<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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> 2
<TABLE>
<CAPTION>
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
<S> <C> <C> <C>
Item 1. Consolidated Balance Sheet as of June 30, 1998 and December 3
31, 1997
Consolidated Statement of Income and Retained Earnings for 4
the three months ended June 30, 1998 and 1997 and for the
six months ended June 30, 1998 and 1997
Consolidated Statement of Cash Flows for the six months 5
ended June 30, 1998 and 1997
Selected Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 19
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Securityholders 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
-------------------------
ASSETS (IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Current assets:
Cash.............................................................................. $ 59,106 $ 71,756
Accounts receivable (less allowance for doubtful accounts of $2,709 for 1998 and
$2,707 for 1997)............................................................... 71,684 68,433
Inventories....................................................................... 37,207 33,718
Deferred income taxes............................................................. 4,390 3,740
Other current assets.............................................................. 9,574 10,256
---------- ----------
Total current assets......................................................... 181,961 187,903
Notes receivable, net................................................................ 1,545 1,692
Property and equipment, net.......................................................... 294,358 286,472
Intangible assets.................................................................... 15,833 15,651
Deferred financing costs............................................................. 11,049 11,786
Deferred income taxes................................................................ 384 -
Other assets......................................................................... 4,292 4,288
---------- ----------
Total assets................................................................. $ 509,422 $ 507,792
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................................. $ 500 $ 500
Accounts payable.................................................................. 35,471 29,035
Other accrued liabilities......................................................... 77,486 72,265
---------- ----------
Total current liabilities.................................................... 113,457 101,800
Commitments and contingencies (Note 7)
Long-term debt....................................................................... 289,375 289,625
Deferred income taxes................................................................ 1,115 4,985
Other long-term liabilities.......................................................... 5,552 4,479
---------- ----------
409,499 400,889
Mandatorily redeemable senior convertible participating preferred stock.............. 65,549 61,404
Other preferred stock, common stock and other stockholders' equity................... 43,570 43,945
Retained earnings (deficit).......................................................... (9,196) 1,554
---------- ----------
34,374 45,499
---------- ----------
Total liabilities and stockholders' equity................................... $ 509,422 $ 507,792
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
------------ ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Fuel.............................................................. $ 137,914 $ 179,839 $ 270,522 $ 373,483
Nonfuel........................................................... 86,187 75,397 161,224 135,731
Rent and royalties................................................ 5,436 9,641 11,114 20,776
---------- ---------- ---------- ----------
Total revenues.................................................... 229,537 264,877 442,860 529,990
Cost of revenues (excluding depreciation)............................ 157,373 198,811 304,583 404,689
---------- ---------- ---------- ----------
Gross profit (excluding depreciation)................................ 72,164 66,066 138,277 125,301
Operating expenses................................................... 46,094 41,460 90,779 75,544
Selling, general and administrative expenses......................... 9,428 8,949 18,368 20,681
Transition expense................................................... 881 5,473 1,874 7,091
Depreciation and amortization........................................ 8,027 7,352 24,571 14,296
Loss on sales of property and equipment.............................. 101 1,538 144 1,464
Other operating expense, net......................................... 292 - 972 -
---------- ---------- ---------- ----------
Income from operations............................................... 7,341 1,294 1,569 6,225
Interest (expense), net.............................................. (6,144) (5,862) (12,134) (10,967)
---------- ---------- ---------- ----------
Income (loss) before income taxes and extraordinary item............. 1,197 (4,568) (10,565) (4,742)
Provision (benefit) for income taxes................................. 519 (1,770) (3,960) (1,838)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item.............................. 678 (2,798) (6,605) (2,904)
Extraordinary loss (less applicable income tax benefit of $3,608).... - - - (5,554)
---------- ---------- ---------- ----------
Net income (loss).................................................... 678 (2,798) (6,605) (8,458)
Less: preferred dividends......................................... (2,073) (1,818) (4,145) (3,637)
