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PART IV
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2013 |
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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 | |
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(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
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24601 Center Ridge Road, Suite 200, Westlake, OH 44145-5639 (Address of Principal Executive Offices) |
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(440) 808-9100 (Registrant's Telephone Number, Including Area Code) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
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| Common Shares | NYSE | |
| 8.25% Senior Notes due 2028 | NYSE |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 o No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 the 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 ý |
Non-accelerated filer
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(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of the voting common shares of beneficial ownership, no par value, or common shares, of the registrant held by non-affiliates was $264.3 million based on the $10.94 closing price per common share on the New York Stock Exchange on June 28, 2013. For purposes of this calculation, an aggregate of 2,812,324 common shares held directly by, or by affiliates of, the directors and the officers of the registrant, plus 2,540,000 common shares held by Hospitality Properties Trust, or HPT, have been included in the number of common shares held by affiliates.
Number of the registrant's common shares outstanding as of June 4, 2014: 37,625,366.
References in this Annual Report on Form 10-K, to "TA", "TravelCenters", the "Company", "we", "us" and "our" include TravelCenters of America LLC and our consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS "BELIEVE", "EXPECT", "ANTICIPATE", "INTEND", "PLAN", "ESTIMATE" OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. AMONG OTHERS, THE FORWARD LOOKING STATEMENTS WHICH APPEAR IN THIS ANNUAL REPORT THAT MAY NOT OCCUR INCLUDE:
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CONVENIENCE STORES WE ACQUIRED ARE HIGH SALES VOLUME FUEL LOCATIONS, THAT THESE CONVENIENCE STORES APPEAR TO NEED ONLY LIMITED NEAR TERM CAPITAL INVESTMENT, THAT THESE CONVENIENCE STORES WILL NOT REQUIRE A LENGTHY PERIOD TO ACHIEVE STABILIZED FINANCIAL RESULTS AND THAT WE EXPECT THAT WE MAY BE ABLE TO REALIZE SYNERGIES IN PURCHASING AND MERCHANDISING AT THESE CONVENIENCE STORES. THE IMPLICATION OF THESE STATEMENTS IS THAT THESE STORES MAY HAVE A POSITIVE IMPACT ON OUR EARNINGS AND IMPROVE OUR FUTURE PROFITS. HOWEVER, ACQUISITIONS AND MANAGING AND INTEGRATING ACQUIRED OPERATIONS CAN BE DIFFICULT, TIME CONSUMING AND/OR MORE EXPENSIVE THAN ANTICIPATED AND INVOLVE RISKS OF FINANCIAL LOSSES. CHANGES OF OWNERSHIP FREQUENTLY RESULT IN PERSONNEL CHANGES AND IN REQUIREMENTS FOR NEW SUPPLY AND SALES ARRANGEMENTS. THESE OR OTHER FACTORS MAY RESULT IN LOWER FINANCIAL PERFORMANCE THAN EXPECTED OR FINANCIAL LOSSES. ALSO, MARKET CONDITIONS AFFECTING THE CONVENIENCE STORES WE ACQUIRED MAY CHANGE IN A WAY WHICH MATERIALLY AND ADVERSELY IMPACTS THE BUSINESS OF THESE CONVENIENCE STORES. WE MAY NOT OPERATE THESE ACQUIRED SITES AS PROFITABLY AS WE NOW EXPECT;
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SALES EFFORTS TO MAINTAIN AND GROW MARKET SHARE, WHICH NEGATIVELY AFFECTED OUR FUEL SALES VOLUME AND FUEL GROSS MARGIN PER GALLON, AND THAT THIS IMPACT ABATED SOMEWHAT IN THE THIRD AND FOURTH QUARTERS VERSUS THE SECOND QUARTER. THE IMPLICATION OF THESE STATEMENTS MAY BE THAT THE COMPETITIVE ENVIRONMENT WITHIN OUR INDUSTRY HAS IMPROVED AND OUR OPERATING RESULTS WILL IMPROVE. IN FACT, WE HAVE NO CONTROL OVER OUR COMPETITORS' FUTURE ACTIONS, THE COMPETITIVE ENVIRONMENT IN OUR INDUSTRY CAN CHANGE QUICKLY AND MAY CAUSE US TO OPERATE LESS PROFITABLY OR EXPERIENCE LOSSES IN THE FUTURE;
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FACILITY MAY BE INCREASED TO $300 MILLION, SUBJECT TO AVAILABLE COLLATERAL AND LENDER PARTICIPATION. IF WE DO NOT HAVE SUFFICIENT COLLATERAL OR IF WE ARE UNABLE TO IDENTIFY LENDERS WILLING TO INCREASE THEIR COMMITMENTS OR JOIN OUR CREDIT FACILITY, WE MAY NOT BE ABLE TO INCREASE THE CREDIT FACILITY OR THE AVAILABILITY OF BORROWINGS WHEN WE MAY NEED OR WANT TO DO SO;
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BUSINESS. IN FACT, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE; AND
THESE AND OTHER UNEXPECTED RESULTS MAY BE CAUSED BY VARIOUS FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL, INCLUDING:
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AND THE TERMS OF ANY CREDIT WE MAY BE ABLE TO OBTAIN ARE UNCERTAIN;
RESULTS THAT DIFFER FROM THOSE STATED OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS MAY ALSO BE CAUSED BY VARIOUS CHANGES IN OUR BUSINESS OR MARKET CONDITIONS AS DESCRIBED MORE FULLY UNDER ITEM 1A. "RISK FACTORS" AND ELSEWHERE IN THIS ANNUAL REPORT.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS. EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD LOOKING STATEMENT AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
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TRAVELCENTERS OF AMERICA LLC
2013 FORM 10-K ANNUAL REPORT
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General
We are a limited liability company formed under Delaware law on October 10, 2006, as a wholly owned subsidiary of Hospitality Properties Trust, or HPT. From that time through January 31, 2007, we conducted no business activities. On January 31, 2007, HPT acquired TravelCenters of America, Inc., our predecessor, restructured this acquired business and distributed all of our then outstanding common shares to the shareholders of HPT. In this Annual Report on Form 10-K for the year ended December 31, 2013, or this Annual Report, we sometimes refer to these transactions as the HPT Transaction, refer to the distribution of our shares in connection with the HPT Transaction as our spin off and refer to HPT and the subsidiaries of HPT from which we lease certain properties collectively as HPT.
Business Overview
We operate and franchise 281 travel center and convenience store locations. Our customers include trucking fleets and their drivers, independent truck drivers and motorists. As of December 31, 2013, our travel center business included 247 travel centers located in 42 states in the U.S., primarily along the U.S. interstate highway system, and the province of Ontario, Canada. Our travel centers included 172 operated under the "TravelCenters of America," "TA" or related brand names, or the TA brand, including 156 that we operated and 16 that franchisees operated, and 75 that were operated under the "Petro Stopping Centers" and "Petro" brand names, or the Petro brand, including 61 that we operated and 14 that franchisees operated. Of our 247 travel centers at December 31, 2013, we owned 33, we leased or managed 189, including 184 that we leased from HPT, and franchisees owned, or leased from others, 25. We sublease to franchisees five of the travel centers we lease from HPT.
