Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2008

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934

 

Commission File Number 001-33274

 

TRAVELCENTERS OF AMERICA LLC

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-5701514

(State or Other Jurisdiction of Incorporation or

 

(I.R.S. Employer Identification No.)

Organization)

 

 

 

24601 Center Ridge Road, Suite 200, Westlake, OH  44145-5639

(Address of Principal Executive Offices)

 

(440) 808-9100

(Registrant’s 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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o  No x

 

Number of Common Shares outstanding at August 8, 2008: 14,504,185 common shares.

 

 

 



Table of Contents

 

TRAVELCENTERS OF AMERICA LLC

 

FORM 10-Q

 

June 30, 2008

 

INDEX

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2008, and December 31, 2007

1

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the three months ended June 30, 2008, and the three months ended June 30, 2007 for TravelCenters of America LLC.

2

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the six months ended June 30, 2008, and the five months ended June 30, 2007, for TravelCenters of America, LLC, and the one month ended January 31, 2007 for TravelCenters of America, Inc. (predecessor)

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2008, and the five months ended June 30, 2007 for TravelCenters of America LLC, and the one month ended January 31, 2007, for TravelCenters of America, Inc. (predecessor)

4

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

5

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

 

Item 4T.

 

Controls and Procedures

28

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

 

Legal Proceedings

29

 

 

 

 

Item 1A.

 

Risk Factors

29

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

30

 

 

 

 

Item 5.

 

Other Information

30

 

 

 

 

Item 6.

 

Exhibits

32

 

 

 

 

 

 

Warning Concerning Forward Looking Statements

33

 

 

 

 

SIGNATURE

35

 

As used herein the terms “we”, “us”, “our” and “TA” include TravelCenters of America LLC and its consolidated subsidiaries unless otherwise expressly stated or the context otherwise requires.

 



Table of Contents

 

Part I.  Financial Information

 

Item 1.  Financial Statements

 

TravelCenters of America LLC

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

106,347

 

$

148,876

 

Restricted cash

 

 

4,801

 

Restricted investments

 

 

271,415

 

Accounts receivable (less allowance for doubtful accounts of $3,120 as of June 30, 2008 and $2,327 as of December 31, 2007)

 

169,424

 

110,555

 

Inventories

 

155,411

 

148,005

 

Leasehold improvement receivable

 

13,139

 

25,000

 

Other current assets

 

55,132

 

37,362

 

Total current assets

 

499,453

 

746,014

 

 

 

 

 

 

 

Property and equipment, net

 

420,740

 

397,266

 

Intangible assets, net

 

37,718

 

39,962

 

Leasehold improvement receivable

 

10,428

 

63,320

 

Other noncurrent assets

 

16,675

 

16,759

 

 

 

 

 

 

 

Total assets

 

$

985,014

 

$

1,263,321

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long term debt

 

$

 

$

262,866

 

Accounts payable

 

212,633

 

154,906

 

Other current liabilities

 

138,657

 

150,011

 

Total current liabilities

 

351,290

 

567,783

 

Other noncurrent liabilities

 

55,995

 

55,479

 

Capital lease obligations

 

104,779

 

105,859

 

Deferred rental allowance

 

91,376

 

94,760

 

Total liabilities

 

603,440

 

823,881

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, no par value, 14,506,705 and 14,489,265 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively

 

540,027

 

539,476

 

Accumulated other comprehensive income

 

1,068

 

1,272

 

Accumulated deficit

 

(159,521

)

(101,308

)

Total shareholders’ equity

 

381,574

 

439,440

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

985,014

 

$

1,263,321

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1



Table of Contents

 

TravelCenters of America LLC

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Fuel

 

$

1,963,803

 

$

1,222,286

 

Non-fuel

 

310,392

 

261,545

 

Rent and royalties

 

3,630

 

2,941

 

Total revenues

 

2,277,825

 

1,486,772

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

Fuel

 

1,903,502

 

1,181,476

 

Non-fuel

 

131,397

 

110,289

 

Total cost of goods sold (excluding depreciation)

 

2,034,899

 

1,291,765

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Site level operating

 

159,403

 

125,512

 

Selling, general & administrative

 

23,289

 

25,278

 

Real estate rent

 

58,411

 

46,969

 

Depreciation and amortization

 

11,134

 

8,029

 

Total operating expenses, net

 

252,237

 

205,788

 

 

 

 

 

 

 

Loss from operations

 

(9,311

)

(10,781

)

 

 

 

 

 

 

Equity in income of joint venture

 

268

 

190

 

Interest income

 

2,109

 

3,822

 

Interest expense

 

(2,673

)

(3,530

)

Loss before income taxes

 

(9,607

)

(10,299

)

Provision (benefit) for income taxes

 

150

 

(3,960

)

Net loss

 

(9,757

)

(6,339

)

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

Foreign currency translation adjustments, (net of taxes of $(36) and $(222), respectively)

 

199

 

445

 

Comprehensive loss

 

$

(9,558

)

$

(5,894

)

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic and diluted

 

14,206

 

8,809

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$

(0.69

)

$

(0.72

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2



Table of Contents

 

TravelCenters of America LLC

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

(in thousands, except per share data)

 

 

 

Company

 

 

Predecessor

 

 

 

Six Months

 

Five Months

 

 

One Month

 

 

 

Ended

 

Ended

 

 

Ended

 

 

 

June 30, 2008

 

June 30, 2007

 

 

January 31, 2007

 

Revenues:

 

 

 

 

 

 

 

 

Fuel

 

$

3,583,085

 

$

1,818,429

 

 

$

285,053

 

Non-fuel

 

595,445

 

400,269

 

 

66,795

 

Rent and royalties

 

7,160

 

4,428

 

 

834

 

Total revenues

 

4,185,690

 

2,223,126

 

 

352,682

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

 

 

 

Fuel

 

3,480,773

 

1,760,878

 

 

270,694

 

Non-fuel

 

249,539

 

166,523

 

 

27,478

 

Total cost of goods sold (excluding depreciation)

 

3,730,312

 

1,927,401

 

 

298,172

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Site level operating

 

317,965

 

197,886

 

 

36,093

 

Selling, general & administrative

 

56,042

 

37,024

 

 

8,892

 

Real estate rent

 

116,093

 

74,259

 

 

931

 

Depreciation and amortization

 

22,071

 

13,357

 

 

5,786

 

Merger related

 

 

 

 

44,972

 

Total operating expenses, net

 

512,171

 

322,526

 

 

96,674

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(56,793

)

(26,801

)

 

(42,164

)

 

 

 

 

 

 

 

 

 

Debt extinguishment expenses

 

 

 

 

(16,140

)

Equity in income of joint venture

 

356

 

190

 

 

 

Interest income

 

5,309

 

5,117

 

 

1,131

 

Interest expense

 

(6,738

)

(4,267

)

 

(5,345

)

Loss before income taxes

 

(57,866

)

(25,761

)

 

(62,518

)

Provision (benefit) for income taxes

 

347

 

(9,804

)

 

(40,470

)

Net loss

 

(58,213

)

(15,957

)

 

(22,048

)

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, (net of taxes of $70, $(273) and $(47), respectively)

 

(204

)

567

 

 

(47

)

Comprehensive loss

 

$

(58,417

)

$

(15,390

)

 

$

(22,095

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic and diluted

 

14,202

 

8,809

 

 

6,937

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$

(4.10

)

$

(1.81

)

 

$

(3.18

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

TravelCenters of America LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Company

 

 

Predecessor

 

 

 

Six Months

 

Five Months

 

 

One Month

 

 

 

Ended

 

Ended

 

 

Ended

 

 

 

June 30, 2008

 

June 30, 2007

 

 

January 31, 2007

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(58,213

)

$

(15,957

)

 

$

(22,048

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Noncash rent expense

 

4,099

 

7,457

 

 

34

 

Cash received for leasehold improvements sold to Hospitality Trust

 

67,729

 

8,664

 

 

 

Share based compensation expense

 

550

 

 

 

4,268

 

Depreciation and amortization

 

22,071

 

13,357

 

 

5,786

 

Equity in income of joint venture

 

(356

)

(190)

 

 

 

Amortization of debt premium

 

 

(1,077

)

 

 

Amortization of deferred financing costs

 

119

 

 

 

267

 

Debt extinguishment expenses

 

 

 

 

16,140

 

Deferred income tax provision

 

 

(854

)

 

(33,827

)

Provision for doubtful accounts

 

726

 

262

 

 

50

 

Unrealized gain on restricted investments

 

 

(805

)

 

 

Changes in assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

(59,479

)