Retained earnings (deficit) ?beginning of the period................. (7,801) 7,358 1,554 14,837
---------- ---------- ---------- ----------
Retained earnings (deficit) ?end of the period....................... $ (9,196) $ 2,742 $ (9,196) $ 2,742
========== ========== ========== ==========
Earnings per common share (basic and diluted):
Loss before extraordinary item.................................... $ (2.34) $ (4.29) $ (17.59) $ (5.67)
Extraordinary loss................................................ - - - (4.82)
--------- --------- --------- ---------
Net loss.......................................................... $ (2.34) $ (4.29) $ (17.59) $ (10.49)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
--------------------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ................................................................... $ (6,605) $ (8,458)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Extraordinary loss....................................................... - 5,554
Depreciation and amortization............................................ 24,571 14,295
Deferred income taxes.................................................... (4,904) -
Provision for doubtful accounts.......................................... 568 808
Loss on sale of property and equipment................................... 144 1,506
Changes in assets and liabilities, adjusted for the effects of
acquisitions of network assets:
Accounts receivable.................................................... (4,115) (5,383)
Inventories............................................................ (2,920) (1,569)
Other current assets................................................... 674 1,344
Accounts payable....................................................... 6,097 5,644
Other current liabilities.............................................. 5,094 4,441
Other, net............................................................... 711 86
---------- ----------
Net cash provided by operating activities................................ 19,315 18,268
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of network assets.............................................. (1,828) (7,901)
Proceeds from sales of property and equipment............................... 137 2,886
Capital expenditures........................................................ (29,649) (7,553)
---------- ----------
Net cash used in investing activities.................................... (31,340) (12,568)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loan borrowings................................................... - 3,750
Revolving loan repayments................................................... - (17,750)
Long-term debt borrowings................................................... - 205,000
Long-term debt repayments................................................... (250) (126,425)
Repurchase of common stock.................................................. (375) (2,205)
Debt issuance costs......................................................... - (12,357)
---------- ----------
Net cash provided by (used in) financing activities...................... (625) 50,013
---------- ----------
Net increase (decrease) in cash........................................ (12,650) 55,713
Cash at the beginning of the period............................................ 71,756 23,779
---------- ----------
Cash at the end of the period.................................................. $ 59,106 $ 79,492
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE
TravelCenters of America, Inc., (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 merged into
the Company as of such date).
The Company is a holding company which, through its wholly-owned
subsidiaries, owns, operates and franchises more full-service travel centers in
the United States than any of its competitors, with 127 network sites
nationwide, including 117 Company-owned locations. The Company currently
operates a network of 123 travel centers in 36 states under the "TravelCenters
of America" or "TA" brand names and a network of four travel centers in two
states under the licensed "Unocal 76" and related brand names.
The accompanying unaudited, consolidated financial statements as of and
for the three- and six-month periods ended June 30, 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- and six-month periods ended June 30, 1998 and 1997, and are not
necessarily indicative of the results to be expected for the full year.
2. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. EARNINGS PER SHARE
A reconciliation of the income and shares used in the computation of
earnings per share follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(DOLLARS AND SHARES IN (DOLLARS AND SHARES IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C>
Loss before extraordinary loss $ 678 $ (2,798) $ (6,605) $ (2,904)
Less: Preferred stock dividends (2,073) (1,818) (4,145) (3,637)
--------- --------- --------- ---------
Net loss available to common stockholders (1,395) (4,616) (10,750) (6,541)
Weighted average shares outstanding 596 1,119 611 1,175
--------- --------- --------- ---------
Loss per share $ (2.34) $ (4.13) $ (17.59) $ (5.57)
========= ========= ========= =========
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 three- and six-month periods ended June 30, 1998 and 1997.
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonfuel merchandise............................................ $ 35,380 $ 30,883
Petroleum products............................................. 1,827 2,835
---------- ----------
Total inventories........................................ $ 37,207 $ 33,718
========== ==========
</TABLE>
5. 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.