Many of our travel centers were originally developed years ago when prime real estate locations along the interstate highway system were more readily available than they are today, which we believe would make it difficult to replicate our business. We believe that our nationwide travel centers provide an advantage to large trucking fleets, particularly long haul trucking fleets, by enabling them to reduce the number of their suppliers by routing their trucks through our travel centers from coast to coast.
We offer a broad range of products and services, including diesel fuel and gasoline, truck repair and maintenance services, full service restaurants, more than 43 different brands of quick serve restaurants, or QSRs, travel stores and various driver amenities. Some of our locations include gaming operations.
The U.S. travel center and truck stop industry in which we operate consists of travel centers, truck stops, diesel fuel outlets and similar properties. We believe that although the travel center and truck stop industry is highly fragmented generally, with in excess of 6,400 travel centers and truck stops in the U.S., the largest trucking fleets tend to purchase the majority of their over the road fuel from us and our largest competitors.
As of December 31, 2013, our business included 34 convenience stores in four states with retail gas stations, primarily Kentucky, that we operate and whose primary customers are motorists. We acquired 31 of these stores in 2013 and continue to operate them under the brand name "Minit Mart." The convenience stores we operate include, on average, ten fueling positions and approximately 5,000 square feet of interior space offering merchandise and QSRs. Of our 34 convenience stores at December 31, 2013, we owned 27, we leased five, including one that we leased from HPT, and we operated two for a joint venture in which we own a minority interest.
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History
Our Predecessor. Our predecessor was formed in December 1992. At the time of the HPT Transaction, our predecessor's business included 163 travel centers, of which 140 were operated by our predecessor, 10 were operated by franchisees on sites leased from our predecessor and 13 were operated by franchisees on sites they owned or leased from others.
The HPT Transaction. We commenced business on January 31, 2007. In order to govern relations before and after our spin off, we entered into a transaction agreement with HPT and Reit Management & Research LLC, or RMR. As a result of the HPT Transaction, our spin off and the related transaction agreement, HPT acquired 146 travel centers and certain other assets previously held by our predecessor and we entered a lease of these assets with HPT, which we refer to as the TA Lease. We owned the remaining assets of our predecessor and remained obligated for our predecessor's liabilities. On January 31, 2007, HPT distributed all of our then outstanding shares to its shareholders. Other material effects of the HPT Transaction that have continuing effects on us are summarized as follows:
The Petro Acquisition. On May 30, 2007, we acquired Petro Stopping Centers, L.P., or Petro, which operated or franchised 69 travel centers along the U.S. interstate highway system. We refer to this transaction as the Petro Acquisition. Simultaneously with the Petro Acquisition, HPT acquired the real estate of 40 Petro travel centers and we leased these 40 travel centers from HPT, which we refer to as the Petro Lease and which together with the TA Lease we refer to as the HPT Leases. In addition to the leasehold for these 40 travel centers, the Petro assets we acquired included the contract rights as franchisor of 24 Petro travel centers and certain other assets.
Rent Deferral Agreement and Amendment Agreement. In August 2008, we entered a rent deferral agreement with HPT. Under the terms of the deferral agreement we deferred a total of $150 million of rent payments through December 31, 2010. In January 2011, we and HPT entered an Amendment Agreement, or the Amendment Agreement, that amended the HPT Leases and our rent deferral agreement with HPT. The Amendment Agreement, among other things, reduced the minimum annual rent payable to HPT, extended the due date for the $150 million of rent that we previously deferred and ceased interest charges on that deferred rent, as further described under the heading "Our Leases With HPT" below.
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Other Significant Activities. During the fiscal year ended December 31, 2013, we completed the following other significant activities:
Recent Developments
On March 17, 2014, we filed a Form 12b-25 with the SEC indicating that we were unable to file this Annual Report within the time period prescribed by the Securities Exchange Act of 1934, as amended, or the Exchange Act, due to unanticipated delays encountered in connection with our accounting for income taxes as well as general delays encountered in connection with the completion of our accounting processes and procedures. On May 13, 2014, we filed a second Form 12b-25 indicating that as a result of the delay in completing this Annual Report, we were also unable to file the First Quarter 10-Q within the time period prescribed by the Exchange Act.
Our Growth Strategy
Acquisitions and Development. Pressure from difficult economic and industry conditions of the past several years has caused some, and may cause further, financial challenges for some travel center operators and may in the future result in opportunities to acquire locations at attractive prices. We believe these conditions led to our acquisitions during 2011 of six travel centers and two properties ancillary to existing travel centers for an aggregate amount of $38.0 million. During 2012, we acquired, for an aggregate amount of $52.3 million, 10 travel centers and the businesses of our franchisees at four travel centers that such franchisees previously had subleased from us. During 2013, we acquired, for an aggregate amount of $46.2 million, nine travel centers and the business of a franchisee at a travel center such franchisee had previously subleased from us. Additionally, in December 2013, we acquired for $67.9 million a business that operates 31 convenience stores with retail gasoline stations in Kentucky and Tennessee. Further, as of December 31, 2013, we had entered an agreement to acquire an additional travel center for a total of $3 million, which acquisition was completed in January 2014. During 2014 to the date of this Annual Report, we entered agreements to acquire two additional travel centers for a total of $21.5 million. We expect to complete these acquisitions in the second or third quarters of 2014, but these purchases are subject to conditions and may not occur, may be delayed or
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the terms may change. We currently intend to continue our efforts to selectively acquire additional properties.
We own seven parcels of undeveloped land suitable for developing travel centers. We have begun to plan to develop travel centers on two of these parcels starting during 2014 or 2015 and may decide to build additional travel centers or other facilities on the other five parcels in the future. We occasionally consider purchasing properties for future development, and we expect to continue to do so in the future.
Existing Properties. We believe we have opportunities to increase revenues and profits through continued investment in our existing properties, including those locations we acquired during 2011 through the date of this annual report. These opportunities include projects such as parking lot expansions, construction of additional truck repair bays, restaurant remodeling, the installation of additional QSR offerings, installation of diesel exhaust fluid dispensers and possible expansion of offerings to include items not previously offered by us, such as natural gas refueling as noted above.
Franchising. In 2011, we added four franchise travel centers. Two of these travel centers are located in Virginia and one travel center is located in each of Alabama and Tennessee. Although we added no franchise sites in 2012 or 2013, we may selectively expand our business through franchising in the future. During 2011, 2012 and 2013, we acquired the operations of one, eight and four, respectively, of our former franchisees who elected to exit those businesses.
