Plan may be either (i)
"nonqualified" stock options subject to the provisions of Code section 83, or
(ii) options intended to qualify for incentive stock option treatment described
in Code section 422.
(c) All options when granted are intended to be nonqualified
stock options, unless the applicable Plan agreement explicitly states that an
option is intended to be an incentive stock option. If an option is intended to
be an incentive stock option, and if for any reason such option (or any portion
thereof) shall not qualify as an incentive stock option, then, to the extent of
such nonqualification, such option (or portion) shall be regarded as a
nonqualified stock option appropriately granted under the Plan provided that
such option (or portion) otherwise meets the Plan's requirements relating to
nonqualified stock options.
1.5 SHARES AVAILABLE FOR AWARDS.
(a) Subject to Sections 2.2(c) (relating to adjustments for
payments covering fractional shares) and 3.5 (relating to adjustments upon
changes in capitalization), as of any date the total number of shares of Common
Stock with respect to which options and unrelated stock appreciation rights may
be granted under the Plan shall be equal to the excess (if any) of (i) 750,000
shares of Common Stock, over (ii) the sum of (A) the number of shares of Common
Stock subject to outstanding options and outstanding unrelated stock
appreciation rights granted under the Plan, (B) the number of shares previously
issued pursuant to the exercise of options granted under the Plan, and (C) the
number of shares in respect of which related and unrelated stock appreciation
rights granted under the Plan shall have previously been exercised. In
accordance with (and without limitation upon) the preceding sentence, shares of
Common Stock covered by options or unrelated stock appreciation rights granted
under the Plan which expire, terminate, or are canceled for any reason
whatsoever without the grantee (or the grantee's beneficiary) having enjoyed any
of the benefits of stock ownership (other than voting rights or dividends that
are forfeited) shall again become available for awards under the Plan.
<PAGE>
3
(b) Shares of stock that shall be subject to issuance pursuant
to the Plan shall be authorized and applicable unissued or treasury shares of
Common Stock.
(c) Without limiting the generality of the foregoing, the
Committee may cancel any award granted under the Plan and issue a new award in
substitution therefor upon such terms as the Committee may in its sole
discretion determine (provided that the substituted award shall satisfy all
applicable Plan requirements as of the date such new award is made) without the
grantee's consent, where (unless the applicable Plan agreement (as defined in
Section 1.7(a)) otherwise provides) the substituted award confers upon the
grantee, until exercised, substantially the same economic benefit inherent in
the replaced award, taking into account any post-exercise puts and calls, etc.,
and with the grantee's consent if otherwise.
(d) In any calendar year, a participant eligible for awards
under the Plan may not be granted options and/or stock appreciation rights under
the Plan covering a combined total of more than 150,000 shares of Common Stock.
1.6 DEFINITIONS OF CERTAIN TERMS.
(a) The term "Affiliate" as used herein means any person or
entity which, at the time of reference, directly, or indirectly through one or
more intermediaries, controls, is controlled by, or is under common control
with, the Company.
(b) The term "Common Stock" as used herein means the shares of
common stock, par value $.01 per share, of the Company as constituted on the
effective date of the Plan, and any other shares into which such common stock
shall thereafter be changed by reason of a recapitalization, merger,
consolidation, split-up, combination, exchange of shares or the like.
(c) Except as otherwise determined by the Committee in its sole
discretion, the "Fair Market Value" of a share of Common Stock as of any date
and in respect of any share of Common Stock shall be the mean between the high
and low sales prices of a share of Common Stock on such date as reported on the
New York Stock Exchange if shares of Common Stock are then trading upon such
exchange, or if not, then such average on such other stock exchange on which
shares of the Common Stock are principally trading, if any, or if the shares are
not then listed on a stock exchange, then such average in over the counter
trading, or if the shares are not publicly traded, then, as otherwise reasonably
determined by the Committee in its sole discretion in accordance with Appendix A
hereto and as set forth in the relevant Plan agreement. In no event shall the
Fair Market Value of any share be less than its par value.
<PAGE>
4
1.7 AGREEMENTS EVIDENCING AWARDS.
(a) Options and stock appreciation rights granted under the Plan
shall be evidenced by written agreements. Any such written agreements shall
(i) contain such provisions not inconsistent with the terms of the Plan as the
Committee may in its sole discretion deem necessary or desirable, and (ii) be
referred to herein as "Plan agreements."
(b) Each Plan agreement with respect to the granting of an
option shall set forth the number of shares of Common Stock subject to the
option granted thereby.
(c) Each Plan agreement with respect to the granting of a
related stock appreciation right shall set forth the number of shares of Common
Stock subject to the option related to the stock appreciation right granted
thereby. Each Plan agreement with respect to the granting of an unrelated stock
appreciation right shall set forth the number of stock appreciation rights
granted thereby.
(d) Each Plan agreement with respect to the granting of an
option shall set forth the amount (the "option exercise price") payable by the
grantee to the Company in connection with the exercise of the option evidenced
thereby. Except as otherwise determined by the Committee with respect to
nonqualified stock options, the option exercise price per share shall not be
less than the Fair Market Value of a share of Common Stock on the date the
option is granted. In the case of options intended to be incentive stock
options, the option exercise price per share shall not be less than the Fair
Market Value of a share of Common Stock on the date the option is granted.
(e) Each Plan agreement with respect to a stock appreciation
right shall set forth the amount (the "appreciation base") over which
appreciation will be measured upon exercise of the stock appreciation right
evidenced thereby. Except as otherwise determined by the Committee, the
appreciation base per share of Common Stock subject to a stock appreciation
right shall not be less than (i) in the case of an unrelated stock appreciation
right, the Fair Market Value of a share of Common Stock on the date the stock
appreciation right is granted, or (ii) in the case of a related stock
appreciation right, the option exercise price per share of Common Stock subject
to the related option.
<PAGE>
5
ARTICLE 2
STOCK OPTIONS AND
STOCK APPRECIATION RIGHTS
2.1 GRANT OF STOCK OPTIONS. The Committee may grant options to
purchase shares of Common Stock in such amounts and subject to such terms and
conditions as the Committee shall from time to time in its sole discretion
determine, subject to the terms of the Plan.
2.2 GRANT OF STOCK APPRECIATION RIGHTS.
(a) RELATED STOCK APPRECIATION RIGHTS. The Committee may grant
a related stock appreciation right in connection with all or any part of an
option granted under the Plan, either at the time the related option is granted
or any time thereafter prior to the exercise, termination or cancellation of
such option, and subject to such terms and conditions as the Committee shall
from time to time determine, subject to the terms of the Plan. The grantee of a
related stock appreciation right shall, subject to the terms of the Plan and the
applicable Plan agreement, have the right to surrender to the Company for
cancellation all or a portion of the related option granted under the Plan, but
only to the extent that such option is then exercisable, and to be paid therefor
an amount equal to the excess (if any) of (i) the aggregate Fair Market Value of
the shares of Common Stock subject to the option or portion thereof (determined
as of the date of exercise of such stock appreciation right), over (ii) the
aggregate appreciation base (determined pursuant to Section 1.7(e)) of the
shares of Common Stock subject to the stock appreciation right or portion
thereof surrendered.
