<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
--------------------------
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 / / No /X/
<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.
----- --------
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 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
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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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
CURRENT ASSETS:
Cash $ 79,492 $ 23,779
Accounts receivable (less allowance
for doubtful accounts of $4,310 for
1997 and $3,502 for 1996) 56,614 54,371
Inventories 33,710 29,082
Deferred income taxes 3,877 3,877
Other current assets 6,537 10,530
---------- ---------
Total current assets 180,230 121,639
Notes receivable, net 1,312 1,835
Property and equipment, net 265,698 269,366
Intangible assets 19,338 19,657
Deferred financing costs 11,547 8,379
Other assets 5,549 5,013
---------- ---------
TOTAL ASSETS $ 483,674 $ 425,889
---------- ---------
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loans $ --- $ 14,000
Current maturities of long-term debt 500 17,250
Accounts payable 41,698 37,201
Other accrued liabilities 29,199 29,422
---------- ---------
Total current liabilities 71,397 97,873
Commitments and contingencies (Note 6)
Long-term debt (net of unamortized discount) 289,875 193,185
Deferred income taxes 9,452 9,452
Other long-term liabilities 5,014 5,914
---------- ---------
TOTAL LIABILITIES 375,738 306,424
Mandatorily redeemable senior convertible
participating preferred stock 53,515 51,075
Other preferred stock, common stock and
other shareholders' equity 47,672 50,743
Retained earnings 6,749 17,647
---------- ---------
54,421 68,390
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 483,674 $ 425,889
---------- ---------
---------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Fuel $ 180,265 $ 119,835 $ 374,416 $ 228,742
Nonfuel 76,384 15,298 137,626 26,850
Rent 8,228 10,370 17,948 21,320
---------- ---------- ---------- ----------
TOTAL REVENUES 264,877 145,503 529,990 276,912
Cost of revenues (excluding depreciation) 198,811 123,386 404,689 234,282
---------- ---------- ---------- ----------
GROSS PROFIT (EXCLUDING DEPRECIATION) 66,066 22,117 125,301 42,630
Operating expenses 41,460 7,002 75,544 12,636
Selling, general and administrative expenses 8,949 5,127 20,681 12,231
Refinancing, transition and development costs 5,473 91 7,091 116
Depreciation and amortization 7,352 3,521 14,296 6,735
(Gain) loss on sales of property and equipment 1,538 (14) 1,464 (41)
Income of subsidiary held for disposition --- (2,042) --- (2,185)
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 1,294 8,432 6,225 13,138
Interest (expense), net (5,862) (3,299) (10,967) (6,507)
---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (4,568) 5,133 (4,742) 6,631
(Benefit) provision for income taxes (1,770) 2,021 (1,838) 2,603
---------- ---------- ---------- ----------
(Loss) income before extraordinary item (2,798) 3,112 (2,904) 4,028
Extraordinary item (less applicable
income tax benefit of $3,608) --- --- (5,554) ---
---------- ---------- ---------- ----------
NET (LOSS) INCOME (2,798) 3,112 (8,458) 4,028
Less: preferred dividends (1,220) (1,220) (2,440) (2,440)
Retained earnings - beginning of the period 10,767 16,690 17,647 16,994
---------- ---------- ---------- ----------
Retained earnings - end of the period $ 6,749 $ 18,582 $ 6,749 $ 18,582
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(Loss) income before extraordinary item per
common share and common share equivalent $ (0.46) $ 0.21 $ (0.61) $ 0.18
Extraordinary item --- --- (0.63) ---
---------- ---------- ---------- ----------
Net loss per common share and common
share equivalent (Note 2) $ (0.46) $ (0.21) $ (1.24) $ 0.18
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares and
common share equivalents (in thousands) 8,695 8,963 8,772 8,963
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (8,458) $ 4,028
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Net income of subsidiary held for disposition --- 1,311
Extraordinary item 5,554 ---
Depreciation and amortization 14,295 6,732
Provision for doubtful accounts 808 573
Loss on sales of property and equipment 1,506 ---
Changes in assets and liabilities, adjusted for
the effects of acquisitions of network assets
Accounts receivable 5,383 (5,547)
Inventories (1,569) 35
Other current assets 1,344 (6,133)
Accounts payable 5,644 12,398
Other current liabilities 4,441 733
Other, net 86 ---
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,268 14,130
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of network assets (7,901) (2,750)
Proceeds from sales of property and equipment 2,886 ---
Capital expenditures (7,553) (6,194)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (12,568) (8,944)
---------- ----------
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 (126,425) (4,000)
Repurchase of common stock (2,205) (126)
Debt issuance costs (12,357) ---
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 50,013 5,874
---------- ----------
Net increase in cash 55,713 11,060
Cash at the beginning of the period 23,779 3,191
---------- ----------
Cash at the end of the period $ 79,492 $ 14,251
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 162 network sites
nationwide, including 133 Company-owned locations. TA currently operates a
network (the "TA Network") of 48 travel centers in 27 states under the
"TravelCenters of America" or "TA" brand name and National currently
operates a network (the "National Network") of 114 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 six months ended June 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.