Our Locations
At December 31, 2013, our 281 locations consisted of:
Our travel centers include 172 operated under the TA and related brands and 75 operated under the Petro brand. Our typical travel center includes:
Substantially all of our travel centers are full service sites located on or near an interstate highway exit and offer fuel and nonfuel products and services 24 hours per day, 365 days per year.
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Our convenience stores include 31 that we operate under the Minit Mart brand and three we operate under other brands. Our typical convenience store includes ten fueling positions and approximately 5,000 square feet of interior space offering merchandise and prepared foods on approximately 2 acres of land.
Properties. The physical layouts of our locations vary from site to site. The majority of the developed acreage at our travel centers consists of truck and car fuel islands, separate truck and car parking lots, a main building that contains a full service restaurant and one or more QSRs, a travel store, a truck maintenance and repair shop and other amenities. Most of our TA travel center locations have one building with separate service areas and most of our Petro travel center locations have several separate buildings. Our convenience store properties include a single building and parking lot.
Product and Service Offering. Our locations offer a broad range of products and services designed to appeal to our customers, including:
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party roadside service providers. RoadSquad Connect TM includes service providers in 47 U.S. states and one Canadian province with a total of nearly 1,400 locations. We also offer truck and trailer repair services at customer facilities through a service program we refer to as RoadSquad OnSite®.
Operating Segment
We manage our business on the basis of one operating segment. Please refer to the consolidated financial statements included in Item 15 of this Annual Report for revenue, operating profit and asset data. We have only a single travel center located in a foreign country, Canada, and the revenues and
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assets related to our operations in Canada are not material. The following table sets forth the composition of our total revenues by type for each of the three years ended December 31, 2013.
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Year Ended December 31, | |||||||||
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2013 | 2012 | 2011 | |||||||
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Revenues: |
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Fuel |
81.5 | % | 83.0 | % | 83.7 | % | ||||
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Nonfuel |
18.3 | % | 16.8 | % | 16.1 | % | ||||
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Rent and royalties from franchisees |
0.2 | % | 0.2 | % | 0.2 | % | ||||
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Total revenues |
100.0 | % | 100.0 | % | 100.0 | % | ||||
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Operations
Fuel. We have numerous sources for our diesel fuel and gasoline supply, including nearly all of the major and large oil companies operating in the U.S. We purchase diesel fuel from various suppliers at rates that fluctuate with market prices and generally are reset daily, and we sell fuel to our customers at prices that we establish daily or are indexed to market prices and reset daily. By establishing diesel fuel supply relationships with several alternate suppliers for most locations, we believe we are able to effectively create competition for our purchases among various diesel fuel suppliers. We also believe that purchasing arrangements with multiple diesel fuel suppliers may help us avoid product outages during times of diesel fuel supply disruptions. At some locations, however, there are very few suppliers for diesel fuel in that market and we may have only one viable supplier. We have single sources of supply for gasoline at each of our locations that offer branded gasoline; we generally purchase gasoline from multiple sources for our locations that offer unbranded gasoline. We offer biodiesel at a number of our travel centers and have a limited number of suppliers for this product at those sites at which we sell biodiesel. We expect to begin selling liquefied natural gas, or LNG, at certain of our travel centers during the second quarter of 2014. Shell is expected to be our sole supplier of LNG at these locations.
Generally our fuel purchases are delivered directly from suppliers' terminals to our locations. We do not contract to purchase substantial quantities of fuel to hold as inventory. We generally have less than three days of diesel fuel and gasoline inventory at our locations. We are exposed to price increases and interruptions in supply. We believe our exposure to market price increases for diesel fuel and gasoline is partially mitigated by the significant amount of our diesel fuel and gasoline sales that are sold under arrangements that include pricing formulae that reset daily and are indexed to market prices and by generally not purchasing fuel for delivery other than on the date of purchase. We historically have not engaged in any fixed or hedged price fuel contracts with customers.
Nonfuel products. We have many sources for the large variety of nonfuel products that we sell. We have developed supply relationships with several suppliers of key nonfuel products, including Daimler for truck parts, Bridgestone Americas Tire Operations, LLC, Michelin North America, Inc. and The Goodyear Tire & Rubber Company for truck tires, McLane Company, Inc. for convenience store and tobacco products and ExxonMobil Oil Corporation for lubricants. We believe that our relationships with these and our other suppliers are satisfactory. We maintain two distribution centers to distribute certain nonfuel and nonperishable products to our locations using a combination of contract carriers and our fleet of trucks and trailers. We believe these distribution centers allow us to purchase inventory and supplies at lower total acquisition costs. These warehouses are leased and include a total of approximately 181,400 square feet of space.
Daimler Agreement. We are party to an agreement with Daimler that extends to July 2019. Daimler is a leading manufacturer of heavy trucks in North America under the Freightliner and Western Star brand names. Except for locations in Texas, our TA and Petro truck repair and
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maintenance facilities are, or are expected to be, authorized providers of repair work and specified warranty repairs to Daimler's customers. This is accomplished through the Freightliner ServicePoint® program at TA locations and through the Freightliner and/or Western Star ServicePoint® program at our Petro locations. Our TA and Petro truck maintenance and repair facilities are also part of Freightliner's 24 hour customer assistance database for emergency and roadside repair referrals and we have access generally to Daimler's parts distribution, service and technical information systems.
Fuel cards. Most of our trucking customers transact business with us by use of fuel cards, most of which are issued by third party fuel card companies. The fuel card industry has only a few significant participants, including Comdata Network, Inc., or Comdata, the largest issuer of fuel cards, WEX Inc. and Electronic Funds Source, LLC, or EFS, a company affiliated with Pilot Travel Centers LLC, or Pilot Flying J. We accept fuel cards as payment at our travel centers and we receive payment for our accounts receivable from these fuel card companies on a daily basis.
Our Leases With HPT
We have two leases with HPT, the TA Lease for 145 properties, and the Petro Lease for 40 Petro properties. Two of our subsidiaries are the tenants under the leases, and we, and in the case of our TA Lease certain of our subsidiaries, guarantee the tenants' obligations under the leases. The following are summaries of the material terms of these leases, as amended.
Term. The TA Lease expires on December 31, 2022. The Petro Lease expires on June 30, 2024, and may be extended by us for up to two additional periods of 15 years each.
Operating Costs. The HPT Leases are "triple net" leases, which require us to pay all costs incurred in the operation of the leased properties, including personnel, utilities, acquiring inventories, providing services to customers, insurance, paying real estate and personal property taxes, environmental related expenses, underground storage tank removal costs and ground lease payments at those properties at which HPT leases the property from the owner and subleases it to us.
Rent. As of December 31, 2013, the TA Lease requires us to pay minimum rent to HPT in an amount of $159.3 million per year through December 31, 2022 and the Petro Lease requires us to pay minimum rent to HPT of $60.2 million through June 30, 2024.