During 1997, a reserve of $559,000 was recorded to recognize the
impairment of certain sites held for sale. This impairment was based on the
estimated sales proceeds at that time. Based on current information available to
the Company, the estimated sales proceeds less costs to sell now exceed the
current carrying values of the related assets. Accordingly, the impairment
charge was reversed in June 1998. This amount is included in depreciation and
amortization in the statement of income and retained earnings.
6. 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.
7
<PAGE> 8
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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 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 $1,160,000 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.
8
<PAGE> 9
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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".
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.
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 judgment 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 judgment 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 judgment 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. The case has been scheduled for
retrial on October 5, 1998, and the discovery phase of the proceedings has
commenced. 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.
9
<PAGE> 10
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 1998
total $5,420,000, 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.
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
The following schedules set forth the consolidating balance sheets of
the Company as of June 30, 1998 and December 31, 1997, the consolidating
statements of income and retained earnings of the Company for the three months
and six months ended June 30, 1998 and 1997, and the consolidating statements of
cash flows of the Company for the six months ended June 30, 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> 11
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET SCHEDULES:
JUNE 30, 1998
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash.................................. $ 41,612 $ 17,494 $ - $ - $ 59,106
Accounts receivable, net.............. - 71,149 535 - 71,684
Inventories........................... - 37,207 - - 37,207
Deferred income taxes................. - 4,390 - - 4,390
Other current assets.................. 22,147 53,740 4,835 (71,148) 9,574
---------- ----------- ----------- ------------ ------------
Total current assets............. 63,759 183,980 5,370 (71,148) 181,961
Notes receivable, net.................... 908 637 - - 1,545
Property and equipment, net.............. - 294,358 - - 294,358
Intangible assets........................ - 15,833 - - 15,833
Deferred financing costs................. 11,049 - - - 11,049
Deferred income taxes.................... 1,804 (1,420) - - 384
Other assets............................. 730 7,262 - (3,700) 4,292
Investments in subsidiaries.............. 338,318 - - (338,318) -
---------- ----------- ----------- ------------ ------------
Total assets..................... $ 416,568 $ 500,650 $ 5,370 $ (413,166) $ 509,422
========== =========== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.. $ 500 $ - $ - $ - $ 500
Accounts payable...................... - 35,459 12 - 35,471
Other accrued liabilities............. 25,516 121,633 1,473 (71,136) 77,486
---------- ----------- ---------- ------------ ------------
Total current liabilities........ 26,016 157,092 1,485 (71,136) 113,457
Long-term debt........................... 289,375 - - - 289,375
Deferred income taxes.................... - 1,115 - - 1,115
Other liabilities........................ - 231,455 - (225,903) 5,552
---------- ----------- ---------- ------------ ------------
Total liabilities................ 315,391 389,662 1,485 (297,039) 409,499
Mandatorily redeemable senior convertible
participating preferred stock......... 65,549 - - - 65,549
Other preferred stock, common stock and
other stockholders' equity............ 44,824 84,879 - (86,133) 43,570
Retained earnings (deficit).............. (9,196) 26,109 3,885 (29,994) (9,196)
---------- ----------- ----------- ------------ ------------
35,628 110,988 3,885 (116,127) 34,374
---------- ----------- ----------- ------------ ------------
Total liabilities and $ 416,568 $ 500,650 $ 5,370 $ (413,166) $ 509,422
stockholders' equity.......... ========== =========== =========== ============ ============
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
-------------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash.................................. $ 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
Investments 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 $ 430,031 $ 463,006 $ 3,097 $ (388,342) $ 507,792
stockholders' equity.......... ========== ========== ========== ============- ==========
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF INCOME AND RETAINED EARNINGS SCHEDULES:
THREE MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
<S> <C> <C> <C> <C> <C>
