<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission file number 333-26497
------------------------------------------
TRAVELCENTERS OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3856519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24601 Center Ridge Road, Suite 200
Westlake, OH 44145-5634
(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.
<TABLE>
<CAPTION>
INDEX PAGE NO.
----- --------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet as of March 31, 1998 and
December 31, 1997 3
Consolidated Statement of Operations and Retained
Earnings for the three months ended March 31, 1998
and 1997 4
Consolidated Statement of Cash Flows for the three
months ended March 31, 1998 and 1997 5
Selected Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Securityholders 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
</TABLE>
2
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- -----------
ASSETS (IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,349 $ 71,756
Accounts receivable (less allowance for doubtful accounts of $2,749 for 1998
and $2,707 for 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,604 68,433
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,342 33,718
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,065 3,740
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,734 10,256
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,094 187,903
Notes receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,097 1,692
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284,633 286,472
Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,815 15,651
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,422 11,786
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 -
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,342 4,288
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $493,618 $507,792
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 500 $ 500
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,224 29,035
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,140 72,265
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 98,864 101,800
Commitments and contingencies (Note 6)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289,500 289,625
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 979 4,985
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,779 4,479
-------- --------
394,122 400,889
Mandatorily redeemable senior convertible participating preferred stock. . . . . . . 63,477 61,404
Other preferred stock, common stock and other stockholders' equity . . . . . . . . . 43,820 43,945
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,801) 1,554
-------- --------
36,019 45,499
-------- --------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . . $493,618 $507,792
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Revenues:
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,630 $194,151
Nonfuel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,060 60,041
Rent and royalties . . . . . . . . . . . . . . . . . . . . . . . . . . 5,634 10,921
-------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,324 265,113
Cost of revenues (excluding depreciation). . . . . . . . . . . . . . . . 147,150 205,878
-------- --------
Gross profit (excluding depreciation). . . . . . . . . . . . . . . . . . 66,174 59,235
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,745 34,083
Selling, general and administrative expenses . . . . . . . . . . . . . . 8,954 11,733
Refinancing, transition and development costs. . . . . . . . . . . . . . 992 1,618
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 16,544 6,944
(Gain) loss on sales of property and equipment . . . . . . . . . . . . . 31 (40)
Other operating (income) expense, net. . . . . . . . . . . . . . . . . . 680 (34)
-------- --------
Income (loss) from operations. . . . . . . . . . . . . . . . . . . . . . (5,772) 4,931
Interest (expense), net. . . . . . . . . . . . . . . . . . . . . . . . . (5,990) (5,105)
-------- --------
Loss before income taxes and extraordinary item. . . . . . . . . . . . . (11,762) (174)
Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . (4,479) (68)
-------- --------
Loss before extraordinary item . . . . . . . . . . . . . . . . . . . . . (7,283) (106)
Extraordinary loss (less applicable income tax benefit of $3,608). . . . - (5,554)
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,283) (5,660)
Less: preferred dividends. . . . . . . . . . . . . . . . . . . . . . . (2,072) (1,819)
Retained earnings--beginning of the period . . . . . . . . . . . . . . . 1,554 14,837
-------- --------
Retained earnings (deficit)--end of the period . . . . . . . . . . . . . $(7,801) $7,538
-------- --------
-------- --------
Earnings per common share (basic and diluted):
Loss before extraordinary item . . . . . . . . . . . . . . . . . . . . $(14.97) $(1.56)
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . - (4.51)
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(14.97) $(6.07)
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------- ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,283) $(5,660)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . - 5,554
Depreciation and amortization. . . . . . . . . . . . . . . . . . 16,544 6,944
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . (4,546) -
Provision for doubtful accounts. . . . . . . . . . . . . . . . . 276 376
(Gain) loss on sale of property and equipment. . . . . . . . . . 31 (40)
Changes in assets and liabilities, adjusted for the effects of
acquisitions of network assets:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 12,553 (3,185)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . (624) 1,361
Other current assets. . . . . . . . . . . . . . . . . . . . . (484) 1,248
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (3,811) 1,782
Other current liabilities . . . . . . . . . . . . . . . . . . 875 (264)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (153) 312
-------- --------
Net cash provided by operating activities. . . . . . . . . . . . 13,378 4,864
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of network assets . . . . . . . . . . . . . . . . . . - (4,254)
Proceeds from sales of property and equipment. . . . . . . . . . . - 77
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (13,535) (1,388)
-------- --------
Net cash used in investing activities. . . . . . . . . . . . . . (13,535) (5,565)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loan borrowings. . . . . . . . . . . . . . . . . . . . . - 3,750
Revolving loan repayments. . . . . . . . . . . . . . . . . . . . . - (17,750)
Long-term debt borrowings. . . . . . . . . . . . . . . . . . . . . - 290,500
Long-term debt repayments. . . . . . . . . . . . . . . . . . . . . (125) (211,800)
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . (125) (1,244)
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . - (11,624)
-------- --------
Net cash provided by (used in) financing activities. . . . . . . (250) 51,832
-------- --------
Net increase (decrease) in cash . . . . . . . . . . . . . . . (407) 51,131
Cash at the beginning of the period. . . . . . . . . . . . . . . . . 71,756 23,779
-------- --------
Cash at the end of the period. . . . . . . . . . . . . . . . . . . . $71,349 $74,910
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
TravelCenters of America, Inc., formerly National
Auto/Truckstops Holdings Corporation (collectively with its subsidiaries, as
the context may require, the "Company"), was incorporated on December 2,
1992, to raise equity and to function as the holding company of its
wholly-owned operating subsidiary, National Auto/Truckstops, Inc.