-7-
<PAGE>
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 $12,357,000 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 six month period ended June 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 June 30, 1997, approximately $647,000
of termination benefits had been paid to the 28 employees actually
terminated. At June 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 $1,960,000.
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. 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. Accordingly, the number of shares issuable on
conversion of the preferred stock was added to the number of common shares.
The number of shares was also increased by 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 and by the number of
outstanding common stock warrants. The increase in the number of common
shares was reduced by the number of common shares which are assumed to have
been purchased with the proceeds from the exercise of the options.
-8-
<PAGE>
4. INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
(IN THOUSANDS)
Nonfuel merchandise $ 31,082 $ 26,090
Petroleum products 2,628 2,992
--------- ---------
Total inventories $ 33,710 $ 29,082
--------- ---------
--------- ---------
5. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 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 six months ended June 30,
1997 and 1996, the Company received $2,263,000 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>
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
$1,439,000 and $3,185,000 for the six months ended June 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 June 30, 1997, of $975,000. 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>
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.
Unocal and the Company have appealed the court's denial of their motions
for judgement notwithstanding the verdict, and the California Plaintiffs
have appealed the court's granting of a new trial and its ruling on the
equitable claims. Decisions on the pending appeals are expected by late
1997. 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>
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 June
30, 1997 total $5,023,000, 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 operators filed a complaint which was styled
as a class action lawsuit alleging that the Company or its representatives
had engaged in certain inappropriate practices or activities including
breach of contract and fraud in connection with acquiring and operating the
Network. No specific dollar damages are claimed in the complaint, but the
plaintiffs generally seek compensatory and punitive damages. In 1997,
plaintiffs amended the complaint to include an additional seven operators
as plaintiffs and to assert the additional claims of tortious interference
with contractual relations and of civil conspiracy, and to withdraw the
plaintiffs' claims to represent a class. Also in 1997, settlement
agreements were reached with four of the plaintiffs at an immaterial cost
to the Company and a fifth plaintiff withdrew its claims in the action.
The Company believes that the claims made in the complaint and the proposed
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.
7. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth the consolidating balance sheets as of
June 30, 1997 and December 31, 1996, the consolidating statements of income
and retained earnings for the three months ended June 30, 1997 and 1996 and
for the six months ended June 30, 1997 and 1996, and consolidating
statements of cash flows for the six months ended June 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.