(18,476

)

 

9,112

 

Inventories

 

(7,422

)

(11,540

)

 

4,779

 

Other current assets

 

(17,768

)

(20,401

)

 

(10,452

)

Accounts payable and other current accrued liabilities

 

66,745

 

12,574

 

 

59,966

 

Other, net

 

(5,917

)

(4,986

)

 

5,950

 

Net cash provided by (used in) operating activities

 

12,884

 

(31,972

)

 

40,025

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisitions of businesses

 

 

(25,577

)

 

 

Proceeds from asset sales

 

2,726

 

 

 

35

 

Proceeds from assets sold to Hospitality Trust

 

 

1,438

 

 

 

    Capital expenditures

 

(62,913

)

(39,328

)

 

(7,176

)

Net cash used in investing activities

 

(60,187

)

(63,467

)

 

(7,141

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Decrease in checks drawn in excess of bank balances

 

 

 

 

(8,170

)

Long term debt repayments

 

 

 

 

(54

)

Cash security for letters of credit refunded (deposited)

 

4,801

 

(36,360

)

 

 

Net cash provided by (used in) financing activities

 

4,801

 

(36,360

)

 

(8,224

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(27

)

(7

 

(7

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

(42,529

)

(131,806

)

 

24,653

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

148,876

 

245,010

 

 

55,297

 

Cash and cash equivalents at the end of the period

 

$

106,347

 

$

113,204

 

 

$

79,950

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except for per share amounts)

 

1.                                      Basis of Presentation, Business Description and Organization

 

TravelCenters of America LLC, which we refer to as the Company, we, us and our, operates and franchises travel centers under the “TravelCenters of America,” “TA” and “Petro” brands primarily along the U.S. interstate highway system. Our customers include trucking fleets and their drivers, independent truck drivers and motorists.  Our travel centers are typically 20 to 25 acre sites and provide our customers with diesel fuel and gasoline as well as nonfuel products and services such as truck repair and maintenance services, full service restaurants, quick service restaurants, travel and convenience stores and various other driver services. We also collect rents and franchise royalties from our franchisees.

 

The accompanying condensed consolidated financial statements are unaudited. The unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, applicable for interim financial statements. Therefore, the disclosures do not include all the information necessary for complete financial statements in accordance with GAAP.  These unaudited interim financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2007.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

 

At June 30, 2008, our business included 236 travel centers in 41 states and in Canada, 167 of which were operated under the “Travel Centers of America” or “TA” brand names and 69 that were operated under the “Petro” brand name. We operated 189 of these travel centers, which we refer to as Company operated sites, and our franchisees operated 47 of these travel centers including 10 travel centers which our franchisees sublease from us and 37 travel centers which our franchisees own or lease from other lessors.

 

We were formed as a Delaware limited liability company on October 10, 2006. Our initial capitalization of one dollar was provided by Hospitality Properties Trust, or Hospitality Trust, on our formation date. Until January 31, 2007, we were a wholly owned, indirect subsidiary of Hospitality Trust that conducted no business activities.  On January 31, 2007, Hospitality Trust acquired Travel Centers of America, Inc., our predecessor, through a merger of a subsidiary of ours with and into TravelCenters of America, Inc., restructured the business of our predecessor and distributed our then outstanding shares to Hospitality Trust shareholders in a spin off transaction.  The principal effects of the restructuring were that (i) our predecessor became our 100% owned subsidiary, (ii) subsidiaries of Hospitality Trust that we do not own became owners of the real estate at substantially all of the travel centers and certain other assets previously owned by our predecessor, (iii) we entered a lease for that real estate and those other assets with Hospitality Trust, which we refer to as the TA Lease, and (iv) all of the outstanding indebtedness of our predecessor was repaid in full.  We refer to these January 31, 2007 events as the HPT Transaction (see Note 3). We retained the balance of the assets previously owned by our predecessor and continued their operations.  We sometimes refer to Hospitality Trust and the subsidiaries of Hospitality Trust from which we lease properties collectively as Hospitality Trust.

 

On May 30, 2007, we acquired Petro Stopping Centers, L.P., or Petro, from Petro Stopping Centers Holdings, L.P., or Petro Holdings, which transaction we refer to as the Petro Acquisition (see Note 3).  Also on May 30, 2007, Hospitality Trust acquired Petro Holdings, which owned the real estate of 40 Petro travel centers.  Simultaneously with Hospitality Trust’s acquisition of this real estate, we leased these 40 travel centers from Hospitality Trust. We refer to this lease as the Petro Lease.

 

2.                                      Recently Issued Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements”, or FAS 157. FAS 157 provides a common fair value hierarchy for companies to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how such fair value measurements were developed. FAS 157 clarifies the principle that fair value should be based on the assumptions that the marketplace would use when pricing an asset or liability, rather than company specific data.  FAS 157 is effective for fiscal years beginning after November 15, 2007.  However, on February 12, 2008, the FASB issued Staff Position 157-2 which delayed the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair

 

5



Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except for per share amounts)

 

value in the financial statements on a recurring basis. For items within its scope, this Staff Position defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008.  The Company adopted FAS 157 effective January 1, 2008 for its financial assets and liabilities and this adoption did not have a material effect on the consolidated financial statements.  The Company does not believe that the adoption , effective January 1, 2009, of FAS 157 for its non-financial assets and liabilities will have a material effect on the consolidated financial statements.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations”, or FAS 141(R).  FAS 141(R) establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any non-controlling interest in the acquiree and goodwill acquired in a business combination.  FAS 141(R) is effective for fiscal years beginning after December 15, 2008.  We are currently evaluating the effect that adopting FAS 141(R) will have on our consolidated financial statements.

 

3.                                      HPT Transaction and Petro Acquisition

 

On January 31, 2007, the HPT Transaction was consummated and we entered the TA Lease.  On May 30, 2007, we consummated the Petro Acquisition and entered the Petro Lease.  Significant differences exist between our statement of operations and comprehensive income (loss) and that of our predecessor.

 

The following unaudited pro forma information presents our results of operations for the 2007 periods as if both the HPT Transaction and the Petro Acquisition had occurred on January 1, 2007:

 

 

 

Three Months
Ended June 30,
2007

 

Six Months
Ended June 30,
2007

 

 

 

 

 

 

 

Total revenues

 

$

1,856,708

 

$

3,450,135

 

Net loss

 

$

(21,961

)

$

(76,607

)

Loss per common share

 

$

(2.49

)

$

(8.90

)

 

These pro forma results of operations are presented for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the HPT Transaction and the Petro Acquisition occurred at the beginning of the period presented, or that may result in the future.  The pro forma results for the six months ended June 30, 2007 include $66,554 of merger related expenses, $16,662 of debt extinguishment expenses and $4,268 of share based compensation expense, each incurred by our predecessor or Petro as a result of the HPT Transaction or our Petro Acquisition, and $8,369 of expenses related to employee retention and separation payments.  The pro forma results for the three months ended June 30, 2007 include $21,582 of merger related expenses and $522 of debt extinguishment expenses incurred by Petro as a result of our Petro Acquisition, and $6,449 of expenses related to employee retention and separation payments.  We do not include motor fuel taxes in our fuel revenues and fuel cost of sales; however prior to the Petro Acquisition, Petro included motor fuel taxes in their fuel revenues and fuel cost of sales.  For purposes of the pro forma presentation provided above, these amounts, for periods prior to May 30, 2007, have not been removed from Petro’s reported revenues prior to the Petro Acquisition.  For the three months ended June 30, 2007, the total revenues presented above include $52,161 of motor fuel taxes that were also included in fuel cost of sales.  For the six months ended June 30, 2007, the total revenues presented above include $130,240 of motor fuel taxes that were also included in fuel cost of sales.

 

6



Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except for per share amounts)

 

4.                                      Earnings Per Share

 

As of the date of the HPT Transaction and continuing through June 30, 2008 we did not have any share options or warrants outstanding.  Shares granted under our equity incentive plan are included in our basic and fully diluted weighted average share counts except to the extent of unvested shares, which would have had an anti-dilutive effect on loss per share for the periods ended June 30, 2008.  The assumed exercise of our predecessor’s stock options and warrants, all of which were cancelled in connection with the HPT Transaction, would have had an anti-dilutive effect on loss per share for the one month period ended January 31, 2007.