("National"). National was incorporated to acquire the travel center network
(the "National Network") of Unocal Corporation ("Unocal") (the "National
Acquisition"). On December 10, 1993, the Company capitalized a second
wholly-owned subsidiary, TA Holdings Corporation ("TAHC"), which in turn
capitalized a wholly-owned subsidiary, TA Operating Corporation ("TA"). TA
was incorporated to acquire the travel center network ("the TA Network") of
BP Exploration and Oil Company ("BP") (the "TA Acquisition"), and had a
wholly-owned subsidiary, TA Franchise Systems Inc. ("TAFSI"), which holds all
of the TA franchise agreements. The National Acquisition was consummated on
April 14, 1993 and the TA Acquisition was consummated on December 10, 1993.
On March 27, 1997 the Company's subsidiaries were restructured such that the
Company directly owns its three subsidiaries, National, TA and TAFSI (the
Company's former subsidiary, TAHC, was liquidated as of such date).
The Company is a holding company which, through its wholly-owned
subsidiaries, owns, operates and franchises more travel centers in the United
States than any of its competitors with 127 network sites nationwide,
including 118 Company-owned locations. The Company currently operates a
network of 121 travel centers in 36 states under the "TravelCenters of
America" or "TA" brand names and a network of six travel centers in four
states under the licensed "Unocal 76" and related brand names.
The accompanying unaudited, consolidated financial statements
as of and for the quarters ended March 31, 1998 and 1997 have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, these statements should be read in
conjunction with the audited financial statements as of and for the year
ended December 31, 1997. In the opinion of management, the accompanying
unaudited, consolidated financial statements contain all adjustments, all of
which were of a normal recurring nature, necessary to present fairly, in all
material respects, the consolidated results of operations and of cash flows
for the three-month period ended March 31, 1998 and 1997, and are not
necessarily indicative of the results to be expected for the full year.
2. EARNINGS PER SHARE
In 1997 the Company adopted SFAS No. 128, "Earnings Per
Share." The computation of basic earnings per common share is based upon the
weighted average number of shares of common stock outstanding. Previously
reported earnings per share (EPS) are restated. A reconciliation of the
income and shares used in the computation follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
------------ ------------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C>
Loss before extraordinary loss $(7,283) $(106)
Less: Preferred stock dividends (2,072) (1,819)
-------- --------
Net loss available to common stockholders (9,355) (1,925)
Weighted average shares outstanding 625 1,231
-------- --------
Loss per share $(14.97) $(1.56)
-------- --------
-------- --------
</TABLE>
The assumed conversion of stock options, warrants and convertible series
of preferred stock would have an antidilutive effect on the loss per share
for the quarters ended March 31, 1998 and 1997. On January 1, 1998, 157,000
options to purchase common stock were granted to management and non-employee
directors.
6
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Nonfuel merchandise. . . . . . . . . . . . . $ 32,108 $ 30,883
Petroleum products . . . . . . . . . . . . . 2,234 2,835
----------- -----------
Total inventories. . . . . . . . . . . $ 34,342 $ 33,718
----------- -----------
----------- -----------
</TABLE>
4. PROPERTY AND EQUIPMENT
During the first quarter of 1998, the estimated useful lives of certain
machinery, equipment, furniture and fixtures were revised downward from 10
years to five years. The effect of this change in estimate resulted in
reductions in income before extraordinary items, net income and earnings per
share of $9.5 million, $5.7 million and $9.08, respectively. This change
resulted in these assets becoming fully depreciated at March 31, 1998.
5. COMBINATION PLAN AND REFINANCING
On January 21, 1997, the Company's Board of Directors approved a plan
to combine the operations of its National and TA Networks under the existing
TA Network management. This plan provides for the divesting of certain
National Network locations, terminating of certain franchise relationships,
transfer of operations of all National Network company-operated locations to
the TA Network and rebranding of certain National Network locations to TA.
On March 27, 1997, the Company was recapitalized and restructured
pursuant to a series of transactions (the "Refinancing") in which (i) the
Company's indebtedness under the old National and TA Credit Facilities and
Subordinated Notes were refinanced, (ii) TA and National guaranteed the
Company's obligations under the new Credit Facilities, the Senior Notes and
the Subordinated Notes and (iii) the Company's subsidiaries were restructured
such that the Company directly owns its three subsidiaries, National, TA and
TAFSI (the Company's former subsidiary, TAHC, was liquidated as of such date).