-12-
<PAGE>
BALANCE SHEET SCHEDULES:
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 50,948 $ 28,544 $ --- $ --- $ 79,492
Accounts receivable, net --- 56,462 1,098 (948) 56,614
Inventories --- 33,710 --- --- 33,710
Deferred income taxes --- 3,877 --- --- 3,877
Other current assets --- 11,156 2 (4,621) 6,537
--------- --------- --------- --------- ---------
Total current assets 50,948 133,749 1,100 (5,567) 180,230
Notes receivable, net --- 1,312 --- --- 1,312
Property and equipment, net --- 269,551 --- (3,853) 265,698
Intangible assets --- 19,338 --- --- 19,338
Deferred financing costs 11,547 --- --- --- 11,547
Other assets 2,500 5,549 --- (2,500) 5,549
Advances to subsidiaries 225,141 --- --- (225,141) ---
Investments in subsidiaries 115,935 --- --- (115,935) ---
--------- --------- --------- --------- ---------
Total assets $ 406,071 $ 429,499 $ 1,100 ($352,996) $ 483,674
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term debt $ 500 $ --- $ --- $ --- $ 500
Accounts payable 1,684 42,591 --- (2,630) 41,698
Other accrued liabilities 3,956 28,084 149 (2,937) 29,199
--------- --------- --------- --------- ---------
Total current liabilities 6,140 70,675 149 (5,567) 71,397
Long-term debt (net of
unamortized discount) 289,875 --- --- --- 289,875
Deferred income taxes --- 9,452 --- --- 9,452
Advance from parent --- 226,775 --- (226,775) ---
Other liabilities --- 5,014 --- --- 5,014
--------- --------- --------- --------- ---------
Total liabilities 296,015 311,916 149 (232,342) 375,738
Mandatorily redeemable senior
convertible participating
preferred stock 53,515 --- --- --- 53,515
Other preferred stock, common stock
and other shareholders' equity 49,792 85,033 --- (87,153) 47,672
Retained earnings 6,749 32,550 951 (33,501) 6,749
--------- --------- --------- --------- ---------
56,541 117,583 951 (120,654) 54,421
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 406,071 $ 429,499 $ 1,100 ($352,996) $ 483,674
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
ASSETS
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 51,075 --- --- --- 51,075
Other preferred stock, common
common stock and other
shareholders' equity 51,997 85,033 --- (86,287) 50,743
Retained earnings 17,647 36,436 948 (37,384) 17,647
--------- --------- --------- --------- ---------
69,644 121,469 948 (123,671) 68,390
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 122,817 $ 431,706 $ 1,053 ($129,687) $ 425,889
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-14-
<PAGE>
STATEMENT OF INCOME AND RETAINED EARNINGS SCHEDULES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ --- $ 180,265 $ --- $ --- $ 180,265
Nonfuel --- 76,037 347 --- 76,384
Rent --- 8,228 --- --- 8,228
--------- --------- --------- --------- ---------
Total revenues --- 264,530 347 --- 264,877
Cost of revenues
(excluding depreciation) --- 198,811 --- --- 198,811
--------- --------- --------- --------- ---------
Gross profit
(excluding depreciation) --- 65,719 347 --- 66,066
Operating expenses --- 41,460 --- --- 41,460
Selling, general and administrative
expenses 62 8,460 427 --- 8,949
Refinancing, transition and
development costs --- 5,473 --- --- 5,473
Depreciation and amortization 809 6,543 --- --- 7,352
(Gain) loss on sales of property
and equipment --- 1,538 --- --- 1,538
--------- --------- --------- --------- ---------
Income from operations (871) 2,245 (80) --- 1,294
Interest income (expense), net (6,156) 294 --- --- (5,862)
Equity income (loss) 1,490 --- --- (1,490) ---
--------- --------- --------- --------- ---------
(Loss) income before income
taxes (5,537) 2,539 (80) (1,490) (4,568)
(Benefit) provision for income taxes (2,739) 997 (28) --- (1,770)
--------- --------- --------- --------- ---------
Net (loss) income (2,798) 1,542 (52) (1,490) (2,798)
Less: preferred dividends (1,220) --- --- --- (1,220)
Retained earnings -
beginning of period 10,767 31,008 1,003 ( 32,011) 10,767
--------- --------- --------- --------- ---------
Retained earnings -
end of the period $ 6,749 $ 32,550 $ 951 ($ 33,501) $ 6,749
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1996
-----------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ --- $ 189,579 $ --- ($ 69,744) $ 119,835