 

5.                                      Inventories

 

Inventories consisted of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Non-fuel merchandise

 

$

110,754

 

$

105,222

 

Petroleum products

 

 

44,657

 

 

42,783

 

Total inventories

 

$

155,411

 

$

148,005

 

 

6.                                      Restricted Investments and Current Maturities of Long Term Debt

 

The 9% Notes.  Simultaneously with the Petro Acquisition, we and Hospitality Trust made arrangements to call Petro’s 9% Senior Secured Notes due 2012, which we refer to as the 9% Notes, by depositing with the trustee for the 9% Notes U.S. Treasury obligations sufficient to effect a covenant defeasance, to pay all of the interest due on the 9% Notes until the redemption date and to pay the full amount of the 9% Notes, including the redemption premium, on the redemption date of February 15, 2008. On December 31, 2007, $250,000 in principal amount of the 9% Notes was outstanding.  The 9% Notes were our obligations and remained so until the redemption date, and are included on our balance sheet as of December 31, 2007, at their estimated fair value, which includes the redemption premium.  On February 15, 2008, we paid the 9% Notes, the redemption premium and accrued interest using funds from the restricted investments that had been held by the trustee for that purpose.

 

Revolving Credit Facility.  We have a $100,000 revolving credit agreement, or credit facility, under which a maximum of $100,000 may be drawn, repaid and redrawn until maturity in November 2012. The maximum amount is subject to limits based on qualified collateral. The credit facility may be used for general business purposes and provides for the issuance of letters of credit. Generally, no principal payments are due until maturity. Credit facility borrowings bear interest at LIBOR plus a spread (currently 100 basis points, subject to adjustment based upon facility availability, utilization and other requirements), and are secured principally by our accounts receivable and inventory.  On July 8, 2008, we entered an amendment to the credit facility to add certain previously excluded receivables and inventory as qualified collateral, subject to completion of lender due diligence.

 

The credit facility requires maintenance of collateral, limits the incurrence of debt and liens, restricts the making of certain investments and the payment of dividends and other distributions, requires a minimum fixed charge ratio under certain circumstances and has other customary covenants, events of default and other provisions. The credit facility provides for acceleration of principal and interest payments upon an event of default. Events of default include, but are not limited to, failure to pay interest or other amounts due, a change in control of us, as defined in the credit facility, and our default of the lease agreements with Hospitality Trust or our management and shared services agreement with Reit Management & Research LLC, or Reit Management.

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except for per share amounts)

 

At December 31, 2007 and June 30, 2008, there were no amounts outstanding under our revolving credit facility, but at June 30, 2008, we had issued $69,442 of letters of credit under this facility, which we caused to be issued to secure certain purchases, insurance, fuel tax and other trade obligations.

 

7.                                      Shareholders’ Equity and Equity Incentive Plans

 

On January 31, 2007, as part of the HPT Transaction, Hospitality Trust distributed 8,808,575 of our common shares to its shareholders in a spin off transaction.  In July and August 2007 we issued an additional 5,335,090 of our common shares in a public offering.

 

Equity Incentive Plans.  An aggregate of 2,000,000 of our common shares are reserved for issuance under the terms of our 2007 Equity Compensation Plan, or the Plan.  During the six months ended June 30, 2008, 25,000 shares were awarded under the Plan.  These shares were valued at $56, based upon the closing price of our shares on the American Stock Exchange on the date of the grant.  As of June 30, 2008, 1,636,960 shares remained available for issuance under our Plan.  We recognized $349 and $550 of noncash share based compensation expense for the three and six month periods ended June 30, 2008, respectively, and recognized no such expense during the five months ended June 30, 2007.

 

Our predecessor had a share option plan that we did not assume. All 939,375 share options that were outstanding under our predecessor’s share option plan as of December 31, 2006 were cancelled as part of the HPT Transaction on January 31, 2007. Our predecessor recognized share based compensation expense of $4,268 in January 2007 when its outstanding options vested and were cancelled as a result of the HPT Transaction.

 

8.                                      Related Party Transactions

 

One of our Managing Directors, Barry Portnoy, is a managing trustee of Hospitality Trust and the Chairman and majority owner of Reit Management.  Our other Managing Director and President and our Treasurer and Chief Financial Officer are also senior vice presidents of Reit Management.  In addition to providing services to us, Reit Management also provides services to Hospitality Trust.  For these reasons, we consider Hospitality Trust and Reit Management to be related parties.  For a more complete description of the relationships among us, Hospitality Trust and Reit Management, please review the contracts among these parties which are publicly available as exhibits to our public filings with the Securities and Exchange Commission, or the SEC, and are accessible at the SEC website, www.sec.gov, and also see our descriptions of these relationships in our Proxy Statement for our 2008 Annual Meeting of Shareholders and the description of the risks which may arise from these relationships in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2007, both of which documents are also accessible on the SEC website.

 

We were formerly a 100% subsidiary of Hospitality Trust and Hospitality Trust is our principal landlord.  During 2007 we completed both the HPT Transaction and the Petro Acquisition together with Hospitality Trust.  Under these leases we are required to pay the following rent amounts: (i) minimum amounts of rent to Hospitality Trust specified in the leases, (ii) additional rent to Hospitality Trust in connection with certain sales to Hospitality Trust of qualifying improvements at sites leased from Hospitality Trust, and (iii) the underlying ground lease payments at those sites subleased to us by Hospitality Trust, which ground lease payments we pay directly to the party from whom Hospitality Trust leases the site.  In certain cases Hospitality Trust has exercised purchase options or otherwise acquired the leased properties that had previously been subleased to us and we now pay the related ground lease rents to Hospitality Trust.  On May 12, 2008, we and Hospitality Trust amended the TA Lease.  Under the TA Lease, we can sell to Hospitality Trust certain capital improvements we make to properties owned by Hospitality Trust with no increase in our rent payable to Hospitality Trust.  These sales were limited to $125,000 but no more than $25,000 in any one year.  This lease amendment permits us to sell to Hospitality Trust qualified improvements which we have made or may make to the travel centers leased from Hospitality Trust under the TA Lease on an expedited basis.  In the event that we elect to sell these capital improvements before the time contractually permitted by the original lease terms, Hospitality Trust’s purchase commitment amount is discounted to reflect the accelerated receipt of funds by us according to a present value formula established in the amended lease.  During the six month period ended June 30, 2008, we sold leasehold improvements to Hospitality Trust for total cash proceeds of $67,729, all of which occurred during the three months ended June 30, 2008.  Taking into account the discount for the early receipt of certain of these proceeds, at June 30, 2008 the remaining amount of the leasehold improvements saleable to Hospitality Trust with no increase in our rent was $28,203.  The following table summarizes the various amounts related to our leases with Hospitality Trust that are reflected in our operating results:

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except for per share amounts)

 

 

 

Three Months
Ended

 

Six Months
Ended

 

Five Months
Ended

 

 

 

June 30, 2008

 

June 30, 2007

 

June 30, 2008

 

June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

Minimum TA Lease base rent cash payments

 

$

39,250

 

$

38,375

 

$

77,917

 

$

63,958

 

Minimum Petro Lease base rent cash payments

 

15,556

 

5,526

 

31,112

 

5,526

 

Rent for improvements sold to Hospitality Trust

 

31

 

10

 

61

 

10

 

Rent for ground leases acquired by Hospitality Trust

 

1,917

 

512

 

2,945

 

747

 

Total rent payments to Hospitality Trust

 

56,754

 

44,423

 

112,035

 

70,241

 

Required straight line rent adjustments

 

3,424

 

4,295

 

7,140

 

7,165

 

Less capital lease obligation amortization (TA Lease)

 

(540

)

(320

)

(1,080

)

(800

)

Less amount recognized as interest (TA Lease)

 

(2,342

)

(2,401

)

(4,684

)

(4,003

)

Less deferred rental allowance amortization (TA Lease)

 

(1,692

)

(1,692

)

(3,385

)

(2,820

)

Rent to Hospitality Trust recognized as rent expense

 

$

55,604

 

$

44,305

 

$

110,026

 

$

69,783

 

 

The other current liabilities balance in our consolidated balance sheets at June 30, 2008 and December 31, 2007, included $18,281 and $17,987, respectively, for rent due to Hospitality Trust.

 

On August 11, 2008 we entered a rent deferral agreement with Hospitality Trust.  See Note 11 for a description of this agreement.

 

We are party to a management and shared services agreement with Reit Management. Reit Management oversees and assists us with various aspects of our business, which may include, but are not limited to, compliance with various laws and rules applicable to our status as a publicly owned company, maintenance of our travel centers, site selection for properties on which new travel centers may be developed, identification of, and purchase negotiation for travel centers and travel center companies, accounting and financial reporting, capital markets and financing activities, investor relations and general oversight of all our daily business activities, including legal matters, human resources, insurance programs, management information systems and the like. For these services, we pay Reit Management a fee equal to 0.6% of our fuel gross margin and 0.6% of our total non-fuel revenues. The fee is payable monthly based upon the prior month’s margin or revenues, as applicable. In connection with the payments made to Reit Management under the management and shared services agreement, for the three months ended June 30, 2008 and 2007, we recognized expense of $2,196 and $1,775, respectively, and for the six and five months ended June 30, 2008 and 2007 we recognized expense of $4,153 and $2,709, respectively.