(b) UNRELATED STOCK APPRECIATION RIGHTS. The Committee may
grant an unrelated stock appreciation right in such amount and subject to such
terms and conditions as the Committee shall from time to time in its sole
discretion determine, subject to the terms of the Plan. The grantee of an
unrelated stock appreciation right shall, subject to the terms of the Plan and
the applicable Plan agreement, have the right to surrender to the Company for
cancellation all or a portion of such stock appreciation right, but only to the
extent that such stock appreciation right is then exercisable, and to be paid
therefor an amount equal to the excess (if any) of (i) the aggregate Fair Market
Value of the shares of Common Stock subject to the stock appreciation right or
portion thereof surrendered (determined as of the date of exercise of such stock
appreciation right), over (ii) the aggregate appreciation base (determined
pursuant to Section 1.7(e)) of the shares of Common Stock subject to the stock
appreciation right or portion thereof.
(c) PAYMENT. Payment due to the grantee upon exercise of a
stock appreciation right shall be made in cash and/or in Common Stock (valued at
the Fair Market Value thereof as of the date of exercise), as determined by the
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6
Committee in its sole discretion. If the Committee shall determine to make all
of such payments in Common Stock, any payments covering fractional shares of
Common Stock shall be rounded up to the next whole share, and no fractional
shares shall be issued and no cash payments shall be made in lieu of fractional
shares.
2.3 EXERCISE OF RELATED STOCK APPRECIATION RIGHT REDUCES SHARES
SUBJECT TO OPTION. Upon any exercise of a related stock appreciation right or
any portion thereof, the number of shares of Common Stock subject to the related
option shall be reduced by the number of shares of Common Stock in respect of
which such stock appreciation right shall have been exercised.
2.4 EXERCISABILITY OF OPTIONS AND STOCK APPRECIATION RIGHTS. Subject
to the other provisions of this Plan:
(a) EXERCISABILITY DETERMINED BY PLAN AGREEMENT. Each Plan
agreement shall set forth the period during which and the conditions subject to
which the option or stock appreciation right evidenced thereby shall be
exercisable, as determined by the Committee in its sole discretion.
(b) DEFAULT PROVISIONS. Unless the applicable Plan agreement
otherwise specifies, subject to Section 2.7:
(i) no option or stock appreciation right shall vest or
become exercisable prior to the December 31 in the year of grant,
(ii) annual options and stock appreciation rights granted
under the Plan shall become fully vested and exercisable on the December 31
in the year of grant provided that the Committee determines that the
applicable performance targets established by the Committee have been met
(and if the applicable performance targets have not been met then such
awards shall not vest or become exercisable and shall be forfeited), and
(iii) each option or stock appreciation right which has
become vested and exercisable in accordance with the foregoing clauses
shall remain vested and exercisable through December 31, 2006, after which
date all such options and stock appreciation rights shall terminate and
cease to be exercisable.
(c) EXERCISE OF RELATED STOCK APPRECIATION RIGHT. Unless the
applicable Plan agreement otherwise provides, a related stock appreciation right
shall be exercisable at any time during the period that the related option may
be exercised.
(d) PARTIAL EXERCISE PERMITTED. Unless the applicable Plan
agreement otherwise provides, an option or stock appreciation right granted
under the
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7
Plan may be exercised from time to time as to all or part of the shares as to
which such option or stock appreciation right shall then be exercisable.
(e) NOTICE OF EXERCISE; EXERCISE DATE.
(i) An option or stock appreciation right shall be
exercisable by the filing of a written notice of exercise with the Company,
on such form as shall be provided to the Optionee by the Committee and in
such manner as the Committee shall in its sole discretion prescribe, and by
payment in accordance with Section 2.6.
(ii) Unless the applicable Plan agreement otherwise
provides or the Committee in its sole discretion otherwise determines, the
date of exercise of an option or unrelated stock appreciation right shall be
the date the Company receives such written notice of exercise.
(iii) For purposes of the Plan, the "option exercise date"
shall be deemed to be the sixth business day immediately following the date
written notice of exercise is received by the Company.
2.5 LIMITATION ON EXERCISE. Notwithstanding any other provision of
the Plan, no Plan agreement shall permit an award to be exercisable more than
ten (10) years after the date of grant or after December 31, 2006.
2.6 PAYMENT OF OPTION PRICE.
(a) TENDER DUE UPON NOTICE OF EXERCISE. Unless the applicable
Plan agreement otherwise provides or the Committee in its sole discretion
otherwise determines, (i) any written notice of exercise of an option shall be
accompanied by payment of the full purchase price for the shares being
purchased, and (ii) the grantee shall have no right to receive shares of Common
Stock with respect to an option exercise prior to the option exercise date.
(b) MANNER OF PAYMENT. Payment of the option exercise price
shall be made in any combination of the following:
(i) by certified or official bank check payable to the
Company (or the equivalent thereof acceptable to the Committee);
(ii) with the consent of the Committee in its sole
discretion, by personal check (subject to collection), which may in the
Committee's discretion be deemed conditional;
(iii) if and to the extent provided in the applicable Plan
agreement, by delivery of previously acquired shares of Common Stock owned
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8
by the grantee for at least six months (or such other period as the
Committee may prescribe that will not result in the imposition of "variable
accounting") having a Fair Market Value (determined as of the option
exercise date) equal to the portion of the option exercise price being paid
thereby, provided that the Committee may require the grantee to furnish an
opinion of counsel acceptable to the Committee to the effect that such
delivery would not result in the grantee incurring any liability under
section 16(b) of the Act and does not require any Consent (as defined in
Section 3.2); and
(iv) with the consent of the Committee in its sole
discretion, by the promissory note and agreement of the grantee providing
for payment with interest on the unpaid balance accruing at a rate not less
than needed to avoid the imputation of income under Code section 7872 and
upon such terms and conditions (including the security, if any, therefor)
as the Committee may determine. Any promissory note issued in accordance
with this Section 2.6(b)(iv) shall be secured by the stock issued in
connection with delivery of such note and shall provide for full recourse
against the grantee, unless the Committee otherwise determines.