Nonfuel --- 61,598 328 (46,628) 15,298
Rent --- 10,370 --- --- 10,370
--------- --------- --------- --------- ---------
Total revenues --- 261,547 328 (116,372) 145,503
Cost of revenues
(excluding depreciation) --- 204,325 --- (80,939) 123,386
--------- --------- --------- --------- ---------
Gross profit
(excluding depreciation) --- 57,222 328 (35,433) 22,117
Operating expenses --- 31,381 --- (24,379) 7,002
Selling, general and administrative
expenses 113 8,943 248 (4,177) 5,127
Refinancing, transition and
development costs --- 91 --- --- 91
Depreciation and amortization --- 6,481 --- (2,960) 3,521
(Gain) loss on sales of property
and equipment --- (14) --- --- (14)
Income from subsidiary held for
disposition --- --- --- (2,042) (2,042)
--------- --------- --------- --------- ---------
Income (loss) from operations (113) 10,340 80 (1,875) 8,432
Interest (expense), net --- (5,174) --- 1,875 ( 3,299)
Equity income (loss) 3,181 --- --- (3,181) ---
--------- --------- --------- --------- ---------
(Loss) income before
income taxes 3,068 5,166 80 (3,181) 5,133
(Benefit) provision for income taxes (44) 2,037 28 --- 2,021
--------- --------- --------- --------- ---------
Net (loss) income 3,112 3,129 52 (3,181) 3,112
Less: preferred dividends (1,220) --- --- --- (1,220)
Retained earnings -
beginning of the period 16,690 31,489 759 (32,248) 16,690
--------- --------- --------- --------- ---------
Retained earnings -
end of the period $ 18,582 $ 34,618 $ 811 ($ 35,429) $ 18,582
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ --- $374,416 $--- $ --- $374,416
Nonfuel --- 136,932 694 --- 137,626
Rent --- 17,948 --- --- 17,948
------- -------- ----- ------ --------
Total revenues --- 529,296 694 --- 529,990
Cost of revenues
(excluding depreciation) --- 404,689 --- --- 404,689
------- -------- ----- ------ --------
Gross profit
(excluding depreciation) --- 124,607 694 --- 125,301
Operating expenses --- 75,544 --- --- 75,544
Selling, general and administrative
expenses 255 19,726 700 --- 20,681
Refinancing, transition and
development costs --- 7,091 --- --- 7,091
Depreciation and amortization 809 13,487 --- --- 14,296
(Gain) loss on sales of property
and equipment --- 1,464 --- --- 1,464
------- -------- ----- ------ --------
Income from operations (1,064) 7,295 (6) --- 6,225
Interest (expense), net (6,434) (4,533) --- --- (10,967)
Equity income (loss) (3,883) --- --- 3,883 ---
------- -------- ----- ------ --------
(Loss) income before income
taxes and extraordinary items (11,381) 2,762 (6) --- (4,742)
(Benefit) provision for income taxes (2,923) 1,094 (9) --- (1,838)
------- -------- ----- ------ --------
(Loss) income before
extraordinary items (8,458) 1,688 3 3,883 (2,904)
Extraordinary items
(Less applicable income
tax benefit of $3,608) --- (5,554) --- --- (5,554)
------- -------- ----- ------ --------
Net (loss) income (8,458) (3,886) 3 3,883 (8,458)
Less: preferred dividends (2,440) --- --- --- (2,440)
Retained earnings -
beginning of the period 17,647 36,436 948 (37,384) 17,647
------- -------- ----- ------ --------
Retained earnings -
end of the period $ 6,749 $ 32,550 $951 ($33,501) $ 6,749
------- -------- ----- ------ --------
------- -------- ----- ------ --------
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ --- $357,429 $ --- ($128,687) $228,742
Nonfuel --- 115,049 661 (88,860) 26,850
Rent --- 21,320 --- --- 21,320
------- -------- ----- --------- --------
Total revenues --- 493,798 661 (217,547) 276,912
Cost of revenues
(excluding depreciation) --- 383,540 --- (149,258) 234,282
------- -------- ----- --------- --------
Gross profit
(excluding depreciation) --- 110,258 661 (68,289) 42,630
Operating expenses --- 60,930 --- (48,294) 12,636
Selling, general and administrative
expenses 143 19,733 496 (8,141) 12,231
Refinancing, transition and
development costs --- 116 --- --- 116
Depreciation and amortization --- 12,642 --- (5,907) 6,735
(Gain) loss on sales of property
and equipment --- (41) --- --- (41)
Income from subsidiary held for
disposition --- --- --- (2,185) (2,185)
------- -------- ----- --------- --------
Income from operations (143) 16,878 165 (3,762) 13,138
Interest (expense), net --- (10,269) --- 3,762 ( 6,507)