 

We have a minority joint venture interest in Petro Travel Plaza LLC, which owns one travel center that we operate under a management agreement and a parcel of land upon which Petro Travel Plaza LLC is developing a new travel center that we expect to operate.  This investment is accounted for under the equity method.  Included in our results for the three and six month periods ended June 30, 2008 was management and accounting fee income of $95 and $190, respectively, earned from our management of this joint venture.  At June 30, 2008 we had a net payable to Petro Travel Plaza LLC of $2,246.

 

9.                                      Commitments and Contingencies

 

Guarantees

 

In the normal course of our business we periodically enter into agreements that contain guarantees or indemnification provisions. While the maximum amount to which we may be exposed under such agreements cannot be estimated, we do not believe that any potential guaranty or indemnification will have a material adverse effect on our consolidated financial position or results of operations.

 

We offer a warranty of our workmanship in our truck repair shops, but we believe the annual warranty expense and corresponding liability are not material to us.

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except for per share amounts)

 

Environmental Matters

 

Our operations and properties are extensively regulated by environmental laws that (i) regulate our operations that may have adverse environmental effects, such as potentially hazardous discharges to air, soil and water, (ii) regulate our management of petroleum products and other potentially hazardous substances, and (iii) impose liability for the costs of cleaning up sites affected by, and for damages resulting from, disposal or other releases of hazardous substances. We use underground and above ground storage tanks to store petroleum products and waste at our travel centers; and we must comply with requirements of environmental laws regarding tank construction, integrity testing, leak detection and monitoring, overfill and spill control, contaminant release reporting, financial assurance and corrective action in the event of a release from a storage tank into the environment.  We regularly conduct investigatory and/or remedial actions with respect to releases of hazardous substances at a number of our sites. We regularly receive notices of alleged violations of environmental laws at travel centers.

 

Under certain environmental agreements entered into as part of our predecessor’s acquisitions of travel centers, prior owners of certain of our sites are required to indemnify us for certain environmental conditions. Certain of our remediation expenditures may be recovered from state government administered tank funds. In addition, we have insurance of up to $35,000 for environmental liabilities at certain of our travel centers that were known at the time the policies were issued, and up to $60,000 for unknown environmental liabilities, subject, in each case, to certain limitations and deductibles.

 

At June 30, 2008, we had an accrued liability for environmental matters of $10,841, as well as a receivable for expected recoveries of certain of these estimated future expenditures and cash in an escrow account to fund certain of these estimated future expenditures, resulting in an estimated net amount of $4,057 to be funded by us in the future.  While it is not possible to quantify with certainty our environmental exposure, in our opinion, based upon the information now known to us, our potential liability for clean up and remediation in excess of the accrual we have recorded will not have a material adverse effect on our financial condition, results of operations or cash flows.

 

While the costs of our environmental compliance in the past have not had, and we do not believe such costs will have, a material adverse impact on us, it is impossible to predict the ultimate effect that changing circumstances and changing environmental laws may have on us in the future. We cannot be certain that additional contamination presently unknown to us does not exist at our sites, or that material liability will not be imposed on us in the future. If additional environmental matters arise or are discovered, or if additional environmental requirements are imposed by government agencies, increased environmental compliance or remediation expenditures may be required, and such costs could have a material adverse effect on us.

 

Pending Litigation

 

In February 2006 a subsidiary of our predecessor and Pilot Travel Centers, LLC, a competitor of ours, were sued by Flying J, Inc., another one of our competitors, and its affiliates in the U.S. District Court for the District of Utah.  In essence the lawsuit claims that we, Pilot and others participated in an unlawful concerted antitrust action to refuse to accept a payment card issued by a Flying J affiliate.  Flying J and its affiliates sought damages in amounts to be determined at trial and other relief.  In April 2008 we settled this litigation for $5,000 and by agreeing to begin accepting the payment card issued by Flying J’s affiliate.  As a result of this settlement, we were dismissed from the litigation on May 5, 2008.  The expense related to this settlement was recognized in the first quarter of 2008 in our selling, general and administrative expenses.

 

In May 2007 we terminated a contract with Simons Petroleum, Inc., or Simons, a fuel marketer, that had been entered by our predecessor.  This contract permitted Simons to market fuel to trucking companies and distribute that fuel through our TA branded locations in exchange for paying low pumping fees to us.  The termination was made at our option as provided in the contract and required an 18 month wind down period during which Simons may continue to market and distribute fuel through our locations.  A dispute arose between us and Simons regarding the proper conduct of the parties during the wind down period.  After settlement negotiations were conducted, we and Simons participated in a mediation, which failed to produce a settlement.  In February 2008, we and Simons participated in a binding arbitration, under the auspices of the American Arbitration Association, or AAA.  During the arbitration, Simons claimed damages in excess of $10,000 and sought a ruling allowing Simons greater flexibility to continue to sell and deliver fuel through our locations, while we claimed damages in excess of $6,000 and sought to clarify the limits of Simons’s rights during the wind down period.

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except for per share amounts)

 

On March 14, 2008, we received the AAA ruling, which ordered us to pay Simons $900 and to accept new customers, if any, presented to us by Simons until November 7, 2008.  We recognized the expense of $900 related to the AAA ruling in the fourth quarter of 2007 and paid this amount in April 2008.

 

On February 1, 2008, we commenced litigation against E2 Investment Partners LLC and related entities and individuals in the Delaware Court of Chancery.  On December 31, 2007, these defendants forwarded a letter to us proposing directors and other matters for consideration at our 2008 annual meeting of shareholders.  We sought a court order declaring that the defendants did not comply with our limited liability company agreement and that therefore the defendants’ notice was invalid and their proposed nominees and other matters were not properly presented for consideration at our 2008 annual meeting.  On April 4, 2008, the Delaware Court of Chancery issued an order declaring that the defendants’ notice breached our limited liability company agreement and was therefore invalid and of no force or effect.  On May 8, 2008, we commenced further litigation against the same defendants in the Delaware Court of Chancery to collect our costs and expenses arising from the defendants’ breach of our LLC agreement.  On July 2, 2008, the defendants filed an answer to our complaint and generally denied liability.  This lawsuit is proceeding.  We do not know what amounts, if any, will ultimately be collected by us.

 

On February 1, 2008, Alan R. Kahn filed a purported derivative action in the Delaware Court of Chancery on behalf of TA against members of our board of directors, Hospitality Trust and Reit Management. This action alleges that our directors breached their fiduciary duties in connection with the Petro Acquisition and seeks an award of unspecified damages and reformation of our Petro Lease. This action also appears to allege that Reit Management and Hospitality Trust aided and abetted our directors.  Under our limited liability company agreement and agreements with Reit Management and Hospitality Trust, we are liable to indemnify our directors, Hospitality Trust and Reit Management for liabilities, costs and expenses incurred by them in connection with this litigation.  On May 6, 2008, we moved to dismiss this complaint.  On June 20, 2008 the plaintiff filed an amended complaint making additional allegations regarding the members of our board of directors and withdrawing his request for reformation of the Petro Lease.  On July 2, 2008, we moved to dismiss the amended complaint.  We believe plaintiff’s allegations are without merit.

 

Beginning in mid December 2006, a series of class action lawsuits was filed against numerous companies in the petroleum industry, including our predecessor and subsidiaries, in United States District courts in over 20 states. Major petroleum companies and significant retailers in the industry have been named as defendants in one or more of these lawsuits.  The plaintiffs in the lawsuits generally allege that they are retail purchasers who purchased motor fuel at temperatures greater than 60 degrees Fahrenheit at the time of sale.   One theory alleges that the plaintiffs purchased smaller quantities of motor fuel than the amount for which we and other defendants charged them because the defendants measured the amount of motor fuel delivered by volume of gallons which, at higher temperatures, contain less energy.  These “temperature cases” seek, among other relief, an order requiring the defendants to install temperature correcting equipment on their retail motor fuel dispensing devices, damages, and attorneys’ fees.   A second theory alleges that fuel taxes are calculated in temperature adjusted 60 degree gallons and are collected by the federal and various state governments from suppliers and wholesalers, who are reimbursed in the amount of the tax by us and other retailers before the fuel is sold to consumers.  These “tax cases” allege that when the fuel is subsequently sold to consumers at temperatures above 60 degrees, the retailers sell a greater volume of fuel than the amount on which they paid tax, and therefore reap an excess profit because the customers pay more tax than the retailer paid. These “tax” cases seek, among other relief, recovery of excess taxes paid and punitive damages.  We believe that there are substantial factual and legal defenses to the theories alleged in these cases.  The cases have been consolidated into one court pursuant to multi-district litigation procedures; and, because discovery has only recently commenced, we cannot estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.