We may request that HPT purchase approved renovations, improvements and equipment additions we make at the leased properties, in return for an increase in our minimum annual rent equal to the amount paid by HPT times the greater of (i) 8.5% or (ii) a benchmark U.S. Treasury interest rate plus 3.5%. HPT is not required to purchase any improvements and we are not required to sell any improvements to HPT.
Starting in 2012, the TA Lease requires us to pay additional rent that generally is calculated as follows: an amount equal to 3% of increases in nonfuel gross revenues and 0.3% of increases in gross fuel revenues at the 145 properties covered by the TA Lease over the respective gross revenue amounts for the year 2011. Additional rent attributable to fuel revenues is subject to a maximum each year calculated by reference to changes in the consumer price index. Additional rent under the TA Lease was $2.1 million and $1.5 million for the years ended December 31, 2013 and 2012, respectively. The Petro Lease requires us to pay additional rent calculated using the same formula as in the TA Lease, except that such payments started in 2013 and are calculated using the revenues of the 40 leased Petro properties in excess of revenues for the year 2012 and the additional rent under the Petro Lease is subject to the waiver of payment of the first $2.5 million of such additional rent. The amount of percentage rent that would have been payable under the Petro Lease for the year ended December 31, 2013, was $0.4 million; because this amount was waived, we did not recognize it as an expense in 2013. In connection with the agreement we entered into with Shell, on April 15, 2013, we and HPT amended the HPT Leases to revise the calculation of percentage rent payable by us under the HPT Leases, with the intended effect that the amount of percentage rent would be unaffected by the type of fuel sold, whether diesel fuel or natural gas.
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On August 11, 2008, we entered a rent deferral agreement with HPT. Under the terms of the deferral agreement, through December 31, 2010, we had deferred $150 million of rent payable to HPT, the maximum amount we were able to defer and which was contractually due to HPT by July 1, 2011. As part of the Amendment Agreement, we and HPT amended the rent deferral agreement, so that $107.1 million of our deferred rent obligation will be due and payable on December 31, 2022, the remaining $42.9 million of our deferred rent obligation will be due and payable on June 30, 2024, and effective January 1, 2011, interest does not accrue on our deferred rent obligation; provided, however, that the deferred rent obligation shall be accelerated and interest shall begin to accrue thereon if certain events provided in the Amendment Agreement occur, including a change of control of us.
On August 13, 2013, the travel center located in Roanoke, VA, that we leased from HPT under the TA Lease was taken by eminent domain proceedings brought by the Virginia Department of Transportation, or VDOT, in connection with planned highway construction. The TA Lease provides that the annual rent payable by us is reduced by 8.5% of the amount of the proceeds HPT receives from the taking or, at HPT's option, the fair market value rent of the property on the commencement date of the TA Lease. In January 2014, HPT received proceeds from VDOT of $6.2 million, which is a portion of VDOT's estimate of the value of the property, and as a result our annual rent under the TA Lease was reduced by $0.5 million effective January 6, 2014. We and HPT intend to challenge VDOT's estimate of the property's value. HPT has entered a lease agreement with VDOT to lease this property through August 2014 for $40,000 per month, and under the terms of the TA Lease we will be responsible to pay this ground lease rent. We sublease this property from HPT and plan to continue operating it as a travel center through August 2014.
Maintenance and Alterations. We must maintain, at our expense, the leased properties, including maintenance of structural and non-structural components. At the end of each lease we must surrender the leased properties in substantially the same condition as existed at the commencement of the lease subject to any permitted alterations and reasonable wear and tear.
Assignment and Subletting. HPT's consent is required for any direct or indirect assignment or sublease of any of the leased properties. We remain liable under the leases for subleased properties.
Environmental Matters. We also are required generally to indemnify HPT for certain environmental matters and for liabilities which arise during the terms of the leases from ownership or operation of the leased properties.
Indemnification and Insurance. With limited exceptions, we indemnify HPT from liabilities which arise during the terms of the leases from ownership or operation of the leased properties. We generally must maintain commercially reasonable insurance. Our insurance coverage requirements include:
The leases generally require that HPT be named as an additional insured under our insurance policies.
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Damage, Destruction or Condemnation. If any leased property is damaged by fire or other casualty or taken by eminent domain, we are generally obligated to rebuild. If the leased property cannot be restored, HPT will generally receive all insurance or taking proceeds, we are liable to HPT for any deductible or deficiency between the replacement cost and the amount of such proceeds, and the annual minimum rent will be reduced by (i) in the case of the TA Lease, at HPT's option, either 8.5% of the net proceeds paid to HPT or the fair market rental of the damaged, destroyed or condemned property, or portion thereof, as of the commencement date of the TA Lease; (ii) in the case of a casualty loss under the Petro Lease, 8.5% of the net proceeds paid to HPT plus 8.5% of the fair market value of the land; and (iii) in the case of a taking under the Petro Lease, 8.5% of the amount of the net proceeds paid to HPT.
Events of Default. Events of default under each lease include the following:
Remedies. Following the occurrence of any event of default, each lease provides that, among other things, HPT may, to the extent legally permitted:
We are also obligated to reimburse HPT for all costs and expenses incurred in connection with any exercise of the foregoing remedies.
Lease Subordination. Each lease may be subordinated to any mortgages of the leased properties by HPT, but HPT is required to obtain nondisturbance agreements for our benefit.
Financing Limitations; Security. Without HPT's prior written consent, our tenant subsidiaries may not incur debt secured by any of their assets used in the operation of the leased properties; provided, however, our tenant subsidiaries may incur purchase money debt to acquire assets used in these operations and we may encumber such assets to obtain a line of credit secured by our tenant subsidiaries' receivables, inventory or certain other assets used in these operations.
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Lease Termination. When a lease terminates, any equipment, furniture, fixtures, inventory and supplies at the leased properties that we own may be purchased by HPT at its then fair market value. Also at termination of the TA Lease, HPT has the right to license any of our software used in the operation of the leased properties thereunder at its then fair market value and to offer employment to employees at the leased properties thereunder; and under both leases we have agreed to cooperate in the transfer of permits, agreements and the like necessary for the operation of the leased properties thereunder.
Territorial Restrictions. Under the terms of each lease, without the consent of HPT, we generally cannot own, franchise, finance, operate, lease or manage any travel center or similar property within 75 miles in either direction along the primary interstate on which a travel center owned by HPT is located.