Fuel................................... $ - $ 137,914 $ - $ - $ 137,914
Nonfuel................................ - 86,036 151 - 86,187
Rent and royalties..................... - 8,227 1,656 (4,447) 5,436
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 232,177 1,807 (4,447) 229,537
Cost of revenues (excluding depreciation). - 157,373 - - 157,373
---------- ---------- ---------- ---------- ------------
Gross profit (excluding depreciation)..... - 74,804 1,807 (4,447) 72,164
Operating expenses........................ 52 50,245 244 (4,447) 46,094
Selling, general and
administrative........................ 191 9,020 217 - 9,428
Transition expense........................ - 881 - - 881
Depreciation and amortization............. 373 7,654 - - 8,027
(Gain) loss on sale of property and
equipment.............................. - 101 - - 101
Other operating (income) expense, net..... - 292 - - 292
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (616) 6,611 1,346 - 7,341
Interest (expense), net................... (949) (5,195) - - (6,144)
Equity income (loss)...................... 1,711 - - (1,711) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ........ 146 1,416 1,346 (1,711) 1,197
Provision (benefit) for income taxes...... (532) 549 502 - 519
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... 678 867 844 (1,711) 678
Less: preferred dividends................. (2,073) - - - (2,073)
Retained (deficit) earnings - beginning
of the period.......................... (7,801) 25,242 3,041 (28,283) (7,801)
---------- ---------- ---------- ---------- ----------
Retained (deficit) earnings - end of the
period................................. $ (9,196) $ 26,109 $ 3,885 $ (29,994) $ (9,196)
========== ========== ========== ========== ==========
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
<S> <C> <C> <C> <C> <C>
Fuel................................... $ - $ 179,839 $ - $ - $ 179,839
Nonfuel................................ - 75,397 - - 75,397
Rent and royalties..................... - 9,294 347 - 9,641
---------- ---------- ---------- ---------- ----------
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........................ 62 8,460 427 - 8,949
Transition expense........................ - 5,473 - - 5,473
Depreciation and amortization............. 809 6,543 - - 7,352
(Gain) loss on sale of property and
equipment.............................. - 1,538 - - 1,538
Other operating (income) expense, net..... - - - - -
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (871) 2,245 (80) - 1,294
Interest (expense), net................... (6,156) 294 - - (5,862)
Equity income (loss)...................... 1,490 - - (1,490) -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes......... (5,537) 2,539 (80) (1,490) (4,568)
Provision (benefit) for income taxes...... (2,739) 997 (28) - (1,770)
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... (2,798) 1,542 (52) (1,490) (2,798)
Less: preferred dividends................. (1,818) - - - (1,818)
Retained earnings (deficit) - beginning of
the period............................. 7,358 31,008 1,003 (32,011) 7,358
---------- ---------- ---------- ---------- ----------
Retained earnings (deficit) - end of the
period................................. $ 2,742 $ 32,550 $ 951 $ (33,501) $ 2,742
========== ========== ========== ========== ==========
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
<S> <C> <C> <C> <C> <C>
Fuel................................... $ - $ 270,522 $ - $ - $ 270,522
Nonfuel................................ - 161,072 152 - 161,224
Rent and royalties..................... - 16,578 3,339 (8,803) 11,114
---------- ---------- ---------- ---------- ----------
Total revenues......................... - 448,172 3,491 (8,803) 442,860
Cost of revenues (excluding depreciation). - 304,583 - - 304,583
---------- ---------- ---------- ---------- ----------
Gross profit (excluding depreciation)..... - 143,589 3,491 (8,803) 138,277
Operating expenses........................ 106 99,096 380 (8,803) 90,779
Selling, general and
Administrative........................ 446 17,486 436 - 18,368
Refinancing, transition and development
costs.................................. - 1,874 - - 1,874
Depreciation and amortization............. 747 23,824 - - 24,571
(Gain) loss on sale of property and
equipment.............................. - 144 - - 144
Other operating (income) expense, net..... - 972 - - 972
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............. (1,299) 193 2,675 - 1,569
Interest (expense), net................... (1,828) (10,306) - - (12,134)
Equity income (loss)...................... (4,541) - - 4,541 -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ........ (7,668) (10,113) 2,675 4,541 (10,565)
Provision (benefit) for income taxes...... (1,063) (3,895) 998 - (3,960)
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... (6,605) (6,218) 1,677 4,541 (6,605)
Less: preferred dividends................. (4,145) - - - (4,145)
Retained earnings - beginning of the
period................................. 1,554 32,327 2,208 (34,535) 1,554