The Refinancing resulted in the early extinguishment of the Company's
prior credit facilities. The remaining unamortized balance, at the time of
the Refinancing, of the deferred financing costs and unamortized debt
discount of $7,846,703 and $1,315,012, respectively, were written off.
6. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to extensive
regulation pursuant to federal, state and local laws, regulations and
ordinances 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 other
hazardous and toxic substances ("Hazardous Substances") or (ii) impose
liability and damages for the costs of cleaning up sites affected by, and for
damages resulting from, past spills and disposal or other releases of
Hazardous Substances ("Environmental Laws").
The Company owns and uses underground storage tanks ("USTs") and
aboveground storage tanks ("ASTs") at Company-operated and Leased Sites to
store petroleum products and waste. These tanks must comply with requirements
of Environmental Laws regarding tank construction, integrity testing, leak
detection and monitoring, overfill and spill control, release reporting,
financial assurance and corrective action in case of a release
7
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
from a UST or AST into the environment. At certain locations, the Company
also is subject to Environmental Laws relating to vapor recovery and
discharges to water. The Company believes that all of its travel centers are
in material compliance with applicable requirements of Environmental Laws.
The Company is making necessary upgrades to USTs to comply with federal
regulations which will take effect in December 1998. These upgrades are
expected to be completed in 1998 at an estimated cost to the Company of
approximately $6 to $8 million. The Company does not believe that such costs
will have a material adverse effect on the Company and the Capital Program
incorporates funds to complete such upgrades.
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 has received notices of alleged violations of Environmental
Laws, or is aware of the need to undertake corrective actions to comply with
Environmental Laws, at Company-owned travel centers in a number of
jurisdictions. The Company does not expect that any financial penalties
associated with these alleged violations, instances of noncompliance, or
compliance costs incurred in connection therewith, will be material to the
Company's results of operation or financial condition. The Company is
conducting investigatory and/or remedial actions with respect to releases
and/or spills of Hazardous Substances that have occurred subsequent to the
National Acquisition and the TA Acquisition, respectively, at fewer than 30
Network properties. While the Company cannot precisely estimate the ultimate
costs it will incur in connection with the investigation and remediation of
these properties, based on its current knowledge, the Company does not expect
that the costs to be incurred at these properties, individually or in the
aggregate, will be material to the Company's results of operation or
financial condition. While the aforementioned matters are, to the best
knowledge of the Company, the only proceedings for which the Company is
currently exposed to potential liability (particularly given the Unocal and
BP indemnities discussed below), there can be no assurance that additional
contamination does not exist at these or additional Network properties, or
that material liability will not be imposed in the future. If additional
environmental problems arise or are discovered, or if additional
environmental requirements are imposed by government agencies, increased
environmental compliance or remediation expenditures may be required, which
could have a material adverse effect on the Company.
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 of
$935,000 for such matters. 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
FORTY-NINER TRUCK PLAZA LITIGATION. In connection with the acquisition
of the Network, the Company acquired six travel centers located in
California. In January 1993, the Operators of four of these travel centers
(the "California Plaintiffs") commenced litigation against Unocal, The
Clipper Group, L.P. ("Clipper," organizer of the institutional investor group
which formed the Company) 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".
8
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
Under the asset purchase agreements pursuant to which the Company
acquired the California Properties from Unocal, and related agreements,
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 Plaintiffs. However, in such
event, the Company would seek indemnification from Unocal for any Excess
Amounts. The Company believes that the claims asserted by the California
Plaintiffs 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 and franchise agreements.
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, for which all defendants are
jointly and severably liable. 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. The
California State Court rendered a decision in favor of the defendants 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 then filed motions with the trial
court to enter judgement in its favor on plaintiffs' 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 defendants' 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 judgement notwithstanding the verdict. The
Court of Appeal also reversed an order of the trial court granting a nonsuit
on plaintiff's claim against the Company and Clipper for civil conspiracy.
The California Supreme Court has denied review. No date has been set for
retrial. 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.
The Company believes all compensatory damages ultimately awarded and
legal fees incurred in this matter are covered under the indemnification
agreement with Unocal. Legal costs incurred by the Company through March 31,
1998 total $5,689,000, of which Unocal has paid $1,000,000 to the Company to
date. Unocal has contested certain of the amounts comprising 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 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.
9
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
7. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth the consolidating balance sheets of
the Company as of March 31, 1998 and December 31, 1997 and the consolidating
statements of income and retained earnings and of cash flows of the Company
for the three months ended March 31, 1998 and 1997. 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 and, (b)
eliminate the Company's investments in its subsidiaries. The Guarantor
Subsidiaries, TA and National, are wholly-owned subsidiaries of the Company
and have fully and unconditionally guaranteed the exchange notes. 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.