Equity income (loss) 4,115 --- --- (4,115) ---
------- -------- ----- --------- --------
(Loss) income before
income taxes (143) 6,609 165 (4,115) 6,631
(Benefit) provision for income taxes (56) 2,601 58 --- 2,603
------- -------- ----- --------- --------
Net (loss) income (87) 4,008 107 (4,115) 4,028
Less: preferred dividends (2,440) --- --- --- (2,440)
Retained earnings -
beginning of the period 16,994 30,610 704 (31,314) 16,994
------- -------- ----- --------- --------
Retained earnings -
end of the period $16,847 $ 34,618 $811 ($35,429) $ 18,582
------- -------- ----- --------- --------
------- -------- ----- --------- --------
</TABLE>
-18-
<PAGE>
STATEMENT OF CASH FLOWS SCHEDULES:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 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 $ --- $ --- $ 18,268
--------- --------- ------ ------ --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisitions of network assets --- (7,901) --- --- (7,901)
Proceeds from sales of property
and equipment --- 2,886 --- --- 2,886
Capital expenditures --- (7,553) --- --- (7,553)
--------- --------- ------ ------ --------
Net cash used in investing
activities --- (12,568) --- --- (12,568)
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 --- (126,425) --- --- (126,425)
Advance from parent (138,775) 138,775 --- --- ---
Debt issuance costs (12,357) --- --- --- (12,357)
Repurchase of common stock (2,205) --- --- --- (2,205)
--------- --------- ------ ------ --------
Net cash (used in) provided
by financing activities 51,538 (1,525) --- --- 50,013
--------- --------- ------ ------ --------
Net increase in cash 50,948 4,765 --- --- 55,713
Cash at beginning of the period --- 23,779 --- --- 23,779
--------- --------- ------ ------ --------
Cash at the end of the period $ 50,948 $ 28,544 $ --- $ --- $ 79,492
--------- --------- ------ ------ --------
--------- --------- ------ ------ --------
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES: $ 126 $ 23,407 $ --- ($ 9,403) $ 14,130
----- ------- ------ -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisitions of network assets --- (2,750) --- --- (2,750)
Capital expenditures --- (9,729) --- 3,535 (6,194)
----- ------- ------ -------- --------
Net cash used in investing
activities --- (12,479) --- 3,535 (8,944)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings --- 10,000 --- --- 10,000
Long-term debt repayments --- (6,500) --- 2,500 (4,000)
Repurchase of common stock (126) --- --- --- (126)
----- ------- ------ -------- --------
Net cash (used in) provided
by financing activities (126) 3,500 --- 2,500 5,874
----- ------- ------ -------- --------
Net increase in cash --- 14,428 --- (3,368) 11,060
Cash at the beginning of the period --- 15,617 --- (12,426) 3,191
----- ------- ------ -------- --------
Cash at the end of the period $ --- $ 30,045 $ --- ($15,794) $ 14,251
----- ------- ------ -------- --------
----- ------- ------ -------- --------
</TABLE>
-20-
<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 162 network
sites nationwide, including 133 Company-owned locations. TA currently
operates a network of 48 travel centers in 27 states under the "Truckstops of
America" or "TA" brand name and National currently operates a network of 114
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
six months ended June 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 six month periods ended June 30, 1997, the Company has
incurred approximately $4.7 million and $6.4 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 $11 million, of which approximately $8
million to $9 million is expected to be incurred in 1997, with the
-21-
<PAGE>
remainder to be incurred in 1998. These 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 in the three month period ended
June 30, 1997. Pursuant to the Company's plans, 111 employees are to be
terminated, 28 of which had been severed through June 30, 1997. Through June
30, 1997, approximately $0.6 million of termination benefits had been paid to
such terminated employees. The remaining accrual for termination benefits of
approximately $2.0 million at June 30, 1997 will be substantially paid by
year-end with the final payments scheduled by March of 1998.