---------- ---------- ---------- ---------- ----------
Retained earnings - end of the period..... $ (9,196) $ 26,109 $ 3,885 $ (29,994) $ (9,196)
========== ========== ========== ========== ==========
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------------
PARENT GUARANTOR NONGUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
Revenues:
<S> <C> <C> <C> <C> <C>
Fuel................................... $ - $ 373,483 $ - $ - $ 373,483
Nonfuel................................ - 135,731 - - 135,731
Rent and royalties..................... - 20,082 694 - 20,776
---------- ---------- ---------- ---------- ----------
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........................ 255 19,726 700 - 20,681
Transition expense........................ - 7,091 - - 7,091
Depreciation and amortization............. 809 13,487 - - 14,296
(Gain) loss on sale of property and
equipment.............................. - 1,464 - - 1,464
Other operating (income) expense, net..... - - - - -
---------- ---------- ---------- ---------- ----------
Income (loss) 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 -
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item..................... (11,381) 2,762 (6) 3,883 (4,742)
Provision (benefit) for income taxes...... (2,923) 1,094 (9) - (1,838)
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item (8,458) 1,668 3 3,883 (2,904)
Extraordinary loss (less applicable income
tax benefit)........................... - (5,554) - - (5,554)
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... (8,458) (3,886) 3 3,883 (8,458)
Less: preferred dividends................. (3,637) - - - (3,637)
Retained earnings - beginning of the
period................................. 14,837 36,436 948 (37,384) 14,837
---------- ---------- ---------- ---------- ----------
Retained earnings - end of the period..... $ 2,742 $ 32,550 $ 951 $ (33,501) $ 2,742
========== ========== ========== ========== ==========
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF CASH FLOW SCHEDULES:
SIX MONTHS ENDED JUNE 30, 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.................. $ (17,355) $ 36,670 $ - $ - $ 19,315
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. - (29,649) - - (29,649)
Proceeds from sales of
property and equipment.............. - 137 - - 137
Acquisitions of network assets........ - (1,828) - - (1,828)
Net cash used in investing
activities....................... - (31,340) - - (31,340)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt repayments............. (250) - - - (250)
Repurchase of common stock.......... (375) - - - (375)
---------- ---------- ---------- ---------- ----------
Net cash used in financing
activities....................... (625) - - - (625)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash......... (17,980) 5,330 - - (12,650)
Cash at the beginning of the period...... 59,592 12,164 - - 71,756
---------- ---------- ---------- ---------- ----------
Cash at the end of the period............ $ 41,612 $ 17,494 $ - $ - $ 59,106
========== ========== ========== ========== ==========
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
TRAVELCENTERS OF AMERICA, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 PROVIDED BY 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 - - -
Repurchase of common stock............ (2,205) - - - (2,205)
Debt issuance costs................... (12,357) - - - (12,357)
---------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities............. 51,538 (1,525) - - 50,013
---------- ------------ ------------ ------------ ------------
Net increase in cash............. 50,948 4,765 - - 55,713
Cash at the beginning of the period...... - 23,779 - - 23,779
---------- ------------ ------------ ------------ ------------
Cash at the end of the period............ $ 50,948 $ 28,544 $ - $ - $ 79,492
========== ============ ============ ============ ============
</TABLE>
18
<PAGE> 19
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
117 Company-owned locations. The Company currently operates a network of 123
travel centers in 36 states under the "TravelCenters of America" or "TA" brand
names and a network of four travel centers in two 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 and six months ended June 30, 1998, the Company
incurred approximately $0.9 million and $1.9 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 $20.0 million, of which approximately $3.0 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.
Two of these sales took place in the first half 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, and one sale was
finalized during the second quarter of 1998. One additional sale was completed
in July 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 percentage of the franchisees' nonfuel revenues and a decrease in
fixed rent revenue. The Company expects these
19
<PAGE> 20
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 June 30, 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. Three such conversions were
completed in the second quarter of 1998, and one additional conversion was
completed on July 15, 1998.