10
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- -------------- -------------- ------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . $ 44,356 $ 26,993 $ - $ - $ 71,349
Accounts receivable, net . . . . . . . - 54,853 751 - 55,604
Inventories. . . . . . . . . . . . . . - 34,342 - - 34,342
Deferred income taxes. . . . . . . . . - 4,065 - - 4,065
Other current assets . . . . . . . . . 27,788 35,649 3,598 (56,301) 10,734
------------- -------------- -------------- ------------- -------------
Total current assets. . . . . . . 72,144 155,902 4,349 (56,301) 176,094
Notes receivable, net. . . . . . . . . . 897 1,200 - - 2,097
Property and equipment, net. . . . . . . - 284,633 - - 284,633
Intangible assets. . . . . . . . . . . . - 14,815 - - 14,815
Deferred financing costs . . . . . . . . 11,422 - - - 11,422
Deferred income taxes. . . . . . . . . . 954 (739) - - 215
Other assets . . . . . . . . . . . . . . 730 3,612 - - 4,342
Investment in subsidiaries . . . . . . . 336,608 - - (336,608) -
------------- -------------- -------------- ------------- -------------
Total assets. . . . . . . . . . . $422,755 $459,423 $ 4,349 $(392,909) $493,618
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt . $ 500 $ - $ - $ - $ 500
Accounts payable . . . . . . . . . . . - 25,369 - (145) 25,224
Other accrued liabilities. . . . . . . 32,005 95,972 1,308 (56,145) 73,140
------------- -------------- -------------- ------------- -------------
Total current liabilities . . . . 32,505 121,341 1,308 (56,290) 98,864
Long-term debt . . . . . . . . . . . . . 289,500 - - - 289,500
Deferred income taxes. . . . . . . . . . - 979 - - 979
Other liabilities. . . . . . . . . . . . - 230,682 - (225,903) 4,779
------------- -------------- -------------- ------------- -------------
Total liabilities . . . . . . . . 322,005 353,002 1,308 (282,193) 394,122
Mandatorily redeemable senior
convertible participating preferred
stock. . . . . . . . . . . . . . . . . 63,477 - - - 63,477
Other preferred stock, common stock
and other stockholders' equity . . . . 45,074 81,179 - (82,433) 43,820
Retained earnings (deficit). . . . . . . (7,801) 25,242 3,041 (28,283) (7,801)
------------- -------------- -------------- ------------- -------------
Total liabilities and
stockholders' equity. . . . . . $422,755 $459,423 $4,349 $(392,909) $493,618
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- -------------- -------------- ------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . $ 59,592 $ 12,164 $ - $ - $ 71,756
Accounts receivable, net . . . . . . . - 67,927 506 - 68,433
Inventories. . . . . . . . . . . . . . - 33,718 - - 33,718
Deferred income taxes. . . . . . . . . - 3,740 - - 3,740
Other current assets . . . . . . . . . 14,176 38,971 2,591 (45,482) 10,256
------------- -------------- -------------- ------------- -------------
Total current assets. . . . . . . 73,768 156,520 3,097 (45,482) 187,903
Notes receivable, net. . . . . . . . . . 887 805 - - 1,692
Property and equipment, net. . . . . . . - 286,472 - - 286,472
Intangible assets. . . . . . . . . . . . - 15,651 - - 15,651
Deferred financing costs . . . . . . . . 11,786 - - - 11,786
Other assets . . . . . . . . . . . . . . 730 3,558 - - 4,288
Investment in subsidiaries . . . . . . . 342,860 - - (342,860) -
------------- -------------- -------------- ------------- -------------
Total assets. . . . . . . . . . . $430,031 $463,006 $ 3,097 $(388,342) $507,792
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: . . . . . . . . . .
Current maturities of long-term debt . $ 500 $ - $ - $ - $ 500
Accounts payable . . . . . . . . . . . - 29,387 - (352) 29,035
Other accrued liabilities. . . . . . . 32,601 83,905 889 (45,130) 72,265
------------- -------------- -------------- ------------- -------------
Total current liabilities . . . . 33,101 113,292 889 (45,482) 101,800
Long-term debt . . . . . . . . . . . . . 289,625 - - - 289,625
Deferred income taxes. . . . . . . . . . (852) 5,837 - - 4,985
Other liabilities. . . . . . . . . . . . - 230,371 - (225,892) 4,479
------------- -------------- -------------- ------------- -------------
Total liabilities . . . . . . . . 321,874 349,500 889 (271,374) 400,889
Mandatorily redeemable senior
convertible participating preferred
stock. . . . . . . . . . . . . . . . . 61,404 - - - 61,404
Other preferred stock, common stock
and other stockholders' equity . . . . 45,199 81,179 - (82,433) 43,945
Retained earnings. . . . . . . . . . . . 1,554 32,327 2,208 (34,535) 1,554
------------- -------------- -------------- ------------- -------------
46,753 113,506 2,208 (116,968) 45,499
------------- -------------- -------------- ------------- -------------
Total liabilities and
stockholders' equity. . . . . . $430,031 $463,006 $3,097 $(388,342) $507,792
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
</TABLE>
12
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ - $ 132,630 $ - $ - $132,630
Nonfuel. . . . . . . . . . . . . . . . - 75,060 - - 75,060
Rent and royalties . . . . . . . . . . - 8,306 1,683 (4,355) 5,634
--------- --------- ------- ------- ---------
Total revenues . . . . . . . . . . . . - 215,996 1,683 (4,355) 213,324
Cost of revenues (excluding
depreciation). . . . . . . . . . . . . - 147,150 - - 147,150
--------- --------- ------- ------- ---------
Gross profit (excluding depreciation). . - 68,846 1,683 (4,355) 66,174
Operating expenses . . . . . . . . . . . 52 48,912 136 (4,355) 44,745
Selling, general and
administrative . . . . . . . . . . . . 257 8,479 218 - 8,954
Refinancing, transition and development
costs. . . . . . . . . . . . . . . . . - 992 - - 992
Depreciation and amortization. . . . . . 374 16,170 - - 16,544
(Gain) loss on sale of property and
equipment. . . . . . . . . . . . . . . - 31 - - 31