(c) CASHLESS EXERCISE. Payment in accordance with clause (iii)
of Section 2.6(b) may be deemed to be satisfied, if and to the extent provided
in the applicable Plan agreement, (i) if the Common Stock is publicly traded (as
described in Section 1.6(c)), by delivery to the Company of an assignment of a
sufficient amount of the proceeds from the sale of Common Stock acquired upon
exercise to pay for all of the Common Stock acquired upon exercise and an
authorization to the broker or selling agent to pay that amount to the Company,
which sale shall be made at the grantee's direction at the time of exercise,
provided that the Committee may require the grantee to furnish an opinion of
counsel acceptable to the Committee to the effect that such delivery would not
result in the grantee incurring any liability under section 16(b) of the Act and
does not require any Consent (as defined in Section 3.2), or (ii) if the Common
Stock is not publicly traded (as described in Section 1.6(c)) by tender to the
Company for cancellation options covering shares of Common Stock of such number
(rounded, if not a whole number to the next highest whole number) that the
spread between the option exercise price and the Put Purchase Price (as defined
in Appendix B) of such shares is sufficient to pay for the number of shares
being purchased.
(d) ISSUANCE OF SHARES. As soon as practicable after receipt of
full payment, the Company shall, subject to the provisions of Section 3.2,
deliver to the grantee one or more certificates for the shares of Common Stock
so purchased, which certificates may bear such legends as the Company may deem
appropriate concerning restrictions on the disposition of the shares in
accordance with applicable securities laws, rules and regulations or otherwise.
<PAGE>
9
2.7 TERMINATION OF EMPLOYMENT. Subject to the other provisions of
the Plan and unless the applicable Plan agreement otherwise provides:
(a) GENERAL RULE. All options and stock appreciation rights
granted to a grantee shall terminate upon his termination of employment for any
reason (including death) except to the extent post-employment exercise of the
vested portion of an option or stock appreciation right is permitted in
accordance with this Section 2.7. The "vested portion" of any option or stock
appreciation right shall mean the portion thereof which is vested (whether or
not then exercisable) immediately prior to the grantee's termination of
employment for any reason.
(b) IMPROPER ACTIVITY; QUIT. All options and stock appreciation
rights granted to a grantee shall terminate and expire on the day the grantee's
employment is terminated for cause or the grantee quits employment, whether or
not he is a party to a written employment contract. For purposes of this
Section 2.7, a grantee's employment shall be deemed to be terminated for "cause"
if, in the case of a grantee who has an employment agreement with the Company or
any Affiliate, he is terminated for cause pursuant to the terms of such
agreement, and in all other cases if he is discharged (i) on account of fraud,
embezzlement or other unlawful or tortious conduct, or conduct involving
dishonesty or moral turpitude, whether or not involving or against the Company
or any Affiliate, (ii) for violation of a significant policy of the Company or
any Affiliate or willful repeated failure to follow directions of the Board of
Directors or a senior executive officer, (iii) for serious and willful acts of
misconduct detrimental to the business or reputation of the Company or any
Affiliate or grantee's conviction of, or plea of guilty or NOLO CONTENDERE to,
any crime that constitutes a felony or involves dishonesty or moral turpitude.
(c) REGULAR TERMINATION; LEAVES OF ABSENCE. If the grantee's
employment terminates for reasons other than as provided in subsection (b) or
(d) of this Section 2.7, the portion of options and stock appreciation rights
granted to such grantee which were vested and exercisable immediately prior to
such termination of employment may be exercised until the earlier of (a) 30 days
after his termination of employment or (b) the date on which such options and
stock appreciation rights terminate or expire in accordance with the provisions
of the Plan (other that this Section 2.7) and the Plan agreement; provided, that
the Committee may in its sole discretion determine such other period for
exercise (i) with respect to any portion of options and stock appreciation
rights which were vested but not exercisable immediately prior to such
termination of employment and (ii) in the case of an individual whose employment
terminates solely because his employer ceases to be an Affiliate or he transfers
his employment with the Company's consent to a purchaser of a business disposed
of by the Company. The Committee may in its discretion determine (i) whether
any leave of absence (including short-term or long-term disability or medical
leave) shall constitute a termination of employment for
<PAGE>
10
purposes of the Plan, and (ii) the impact, if any, of any such leave on
outstanding awards under the Plan.
(d) DEATH. If a grantee's employment terminates by reason of
death, or if a grantee's employment terminates in the manner described in
Section 2.7(c) and he dies within the period for exercise provided for therein,
the options and stock appreciation rights vested and exercisable by him
immediately prior to his death shall be exercisable by the person to whom such
options and stock appreciation rights pass under the grantee's will (or, if
applicable, pursuant to the laws of descent and distribution) until the earlier
of (a) one year after the grantee's death or (b) the date on which such options
and stock appreciation rights terminate or expire in accordance with the
provisions of the Plan (other than this Section 2.7) and the Plan agreement;
provided, that the Committee may in its sole discretion determine such other
period for exercise with respect to any portion of options and stock
appreciation rights which were vested but not exercisable by the grantee
immediately prior to his death.
2.8 CALL AND PUT OPTIONS. Unless the applicable Plan agreement
otherwise provides,
(a) CALL OPTION OF COMPANY. If a grantee shall no longer be
employed by the Company or any Affiliate for any reason whatsoever,
including, without limitation, by reason of death, permanent disability,
adjudicated incompetency or termination with or without cause (each, a
"termination" and the effective date of such termination is hereinafter
referred to as the "Termination Effective Date"), irrespective of whether
such grantee receives in connection with the termination any severance or
other payment from the Company or any Affiliate, the Company, by written
notice (the "Call Notice") to such grantee, his estate, or his legal
representative, as the case may be, or his "Permitted Transferee" (as defined
in Section 3.3) (the "Departing Purchaser"), given within sixty (60) days
after the later of (x) the Termination Effective Date, and (y) where
applicable, the expiration of the Post-Employment Exercise Period (as defined
below) (the "Primary Election Period"), shall have the right, but not the
obligation, to purchase (any such right but not obligation hereunder, a "Call
Option"), and if the Company exercises such Call Option, the Departing
Purchaser shall have the obligation to sell, such number of shares of Common
Stock specified in the Call Notice, which number may be any or all of the
shares of Common Stock held by the Departing Purchaser (the "Departing
Purchaser Shares"), at an aggregate purchase price equal to the Call Purchase
Price (as defined in Appendix A hereof) on the Termination Effective Date.
The Post-Employment Exercise Period shall mean the period following the
grantee's termination of employment during which he (or in the case of his
death, the person to whom options to acquire such shares pass in accordance
with Section 2.7(d) hereof) may exercise the vested portion of such option
granted thereunder in accordance with the provisions of Section 2.7 hereof
(or under the applicable Plan agreement, if different). If the Company
elects not to purchase all of the Departing Purchaser
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11
Shares, not later than the end of the Primary Election Period, the Company
shall so notify the other Management Stockholders and shall include in such
notice the Call Purchase Price on the Termination Effective Date.