 

In November 2006 Great American Insurance Company of New York and Novartis Pharmaceuticals Corporation, or Novartis, filed a complaint against our predecessor and an unrelated party Prime, Inc., or Prime, in connection with the alleged theft of a tractor trailer operated by Prime which contained Novartis pharmaceutical products.  The alleged theft occurred at our Bloomsbury, New Jersey travel center.  Novartis seeks damages up to or exceeding $30,000 together with interest and costs, attorneys’ fees and disbursements.  On January 5, 2007, our predecessor answered Novartis’ complaint and asserted a cross claim for contribution and indemnification against Prime.  We believe that there are substantial defenses to these claims and that any liability arising from this matter may be covered by one or more of our existing insurance policies or by Prime.

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except for per share amounts)

 

On July 10, 2008, Riverside County, California filed litigation against us in the Superior Court of California, Riverside County, seeking civil penalties and injunctive relief for alleged past violations of various state laws and regulations relating to our predecessor’s management of underground storage tanks.  A second California county, Tehama County, commenced litigation against our predecessor in March 2005 in the Superior Court of California, Tehama County, seeking civil penalties and injunctive relief arising out of a fuel spill which occurred in December 2003.  We have been involved in negotiations with these two California counties and two other California counties, San Bernardino County and Shasta County, concerning alleged past violations of various state laws and regulations relating to the management of underground storage tanks in an effort to resolve pending and threatened claims.  Although we believe that the judgments or settlements which may result from these litigations and negotiations are unlikely to be material, California’s environmental laws provide for the possible assessment of large civil penalties for various violations, including some violations which do not result in environmental harm or continuing environmental risks.  In addition, only a portion of the claims being asserted by these California counties are likely to be covered under our environmental insurance policies with our insurers.  Accordingly, these litigations and negotiations may result in our obligation to pay material amounts.

 

We are involved from time to time in various other legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of our business. However, except for the litigation described above, we believe that we are not now involved in any litigation which, individually or in the aggregate, would have a material adverse affect on our business, financial condition, results of operations or cash flows.

 

10.                               Income Taxes

 

The provisions (benefits) for income taxes included in our current and historical financial statements were as follows:

 

 

 

Company

 

 

Predecessor

 

 

 

Three Months

 

Three Months

 

Six Months

 

Five Months

 

 

One Month

 

 

 

Ended

 

Ended

 

Ended

 

Ended

 

 

Ended

 

 

 

June 30, 2008

 

June 30, 2007

 

June 30, 2008

 

June 30, 2007

 

 

January 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current tax provision (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

 

$

(4,870

)

$

 

$

(7,470

)

 

$

(6,750

)

State

 

150

 

(923

)

347

 

(1,480

)

 

107

 

Foreign

 

 

 

 

 

 

 

 

 

150

 

(5,793

)

347

 

(8,950

)

 

(6,643

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax provision (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

(4,816

)

1,468

 

(20,025

)

(970

)

 

(31,380

)

State

 

(559

)

365

 

(2,373

)

116

 

 

(2,432

)

Foreign

 

(27

)

 

(79

)

 

 

(15

)

 

 

(5,402

)

1,833

 

(22,477

)

(854

)

 

(33,827

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total tax provision (benefit):

 

(5,252

)

(3,960

)

(22,130

)

(9,804

)

 

(40,470

)

Change in valuation allowance

 

5,402

 

 

22,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net tax provision (benefit)

 

$

150

 

$

(3,960

)

$

347

 

$

(9,804

)

 

$

(40,470

)

 

Because of our short history and operating losses we do not currently recognize the benefit of any of our deferred tax assets, including tax loss carry forwards, that may be used to offset future taxable income.  We will, however, continue to assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If we later believe it is more likely than not we will recover some or all of our deferred tax assets, we will record an appropriate amount of these assets as an income tax benefit in our consolidated statement of operations at that time.  As of December 31, 2007, our federal net operating loss carryforward was approximately $37,200. Our net operating loss carryforwards will begin to expire in 2028.

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except for per share amounts)

 

Our effective tax rates for the three and six month periods ended June 30, 2008 were a provision of 1.0% and 0.6%, respectively, which differed from the statutory rate primarily due to recognition of a valuation allowance against our net deferred tax assets and to state income taxes net of the federal tax effect.  Our effective tax rate for the three and five month periods ended June 30, 2007 and our predecessor’s effective tax rate for the one month ended January 31, 2007 were benefits of 38.4%, 38.1% and 64.7%, respectively.  Our tax rate for the three and five month periods ended June 30, 2007, differed from the statutory rate primarily due to state income taxes, net of the federal tax effect.  Our predecessor’s tax rate for the one month ended January 31, 2007 differed from the statutory rate primarily due to deductibility for tax purposes of expenses related to stock options that were not expensed for financial reporting purposes, partially offset by certain merger related expenses recognized in the financial statements which were not deductible for income tax purposes.

 

11.                               Subsequent Event

 

On August 11, 2008, we entered a rent deferral agreement with Hospitality Trust.  Significant terms of this agreement include:

 

(i)

We currently lease 185 travel centers from Hospitality Trust under two leases for combined rent of $18,781 per month. This rent amount periodically increases pursuant to formulas in the leases. We will have the option to defer our monthly rent payments to Hospitality Trust by up to $5,000 per month for periods beginning July 1, 2008 until December 31, 2010.

(ii)

We will not be obligated to pay cash interest on the deferred rent through December 31, 2009.

(iii)

We will issue 1,540,000 of our common shares to Hospitality Trust (approximately 9.6% of our shares outstanding after this new issuance). In the event we do not defer our monthly payments for the full permitted amounts through December 31, 2009, the pro-rata amount of our shares issued to Hospitality Trust may be repurchased by us for nominal consideration.

(iv)

In the event that any rents which have been deferred remain unpaid or additional rent amounts are deferred after December 31, 2009, interest on all such amounts will be payable to Hospitality Trust monthly at the rate of 12% per annum, beginning January 1, 2010.

(v)

No such rent deferrals are permitted for rent periods after December 31, 2010.  Any deferred rent (and interest thereon) not paid will be due to Hospitality Trust on July 1, 2011.  Any deferred amounts (and interest) may be prepaid at any time.

(vi)

This deferral agreement also includes a prohibition on share repurchases and dividends by us while any deferred rent remains unpaid and has change of control covenants so that amounts deferred will be payable to Hospitality Trust in the event we experience a change of control while deferred rent is unpaid.

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We were formed in October 2006 as a Delaware limited liability company. We were formed as a wholly owned subsidiary of Hospitality Trust to succeed to the operating business of our predecessor, which Hospitality Trust acquired on January 31, 2007. Until January 31, 2007, we operated as a shell company subsidiary of Hospitality Trust. Because of the HPT Transaction and the Petro Acquisition described in Note 1 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe our 2007 historical financial information may not be an appropriate basis for comparison with our current or future financial position, results of operations or cash flows. You should read the following discussion in conjunction with the financial statements included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2007.

 

Our fuel costs are subject to potentially material changes as a result of the market prices of diesel fuel and gasoline, as well as the availability of these products. These factors are subject to the worldwide petroleum products supply chain, which historically has incurred shocks as a result of, among other things, severe weather, terrorism, political crises, wars and other military actions and variations in demand, which are often the result of changes in the macroeconomic environment. Over the past few years there has been a significant increase in the cost of diesel fuel and gasoline; first, as crude oil demand increased during the previous economic recovery in the United States and events such as Hurricane Katrina affected the supply system; then as economic growth in certain developing economies, such as China and India, increased demand for petroleum products; and, more recently, as the world value of the U.S. dollar has declined and as speculation in the price of these commodities has increased. We expect that, although most of these significant increases in our costs for these products can largely be passed on to our customers over time, these increased prices can result in negative effects on our sales and profitability and material increases in our working capital requirements. We expect that petroleum products markets will continue to be volatile during the next 12 months.