Management expects that, over time, the increases in 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
---------------------- -----------------------
JUNE 30, JUNE 30,
---------------------- -----------------------
1998(1) 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Company-owned and operated sites 84 40 - 35
Company-owned and leased sites 29 - 4 58
-------- -------- -------- --------
Company-owned sites 113 40 4 93
Franchisee-owner sites 10 8 - 21
-------- -------- -------- --------
Total 123 48 4 114
======== ======== ======== ========
Stand-alone shops 2 2 - -
======== ======== ======== ========
</TABLE>
(1) Excludes two closed sites as of June 30, 1998.
RESULTS OF OPERATIONS FOR THE SIX- AND THREE-MONTH PERIODS
ENDED JUNE 30, 1998 AND 1997
Revenues
The Company's consolidated revenues for the three- and six-month
periods ended June 30, 1997 were $229.5 million and $442.9 million,
respectively, which represent decreases from the prior periods of $35.3 million,
or 13.3% for the three-month period and $87.1 million, or 16.4% for the
six-month period.
20
<PAGE> 21
Fuel revenue for the six months ended June 30, 1998 reflects a decrease
of $103.0 million, or 27.6%. For the second quarter, the 1998 amount reflects a
decrease from the same period in 1997 of $41.9 million, or 23.3%. The decrease
in fuel revenue for the three- and six-month periods is a result of decreased
diesel volumes combined with a decrease in diesel pump prices. For the three
months and six months ended June 30, 1998, diesel volumes decreased 6.3% and
9.0% between years, respectively, which is the result of a decrease in the total
number of sites between years, offset by increased volumes at continuing sites.
Average diesel sale prices decreased 10.1% and 18.5%, for the same periods,
respectively, as a result of declines in the cost of crude oil.
Nonfuel revenues for the quarter ended June 30, 1998 increased 14.3% to
$86.2 million from $75.4 million for the same period in 1997. For the six-month
period ended June 30, 1998 nonfuel revenues increased 18.8% to $161.2 million
from $135.7 million for the same period in 1997. These increases are 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 both 1998 periods 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 former National franchisees sign new franchise and lease
agreements with TAFSI. 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 two quarters of 1998 and 1997
decreased 22.3% between years. Royalty revenues for franchisee locations in the
Network in the first two quarters of both 1998 and 1997 increased 75.7% between
years. 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 second quarter of 1998 was $72.2
million, compared to $66.1 million for 1997, an increase of $6.1 million, or
9.2%. Year-to-date gross profit through June 30, 1998 was $138.3 million
compared to $125.3 million for 1997, an increase of $13.0 million, or 10.4%. The
increases in the Company's gross profit were 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 $4.6 million, or 11.1%,
to $46.1 million for the three-month period ended June 30, 1998. Operating
expenses for the six-month period ending June 30, 1998 increased by $15.2
million, or 20.1%, to $90.8 million. These increases reflect the increased
number of Company-operated Sites from the conversion of Leased Sites that
occurred throughout 1997.
The Company's SG&A for the second quarter increased from $8.9 million
in 1997 to $9.4 million in 1998. Year-to-date SG&A expense decreased from $20.7
million in 1997 to $18.4 million in 1998. The year-to-date reductions in SG&A
are primarily a result of 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.
Transition Expense
Transition expenses for the six months ended June 30, 1998 were $1.9
million, compared to $7.1 million for the same period in 1997. For the three
months ended June 30, 1998, these expenses were $0.9 million, compared to $5.5
million for the same period in 1997. 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.
21
<PAGE> 22
Depreciation and Amortization
Depreciation and amortization for the second quarter of 1998 was $8.0
million, compared to $7.4 million for the same period in the prior year.
Depreciation for the six-month period ending June 30, 1998 was $24.6 million,
compared to $14.3 million for the same period in 1997.
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. In addition, an impairment
reserve of $0.6 million recorded in the 1997 fourth quarter with respect to
certain sites being held for sale was completely reversed in the 1998 second
quarter. This reversal was based on increases in the estimated sales prices of
the respective sites.