Non-Economic Properties. If during a lease term the continued operation of any leased property becomes non-economic in our reasonable determination and we and HPT cannot agree on an alternative use for the property, we may offer that property for sale, including the sale of HPT's interest in the property, free and clear of our leasehold interests. No sale of a property leased from HPT, however, may be completed without HPT's consent. In the event we obtain a bona-fide offer to purchase the property and HPT consents to the sale, the net sale proceeds received will be paid to HPT, exclusive of amounts associated with personal property, which we can elect to sell to the buyers or keep, and the annual minimum rent payable shall be reduced. In the case of the TA Lease, this reduction will be, at HPT's option, either the amount of such proceeds times 8.5% or the fair market rental for such property as of the commencement date of the lease; in the case of the Petro Lease, this reduction will be the amount of such proceeds times 8.5%. If we obtain a bona-fide offer to purchase the property but HPT does not consent to the sale of the property, that property will no longer be part of the lease and the minimum rent will be reduced as if the sale had been completed at the amount offered. No more than a total of 15 properties subject to the TA Lease and no more than five properties subject to the Petro Lease may be offered for sale as non-economic properties during the applicable lease term.
Arbitration. Our leases with HPT also include arbitration provisions for the resolution of disputes, claims and controversies.
For further information about the HPT Leases and related amounts, see Note 17 to the Notes to Consolidated Financial Statements in Item 15 of this Annual Report, which is incorporated herein by reference. In addition, for more information about these transactions and relationships and about the risks which may arise as a result of these transactions and relationships, see elsewhere in this Annual Report, including "Warning Concerning Forward Looking Statements" and Item 1A, "Risk Factors".
Relationships with Franchisees
We have lease and franchise agreements with lessees and owners of travel centers. We collect rent and franchise, royalty and other fees under these agreements. As of December 31, 2013, 30 of our travel centers were operated by our franchisees. Five of these travel centers are leased by us from HPT and subleased by us to a franchisee. Twenty five of these travel centers are owned, or leased from others, by our franchisees. As of December 31, 2013, one franchisee operated four travel centers, two operated two travel centers, and 22 operated one travel center each. The table below summarizes by state information as of December 31, 2013, regarding branding and ownership of the travel centers our
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franchisees operate. Similar information for the locations we operate is included in Item 2 of this Annual Report.
|
|
Brand Affiliation
of Sites (1) |
Ownership of
Sites By: (1) |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
TA | Petro | Total | HPT |
Franchisee
or Others |
|||||||||||
|
Alabama |
1 | 1 | 2 | 1 | 1 | |||||||||||
|
Georgia |
1 | — | 1 | 1 | — | |||||||||||
|
Illinois |
— | 1 | 1 | — | 1 | |||||||||||
|
Iowa |
1 | — | 1 | — | 1 | |||||||||||
|
Kansas |
1 | 1 | 2 | — | 2 | |||||||||||
|
Minnesota |
— | 2 | 2 | — | 2 | |||||||||||
|
Missouri |
2 | 2 | 4 | — | 4 | |||||||||||
|
North Carolina |
— | 1 | 1 | — | 1 | |||||||||||
|
North Dakota |
— | 1 | 1 | — | 1 | |||||||||||
|
Ohio |
2 | 1 | 3 | — | 3 | |||||||||||
|
Oregon |
1 | — | 1 | — | 1 | |||||||||||
|
Pennsylvania |
1 | — | 1 | — | 1 | |||||||||||
|
Tennessee |
2 | — | 2 | 1 | 1 | |||||||||||
|
Texas |
2 | — | 2 | 2 | — | |||||||||||
|
Virginia |
1 | 2 | 3 | — | 3 | |||||||||||
|
Wisconsin |
1 | 2 | 3 | — | 3 | |||||||||||
| | | | | | | | | | | | | | | | | |
|
Total |
16 | 14 | 30 | 5 | 25 | |||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Franchise Agreements
Material provisions of our franchise agreements typically include the following:
Initial Franchise Fee. The initial franchise fee for a new franchise is $1,000,000.
Term of Agreement. The initial term of a franchise agreement is generally ten to fifteen years. Our TA franchise agreements generally provide for two five year renewals on the terms then being offered to prospective franchisees at the time of the franchise renewal and our Petro franchise agreements generally provide for two five year renewals on the same terms and conditions as the expiring agreements. As of December 31, 2013, our franchise agreements had an average remaining term excluding renewal options of five years and an average remaining term including renewal options of 13 years.
Protected Territory. Under the terms of our franchise agreements for TA travel centers, generally we have agreed not to operate, or allow another person to operate, a travel center or travel center business that uses the TA brand in a specified territory for that TA branded franchise travel center. Under the terms of our franchise agreements for Petro travel centers, generally we have agreed not to operate, or allow another person to operate, a travel center or travel center business that uses the Petro brand in a specified territory for that Petro branded franchise travel center.
Restrictive Covenants. Generally our franchisees may not operate any travel center or truck stop related business under a franchise agreement, licensing agreement or marketing plan or system of another person or entity. If the franchisee owns the franchised premises, generally for a two year
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period after expiration or earlier termination of our franchise agreement the franchisee may not operate the premises with a competitive brand.
Nonfuel Product Offerings. Franchisees are required to operate their travel centers in conformity with guidelines that we establish and offer any products and services that we deem to be a standard product or service in our travel centers.
Fuel Purchases, Sales and Royalties. Our franchise agreements require the franchisee to pay us a royalty fee per gallon of fuel sold based on sales of certain fuels at the franchised travel center, unless they purchase their fuel inventory from us. We also purchase receivables generated by some of our franchisees in connection with sales to common trucking fleet customers through our proprietary billing system on a non-recourse basis in return for a fee.
Royalty Payments on Nonfuel Revenues. Franchisees are required to pay us a royalty fee generally equal to between 2% and 4% of nonfuel revenues, in some cases up to a threshold amount, with a lower percentage fee payable on amounts in excess of the threshold amount and on revenues from branded QSRs.
Advertising, Promotion and Image Enhancement. Our franchisees are required to make additional payments to us as contributions to the applicable brand wide advertising, marketing and promotional expenses we incur.
Termination/Nonrenewal. Generally, we may terminate or refuse to renew a franchise agreement for default by the franchisee. Generally, we may also refuse to renew if we determine that renewal would not be in our economic interest or, in the case of TA franchisees and Petro franchisees under our current form of franchise agreement, if the franchisee will not agree to the terms in our then current form of franchise agreement.
Rights of First Refusal. During the term of each franchise agreement, we generally have a right of first refusal to purchase that facility at the price offered to a franchisee by a third party. In addition, some of our agreements give us a right to purchase the franchised center for fair market value, as determined by the parties or an independent appraiser, upon expiration or earlier termination of the franchise agreement.