(b) CALL OPTION OF OTHER MANAGEMENT STOCKHOLDERS. For the
thirty (30) days following the end of the Primary Election Period (or the
earlier delivery of the notice from the Company referred to in the final
sentence of Section 2.8(a)) (the "Secondary Election Period"), each other
"Management Stockholder" (as defined in the preamble to the Supplemental
Stockholders' Agreement), by written notice (the "Call Notice") to the Departing
Purchaser given within the Secondary Election Period, shall have such a Call
Option and if any other Management Stockholder exercises such Call Option, the
Departing Purchaser shall have the obligation to sell to such Management
Stockholder, the aggregate number of Departing Purchaser Shares specified in
such Call Notices and not purchased by the Company pursuant to Section 2.8(a),
at an aggregate purchase price equal to the Call Purchase Price on the
Termination Effective Date. If such Management Stockholders elect to purchase
more than the number of Departing Purchaser Shares not purchased by the Company,
the same procedure shall be followed, except that the number of shares to be
sold and the aggregate purchase price shall be divided PRO RATA among such
electing Management Stockholders, in the relative proportion that the number of
shares of Common Stock held by each bears to the total number of shares of
Common Stock held by all such Management Stockholders electing to purchase the
Departing Purchaser Shares not purchased by the Company, or as such electing
Management Stockholders may otherwise agree among themselves. If the other
Management Stockholders elect not to purchase all of the Departing Purchaser
Shares, not later than the end of the Secondary Election Period, the Company
shall immediately so notify the Investors and shall include in such notice the
Call Purchase Price on the Termination Effective Date.
(c) CALL OPTION OF INVESTORS. For the thirty (30) days
following the end of the Secondary Election Period (or the earlier delivery of
the notice from the Company referred to in the final sentence of Section 2.8(b))
(the "Tertiary Election Period"), each "Investor" (as defined in the
Supplemental Stockholders' Agreement), by written notice (the "Call Notice") to
the Departing Purchaser given within the Tertiary Election Period, shall have
such a Call Option and if any Investor exercises such Call Option, the Departing
Purchaser shall have the obligation to sell to the Investors, the aggregate
number of Departing Purchaser Shares specified in such Call Notices not
purchased by the Company or the other Management Stockholders pursuant to
Sections 2.8(a) and 2.8(b), at an aggregate purchase price equal to the Call
Purchase Price on the Termination Effective Date. If the Investors elect to
purchase more than the number of Departing Purchaser Shares not purchased by the
Company or the other Management Stockholders, the same procedure shall be
followed, except that the number of shares to be sold and the aggregate purchase
price shall be divided PRO RATA among such electing Investors, in the relative
proportion that the number of shares of Common Stock held by each
<PAGE>
12
bears to the total number of shares of Common Stock held by all such
Investors electing to purchase Departing Purchaser Shares, or as such
electing Investors may otherwise agree among themselves. If the Investors
elect not to purchase all of the Departing Purchaser Shares not purchased by
the Company or the other Management Stockholders, the Company shall
immediately so notify the Put Eligible Holders (as defined below) and shall
include in such notice the Put Purchase Price on the Termination Effective
Date.
(d) PUT OPTION. If all of the Departing Purchaser Shares are
not purchased pursuant to Sections 2.8(a) through (c) above, then for a period
of sixty (60) days following the Tertiary Election Period (or the earlier
delivery of the notice from the Company referred to in the final sentence of
Section 2.8(c)), the Departing Purchaser shall have the right and option (the
"Put Option") to require the Company to purchase any or all of the shares of
Common Stock held by such Departing Purchaser by delivering written notice of
exercise (the "Put Exercise Notice") to the Company setting forth the number of
such shares of Common Stock subject to the Put Option. If the Departing
Purchaser shall exercise the Put Option, then the Company shall purchase, and
the Departing Purchaser shall sell, such number of shares of Common Stock set
forth in the Put Exercise Notice delivered by such Departing Purchaser at an
aggregate purchase price equal to the Put Purchase Price (as defined in Appendix
B hereof) on the Termination Effective Date.
(e) RESTRICTIONS ON PUT. In the event that following the
delivery of a Put Exercise Notice, the Company is unable to repurchase the
shares of Common Stock set forth in the Put Exercise Notice (and any shares of
Common Stock transferred by the grantee to his Permitted Transferees) as a
result of legal or bona fide business or contractual restrictions which the
Company shall make reasonable efforts to remove, then such Put Exercise Notice
shall nevertheless remain in full force and effect (in which event the Company
shall repurchase the shares of Common Stock set forth in the Put Exercise Notice
within sixty (60) days following the date on which the Company first becomes
able to repurchase all of such shares), unless within sixty (60) days of
receiving notice from the Company of such inability (and in any event prior to
repurchase of such shares by the Company), the Departing Purchaser notifies the
Company that he elects to withdraw and terminate the Put Exercise Notice.
(f) CLOSING. The closing of any purchase under this Section 2.8
shall, subject to Section 2.8(e) and a reasonable period to effect the
completion of any required regulatory approvals, be held at the principal
offices of the Company at 11:00 a.m. local time on the 30th day after the date
of the latest Call Notice or, if applicable, Put Exercise Notice, as the case
may be, or at such other time and place as the Company and the Departing
Purchaser agree upon. At such closing, the Departing Purchaser shall deliver or
cause the delivery of certificates representing the shares of Common Stock to be
sold, duly endorsed for transfer and accompanied by all requisite stock transfer
taxes, and such shares shall be free and
<PAGE>
13
clear of any liens, claims, options, charges, encumbrances or rights of
others arising through the action or inaction of the Departing Purchaser and
the Departing Purchaser shall so represent and warrant, and further represent
and warrant that he or she or it is the beneficial owner of such shares. The
Company, the other Management Stockholders and/or the Investors, as the case
may be, shall deliver at the closing payment in full, by certified or bank
check for such shares.
(g) TERMINATION OF CALL AND PUT OPTIONS UPON IPO. The
provisions of this Section 2.8 shall terminate automatically upon the
consummation of an IPO (as such term is defined in Section 3.11(e)).