NETWORK RATIONALIZATION
During the second 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 six
months ended June 30, 1997, two Company-owned National travel centers were
sold to the operators of those sites for gross proceeds of $3.3 million,
resulting in a loss on sale of $1.5 million. An additional 21 such sales
are expected to close by the second quarter of 1998, providing expected sales
proceeds of an additional approximately $56 million. The Company expects
that it will recognize a gain from these sales. During the second quarter of
1997, relationships with the owner/operators of four franchised travel
centers ("Franchisee-Owner Sites") were terminated and agreements have been
reached with, or appropriate notices provided to, owner/operators of an
additional 17 such sites, such that the Company expects that all such
Franchisee-Owner Sites not selected to continue in the network 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 will begin 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 franchise nonfuel revenues will result in a net increase
in the Company's revenue.
-22-
<PAGE>
SITE CONVERSIONS
During the three months ended June 30, 1997, the Company converted eight
National Network travel centers from Company-owned and leased locations
("Leased Sites") to Company-owned and operated locations by acquiring the
travel center operations from the related operators, bringing the total of
such conversions during 1997 to 17. One additional such conversion was
completed in early July 1997 and the Company is currently in discussions with
operators regarding the possible conversion of additional Leased Sites to
Company-operated sites. A total of 20 travel centers have been converted to
Company-operated sites since June 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
National sites are converted to TA travel centers and TA management,
marketing, operations, safety and training programs are fully implemented.
In June 1997, 14 of the National Company-operated travel centers were
converted to TA Company-operated sites, with the remaining 21 National
Company-operated locations converting in July 1997. 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 second half of 1997.
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 JUNE 30, AS OF JUNE 30,
--------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
Company-owned and operated sites 40 39 35 16
Company-owned and leased sites --- --- 58 79
----- ----- ----- -----
Company-owned sites 40 39 93 95
Franchisee-owner sites 8 8 21 30
----- ----- ----- -----
Total 48 47 114 125
----- ----- ----- -----
----- ----- ----- -----
At the conclusion of the Combination Plan, assuming the Combination Plan is
completed as expected by management, the Network will consist of 123 travel
centers, 69 of which will be Company-owned and operated, 42 of which will be
Leased Sites and 12 of which will be Franchisee-Owner Sites, although the
achievement of the Combination Plan as currently envisioned is not ensured.