Franchisee Sublease Agreements
In addition to franchise fees, we also collect rent from franchisees who sublease their respective travel centers from us. At December 31, 2013, there were five such subleased franchisee travel centers. During 2012 and 2013, we acquired the operations at four and one travel centers, respectively, that previously had been subleased from us by franchisees. The current terms of the five remaining sublease agreements end between June and September 2017. Four of the five remaining subleases have one renewal option for an additional five year period; the fifth sublease has no further renewal options. The subleases require that the franchisees notify us of their intent to renew the sublease at least 90 days but not more than 180 days prior to the expiration of the current term. Among other things, renewal is contingent upon the franchisee not being in default under the expiring sublease and executing our then current form of sublease, the terms of which may differ from the expiring sublease, including without limitation, increased rent. The material provisions of our sublease agreements typically include the following:
Operating Costs. Under the terms of our existing leases, the sublessee is responsible for the payment of all costs and expenses in connection with the operation of the leased travel centers, typically excluding certain environmental costs, certain maintenance costs and real estate taxes.
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Rent. Under the terms of our existing leases, the sublessee must pay annual fixed rent equal to the sum of:
Use of the Leased Travel Center. The leased travel center must be operated as a travel center in compliance with all laws, including all environmental laws.
Termination/Nonrenewal. The subleases contain terms and provisions regarding termination and nonrenewal, which are substantially the same as the terms and provisions of the related franchise agreements. The subleases are cross defaulted with the related franchise agreements. In certain circumstances we may reimburse the franchisee for a portion of the franchisee's cost of certain capital improvements upon termination of the sublease.
Franchise Regulation
Some states require state registration and delivery of specified disclosure documentation to potential franchisees and impose special regulations on petroleum franchises. Some state laws also impose restrictions on our ability to terminate or not renew franchises and impose other limitations on the terms of our franchise relationships or the conduct of our franchise business. A number of states include, within the scope of their petroleum franchising statutes, prohibitions against price discrimination and other allegedly anticompetitive conduct. These provisions supplement applicable federal and state antitrust laws. Federal Trade Commission regulations require that we make extensive disclosure to prospective franchisees. We believe that we are in compliance with all franchise laws applicable to our business.
Gaming Regulation
As a result of our involvement in gaming operations through certain of our subsidiaries, we and such subsidiaries, which we refer to as our licensed subsidiaries, are currently subject to gaming regulations in Louisiana, Montana and Nevada. Requirements under gaming regulations vary by jurisdiction but include, among other things:
Holders of beneficial interests in our voting securities are subject to licensing or suitability investigations by the relevant gaming authorities under various circumstances including, generally, the attainment of certain levels of ownership of a class of voting securities, or involvement in the gaming
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operations of or influence over us or our licensed subsidiaries. Persons or entities seeking to acquire control over us or over operation of the license are subject to prior investigation by and approval from the relevant gaming authorities. Any beneficial owner of our voting securities, regardless of the number of shares owned, may be required by a relevant gaming authority to file an application and have his or its suitability reviewed in certain circumstances, including if the gaming authority has reason to believe that such ownership of our voting securities would otherwise be inconsistent with its state's gaming laws. In some jurisdictions, the applicant must pay all costs of investigations incurred in connection with such investigations. Additionally, in the event of a finding by a relevant gaming authority that a person or entity is unsuitable to be an owner of our securities, such person would be prohibited from, among other things, receiving any dividend or interest upon such securities, exercising any voting right conferred through such securities or continuing to hold our securities beyond such period of time as may be prescribed by such gaming authority, managing the licensed business and, in some cases, the shareholder may be required to divest himself or itself of our voting securities.
Certain of our and our subsidiaries' officers and directors must also file applications, be investigated and be licensed or found suitable by the relevant gaming authorities in order to hold such positions. In the event of a finding by a relevant gaming authority that a director, officer, key employee or individual with whom we or our licensed subsidiary have a material relationship is unsuitable, we or our licensed subsidiary, as applicable, may be required to sever our relationships with such individual.
Any violations by us or any of our licensed subsidiaries of the gaming regulations to which we are subject could result in fines, penalties (including the limiting, conditioning, suspension or revocation of any licenses held) and criminal actions. Additionally, certain jurisdictions, such as Nevada, empower their regulators to investigate participation by licensees in gaming outside their jurisdiction and require access to periodic reports regarding those gaming activities. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions.
Competition
Travel Centers
Fuel and nonfuel products and services can be obtained by trucking companies and truck drivers from a variety of sources, including national and regional full service travel centers and pumper only truck stops, some of which are owned or franchised by large chains and some of which are independently owned and operated, and some large service stations. In addition, some trucking companies operate their own terminals to provide fuel and services to their own trucking fleets and drivers.
Although there are in excess of 6,400 travel centers and truck stops in the U.S., we believe that large trucking fleets and long haul trucking fleets tend to purchase the large majority of their fuel at the approximately 1,900 travel centers and truck stops that are located at or near interstate highway exits and from us or our largest competitors. Based on the number of locations, Pilot Flying J, and Love's Travel Stops and Country Stores, Inc., or Love's, and we are the largest companies in our industry.
We compete with other travel center and truck stop chains based primarily on diesel fuel prices. We also experience competition, to a lesser extent, from travel center chains and independent full service travel centers that is based on the quality, variety and pricing of the wide array of nonfuel product, service and amenities offerings. Our truck repair and maintenance facilities compete with the truck repair and maintenance facilities at Pilot Flying J and Love's locations. These two competitors have increased their respective numbers of truck repair and maintenance facilities over the past few years but do not have as large a chain of repair and maintenance facilities as we do. For truck maintenance and repair services, we also compete with regional full service travel center and truck stop chains, full service independently owned and operated travel centers and truck stops, fleet maintenance
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terminals, independent garages, truck dealerships, truck quick lube facilities and other parts and service centers. We also compete with other full service restaurants, QSRs, mass merchandisers, electronics stores, drugstores and travel stores. Some truck fleets own their own fuel, repair and maintenance facilities; however, we believe the long term trend has been toward a reduction in these facilities in favor of obtaining fuel, repair and maintenance services from third parties like us.
An additional source of competition in the future could result from commercialization of state owned interstate highway rest areas. Some state governments have historically requested that the federal government allow these rest areas to offer fuel and nonfuel products and services similar to that offered at a travel center and certain congressional leaders have historically supported such legislation. If commercialized, these rest areas may increase the number of locations competing with us and these rest areas may have significant competitive advantages over existing travel centers, including ours, because they are generally located on restricted (i.e., toll) roads and have dedicated ingress and egress.
Some states have privatized their toll roads that are part of the interstate highway system. We believe it is likely that tolls will increase on privatized highways. In addition, some states may increase tolls for their own account. If tolls are introduced or increased on highways in the proximity of our travel centers, our business at those travel centers may decline because truckers may seek alternative routes.
We believe we may be able to compete successfully for the following reasons:
HPT is not obligated to provide us with opportunities to lease additional properties, and we may not be able to find other sources of capital sufficient to maintain or grow our travel center business. Also, some of our competitors may have more resources than we do; and some of our competitors have vertically integrated fuel, fuel card and other businesses which may provide them competitive advantages. For all of these reasons and others, we can provide no assurance that we will be able to compete successfully.