Income from Operations
Income from operations was $7.3 million for the second quarter of 1998,
compared to $1.3 million for the second quarter of 1997. This is a result of an
increase in gross profit of $6.1 million, a decrease in transition expense of
$4.6 million and a decrease in losses on sales of property and equipment of $1.4
million, offset by increases in operating expenses of $4.6 million, increases in
SG&A of $0.5 million and increases in depreciation expense of $0.7 million.
Income from operations was $1.6 million for the six months ended June
30, 1998, compared to $6.2 million for the six months ended June 30, 1997. This
is a result of an increase in gross profit of $13.0 million, a decrease in
transition expense of $5.2 million, decreases in SG&A of $2.3 million and a
decrease in losses on sales of property and equipment of $1.3 million, offset by
increases in operating expenses of $15.2 million, increases in depreciation
expense of $10.3 million and other expense of $1.0 million.
EBITDA (defined as income from operations plus the sum of (a)
depreciation, amortization and other non-cash charges, (b) transition expense
and (c) gains or losses from sales of property and equipment) for the Company
for the three- and six-month periods ending June 30, 1998 was $17.2 million and
$29.9 million, respectively, compared to $15.7 million and $29.1 million for the
respective 1997 periods.
Interest Expense - Net
Interest expense for the first quarter and first half of 1998 was $0.3
million and $1.2 million higher than the same periods in the prior year as a
result of the increased debt balance after the 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 $19.3 million for the
first half of 1998, compared to $18.3 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 combined with reduced net losses.
Net cash used in investing activities increased to $31.3 million for
the first half of 1998, up from $12.6 million for the first half of 1997. The
increase is primarily the result of increases in capital expenditures offset by
the decrease in the acquisitions 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 June 30, 1998, although one such conversion was
completed in July 1998, and a few additional conversions remain possible. The
increase in capital expenditures between years is 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 requirements which will take effect on
December 22, 1998.
22
<PAGE> 23
Net cash used in financing activities was $0.6 million during the first
half of 1998, compared to $50.0 million generated during the first half of 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 $289.9 million of indebtedness, consisting of $125.0 million
principal amount of Senior Subordinated Notes, $85.5 million principal amount of
Senior Notes and a $79.4 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 June 30, 1998. The Senior Notes have no
amortization requirements until 2001, the Senior Subordinated Notes are due in
2007 and the term facility has annual amortization requirements of $0.5 million
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.
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 $1.2
million as of June 30, 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 is currently in the process of making its information
technology systems ("IT") Year 2000 compliant. As a result of the Combination,
management determined a new IT system would be required to handle the combined
operations of TA and National, as neither TA nor National's current IT systems
have the capability of handling the combined operations as effectively as
desired. To this end, the Company has begun implementing a new IT system that
will replace substantially all of the older IT systems that were in use. The new
IT system is fully Year 2000 compliant, and management expects to begin using
the new system during the second quarter of 1999. This implementation has not
been accelerated due to Year 2000 issues. Only minor modifications are necessary
to older systems that will continue to be used, such as the Access 76 fleet
billing system and various retail point of sale systems, and management
anticipates these modifications will be completed and tested prior to December
31, 1999. The costs of these modifications are not expected to be material to
the Company's financial position or results of operations.
23
<PAGE> 24
The Company has not yet determined what its most reasonably likely Year
2000 worst case scenario would be and, consequently, has not yet prepared a
contingency plan for dealing with that scenario. Management believes the
Company's efforts to ensure its IT systems are Year 2000 compliant are adequate
and, thus, the greatest risk lies with third parties. The Company is currently
surveying its customers, vendors, and third-party billing providers to determine
their state of readiness for Year 2000 processing. When that process is
complete, an assessment of the most reasonably likely worst case scenario will
be made, and a contingency plan to deal with that scenario will be developed.