-23-
<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 statement for the three and six month periods ended June 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
REVENUES:
Fuel $180,265 $189,579 $374,416 $357,429
Nonfuel 76,384 61,926 137,626 115,710
Rent 8,228 10,370 17,948 21,320
-------- -------- -------- --------
TOTAL REVENUES 264,877 261,875 529,990 494,459
Cost of revenues (excluding depreciation) 198,811 204,325 404,689 383,540
-------- -------- -------- --------
GROSS PROFIT (EXCLUDING DEPRECIATION) 66,066 57,550 125,301 110,919
Operating expenses 41,460 31,381 75,544 60,930
Selling, general and administrative expenses 8,949 9,304 20,681 20,372
Refinancing, transition and development costs 5,473 91 7,091 116
Depreciation and amortization 7,352 6,481 14,296 12,642
(Gain) loss on sales of property and equipment 1,538 (14) 1,464 (41)
-------- -------- -------- --------
INCOME FROM OPERATIONS 1,294 10,307 6,225 16,900
Interest (expense), net (5,862) (5,174) (10,967) (10,269)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS (4,568) 5,133 (4,742) 6,631
Provision (benefit) for income taxes (1,770) 2,021 (1,838) 2,603
-------- -------- -------- --------
Income (loss) before extraordinary items (2,798) 3,112 (2,904) 4,028
Extraordinary items (net of taxes) --- --- (5,554) ---
-------- -------- -------- --------
Net (loss) income $ (2,798) $ 3,112 $ (8,458) $ 4,028
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
-24-
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTH PERIODS ENDED
JUNE 30, 1997 AND 1996
REVENUES
The Company's consolidated revenues for the three and six month
periods ended June 30, 1997 were $264.9 million and $530.0 million,
respectively, which represent increases over the prior year periods of
$3.0 million, or 1.1%, for the three month period and $35.5 million,
or 7.2%, for the six month period.
Fuel revenue for the six months ended June 30, 1997 reflects an
increase over the 1996 period of $17.0 million, or 4.8%. For the
second quarter, the 1997 amount reflects a decrease from the same
period in 1996 of $9.3 million, or 4.9%. The increase in fuel revenue
for the six month period primarily results from an increase in diesel
gallons sold of 20.8 million gallons, or 4.3%, and an increase in
average retail diesel prices of 4.6%. For the second quarter, the
decrease from 1996 is primarily attributable to a 5.7% decrease in
average retail diesel fuel prices, somewhat offset by increased sales
volume of 12.3 million gallons, or 5.1%.
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
June 30, 1996 there are 20 additional converted National sites and one
new TA site as well as two additional stand-alone shops.
Rent revenue for both 1997 periods has decreased from the same
periods in 1996 as a direct result of the conversions of leased sites
to Company-operated sites. Rent revenue is expected to continue to
decline as additional sites are converted to Company-operations or
sold and as current 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 franchisee operations.
GROSS PROFIT
The Company's gross profit for the second quarter of 1997 was
$66.1 million, compared to $57.6 million for 1996, an increase of $8.5
million, or 14.8%. For the first half of 1997, the Company's gross
profit was $125.2 million, an increase of $14.4 million, or 12.9%,
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.
-25-
<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 $10.1 million, or
32.2%, and $14.6 million, or 24.0%, respectively, to $41.5 million and
$75.5 million for the three and six month periods ended June 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 addition of three new-build TA sites (including the
two stand-alone shops) and the conversion of 20 Leased Sites to
Company-operated sites since June 30, 1996.
The Company's SG&A for the second quarter decreased from $9.3
million in 1996 to $8.9 million in 1997, primarily as a result of
personnel reduction at National pursuant to the Combination Plan,
partially offset by increased staffing in the operational support and
business development areas at TA. For the six month period, SG&A
increased by $0.3 million to $20.7 million primarily due to the TA
staffing increases previously described.
REFINANCING, TRANSITION AND DEVELOPMENT COSTS
Refinancing, transition and development costs for the second
quarter of 1997 increased from $0.1 million for 1996 to $5.5 million,
while for the first half of 1997 such costs increased to $7.1 million
from $0.1 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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the second quarter and first
half of 1997 increased by $0.9 million and $1.7 million, respectively,
from the corresponding 1996 periods 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 second quarter of
1997 was $1.3 million as compared to $10.3 million in 1996, a decrease
of $9.0 million. For the six months ended June 30, 1997, income from
operations reflects a decrease from 1996 of $10.7 million to $6.2
million. The decreases in both periods are primarily attributable to
the transition costs being incurred to effect the Combination Plan.