Other operating (income) expense, net. . - 680 - - 680
--------- --------- ------- ------- ---------
Income (loss) from operations. . . . . . (683) (6,418) 1,329 - (5,772)
Interest (expense), net. . . . . . . . . (879) (5,111) - - (5,990)
Equity income (loss) . . . . . . . . . . (6,252) - - 6,252 -
--------- --------- ------- ------- ---------
Income (loss) before income taxes. . . . (7,814) (11,529) 1,329 6,252 (11,762)
Provision (benefit) for income taxes . . (531) (4,444) 496 - (4,479)
--------- --------- ------- ------- ---------
Net income (loss). . . . . . . . . . . . (7,283) (7,085) 833 6,252 (7,283)
Less: preferred dividends. . . . . . . . (2,072) - - - (2,072)
Retained earnings (deficit) - beginning of
the period . . . . . . . . . . . . . . 1,554 32,327 2,208 (34,535) 1,554
--------- --------- ------- ------- ---------
Retained earnings (deficit) - end of the
period . . . . . . . . . . . . . . . . $ (7,801) $ 25,242 $ 3,041 $(28,283) $ (7,801)
--------- --------- ------- ------- ---------
--------- --------- ------- ------- ---------
</TABLE>
13
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues:
Fuel $ - $194,151 $ - $ - $194,151
Nonfuel. . . . . . . . . . . . . . . . - 10,574 - - 10,574
Rent and royalties . . . . . . . . . . - 60,041 347 - 60,388
--------- --------- --------- --------- ---------
Total revenues. . . . . . . . . . - 264,766 347 - 265,113
Cost of revenues (excluding
depreciation). . . . . . . . . . . . . - 205,878 - - 205,878
--------- --------- --------- --------- ---------
Gross profit (excluding depreciation). . - 58,888 347 - 59,235
Operating expenses . . . . . . . . . . . - 34,083 - - 34,083
Selling, general and
administrative . . . . . . . . . . . . 194 11,267 272 - 11,733
Refinancing, transition and development
costs. . . . . . . . . . . . . . . . . - 1,618 - - 1,618
Depreciation and amortization. . . . . . - 6,944 - - 6,944
(Gain) loss on sale of property and
equipment. . . . . . . . . . . . . . . - - - - -
Other operating (income) expense, net. . - (74) - - (74)
--------- --------- --------- --------- ---------
Income (loss) from operations. . . . . . (194) 5,050 75 - 4,931
Interest (expense), net. . . . . . . . . (278) (4,827) - - (5,105)
Equity income (loss) . . . . . . . . . . (5,372) - - 5,372 -
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary items. . . . . . . . . . (5,844) 223 75 5,372 (174)
Provision (benefit) for income taxes . . (184) 97 19 - (68)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item. (5,660) 126 56 5,372 (106)
Extraordinary loss (less applicable
income tax benefit). . . . . . . . . . - (5,554) - - (5,554)
--------- --------- --------- --------- ---------
Net income (loss). . . . . . . . . . . . (5,660) (5,428) 56 5,372 (5,660)
Less: preferred dividends. . . . . . . . (1,819) - - - (1,819)
Retained earnings - beginning of the
period . . . . . . . . . . . . . . . . 14,837 36,436 947 (37,383) 14,837
--------- --------- --------- --------- ---------
Retained earnings - end of the period. . $ 7,358 $ 31,008 $ 1,003 $(32,011) $ 7,538
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
14
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES . . . . . . . . . $(14,986) $ 28,364 $ - $ - $ 13,378
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . - (13,535) - - (13,535)
--------- --------- --------- --------- ---------
Net cash used in investing
activities. . . . . . . . . . . . - (13,535) - - (13,535)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt repayments. . . . . . . (125) - - - (125)
Repurchase of common stock . . . . . . (125) - - - (125)
--------- --------- --------- --------- ---------
Net cash used in financing
activities. . . . . . . . . . . . (250) - - - (250)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash . . (15,236) 14,829 - - (407)
Cash at the beginning of the period. . . 59,592 12,164 - - 71,756
--------- --------- --------- --------- ---------
Cash at the end of the period. . . . . . $ 44,356 $ 26,993 $ - $ - $ 71,349
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
15
<PAGE>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES . . . . . . . . . . . . . . $ 1,999 $ 2,865 $ - $ - $ 4,864
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of network assets . . . . - (4,254) - - (4,254)
Proceeds from sales of property and
equipment. . . . . . . . . . . . . . - 77 - - 77
Capital expenditures . . . . . . . . . - (1,388) - - (1,388)
--------- --------- --------- --------- ---------
Net cash used in investing
activities. . . . . . . . . . . . - (5,565) - - (5,565)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loan borrowings. . . . . . . - 3,750 - - 3,750
Revolving loan repayments. . . . . . . - (17,750) - - (17,750)
Long-term debt borrowings. . . . . . . 290,500 - - - 290,500
Long-term debt repayments. . . . . . . - (211,800) - - (211,800)
Repurchase of common stock . . . . . . (1,244) - - - (1,244)
Debt issuance costs. . . . . . . . . . (11,624) - - - (11,624)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities. . . . . . . 54,228 (2,396) - - 51,832
--------- --------- --------- --------- ---------
Net increase in cash. . . . . . . 56,227 (5,096) - - 51,131
Cash at the beginning of the period. . . - 23,779 - - 23,779
--------- --------- --------- --------- ---------
Cash at the end of the period. . . . . . $ 56,227 $ 18,683 $ - $ - $ 74,910
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
16
<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
consolidated financial statements and notes to consolidated financial
statements included herein, and the audited financial statements and
Management's Discussion and Analysis included with the Company's Form 10-K
for the year ended December 31, 1997.