2.9 SPECIAL ISO REQUIREMENTS. In order for a grantee to receive
special tax treatment with respect to stock acquired under an option intended to
be an incentive stock option, the grantee of such option must be, at all times
during the period beginning on the date of grant and ending on the day three
months before the date of exercise of such option, an employee of the Company or
any of the Company's parent or subsidiary corporations (within the meaning of
Code section 424), or of a corporation or a parent or subsidiary corporation of
such corporation issuing or assuming a stock option in a transaction to which
Code section 424(a) applies. No option intended to be an incentive stock option
shall be granted under the Plan unless the Plan is approved, directly or
indirectly, by (i) the express consent of stockholders holding at least a
majority of the Company's voting stock voting in person or by proxy at a duly
held stockholders' meeting, or (ii) the unanimous written consent of the
stockholders of the Company, within 12 months before or after the date the Plan
is adopted. If an option granted under the Plan is intended to be an incentive
stock option, and if the grantee, at the time of grant, owns stock possessing 10
percent or more of the total combined voting power of all classes of stock of
the grantee's employer corporation or of its parent or subsidiary corporation,
then (a) the option exercise price per share shall in no event be less than 110
percent of the Fair Market Value of the Common Stock on the date of such grant
and (b) such option shall not be exercisable after the expiration of five years
after the date such option is granted.
ARTICLE 3
MISCELLANEOUS
3.1 AMENDMENT OF THE PLAN; MODIFICATION OF AWARDS.
(a) PLAN AMENDMENTS. The Board may, without stockholder
approval, at any time and from time to time suspend, discontinue or amend the
Plan in any respect whatsoever, except that no such amendment shall impair any
rights under either any award theretofore made under the Plan or a Plan
Agreement theretofore executed, without the consent of the optionee.
Furthermore, from and
<PAGE>
14
after the time the Plan is initially approved by the stockholders, except as
and to the extent otherwise permitted by Section 3.5 or 3.11, no such
amendment shall be made without stockholder approval if (i) such approval is
necessary to comply with any tax or regulatory requirement, including for
these purposes any approval requirement which is a prerequisite for exemptive
relief from Section 16(b) of the Act or Code section 162(m) (provided that
the Company is subject to the requirements of Section 16 of the Act or Code
section 162(m), as the case may be, as of the date of such action), (ii) if
such amendment shall permit a stock option or stock appreciation right to be
exercisable more than 10 years after the date of grant, or (iii) if such
amendment shall extend the term of the Plan beyond the period set forth in
Section 3.13.
(b) AWARD MODIFICATIONS. With the consent of the grantee
(except with respect to the Committee's ability to substitute awards without the
consent of the grantee in accordance with Section 1.5(c)), and subject to the
terms and conditions of the Plan (including Section 3.1(a)), the Committee may
amend outstanding Plan agreements with such grantee, including, without
limitation, any amendment which would (i) accelerate the time or times at which
an award may vest or become exercisable and/or (ii) extend the scheduled
termination or expiration date of the award.
3.2 RESTRICTIONS.
(a) CONSENT REQUIREMENTS. If the Committee shall at any time
determine that any Consent (as hereinafter defined) is necessary or desirable as
a condition of, or in connection with, the granting of any award under the Plan,
the acquisition, issuance or purchase of shares or other rights hereunder or the
taking of any other action hereunder (each such action being hereinafter
referred to as a "Plan Action"), then such Plan Action shall not be taken, in
whole or in part, unless and until such Consent, which the Committee shall make
reasonable efforts to obtain, shall have been effected or obtained to the full
satisfaction of the Committee. Without limiting the generality of the
foregoing, if (i) the Committee may make any payment in cash, Common Stock or
both, and (ii) the Committee determines that Consent is necessary or desirable
as a condition of, or in connection with, payment in any one or more of such
forms, then the Committee shall be entitled to determine not to make any payment
whatsoever until such Consent has been obtained.
(b) CONSENT DEFINED. The term "Consent" as used herein with
respect to any Plan Action means (i) any and all listings, registrations or
qualifications in respect thereof upon any securities exchange or other
self-regulatory organization or under any federal, state or local law, rule
or regulation, (ii) the expiration, elimination or satisfaction of any
prohibitions, restrictions or limitations under any federal, state or local
law, rule or regulation or the rules of any securities exchange or other
self-regulatory organization, (iii) any and all written agreements and
representations by the grantee with respect to the disposition of shares, or
with
<PAGE>
15
respect to any other matter, which the Committee shall deem necessary or
desirable to comply with the terms of any such listing, registration or
qualification or to obtain an exemption from the requirement that any such
listing, qualification or registration be made and (iv) any and all consents,
clearances and approvals in respect of a Plan Action by any governmental or
other regulatory bodies or any parties to any loan agreements or other
contractual obligations of the Company or any Affiliate.
3.3 NONTRANSFERABILITY. No award granted to any grantee under the
Plan or under any Plan agreement shall be assignable or transferable by the
grantee other than by will or by the laws of descent and distribution. During
the lifetime of the grantee, all rights with respect to any option or stock
appreciation right granted to the grantee under the Plan or under any Plan
agreement shall be exercisable only by him. Shares of Common Stock acquired
upon exercise of any portion of an option granted to a grantee under the Plan
shall not be transferable to any person, other than (i) to the grantee's parent,
spouse, ex-spouse or child (or any trust for the benefit of any such person) or
(ii) pursuant to the laws of descent and distribution, in each case, to a
"Permitted Transferee" and such shares shall remain subject to the call and put
options set forth in Section 2.8 above. Each transferee shall agree in writing
to be bound by all of the provisions of this Plan and any applicable Plan
agreement, and no such transferee shall be permitted to make any transfer other
than in accordance with the terms of the Plan or such Plan agreement.
3.4 WITHHOLDING TAXES.
(a) Whenever under the Plan shares of Common Stock are to be
delivered upon exercise of an option or stock appreciation right, the Company
may require as a condition of delivery that the grantee remit an amount
sufficient to satisfy all federal, state and other governmental withholding tax
requirements related thereto. Whenever cash is to be paid under the Plan
(whether upon exercise of a stock appreciation right or otherwise), the Company
may, as a condition of its payment, deduct therefrom, or from any salary or
other payments due to the grantee, an amount sufficient to satisfy all federal,
state and other governmental withholding tax requirements related thereto or to
the delivery of any shares of Common Stock under the Plan.
(b) Without limiting the generality of the foregoing, (i) a
grantee may elect to satisfy all or part of the foregoing withholding
requirements by delivery of unrestricted shares of Common Stock owned by the
grantee for at least six months (or such other period as the Committee may
determine) having a Fair Market Value (determined as of the date of such
delivery by the grantee) equal to all or part of the amount to be so withheld,
provided that the Committee may require, as a condition of accepting any such
delivery, that the grantee furnish an opinion of counsel acceptable to the
Committee to the effect that such delivery would not result in the grantee
incurring any liability under section 16b of the Act; and (ii) the Committee may
permit any such delivery to be made by withholding shares of
<PAGE>
16
Common Stock from the shares otherwise issuable pursuant to the award(s)
giving rise to the tax withholding obligation (in which event the date of
delivery shall be deemed the date the award(s) was exercised).