Convenience Stores
The convenience store industry is highly competitive with ease of entry and constant change in the number and types of retailers offering the products and services similar to those we offer. Fuel, food, including prepared foods, and nonfood items similar or identical to those sold by us are generally available from various competitors in the communities we serve, including other convenience store chains, independent convenience store operators, supermarkets, drug stores, mass merchants, gasoline stations and other retail stores. We believe our stores compete principally with their local grocery stores, convenience stores, restaurants, and larger gasoline stations offering a more limited selection of grocery and food items for sale. We believe that we may have a competitive advantage in this market because at an average of approximately 5,000 square feet, our convenience stores are larger than the average convenience store, which average is approximately 2,900 square feet according to the National
25
Association of Convenience Stores, enabling us to have a larger variety of product and service offerings.
Environmental and Climate Change Matters
Extensive environmental laws regulate our operations and properties. These laws may require us to investigate and clean up hazardous substances, including petroleum or natural gas products, released at our owned and leased properties. Governmental entities or third parties may hold us liable for property damage and personal injuries, and for investigation, remediation and monitoring costs incurred in connection with any contamination and regulatory compliance. We use both underground storage tanks and above ground storage tanks to store petroleum products, natural gas and waste at our locations. We must comply with environmental laws regarding tank construction, integrity testing, leak detection and monitoring, overfill and spill control, release reporting and financial assurance for corrective action in the event of a release. At some locations we must also comply with environmental laws relative to vapor recovery or discharges to water. In addition, legislation and regulation regarding climate change, including greenhouse gas emissions, and other environmental matters may be adopted or administered and enforced differently in the future, which could adversely impact our business. For instance, federal and state governmental requirements addressing emissions from trucks and other motor vehicles, such as the U.S. Environmental Protection Agency's gasoline and diesel sulfur control requirements that limit the concentration of sulfur in motor gasoline and diesel fuel, as well as President Obama's recent order that his administration develop and implement new fuel efficiency standards for medium and heavy duty commercial trucks by March 2016, could negatively impact our business. While the costs of our environmental compliance in the past have not had a material adverse impact on us, it is impossible to predict the ultimate effect changing circumstances and changing environmental laws may have on us in the future. Under the terms of our leases, we generally have agreed to indemnify HPT for any environmental liabilities related to properties that we lease from HPT and we are required to pay all environmental related expenses incurred in the operation of these properties. Under our agreement with Shell, we have agreed to indemnify Shell and its affiliates from certain environmental liabilities incurred with respect to our travel centers where natural gas fueling lanes are installed by Shell. Also, legislation and regulations that limit carbon emissions may cause our energy costs at our locations to increase.
For further information about these and other environmental and climate change matters, see the disclosure under the heading "Environmental Matters" in Note 18 to the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report, which disclosure is incorporated herein by reference. In addition, for more information about these environmental and climate change matters and about the risks which may arise as a result, see elsewhere in this Annual Report, including "Warning Concerning Forward Looking Statements," Item 1A, "Risk Factors," and Item 7, "Management's Discussion and Analysis—Environmental and Climate Change Matters."
Intellectual Property
We own no patents. We own the "Petro Stopping Centers" and "Minit Mart" names and related trademarks and various trade names used in our business such as RoadSquad®, RoadSquad Connect TM , UltraOne®, Iron Skillet®, Reserve-It TM and others. We have the right to use the "TA", "TravelCenters of America" and other trademarks historically used by our predecessor, which are owned by HPT, during the term of the TA Lease. We also license certain trademarks used in the operation of certain of our QSRs and convenience stores and may in the future license trademarks to be used in the operation of one or more of our full service restaurants. We believe that these trademarks are important to our business, but that they could be replaced with alternative trademarks without significant disruption in our business except for changes in cost, which may be significant.
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Seasonality
Assuming little variation in fuel prices, our revenues are usually lowest in the first quarter of a year when movement of freight by professional truck drivers and motorist travel are typically at their lowest levels of the year, and our revenues in the fourth quarter of a year are often somewhat lower than those of the second and third quarters because, although the beginning of the fourth quarter is often positively impacted by increased movement of freight in preparation for various national holidays, that positive impact is often more than offset by a reduction in freight movement caused by vacation time associated with those holidays taken by professional truck drivers toward the end of the year. While our revenues are modestly seasonal, the quarterly variations in our operating results may reflect greater seasonal differences because our rent and certain other costs do not vary seasonally.
Employees
As of December 31, 2013, we employed approximately 20,670 people on a full or part time basis. Of this total, approximately 20,000 were employees at our company operated sites, 600 performed managerial, operational or support services at our headquarters or elsewhere and 70 employees staffed our distribution centers. Thirty of our employees at two travel centers are represented by unions. We believe that our relationship with our employees is satisfactory.
Internet Website
Our internet website address is www.tatravelcenters.com. Copies of our governance guidelines, code of business conduct and ethics, our policy outlining procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters and the charters of our audit, compensation and nominating and governance committees are posted on our website and also may be obtained free of charge by writing to our Secretary, TravelCenters of America LLC, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458 or at our website. We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the SEC. Any shareholder or other interested party who desires to communicate with our Independent Directors, individually or as a group, may do so by filling out a report on our website. Our board of directors also provides a process for security holders to send communications to the entire board. Information about the process for sending communications to our board can be found on our website. Our website address is included several times in this Annual Report as a textual reference only and the information in the website is not incorporated by reference into this Annual Report.
Our business faces many risks. If any of the events or circumstances described in the following risks occurs, our business, financial condition or results of operations could suffer and the trading price of our equity securities could decline. Investors and prospective investors should carefully consider the following risks, the risks referred to elsewhere in this Annual Report and the information contained under the heading "Warning Concerning Forward Looking Statements" before deciding whether to invest in our securities.
Risks related to our business
Our operations have produced losses .
From when we began operations on January 31, 2007, through 2010 our business produced losses. Although some of our historical results were impacted by separation obligations with our former
27
management, business reorganizations and other costs that did not recur and we have been profitable in 2011, 2012 and 2013, we believe our losses in prior periods were also the result of the general decline of the U.S. and world economies over which we have no control. We cannot provide any assurance that we will be able to operate profitably in future periods.
Our operating margins are narrow.
Our total revenues for the year ended December 31, 2013, were $7.9 billion, while the sum of our cost of goods sold (excluding depreciation) and site level operating expenses for the same period totaled $7.5 billion. Fuel sales in particular generate low gross margin percentages. Our fuel sales for the year ended December 31, 2013, were $6.5 billion and our gross margin on fuel sales was $0.3 billion, or approximately 5.3% of fuel sales. A small percentage decline in our future revenues or increase in our future costs and expenses, especially revenues and costs and expenses related to fuel, may cause our profits to decline or us to incur losses.