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
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 June 30, 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. The case has been scheduled for retrial on October 5, 1998, and
the discovery phase of the proceedings has commenced. 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
24
<PAGE> 25
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
The Annual Meeting of Stockholders of TravelCenters of America, Inc.
was held on May 7, 1998, for the purpose of electing a board of directors and
approving an amendment to the Company's Restated Certificate of Incorporation.
The nominees Harrison T. Bubb, Robert B. Calhoun, Jr., Margaret M. Eisen, Edwin
P. Kuhn, Eugene P. Lynch, Louis J. Mischianti and Rolf H. Towe were all elected
by the following vote:
<TABLE>
<CAPTION>
<S> <C> <C>
Shares Voted "For" 2,780,183
Shares Voted "Against" 405,000
Shares "Withheld" 0
The amendment to the Company's Restated Certificate of Incorporation was
approved by the following vote:
Shares Voted "For" 5,460,839
Shares Voted "Against" 405,000
Shares "Withheld" 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ----------------- --------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1* Restated Certificate of Incorporation of the Company
3.2 Certificate of Amendment to the Restated Certificate of Incorporation of the Company.
27 Financial Data Schedule
* Incorporated herein by reference to exhibits filed with the Company's Registration Statement on Form S-4
(File No. 333-26497) effective July 17, 1997.
(b) Reports on Form 8-K
During the second quarter of 1998, the Company filed no reports on Form 8-K.
</TABLE>
25
<PAGE> 26
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: August 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)
26
<PAGE> 1
Exhibit 3.2
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
TRAVELCENTERS OF AMERICA, INC.
------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
------------------------------------
TravelCenters of America, Inc., a Delaware corporation (hereinafter
referred to as the "Corporation"), does hereby certify as follows:
FIRST: Section 8.1 of the Corporation's Restated Certificate of
Incorporation is hereby amended to read in its entirety as set forth below:
8.1 To the extent not prohibited by law, the Corporation shall
indemnify any person who is or was made, or threatened to be made, a party to
any threatened, pending or completed action, suit or proceeding (a
"PROCEEDING"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a Director or
officer of the Corporation, or at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, joint venture,
trust, employee benefit plan or other enterprise (an "OTHER ENTITY"), all such
persons being deemed to be "Eligible Persons" against judgments, fines,
penalties, excise taxes, amounts paid in settlement and costs, charges and
expenses (including attorneys' fees, disbursements and other charges). Persons
who are not Directors or officers of the Corporation (or otherwise entitled to
indemnification pursuant to the preceding sentence) may be similarly indemnified
in respect of service to the Corporation or to an Other Entity to the extent the
Board at any time specifies that such persons are entitled to the benefits of
this Section 8.
SECOND: The foregoing amendment was duly adopted in accordance with
Section 242 of the General Corporation Law of the State of Delaware.
<PAGE> 2
IN WITNESS WHEREOF, TravelCenters of America, Inc. has caused this
Certificate to be duly executed in its corporate name this 24th day of July,
1998.
TRAVELCENTERS OF AMERICA, INC.
By: /s/ Edwin P. Kuhn
-----------------
Name: Edwin P. Kuhn
Title: President and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30,
1998, 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 59,106
<SECURITIES> 0
<RECEIVABLES> 74,393
<ALLOWANCES> 2,709
<INVENTORY> 37,207
<CURRENT-ASSETS> 181,961
<PP&E> 294,358
<DEPRECIATION> 0
<TOTAL-ASSETS> 509,422
<CURRENT-LIABILITIES> 113,457
<BONDS> 289,375
65,549
38
<COMMON> 14
<OTHER-SE> 34,322
<TOTAL-LIABILITY-AND-EQUITY> 509,422
<SALES> 431,746
<TOTAL-REVENUES> 442,860
<CGS> 304,583
<TOTAL-COSTS> 304,583
<OTHER-EXPENSES> 136,140
<LOSS-PROVISION> 568
<INTEREST-EXPENSE> 12,134
<INCOME-PRETAX> (10,565)
<INCOME-TAX> (3,960)
<INCOME-CONTINUING> (6,605)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,605)
<EPS-PRIMARY> (17.59)
<EPS-DILUTED> (17.59)
</TABLE>