3.5 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. If and to the extent
specified by the Committee, the number of shares of Common Stock which may be
issued pursuant to awards under the Plan, the number of shares of Common Stock
subject to awards under the Plan, the option exercise price and appreciation
base of options and stock appreciation rights theretofore granted under the
Plan, and the amount payable by a grantee in respect of an award (if any), may
be appropriately adjusted (as the Committee may determine) for any change in the
number of issued shares of common stock resulting from the subdivision or
combination of shares of common stock or other capital adjustments, or the
payment of a stock dividend or other extraordinary dividend after the effective
date of this Plan, or other change in such shares of common stock effected
without receipt of consideration by the Company; provided, that any awards
covering fractional shares of common stock resulting from any such adjustment
shall be rounded up to the next whole share, and provided further, that each
incentive stock option granted under the Plan shall not be adjusted in a manner
that causes such option to fail to continue to qualify as an "incentive stock
option" within the meaning of Code section 422. Adjustments under this Section
3.5 shall be made by the Committee, whose determination as to what adjustments
shall be made, and the extent thereof, shall be final, binding and conclusive.
3.6 RIGHT OF DISCHARGE RESERVED. Nothing in the Plan or in any Plan
agreement shall confer upon any person the right to continue in the employment
or service of the Company or an Affiliate or affect any right which the Company
or an Affiliate may have to terminate the employment or service of such person.
3.7 NO RIGHTS AS A STOCKHOLDER. No grantee or other person shall
have any of the rights of a stockholder of the Company with respect to shares
subject to an option or shares deliverable upon exercise of a stock appreciation
right until the issuance of a stock certificate to him for such shares. Except
as otherwise provided in Section 3.5, no adjustment shall be made for dividends,
distributions or other rights (whether ordinary or extraordinary, and whether in
cash, securities or other property) for which the record date is prior to the
date such stock certificate is issued. In the case of a grantee of an award
which has not yet vested and become exercisable, the grantee shall have the
rights of a stockholder of the Company if and only to the extent provided in the
applicable Plan agreement.
3.8 NATURE OF PAYMENTS.
(a) Any and all awards or payments hereunder shall be granted,
issued or paid, as the case may be, in consideration of services performed for
the Company or for its Affiliates by the grantee.
<PAGE>
17
(b) No such awards, issuances and payments shall, unless
otherwise determined by the Committee, be taken into account in computing the
amount of the grantee's salary or compensation for the purposes of determining
any pension, retirement, death or other benefits under (i) any pension,
retirement, life insurance or other benefit plan of the Company or any Affiliate
or (ii) any agreement between the Company or any Affiliate and the grantee.
(c) By accepting an award under the Plan, the grantee shall
thereby waive any claim to continued exercise or vesting of an award or to
damages or severance entitlement related to non-continuation of the award beyond
the period provided herein or in the applicable Plan agreement, notwithstanding
any contrary provision in any written employment contract with the grantee,
whether any such contract is executed before or after the grant date of the
award.
3.9 NON-UNIFORM DETERMINATIONS. The Committee's determinations
under the Plan need not be uniform and may be made by it selectively among
persons who receive, or are eligible to receive, awards under the Plan
(whether or not such persons are similarly situated). Without limiting the
generality of the foregoing, the Committee shall be entitled, among other
things, to make non-uniform and selective determinations, and to enter into
non-uniform and selective Plan agreements, as to (a) the persons to receive
awards under the Plan, (b) the terms and provisions of awards under the Plan,
(c) the exercise by the Committee of its discretion in respect of the
exercise of stock appreciation rights pursuant to the terms of the Plan, and
(d) the treatment of leaves of absence for purposes of Section 2.7(b).
3.10 OTHER PAYMENTS OR AWARDS. Nothing contained in the Plan shall be
deemed in any way to limit or restrict the Company, any Affiliate or the
Committee from making any award or payment to any person under any other plan,
arrangement or understanding, whether now existing or hereafter in effect.
3.11 CERTAIN REORGANIZATIONS.
(a) In the event that the Company is merged or consolidated with
another corporation (other than an Affiliate) and, whether or not the Company
shall be the surviving corporation, there shall be any change in the shares of
common stock by reason of such merger or consolidation, or in the event that all
or substantially all of the assets of the Company are acquired by another person
(other than an Affiliate) or in the event of a "Change of Control" (as defined
in Section 3.11(e) below), after the date of the adoption of this Plan, or in
the event of a reorganization or liquidation of the Company where the recipient
of most of the Company's assets is not an Affiliate (each such event being
hereinafter referred to as a "Reorganization Event") or in the event that the
Board shall propose that the Company enter into a Reorganization Event, then the
Committee may in its discretion take any or all of the following actions:
<PAGE>
18
(i) by written notice to each grantee, provide that his
outstanding options and/or stock appreciation rights will be terminated
unless exercised within 30 days (or such longer period as the Committee
shall determine in its sole discretion) after the date of such notice
(without acceleration of the vesting and/or exercisability of such awards
(subject to the provisions of Section 3.11(c) with respect to a Change of
Control or IPO)); and/or
(ii) advance the dates upon which any or all outstanding
options and/or stock appreciation rights shall be vested and/or exercisable
(subject to the provisions of Section 3.11(c) with respect to a Change of
Control or IPO).
(b) Whenever deemed appropriate by the Committee, any action
referred to in Section 3.11(a) may be made conditional upon the consummation of
the applicable Reorganization Event.
(c) In the event that a "Change of Control" or an "IPO" (as such
terms are defined in Section 3.11(e) below) is effective prior to January 1,
2001, then upon the consummation of the Change of Control or IPO: (i) all
outstanding options and unrelated stock appreciation rights granted under the
Plan with respect to the calendar year in which such Change of Control or IPO is
effective (including any such awards which were granted with respect to a prior
calendar year and which did not then vest and become exercisable, which were
regranted with respect to the calendar year in which such Change of Control or
IPO is effective) to the "Eligible Grantees" (as defined below) shall
immediately become fully vested and exercisable, and (ii) any options and
unrelated stock appreciation rights granted under the Plan to each Eligible
Grantee with respect to each calendar year after the calendar year in which such
Change of Control or IPO is effective, as evidenced by a Plan agreement executed
by the Eligible Grantee and the Company shall immediately be granted and become
fully vested and exercisable. The option exercise price for each such option
(and the appreciation base for each such unrelated stock appreciation right)
described in clause (ii) in the preceding sentence shall be the option exercise
price for the most recent option granted under the Plan in the event of a Change
of Control, or the price per share at which shares of Common Stock are offered
in the IPO in the event of an IPO. The term "Eligible Grantee" means an
individual who has been granted an award under the Plan and who remains actively
employed by the Company or its Affiliates on the effective date of the Change of
Control or IPO. There shall be no acceleration of the grant, vesting or
exercisability of any award under the Plan if a Change of Control or IPO becomes
effective after December 31, 2000. A Change of Control or IPO shall not cause
any award granted under the Plan with respect to any calendar year prior to the
calendar year in which the Change of Control or IPO becomes effective to become
further vested or exercisable.