EBITDA (defined as income from operations plus the sum of (a)
depreciation and amortization, (b) refinancing, transition and
development costs and (c) gains or losses from sales of property and
equipment) for the Company for the three and six month periods ended
June 30, 1997 was $15.7 million and $29.1 million, respectively, as
compared to $16.9 million and $29.6 million for the respective 1996
periods.
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<PAGE>
INTEREST (INCOME) EXPENSE - NET
Interest expense for the second quarter and first half of 1997 was in
both cases $0.7 million higher 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 $18.3 million
in the first half of 1997 and $23.5 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 six months ended
June 30, 1997 was $12.6 million versus $12.5 million in 1996. The
amount for 1997, while relatively flat versus the 1996 amount,
reflects increased expenditures related to conversions of Leased Sites
to Company-operated sites, partially offset by increased proceeds from
sales of property and equipment resulting from the sales of two Leased
Sites to the respective operators.
Net cash flows provided by financing activities were $50.0
million in the first six months of 1997 and $3.4 million for the first
six months of 1996. The change in the amount of cash flows provided
by financing activities 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 $290.4 million of indebtedness, consisting of $125.0
million principal amount of Subordinated Notes, $85.5 million
principal amount of Senior Notes and a $79.9 million term credit
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 June 30, 1997. The Senior Notes have no
amortization requirements until 2001, the 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 $200 million in
the Network between 1997 and the end of 2001 (with approximately $110
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 million of the $200
million intended to be spent represents normal ongoing maintenance and
related capital expenditures. The Company has budgeted expenditures
in order to rebrand and reimage sites, add additional nonfuel
offerings (such as fast food offerings) at existing sites, to make
required environmental improvements, convert certain Leased Sites to
Company-operated sites and purchase, install and upgrade information
systems at certain sites.
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<PAGE>
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 $15 million to $20
million in 1997 and 1998 to complete the upgrade of USTs and other
environmental related costs. The Company also expects to spend a
total of approximately $6 million in 1997 and 1998 for certain
one-time projects relating to control of wastewater and storm water
discharges and other matters. 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 $1 million as of June 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 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 TravelCenter networks into a single network.
The forward looking statements should be considered in light of these
factors.
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<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
The information included in the Company's Prospectus, dated July
23, 1997, under the caption "Business--Litigation" is incorporated
herein by reference. This portion of the Prospectus is included as
Exhibit 99.1 to this Report. No material developments have since
occurred in respect of the matters described therein.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
Exhibit 27 Financial Data Schedule
Exhibit 99.1 Section captioned "Business--Litigation" from the
Company's Prospectus, dated July 23, 1997
(b) REPORTS ON FORM 8-K
During the three months ended June 30, 1997, the Company filed no
reports on Form 8-K.
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<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.
TRAVEL CENTERS OF AMERICA, INC.
(Registrant)
Date: August 15, 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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<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 JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 79,492
<SECURITIES> 0
<RECEIVABLES> 60,924
<ALLOWANCES> 4,310
<INVENTORY> 33,710
<CURRENT-ASSETS> 180,230
<PP&E> 265,698
<DEPRECIATION> 0
<TOTAL-ASSETS> 483,674
<CURRENT-LIABILITIES> 71,397
<BONDS> 289,875
53,515
38
<COMMON> 14
<OTHER-SE> 54,421
<TOTAL-LIABILITY-AND-EQUITY> 483,674
<SALES> 512,042
<TOTAL-REVENUES> 529,990
<CGS> 404,689
<TOTAL-COSTS> 404,689
<OTHER-EXPENSES> 119,076
<LOSS-PROVISION> 808
<INTEREST-EXPENSE> 10,967
<INCOME-PRETAX> (4,742)
<INCOME-TAX> (1,838)
<INCOME-CONTINUING> (2,904)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,554)
<CHANGES> 0
<NET-INCOME> (8,458)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> 0
</TABLE>
<PAGE>
LITIGATION EXHIBIT 99.1
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. These orders are
currently on appeal. The appeal has been fully briefed but not argued. 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.
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.
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<PAGE>
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.
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 travel center 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.
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