OVERVIEW
The Company is a holding company which, through its wholly-owned
subsidiaries, owns, operates and franchises more travel centers in the United
States than any of its competitors with 127 network sites nationwide,
including 118 Company-owned locations. The Company currently operates a
network of 121 travel centers in 36 states under the "TravelCenters of
America" or "TA" brand names and a network of six travel centers in four
states under the licensed "Unocal 76" and related brand names.
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 Operators and Franchisee-Owners, 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 months ended March 31, 1998, the Company incurred
approximately $1.0 million 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 $20.0 million, of
which approximately $2.5 million to $4.0 million is expected to be incurred
in 1998. These expenses relate to, among other things, (i) employee
separations, (ii) the costs to convert National Network travel centers to
Network travel centers, (iii) the costs to dispose of travel centers or
terminate lease or franchise agreements, and (iv) the costs of integrating
the management and operations of the Existing Networks into the 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 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
were terminated, with payments of termination benefits of $2.0 million and
$0.6 million made in 1997 and in the first quarter of 1998, respectively.
NETWORK RATIONALIZATION
Throughout 1997, the Company continued to refine and execute its plans
for improving the profitability of the Network through rebranding of its
sites under the TA brand name and rationalizing the number and locations of
its travel centers. For the year ended December 31, 1997, 15 National Leased
Sites were sold to the Operators of those sites for a net gain on sale of
$11.9 million, none of which took place in the first quarter of 1997. The
Company anticipates additional site sales during 1998 as it continues
rationalizing the Network. No sales were finalized during the first quarter
of 1998. During the year ended December 31, 1997, relationships with the
Franchisee-Owners of 27 Franchisee-Owner Sites were terminated. Beginning in
July 1997, those National Network franchisees whose sites have been selected
for inclusion in the Network began to convert their franchises to TAFSI from
National, a process that includes rebranding the travel centers to the TA
brand, installation of TA's store and shop programs, training of the
franchisees in TA's operating procedures and revisions to the franchise
agreements and lease agreements, such that there will be an increase in the
royalty the Company receives as a
17
<PAGE>
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.
Through March 31, 1998, 29 former National franchisees had signed TAFSI
franchise agreements.
SITE CONVERSIONS
During 1997, the Company converted 27 National Leased Sites to
Company-operated Sites by acquiring the travel center operations from the
related Operators. 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. Two such conversions
were completed in the second quarter of 1998.
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 Sites were
converted to TA Company-operated Sites, and in July 1997, the then remaining
21 National Company-operated Sites were so converted. National Leased Sites
subsequently converted to Company-operated Sites were converted to TA
Company-operated Sites 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 increase revenues and, as a consequence,
employees were hired in anticipation of the expected revenue increases. For
these reasons, the Company anticipates that the operating results of these
converted travel centers will continue to improve during 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.
<TABLE>
<CAPTION>
TA NATIONAL
-------------------- -----------------------
MARCH 31, MARCH 31,
--------------------- ------------------------
1998(1) 1997 1998 1997
------- ---- ---- ----
<S> <C> <C> <C> <C>
Company-owned and operated sites 82 40 - 27
Company-owned and leased sites 29 - 6 68
--- --- --- ---
Company-owned sites 111 40 6 95
Franchisee-owner sites 10 8 - 26
--- --- --- ---
Total 121 48 6 121
--- --- --- ---
--- --- --- ---
Stand-alone shops 2 2 - -
--- --- --- ---
--- --- --- ---
</TABLE>
(1) Excludes three closed sites as of March 31, 1998.