<PAGE>
19
(d) LOOK BACK RIGHT. If (a) any grantee shall (i) be discharged
from employment without cause or (ii) terminate his or her employment for good
reason or by reason of such grantee's death or permanent disability; (b) (i) the
Company, the other Management Stockholders or the Investors shall have exercised
its or their Call Options with respect to any Management Shares held by such
grantee (or any other Departing Purchaser of such grantee) or (ii) such
Departing Purchaser shall have exercised his, her or its Put Option with respect
to any shares of such Departing Purchaser; and (c) a change of control is
consummated through one or more transactions (collectively, a "Change of Control
Transaction") within six months after such discharge or termination, then such
Departing Purchaser (an "Eligible Stockholder"), shall be eligible (but not
obligated) to exercise the right to receive from the persons purchasing such
shares upon exercise of a Call Option or Put Option (PRO RATA as to the number
of such shares so purchased) an additional payment determined in the following
sentence. The amount of such additional payment shall be an amount such that
the Eligible Stockholder receives the same amount and type of consideration as
such Eligible Stockholder would have received in the Change of Control
Transaction if the shares transferred through exercise of the Call Options
and/or Put Options had instead been transferred in the Change of Control
Transaction, by receiving the amount per share by which the consideration that
other stockholders received in the Change of Control Transaction exceeds the
consideration that the Eligible Stockholder received through the exercise of the
Call Options, or through the exercise of the Put Options; provided that, in the
case of any Eligible Stockholder who exercised a Put Option, the number of
shares subject to adjustment under this Section 3.11(d) (the "Qualifying Number
of Put Shares") shall be made only with respect to a number of shares of Common
Stock (if any) obtained by dividing (x) the amount of "Indebtedness" (as defined
in Section 3.11(e)) owed by such grantee to the Company at the time such Put
Option was exercised by (y) the Put Purchase Price at which such Put Options
were exercised (the "Put Price"). If the consideration received by other
stockholders in the Change of Control Transaction is payable entirely in cash,
the payment required by this Section 3.11(d) shall be made by payment of an
additional cash payment. If the consideration received by other stockholders in
the Change of Control Transaction is all or partially in consideration other
than cash, the Eligible Stockholder shall return all or a proportionate amount
of the cash previously received upon exercise of the Call Option or all or a
proportionate amount of the Qualified Put Amount (as defined below) in exchange
for such other consideration. The term "Qualified Put Amount" means the
Qualified Number of Put Shares multiplied by the Put Price. In addition, an
interest factor of eight percent (8%) per annum shall be charged to the Eligible
Stockholder, calculated from the date of payment under the Call Option or Put
Option to the date the Eligible Stockholder receives payment or consideration
under this Section 3.11(d). The Committee shall make all determinations of any
adjustment pursuant to this Section 3.11(d) and such determination shall be
final and binding on all parties absent manifest error. Not later than thirty
(30) days following a Change of Control Transaction, the Company shall give
notice to each Eligible Stockholder of his or her rights under this Section
3.11(d) and unless such Eligible Stockholder shall exercise his or her rights
hereunder within
<PAGE>
20
thirty (30) days following the delivery of such notice, all rights under this
Section 3.11(d) shall irrevocably terminate. The provisions of this Section
3.11(d) shall terminate automatically upon the consummation of an IPO.
(e) ADDITIONAL DEFINITIONS. The term "Change of Control" means
either (i) a person or "group" (within the meaning of section 13(d)(3) of the
Act but excluding any underwriter participating in a public offering of the
Company's securities) acquiring or having beneficial ownership of securities
(including options, warrants, rights and convertible and exchangeable
securities) having a majority of the ordinary voting power of the capital stock
of the Company (assuming exercise or conversion solely of the securities held by
such person or group), (ii) the election of a majority of the directors of the
Company who are not currently directors of the Company and are not designated or
approved by a majority of the Company's current directors or their designated or
approved successors, or (iii) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all, or substantially
all, of the assets of the Company. The term "IPO" means an offering of Common
Stock of the Company registered under the Securities Act of 1933, as amended
from time to time, or any successor act. The term "Permanent Disability" means
the physical or mental inability of the grantee to perform, consistent with past
practice, the grantee's duties (including such duties as specified in any
employment agreement) for at least 12 consecutive months. The term "Good
Reason" means a resignation by the grantee as a result of one or both of the
following events: (i) a material reduction in the grantee's aggregate
compensation, duties or title with respect to the Company or any of its
Affiliates (other than nonsubstantive, titular or nominal changes); or (ii) a
material breach of any employment agreement of the grantee by the Company or any
of its Affiliates unless such breach is substantially cured within a reasonable
period of time after written notice advising the Company of the acts or
omissions constituting such breach is actually received by the Company in
accordance with the notice provisions of such employment agreement. The term
"Indebtedness" means any amount borrowed by a grantee from the Company in
connection with a purchase by the grantee of Common Stock.
3.12 SECTION HEADINGS. The section headings contained herein are for
the purposes of convenience only and are not intended to define or limit the
contents of said sections.
3.13 EFFECTIVE DATE AND TERM OF PLAN.
(a) The Plan shall be adopted subject to the approval of the
Board and the written approval of holders of record of stock of the Company
representing more than seventy-five percent (75%) of the voting power of all
outstanding stock of the Company on the date the Plan is adopted (determined
without regard to any stock actually or constructively owned by any grantee and
such other persons as determined by the Company), and the Plan shall become
effective as of January 1, 1997.
<PAGE>
21
(b) The Plan shall terminate 10 years after the earlier of the
date on which it becomes effective or the date on which it is approved by
shareholders, and no awards shall thereafter be made under the Plan.
Notwithstanding the foregoing, all awards made under the Plan prior to such
termination date shall remain in effect until such awards have been satisfied or
terminated in accordance with the terms and provisions of the Plan.
3.14 GOVERNING LAW. This Plan shall be governed by the laws of the
State of New York applicable to agreements made and to be performed entirely
within such State.
<PAGE>
22
APPENDIX A
"Call Purchase Price" means the purchase price equal to a number
obtained by the following formula:
(X-Y) x A/B
where
X equals the Call Multiplier multiplied by EBITDA (as defined
below);
Y equals the aggregate amount of consolidated Indebtedness (as
defined below);
A equals the number of shares of Common Stock for which options
have been granted to the respective grantee ("Shares") subject to
the Call Notice; and
B equals the number of issued and outstanding shares of capital
stock of the Company plus all shares issuable pursuant to
warrants exercisable at a price equal to $.01 per warrant, each
as of the date of the Call Notice.