 

Sumnmary of Travel Center Site Counts

 

The changes in the number of our sites (company operated, franchisee leased and operated or franchisee owned and operated) are significant factors that influenced the changes in our results of operations. The following table summarizes the changes in the composition of our business from December 31, 2006 through June 30, 2008:

 

 

 

 

 

 

 

Franchisee

 

 

 

 

 

 

 

 

 

Owned

 

 

 

 

 

Company

 

Franchisee

 

and

 

 

 

 

 

Operated

 

Operated

 

Operated

 

Total

 

Number of travel centers at December 31, 2006

 

140

 

10

 

13

 

163

 

 

 

 

 

 

 

 

 

 

 

January - June 2007 Activity:

 

 

 

 

 

 

 

 

 

Acquisition of franchise travel center

 

1

 

 

(1

)

 

Petro acquisition

 

45

 

 

24

 

69

 

New travel center

 

1

 

 

 

1

 

Number of travel centers at June 30, 2007

 

187

 

10

 

36

 

233

 

 

 

 

 

 

 

 

 

 

 

July - December 2007 Activity:

 

 

 

 

 

 

 

 

 

New travel centers

 

3

 

 

1

 

4

 

Closed travel center

 

(1

)

 

 

(1

)

Number of travel centers at December 31, 2007

 

189

 

10

 

37

 

236

 

 

 

 

 

 

 

 

 

 

 

January – June 2008 Activity:

 

 

 

 

 

 

 

 

 

No activity

 

 

 

 

 

Number of travel centers at June 30, 2008

 

189

 

10

 

37

 

236

 

 

14



Table of Contents

 

Relevance of Fuel Revenues

 

Due to volatile pricing of fuel products and our pricing arrangements with fuel customers, we believe that fuel revenue is not a reliable metric for analyzing our results of operations or our predecessor’s results from period to period. As a result solely of changes in fuel prices, our fuel revenue may increase or decrease significantly versus our or our predecessor’s historical results of operations, in both absolute amounts and on a percentage basis, without a comparable change in fuel sales volumes or in gross margin per gallon. We consider fuel volumes and gross margin to be better measures of comparative performance than fuel revenues.

 

Results of Operations

 

Three months ended June 30, 2008 compared to June 30, 2007

 

The following table summarizes our results for the three month periods ended June 30, 2008 and 2007.  Due to the Petro Acquisition on May 30, 2007, the results for the 2007 period may not be an appropriate basis for comparison to our current year results.  The results shown for the 2007 period include the results from Petro beginning on May 30, 2007 and do not include pro forma adjustments.

 

 

 

Three Months Ended June 30,

 

$

 

%

 

(dollars in millions)

 

2008

 

2007

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Fuel

 

$

1,963.8

 

$

1,222.3

 

$

741.5

 

60.7

%

Non-fuel

 

310.4

 

261.6

 

48.8

 

18.7

%

Rent and royalties

 

3.6

 

2.9

 

0.7

 

23.4

%

Total revenues

 

2,277.8

 

1,486.8

 

791.0

 

53.2

%

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

 

 

 

 

Fuel

 

1,903.5

 

1,181.5

 

722.0

 

61.1

%

Non-fuel

 

131.4

 

110.3

 

21.1

 

19.1

%

Total cost of goods sold (excluding depreciation)

 

2,034.9

 

1,291.8

 

743.1

 

57.5

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Site level operating expenses

 

159.4

 

125.5

 

33.9

 

27.0

%

Selling, general & administrative expense

 

23.3

 

25.3

 

(2.0

)

-7.9

%

Real estate rent

 

58.4

 

47.0

 

11.4

 

24.4

%

Depreciation and amortization expense

 

11.1

 

8.0

 

3.1

 

38.7

%

Total operating expenses

 

252.2

 

205.8

 

46.4

 

22.6

%

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(9.3

)

(10.8

)

1.5

 

-13.6

%

Equity income in joint venture

 

0.3

 

0.2

 

0.1

 

41.1

%

Interest income

 

2.1

 

3.8

 

(1.7

)

-44.8

%

Interest expense

 

(2.7

)

(3.5

)

0.8

 

-24.3

%

Loss before income taxes

 

(9.6

)

(10.3

)

0.7

 

6.7

%

Provision (benefit) for income taxes

 

0.2

 

(4.0

)

4.2

 

-103.8

%

Net loss

 

$

(9.8

)

$

(6.3

)

$

(3.5

)

53.9

%

 

15



Table of Contents

 

Same Site Comparisons. A travel center is included in the following same site comparisons if it was continuously operated by us, or the prior owner of the Petro sites from April 1, 2007 through June 30, 2008 or, in the case of rent revenues and royalty revenues, by a franchisee of ours or the prior owner of Petro for that same period. Travel centers are not excluded from the same site comparisons as a result of expansions in their size or in the services offered.

 

 

 

Three Months Ended June 30,

 

 

 

%

 

(gallons and dollars in millions)

 

2008

 

2007

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Number of company operated travel centers

 

184

 

184

 

 

 

 

 

 

 

 

 

 

 

 

 

Diesel sales volume (gallons) (1)

 

452.5

 

540.4

 

(87.9

)

-16.3

%

Gasoline sales volume (gallons) (1)

 

56.5

 

68.0

 

(11.5

)

-16.9

%

Fuel margin(1)

 

$

60.7

 

$

53.0

 

$

7.7

 

14.5

%

Total nonfuel revenues (1)

 

$

307.0

 

$

319.3

 

$

(12.3

)

-3.8

%

Operating expenses (1), (2)

 

$

154.8

 

$

156.2

 

$

(1.4

)

-0.9

%

 

 

 

 

 

 

 

 

 

 

Number of franchisee operated travel centers

 

46

 

46

 

 

 

Rent and royalty revenues

 

$

3.6

 

$

3.8

 

$

(0.2

)

-5.3

%

 


(1)                   Includes fuel volume, fuel margin, revenues and expenses of company operated travel centers only.

(2)                   Excludes real estate rent expense, Petro integration expenses, legal settlement expense and previously deferred maintenance costs which were expensed under GAAP.

 

Revenues. Revenues for the three month period ended June 30, 2008, were $2,277.8 million, which represented an increase from the quarter ended June 30, 2007, of $791.0 million, or 53.2%, that is primarily attributable to the Petro Acquisition and increases in fuel sales prices.

 

Fuel revenue for the quarter ended June 30, 2008, increased by $741.5 million, or 60.7%, as compared to the same period in 2007. This increase was principally the result of sites added in 2007, including the Petro sites, and increases in fuel sales prices.  The table below shows the changes in fuel revenues between periods that resulted from price and volume changes:

 

 

 

Gallons
Sold

 

Gallons
Sold

 

Fuel

 

(gallons and dollars in millions)

 

Diesel Fuel

 

Gasoline

 

Revenues

 

 

 

 

 

 

 

 

 

Results for three months ended June 30, 2007

 

469.4

 

57.7

 

$

1,222.3

 

 

 

 

 

 

 

 

 

Increase due to petroleum products price changes

 

 

 

704.0

 

Decrease due to TA same site volume changes

 

(54.5

)

(10.1

)

(146.5

)

Increase due to Petro sites added

 

71.2

 

7.0

 

212.7

 

Increase due to other net company operated sites added since January 1, 2007

 

5.3

 

2.6

 

17.9

 

Increase (decrease) due to wholesale fuel business sales volume variations

 

(20.0

)

(0.5

)

(46.6

)

Net increase (decrease) from prior year period

 

2.0

 

(1.0

)

741.5

 

 

 

 

 

 

 

 

 

Results for three months ended June 30, 2008

 

471.4

 

56.7

 

$

1,963.8

 

 

16



Table of Contents

 

On a same site basis for our company operated TA and Petro sites, diesel fuel sales volume decreased by 87.9 million gallons, or 16.3%, and gasoline sales volume decreased by 11.5 million gallons, or 16.9% during the three months ended June 30, 2008 compared to the same period in 2007.  We believe the same site diesel fuel sales volume decrease resulted primarily from a decline in trucking activity that was largely attributable to the slowing of economic activity in the U.S., particularly the declines in the shipments of durable goods, including new home building supplies, as well as a decline in imports into the U.S. that are transported by truck, combined with the high cost of fuel negatively affecting the demands for fuel during the 2008 periods as compared to the 2007 periods. We believe the same site gasoline sales volume decrease resulted primarily from the high cost of fuel to consumers and the general condition of the U.S. economy.  Some of our diesel and gasoline fuel volume declines experienced in the 2008 period may also be the result of our strategic fuel pricing decision to not compete for lower margin fuel business.