RESULTS OF OPERATIONS
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
REVENUES
The Company's consolidated revenues for the three months ended March 31,
1998 were $213.3 million, which represents a decrease from the same period in
the prior year of $51.8 million, or 19.5%.
18
<PAGE>
Fuel revenue for the three months ended March 31, 1998 was $132.6 million
compared to $194.2 million for the same period in 1997, a decrease of $61.5
million or 31.7%. The decrease is a result of a decrease in diesel volumes,
combined with a decrease in diesel pump prices. Diesel volumes decreased
11.6% between years, which is the result of the decrease in the total number
of sites between years, offset by increased volumes at continuing sites.
Average diesel sales prices decreased approximately 26.2% between the first
quarter of 1997 and the first quarter of 1998 as a result of the significant
decline in the cost of crude oil.
Nonfuel revenues for the three months ended March 31, 1998 increased
$15.1 million over the prior year quarter to $75.1 million. This represents
an increase of 25.2%. This is due to the increase in the number of
Company-operated sites between years, coupled with the increased revenues at
former National locations that have been rebranded as TA travel centers.
Rent and royalty revenues for the quarter have decreased from the same
periods in 1997 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. 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. Rent revenues for Leased
Sites that were leased in both the first quarter 1998 and the first quarter
1997 decreased 18.8% between years. Royalty revenues for franchisee
locations in operation in the first quarters of both 1998 and 1997 increased
85.1%. The decline in rent revenue is expected to cease, as the network
rationalization is substantially complete with regards to franchisee-lessees.
GROSS PROFIT
The Company's gross profit for the first quarter of 1998 was $66.2
million, compared to $59.2 million for 1997, an increase of $7.0 million, or
11.8%. 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 conversion of travel centers from
Leased Sites to Company-operated sites.
OPERATING AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating expenses include the direct expenses of Company-operated
Sites, and selling, general and administrative expenses (SG&A) include
corporate overhead and administrative costs.
The Company's operating expenses increased by $10.6 million, or 31.1%,
to $44.7 million for the three-month period ended March 31, 1998. These
increases reflect the increased number of Company-operated Sites from the
conversion of Leased Sites to Company-operated Sites that occurred throughout
1997.
The Company's SG&A for the first quarter decreased from $11.7 million in
1997 to $9.0 million in 1998, primarily due to synergies resulting from
personnel reductions at National pursuant to the Combination Plan, partially
offset by increased staffing in the operational support and business
development areas at TA.
REFINANCING, TRANSITION AND DEVELOPMENT COSTS
Refinancing, transition and development costs for the first quarter of
1998 decreased from $1.6 million in 1997 to $1.0 million in 1998. These
costs were incurred in effecting the Combination Plan. The Company
anticipates approximately $2.5 million to $4.0 million of such costs to be
incurred in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation expense for the first quarter of 1998 was $16.5 million,
compared to $6.9 million for the same period last year.
During the first quarter of 1998, the estimated useful lives of certain
machinery, equipment, furniture and fixtures were revised downward from 10
years to five years. The effect of this change in estimate resulted in
reductions in income before extraordinary items, net income and earnings per
share of $9.5 million, $5.7 million and $9.08, respectively. This change
resulted in these assets becoming fully depreciated at March 31, 1998.
19
<PAGE>
INCOME (LOSS) FROM OPERATIONS
The Company incurred a loss from operations of $5.8 million for the
first quarter of 1998, compared to income from operations of $4.9 million for
the same period in the prior year. This is the result of increases in gross
profit of $7.0 million and decreases in SG&A of $2.7 million, offset by
increases in operating expenses of $10.6 million and increases in
depreciation expense of $9.6 million. EBITDA (defined as income from
operations plus the sum of (a) depreciation, amortization and other non-cash
charges, (b) refinancing, transition and development costs and (c) gains or
losses from sales of property and equipment) for the Company for the three
month period ended March 31, 1998 was $12.7 million, compared to $13.4
million for the same period in the prior year. The decreased EBITDA from
1997 is primarily the result of reduced sites.
INTEREST EXPENSE -- NET
Interest expense for the first quarter of 1998 was $0.9 million higher
than the same period in the prior year as a result of the increased debt
balance after consummation of the Refinancing (discussed in Liquidity and
Capital Resources below).
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 acquisition, expansion and
environmental upgrades.
Net cash provided by operating activities totaled $13.4 million for the
first quarter of 1998, compared to $4.9 million for the same period in the
prior year. The increase between years is primarily the result of net
reductions in working capital needs between years.
Net cash used in investing activities increased to $13.5 million for the
first quarter of 1998, up from $5.6 million for the first quarter of 1997.
The increase is the result of increases in capital expenditures offset by the
decrease in the acquisition of network assets. Acquisitions of network
assets represents amounts spent acquiring the leasehold interests of
operators when converting Leased Sites to Company-operated Sites. These
activities were substantially complete at March 31, 1998, although two such
conversions have taken place through May 14, 1998 and a few additional
conversions remain possible. The increase in capital expenditures between
years are primarily the result of converting National Network travel centers
to TA Network travel centers, remodeling of existing TA Network travel
centers and improvements in USTs and ASTs to comply with increased statutory
and regulatory requirements which will take effect on December 22, 1998.