The Call Multiplier is equal to the Multiplier.
The Multiplier shall be determined in the following manner:
(a) Not later than 90 days after the end of each fiscal year of the
Company, the Compensation Committee of the Board (the "Compensation Committee")
shall determine the Multiplier in effect with respect to the effective date of
terminations of employment in such prior fiscal year based on its good faith
determination of the value of comparable enterprises. The Compensation
Committee shall promptly notify in writing each member of the Company's
management who has outstanding options under this Plan which are vested and
exercisable and/or was ever granted an option to purchase shares by the Company
and currently owns shares of Common Stock and who is subject to any call or put
arrangement based on a price determined with reference to the Call Multiplier or
the Put Multiplier (as defined in Appendix B) (the "Affected Management
Stockholders") as to the Multiplier as so determined.
(b) The determination of the Compensation Committee pursuant to
paragraph (a) above shall be final and binding unless, within 30 days following
such determination, Affected Management Stockholders holding a majority interest
of common stock then owned by the Affected Management Shareholders or which may
be acquired by the Affected Management Shareholders upon exercise of outstanding
<PAGE>
23
options under this Plan which are vested and exercisable shall notify the
members of the Compensation Committee in writing (a "Contest Notice") that such
Affected Management Stockholders contest such determination. The Affected
Management Stockholders and the Compensation Committee will use their reasonable
best efforts to agree within 30 days following receipt of a Contest Notice upon
an appropriate Multiplier and if they are unable to do so shall thereupon
jointly appoint an independent appraiser (the "Independent Appraiser") who shall
determine the Multiplier and whose decision shall be binding upon the Company
and all Affected Management Stockholders. If the Compensation Committee and the
Affected Management Stockholders delivering the Contest Notice shall fail to
make the joint selection of the Independent Appraiser within such 30-day period,
then the Company's independent auditors shall select such Independent Appraiser
(which shall not be such auditing firm).
(c) Subject to paragraph (d), the Multiplier shall be in effect for
the entire fiscal year in which it is determined and shall be given retroactive
effect if necessary to the beginning of such fiscal year. If any Call Option or
Put Option shall be exercised prior to the determination of the Multiplier for
that fiscal year, the Compensation Committee shall make a provisional
determination of the Call Purchase Price or the Put Purchase Price, in its sole
discretion, but in no event less than using the minimum Multiplier set forth in
paragraph (e) below. Any adjustment required shall be made promptly following
final determination of the Multiplier.
(d) Notwithstanding paragraph (c), either the Company or Affected
Management Stockholders holding a majority interest of common stock then owned
by the Affected Management Shareholders or which may be acquired by the Affected
Management Shareholders upon exercise of outstanding options under this Plan
which are vested and exercisable may, by written notice to the Compensation
Committee (if the request is being made by the Affected Management Stockholders)
or to each Affected Management Stockholder (if the request is being made by the
Company), require a redetermination of the Multiplier if the persons requesting
such redetermination determine in good faith that a material change has occurred
since the date of the most recent determination in the financial condition or
business prospects of the Company and its subsidiaries, taken as a whole, or in
major financial markets in the United States. Promptly following the receipt of
any written notice under this paragraph (d), the procedures set forth in
paragraphs (a) and (b) shall be taken; however, any redetermination shall only
be given prospective effect from the time such redetermination is finally made.
(e) Notwithstanding anything to the contrary set forth in this
definition of Multiplier, in no event shall the Multiplier be less than 5.5 nor
greater than 7.0.
(f) The costs of the Independent Appraiser shall be borne by the
Company.
<PAGE>
24
EBITDA shall mean the Company's consolidated income from operations
plus the sum of consolidated depreciation, amortization and non-recurring
transition costs and adjusted for consolidated non-cash gains and losses on
sales of assets, all in accordance with generally accepted accounting principles
consistently applied and as determined by the Committee, for the most recent
four (4) consecutive full fiscal quarters subsequent to the date of adoption of
this Plan and prior to the date of the delivery of the Call Notice.
Indebtedness shall mean consolidated Indebtedness (as such term is
defined in the Indenture with Fleet National Bank pursuant to which the
Company's Senior Subordinated Notes are being issued) of the Company, minus
marketable securities and cash equivalents, plus $2.5 million, as reflected on
the Company's balance sheet of the last day of the most recent fiscal quarter
ending prior to the date of the delivery of the Call Notice.
<PAGE>
25
APPENDIX B
"Put Purchase Price" means the purchase price equal to a number
obtained by the following formula:
(X-Y) x A/B
where
X equals the Put Multiplier multiplied by EBITDA (as defined in
Appendix A attached hereto);
Y equals the aggregate amount of consolidated Indebtedness (as
defined in Appendix A attached hereto);
A equals the number of Shares (as defined in Appendix A attached
hereto) subject to the Put Exercise Notice (and the Shares
required to be sold to the Company by any Permitted Transferee);
and
B equals the number of issued and outstanding shares of capital
stock of the Company plus all shares issuable pursuant to
warrants exercisable at a price equal to $.01 per warrant, each
as of the date of the Put Exercise Notice.
The Put Multiplier equals the Call Multiplier as from time to time in
effect (as defined in Appendix A hereto), minus 0.2.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 76,816
<SECURITIES> 0
<RECEIVABLES> 69,085
<ALLOWANCES> 4,405
<INVENTORY> 32,491
<CURRENT-ASSETS> 186,638
<PP&E> 264,523
<DEPRECIATION> 0
<TOTAL-ASSETS> 487,912
<CURRENT-LIABILITIES> 72,942
<BONDS> 289,750
59,463<F1>
0
<COMMON> 0
<OTHER-SE> 52,696<F1>
<TOTAL-LIABILITY-AND-EQUITY> 487,912
<SALES> 755,747
<TOTAL-REVENUES> 780,302
<CGS> 585,226
<TOTAL-COSTS> 585,226
<OTHER-EXPENSES> 174,937
<LOSS-PROVISION> 1,404
<INTEREST-EXPENSE> 16,954
<INCOME-PRETAX> 3,185
<INCOME-TAX> 1,231
<INCOME-CONTINUING> 1,954
<DISCONTINUED> 0
<EXTRAORDINARY> (5,554)
<CHANGES> 0
<NET-INCOME> (3,600)
<EPS-PRIMARY> (8.08)
<EPS-DILUTED> 0
<FN>
<F1> (1) See footnote 7 to the consolidated financial statements
</FN>
</TABLE>