 

Nonfuel revenues for the three months ended June 30, 2008 were $310.4 million, an increase of $48.8 million, or 18.7%, as compared to the same period in 2007. Of this increase, $46.5 million related to the company operated sites added in the Petro Acquisition on May 30, 2007 and $5.5 million from other sites added in 2007. The remainder of the change between years is related to the decline in sales at those sites we operated during both periods, partially offset by our pricing increases.  Nonfuel revenues were 13.6% of total revenues for the quarter ended June 30, 2008, as compared to 17.6% for the same period in 2007.

 

On a same site basis for our company operated TA and Petro sites, nonfuel revenues decreased by $12.3 million, or 3.8% during the three months ended June 30, 2008 compared to the same period in 2007.  We believe the same site nonfuel revenue decrease reflects decreased customer traffic in our travel centers as a result of the factors affecting our fuel sales volumes, which decline was somewhat offset by increases in our truck repair shop revenues and the attractiveness of our other nonfuel products and services to customers who may not purchase fuel.

 

Rent and royalty revenues for the three months ended June 30, 2008 were $3.6 million, an increase of $0.7 million, or 23.4%, as compared to the same period in 2007. This increase was primarily the result of a $0.8 million increase between quarters in royalty revenues as a result of the 24 Petro franchisee sites added on May 30, 2007.

 

Cost of goods sold (excluding depreciation). Cost of goods sold for the three months ended June 30, 2008, was $2,034.9 million, an increase of $743.1 million, or 57.5%, as compared to the same period in 2007, which was primarily attributable to the cost of goods sold at the Petro locations acquired on May 30, 2007, and increased fuel costs.  Fuel cost of goods sold for the quarter ended June 30, 2008 of $1,903.5 million increased by $722.0 million, or 61.1%, of which $205.9 million related to the company operated sites added in the Petro Acquisition on May 30, 2007.  The increase in fuel cost of goods sold for the quarter ended June 30, 2008 as compared to the same period in 2007 also resulted from commodity price increases partially offset by the fuel sales volumes decreases described above.

 

Nonfuel cost of goods sold for the three months ended June 30, 2008 was $131.4 million, an increase of $21.1 million, or 19.1%, as compared to the same period in 2007, of which $21.2 million related to the company operated sites added in the Petro Acquisition on May 30, 2007.  Nonfuel cost of goods sold also decreased due to same site nonfuel sales decreases noted above, offset by increases in product unit costs and from sites added in 2007.

 

17



Table of Contents

 

Site level operating expenses. Site level operating expenses for the three months ended June 30, 2008, were $159.4 million, an increase of $33.9 million, or 27.0%, as compared to the same period in 2007. This increase primarily resulted from $25.3 million in site level operating expenses related to the company operated sites added in the Petro Acquisition on May 30, 2007 and $2.8 million from the other company operated locations added in 2007.

 

On a same site basis for our company operated TA and Petro sites, site level operating expenses decreased by $1.4 million, or 0.9% in the three months ended June 30, 2008 compared to the same period in 2007.  This decrease in site level operating expenses on a same site basis was primarily the result of decreases in labor and related benefits and payroll tax costs as a result of our March 2008 workforce reduction, other labor control initiatives and the lower sales volumes we realized during the quarter.  These savings were partially offset by increases in other operating expenses that are not as directly related to our volume of business, primarily utilities, real estate and other taxes not based on income, payment card transaction fees and our vehicle fuel expenses.  On a same site basis, site level operating expenses as a percentage of nonfuel revenues for the quarter ended June 30, 2008 were 50.4%, compared to 48.9% for the same period in 2007.  The increase in operating expenses as a percentage of nonfuel revenues is because a certain portion of our expenses are fixed in nature so decreases in nonfuel revenues do not always result in a corresponding decrease in site level operating expenses.

 

Selling, general and administrative expenses.  Selling, general and administrative expenses for the three months ended June 30, 2008 were $23.3 million, a decrease of $2.0 million, or 7.9%, as compared to the same period in 2007.  This decrease primarily resulted from our cost saving strategies, including our March 2008 workforce reduction partially offset by an increase in legal fees and other costs related to the litigation matters discussed in Note 9 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, and an increase in share based compensation expense.

 

Real estate rent expense.  Rent expense for the three months ended June 30, 2008 was $58.4 million, an increase of $11.4 million as compared to the same period in 2007.  This increase was primarily attributable to our entering the Petro Lease on May 30, 2007. Under our real estate leases, we paid rent of $59.4 million during the three months ended June 30, 2008 of which $2.3 million was recognized as interest expense and $0.5 million was recognized as a reduction of our capital lease obligation.  In addition, we accrued $3.5 million of noncash rent expense to recognize rent expense on a straight line basis over the terms of those leases that include rent escalation provisions and amortized $1.7 million of our deferred rental allowance as a reduction of rent expense.

 

Depreciation and amortization expense.  Depreciation and amortization expense for the three months ended June 30, 2008 was $11.1 million, an increase of $3.1 million, or 38.7%, as compared to the same period in 2007.  This increase was primarily attributable to assets acquired in the Petro Acquisition.

 

Income (loss) from operations.  Net loss from operations for the three months ended June 30, 2008, was $9.3 million, an increase of $1.5 million, or 13.6%, as compared to the same period in 2007. This increase was the result of the changes in revenues and expenses described above and primarily resulted from the condition of the U.S. economy and the trucking industry, as well as our high cost of fuel.

 

18



Table of Contents

 

Interest income and expense.  Interest income and expense consisted of the following:

 

 

 

Three Months Ended June 30,

 

$

 

(dollars in millions)

 

2008

 

2007

 

Change

 

 

 

 

 

 

 

 

 

Accretion of leasehold improvement receivable

 

$

1.8

 

$

1.5

 

$

0.3

 

Interest income on restricted investments

 

 

0.8

 

(0.8

)

Other interest income

 

0.3

 

1.5

 

(1.2

)

Total interest income

 

$

2.1

 

$

3.8

 

$

(1.7

)

 

 

 

 

 

 

 

 

Interest on the defeased 9% Notes

 

$

 

$

0.8

 

$

(0.8

)

Rent expense classified as interest

 

2.4

 

2.4

 

 

Other interest expense

 

0.3

 

0.3

 

 

Total interest expense

 

$

2.7

 

$

3.5

 

$

(0.8

)

 

There was no interest income on restricted investments or interest expense on the 9% Notes for the three months ended June 30, 2008 as the restricted investments were used to repay the defeased 9% Notes in full on February 15, 2008.  The decrease in other interest income was primarily attributable to reduced interest income on our lower cash balances in the second quarter of 2008 as compared to the same period in 2007, and declining interest rates.

 

Income tax provision (benefit).  Our effective tax rates for the three month periods ended June 30, 2008 and 2007 were a provision of 1.0% and a benefit of 38.5%, respectively. The rate for the 2008 period differs from the statutory rate due to a $5.4 million increase in the valuation allowance against our net deferred tax assets, and to state income taxes net of the federal tax effect.  For the 2007 period, the effective tax rate differs from the statutory rate primarily due to state income taxes net of the Federal tax effect.

 

19



Table of Contents

 

Six months ended June 30, 2008 compared to June 30, 2007

 

We were spun off from Hospitality Trust on January 31, 2007, and had no operations prior to that time.  For the purpose of discussing the historical results of operations, the following table combines our results for the five months ended June 30, 2007, which include the results of Petro only from May 30, 2007, and the results of our predecessor, without pro forma adjustments, for the one month ended January 31, 2007, and compares these combined results of operations to our results for the six months ended June 30, 2008.  The data has been presented to facilitate our discussion below of the trends and changes affecting our operating results.  It has been prepared for comparative purposes only and does not purport to be indicative of the results of operations that actually would have resulted had the HPT Transaction occurred on January 1, 2007, and is not indicative of our future results of operations.