Net cash used in financing activities was $0.3 million during the first
quarter of 1998, compared to $51.1 million generated during the first quarter
in the prior year. The change in the amount of financing activity cash flows
between 1997 and 1998 was due to the refinancing completed in the first
quarter of 1997.
On March 27, 1997 the Company was refinanced and currently has
outstanding $289.5 million of indebtedness, consisting of $125.0 million
principal amount of Senior Subordinated Notes, $85.5 million principal amount
of Senior Notes and a $79.5 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 March 31, 1998. 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 in excess of $200 million in the Network
between 1997 and the end of 2001 (with approximately $75 million of this
amount to be spent in each of 1997 and 1998) in connection with the Capital
Program to upgrade, rebrand, reimage and increase the number of travel
centers. Approximately $50 million of the capital expenditures intended to be
made represent normal ongoing maintenance and related capital expenditures
(with approximately $10 million of this amount to be spent in 1998). The
Company has budgeted expenditures in order to add additional sites, rebrand
and reimage sites, add additional non-fuel offerings (such as quick-serve
restaurant offerings) at existing sites, make required environmental
improvements, and purchase, install and upgrade its information systems.
20
<PAGE>
The Company anticipates that it will be able to fund its 1998 working
capital requirements and capital expenditures primarily from funds generated
from the refinancing, funds generated from operations and asset sales, 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,
borrowing 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 Sites
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 $6 million to $8 million in 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 March 31, 1998. 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.
"YEAR 2000" ISSUES
The Company has made and will continue to make certain investments in
its software systems and applications to ensure the Company is year 2000
compliant. The Company is currently in the process of evaluating its computer
software and databases to determine the nature and extent of the
modifications that will be required to prevent problems related to the year
2000. The financial impact to the Company has not been and is not
anticipated to be material to its financial position or results in any given
year.
FORWARD-LOOKING STATEMENTS
The Company is making this statement in order to satisfy the "safe
harbor" provision contained in the Private Securities Litigation Reform Act
of 1995. 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. Such forward-looking statements are
made based on management's expectations and beliefs concerning future events
impacting the Company and are subject to uncertainties and factors relating
to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the Company,
that could cause actual results of the Company to differ materially from
those matters expressed in or implied by 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
Combination Plan. The forward-looking statements should be considered in
light of these factors.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is a party to litigation in the ordinary
course of its business involving, by way of example, matters such as breach
of contract, actions under PMPA or other franchise regulations, actions under
Environmental Laws, bankruptcy claims, condemnation matters, employment
claims, negligence and other similar claims. Certain of such claims are
covered by the Company's third party insurance policies or indemnification
agreements with BP or Unocal. While claims for damages in such litigation in
certain instances may
21
<PAGE>
not be covered by an insurance policy or an indemnification agreement or may
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.
The following describes the more significant pending matters in which the
Company is involved as of March 31, 1998.
FORTY-NINER TRUCK PLAZA LITIGATION. This action was commenced in
California Superior Court, Sacramento County, on January 28, 1993 by four
Operators of National Leased Sites in California. The complaint asserts
claims on behalf of each of the plaintiffs against the Company, Clipper and
Unocal based upon alleged violations by Unocal of the California Business and
Professions Code and of an alleged contract by failing to provide the
plaintiffs 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, Unocal 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 California Supreme Court has denied review. No date
has been set for retrial. Pursuant to the asset purchase and related
agreements between the Company and Unocal, the Company believes that Unocal
is required to indemnify it for attorneys' fees and compensatory damages.
Unocal has contested certain of the amounts comprising 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
first quarter of 1998.
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ --------------------------------------------------------
<C> <S>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the first quarter of fiscal 1998, the Company filed no reports on
Form 8-K.
23
<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: May 14, 1998 By: /s/ James W. George
------------------------------------
Name: James W. George
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial
Officer and
Duly Authorized Officer)
<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 MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 71,349
<SECURITIES> 0
<RECEIVABLES> 58,353
<ALLOWANCES> 2,749
<INVENTORY> 34,342
<CURRENT-ASSETS> 176,094
<PP&E> 284,633
<DEPRECIATION> 0
<TOTAL-ASSETS> 493,618
<CURRENT-LIABILITIES> 98,864
<BONDS> 289,500
63,477
38
<COMMON> 14
<OTHER-SE> 35,967
<TOTAL-LIABILITY-AND-EQUITY> 493,618
<SALES> 207,690
<TOTAL-REVENUES> 213,324
<CGS> 147,150
<TOTAL-COSTS> 147,150
<OTHER-EXPENSES> 71,946
<LOSS-PROVISION> 276
<INTEREST-EXPENSE> 5,990
<INCOME-PRETAX> (11,762)
<INCOME-TAX> (4,479)
<INCOME-CONTINUING> (7,283)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,283)
<EPS-PRIMARY> (14.97)
<EPS-DILUTED> (14.97)
</TABLE>