 

 

 

Company

 

 

Predecessor

 

Combined

 

 

 

 

 

 

 

Six

 

Five

 

 

One

 

Six

 

 

 

 

 

 

 

Months

 

Months

 

 

Month

 

Months

 

 

 

 

 

 

 

Ended

 

Ended

 

 

Ended

 

Ended

 

 

 

 

 

 

 

June 30,

 

June 30,

 

 

January 31,

 

June 30,

 

$

 

%

 

(dollars in millions)

 

2008

 

2007

 

 

2007

 

2007

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

$

3,583.1

 

$

1,818.4

 

 

$

285.1

 

$

2,103.5

 

$

1,479.6

 

70.3

%

Non-fuel

 

595.4

 

400.3

 

 

66.8

 

467.1

 

128.3

 

27.5

%

Rent and royalties

 

7.2

 

4.4

 

 

0.8

 

5.2

 

2.0

 

36.1

%

Total revenues

 

4,185.7

 

2,223.1

 

 

352.7

 

2.575.8

 

1,609.9

 

62.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

3,480.8

 

1,760.9

 

 

270.7

 

2,031.6

 

1,449.2

 

71.3

%

Non-fuel

 

249.5

 

166.5

 

 

27.5

 

194.0

 

55.5

 

28.6

%

Total cost of goods sold (excluding depreciation)

 

3,730.3

 

1,927.4

 

 

298.2

 

2,225.6

 

1,504.7

 

67.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Site level operating expenses

 

318.0

 

197.9

 

 

36.1

 

234.0

 

84.0

 

35.9

%

Selling, general & administrative expense

 

56.0

 

37.0

 

 

8.9

 

45.9

 

10.1

 

22.1

%

Real estate rent

 

116.1

 

74.3

 

 

0.9

 

75.2

 

40.9

 

54.4

%

Depreciation and amortization expense

 

22.1

 

13.3

 

 

5.8

 

19.1

 

3.0

 

15.3

%

Merger related expenses

 

 

 

 

45.0

 

45.0

 

(45.0

)

0.0

%

Total operating expenses

 

512.2

 

322.5

 

 

96.7

 

419.2

 

93.0

 

22.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(56.8

)

(26.8

)

 

(42.2

)

(69.0

)

12.2

 

17.6

%

Debt extinguishment expense

 

 

 

 

(16.1

)

(16.1

)

16.1

 

0.0

%

Equity income in joint venture

 

0.4

 

0.2

 

 

 

0.2

 

0.2

 

100.0

%

Interest income

 

5.3

 

5.1

 

 

1.1

 

6.2

 

(0.9

)

15.0

%

Interest expense

 

(6.7

)

(4.3

)

 

(5.3

)

(9.6

)

2.9

 

30.0

%

Loss before income taxes

 

(57.8

)

(25.8

)

 

(62.5

)

(88.3

)

30.5

 

34.5

%

Provision (benefit) for income taxes

 

0.4

 

(9.8

)

 

(40.5

)

(50.3

)

50.7

 

-100.7

%

Net loss

 

$

(58.2

)

$

(16.0

)

 

$

(22.0

)

$

 (38.0

)

$

(20.2

)

53.2

%

 

20



Table of Contents

 

Same Site Comparisons. A travel center is included in the following same site comparisons if it was continuously operated by us, our predecessor or the prior owner of the Petro sites from January 1, 2007 through June 30, 2008 or, in the case of rent revenues and royalty revenues, by a franchisee of ours, our predecessor, or the prior owner of Petro for that same period. Travel centers are not excluded from the same site comparisons as a result of expansions in their size or in the services offered.

 

 

 

Six Months Ended June 30,

 

 

 

 

 

(gallons and dollars in millions)

 

Company
2008

 

Combined
2007

 

Change

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

Number of company operated travel centers

 

182

 

182

 

 

 

 

 

 

 

 

 

 

 

 

 

Diesel sales volume (gallons) (1)

 

921.3

 

1,078.0

 

(156.7

)

-14.5

%

Gasoline sales volume (gallons) (1)

 

110.0

 

125.6

 

(15.6

)

-12.4

%

Fuel margin(1)

 

$

102.6

 

$

99.8

 

$

2.8

 

2.8

%

Total nonfuel revenues (1)

 

$

585.3

 

$

603.3

 

$

(18.0

)

-3.0

%

Operating expenses (1), (2)

 

$

308.4

 

$

307.1

 

$

1.3

 

0.4

%

 

 

 

 

 

 

 

 

 

 

Number of franchisee operated travel centers

 

46

 

46

 

 

 

Rent and royalty revenues

 

$

7.1

 

$

7.3

 

$

(0.2

)

-2.7

%

 


(1)                   Includes fuel volume, fuel margin, revenues and expenses of company operated travel centers only.

(2)                   Excludes real estate rent expense, Petro integration expenses, legal settlement expense and previously deferred maintenance costs which were expensed under GAAP.

 

Revenues. Revenues for the six months ended June 30, 2008, were $4,185.7 million, which represented an increase from the six months ended June 30, 2007, of $1,609.9 million, or 62.5%, that is primarily attributable to the Petro Acquisition and increases in fuel sales prices.

 

Fuel revenue for the six months ended June 30, 2008, increased by $1,479.6 million, or 70.3%, as compared to the same period in 2007. This increase was principally the result of sites added in 2007, including the Petro sites, and increases in fuel sales prices.  The table below shows the changes in fuel revenues between periods that resulted from price and volume changes:

 

21



Table of Contents

 

 

 

Gallons
Sold

 

Gallons
Sold

 

Fuel

 

(gallons and dollars in millions)

 

Diesel Fuel

 

Gasoline

 

Revenues

 

 

 

 

 

 

 

 

 

Results for six months ended June 30, 2007

 

878.6

 

103.0

 

$

2,103.5

 

 

 

 

 

 

 

 

 

Increase due to petroleum products price change

 

 

 

1,122.2

 

Decrease due to TA same site volume change

 

(95.7

)

(12.9

)

(228.8

)

Increase due to Petro sites added

 

204.0

 

17.5

 

602.0

 

Increase due to other net company operated sites added since January 1, 2007

 

12.2

 

5.5

 

37.5

 

Increase (decrease) due to wholesale fuel business sales volume variations

 

(25.3

)

0.1

 

(53.3

)

Net increase from prior year period

 

95.2

 

10.2

 

1,479.6

 

 

 

 

 

 

 

 

 

Results for six months ended June 30, 2008

 

973.8

 

113.2

 

$

3,583.1

 

 

On a same site basis for our company operated TA and Petro sites, diesel fuel sales volume decreased by 156.7 million gallons, or 14.5%, and gasoline sales volume decreased by 15.6 million gallons, or 12.4% during the six months ended June 30, 2008 as compared to the same period in 2007.  We believe the same site diesel fuel sales volume decrease resulted primarily from a decline in trucking activity that was largely attributable to the slowing of economic activity in the U.S., particularly the declines in the shipments of durable goods, including new home building supplies, as well as a decline in imports into the U.S. that are transported by truck, combined with the high cost of fuel negatively affecting the demands for fuel during the 2008 periods as compared to the 2007 periods. We believe the same site gasoline sales volume decrease resulted primarily from the high cost of fuel to consumers and the general condition of the U.S. economy.  Some of our fuel volume declines experienced in the 2008 period may also be the result of our strategic fuel pricing decision not to compete for lower margin fuel business, especially during the three months ended June 30, 2008.

 

Nonfuel revenues for the six months ended June 30, 2008 were $595.4 million, an increase of $128.3 million, or 27.5%, as compared to the same period in 2007. Of this increase, $122.0 million related to the company operated sites added in the Petro Acquisition on May 30, 2007 and $11.3 million from other sites added in 2007. The remainder of the change between years is related to the decline in sales at those sites we operated during both periods, partially offset by our pricing increases.  Nonfuel revenues were 14.2% of total revenues for the six months ended June 30, 2008, as compared to 18.1% for the same period in 2007.

 

On a same site basis for our company operated TA and Petro sites, nonfuel revenues decreased by $18.0 million, or 3.0%.  We believe the same site nonfuel revenue decrease reflects decreased customer traffic in our travel centers as a result of the factors affecting our fuel sales volumes, which decline was somewhat offset by increases in our truck repair shop revenues and the attractiveness of our other nonfuel products and services to customers who may not purchase fuel.

 

Rent and royalty revenues for the six months ended June 30, 2008 were $7.2 million, an increase of $2.0 million, or 36.1%, as compared to the same period in 2007. This increase was primarily the result of a $2.1 million increase between the comparable periods in royalty revenues as a result of the 24 Petro franchisee sites added on May 30, 2007.

 

Cost of goods sold (excluding depreciation). Cost of goods sold for the six months ended June 30, 2008, was $3,730.3 million, an increase of $1,504.7 million, or 67.6%, as compared to the same period in 2007, which was primarily attributable to the cost of goods sold at the Petro locations acquired on May 30, 2007 and increased fuel costs.  Fuel cost of goods sold for the six months

 

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ended June 30, 2008 of $3,480.8 million increased by $1,449.2 million, or 71.3%, of which $582.7 million resulted from fuel sales at the Petro locations acquired on May 30, 2007. The increase in fuel cost of goods sold for the six months ended June 30, 2008 as compared to the same period in 2007 also resulted from commodity price increases partially offset by the fuel sales volumes decreases described above.

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