Our financial results are affected by U.S. economic conditions.
The trucking industry is the primary customer for our goods and services. Demand for trucking services in the U.S. generally reflects the amount of commercial activity in the U.S. economy. When the U.S. economy declines, demand for our products and services typically declines. For example, in the recent past declines in housing construction led to less lumber and construction materials being shipped, and these reduced shipments resulted in fewer customers and lower sales volumes at our travel centers. While the U.S. economy recently has been slowly growing over the past several quarters and trucking activity measures reflect growth in that industry, the strength and sustainability of any economic recovery is uncertain. If the U.S. economy continues to operate as it has over the past few years, or if it worsens, our financial results may not improve and may decline.
We have a substantial amount of indebtedness and rent obligations, which could adversely affect our financial condition.
As of December 31, 2013, we had total consolidated indebtedness of $154.9 million, consisting of letters of credit outstanding under our credit facility and $110 million of our 8.25% Senior Notes due 2028. As of December 31, 2013, we also had deferred rent obligations of $150 million, $107.1 of which is due on December 31, 2022, and $42.9 million of which is due on June 30, 2024, and substantial ongoing obligations under our leases. Together, these obligations are substantial and could limit our ability to obtain financing for working capital, capital expenditures, acquisitions, refinancing, lease obligations or other purposes. They may also increase our vulnerability to adverse economic, market and industry conditions, limit our flexibility in planning for, or reacting to, changes in our business operations or to our industry overall, and place us at a disadvantage in relation to competitors that have lower debt levels. Any or all of the above events and factors could have an adverse effect on our results of operations and financial condition.
We are obligated to pay material amounts of rent to HPT.
The terms of our leases with HPT require us to pay all of our operating costs and generally fixed amounts of rent. During periods of business decline, like the one we experienced during the recent recession, our revenues and gross margins may decrease but our minimum rents due to HPT do not decline. A decline in our revenues or an increase in our expenses may make it difficult or impossible for us to meet all of our obligations and, if we default under our HPT leases, we may be unable to continue our business.
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Fuel price increases and fuel price volatility negatively affect our business.
High fuel prices and the inability to project future prices have several adverse impacts upon our business. First, high fuel prices result in higher truck shipping costs. This causes shippers to consider alternative means for transporting freight, which reduces trucking business and, in turn, reduces our business. Second, high fuel prices cause our trucking customers to seek cost savings throughout their businesses. This has resulted in many customer measures to conserve fuel, such as lower maximum driving speeds and reduced truck engine idling reducing total fuel consumption and our fuel sales. Third, higher fuel prices may result in less disposable income for our customers to purchase our nonfuel goods and services. Fourth, higher and more volatile fuel commodity prices increase the working capital needed to maintain our fuel inventories and receivables, and this increases our costs of doing business. Further, increases in fuel prices may place us at a cost disadvantage to our competitors that may have larger and longer maintained fuel inventory that may have been purchased during periods of lower fuel prices. If fuel commodity prices or fuel price volatility increase, our financial results may not improve and may worsen.
Increasing truck fuel efficiency may adversely impact our business.
Government regulation and the high cost of motor fuels are causing truck manufacturers and our trucking customers to focus on fuel efficiency. The largest part of our business consists of selling motor fuel. If our trucking customers purchase less motor fuel because their trucks are operated more efficiently, our financial results will decline unless we are able to sufficiently offset those declines by selling substitute or other products or services, gaining market share or increasing our gross margins per gallon of fuel sold on lower volumes of fuel sales. It is unclear whether we will be able to operate our travel centers profitably if the amount of motor fuels used by the U.S. trucking industry declines because of fuel use efficiencies. If and as truck fuel use efficiency continues to increase and if we are unable to sufficiently increase our sales of other products and services to gain market share or to increase our profit margins on lower fuel volumes, our profits may decline or we may incur losses.
Climate change and other environmental legislation and regulation and market reaction thereto may decrease demand for our major product, diesel fuel, and require us to make significant capital or other expenditures, which may adversely affect our business .
Climate change legislation and regulation, including those addressing greenhouse gas emissions, and market reaction to any such legislation or regulation or to climate change concerns, may decrease the demand for our major product, diesel fuel, and may require us to make significant capital or other expenditures. Legislative and regulatory initiatives requiring increased truck fuel efficiency have accelerated in the United States, and these mandates have and may continue to result in decreased demand for diesel fuel, which could have a material adverse effect on our business, financial condition and results of operations. Increased costs incurred by our suppliers as a result of climate change or other environmental legislation or regulation may be passed on to us in the prices we pay for our fuel supplies, but we may not be able to pass on those increased costs to our customers. Increased fuel costs resulting from these reasons would likely have similar effects on our business, operations and liquidity as discussed elsewhere regarding high fuel costs, including decreased demand for our fuel at our locations, increased working capital needs and decreased fuel gross margins. Further, legislation and regulations that limit carbon emissions may cause our energy costs at our locations to increase. Moreover, technological changes developed or changes in customer transportation or fueling preferences, including as a result of or in response to any such legislation, regulation or market reaction, may require us to make significant capital or other expenditures to adopt those technologies or to address those changed preferences and may decrease the demand for products and services sold at our locations. For example, federal and state governmental requirements addressing emissions from trucks and other motor vehicles, such as the U.S. Environmental Protection Agency's gasoline and
29
diesel sulfur control requirements that limit the concentration of sulfur in motor gasoline and diesel fuel, could negatively impact our business by making the fuel more expensive and causing our customers to buy less. For more information regarding climate change matters and their possible adverse impact on us, please see Item 7, "Management's Discussion and Analysis—Environmental and Climate Change Matters."
Our travel centers require regular and substantial maintenance and capital investments.
Our travel centers are open for business 24 hours per day, 365 days per year. Also, many of our travel centers were originally constructed more than 25 years ago. Because of the age of many of our travel centers and because of the nature and intensity of the uses of our travel centers, our travel centers require regular and substantial expenditures for maintenance and capital investments to remain functional and attractive to customers. If we cannot access capital necessary to maintain our properties, our business may decline and our profits may decline or we may incur losses. Also, deferring certain capital expenditures in the near term may require us to make even larger amounts of capital expenditures in the future.
Although we may request that HPT purchase future renovations, improvements and equipment at the travel centers that we lease from HPT, HPT is not obligated to purchase any amounts and any amounts it purchases will result in an increase in our rent payable to HPT.
Our failure to prepare and timely file our periodic reports with the SEC may adversely affect our access to the public markets to raise debt or equity capital as necessary to make required investments in our properties or to implement our business strategies.
We are not current in our reporting requirements with the SEC, and, as a result, are not able to use our shelf registration statement on Form S-3 to access the public markets to raise debt or equity capital. This limitation could adversely affect our ability to make the capital investments necessary to maintain our properties or prevent us from pursuing transactions or implementing business strategies that we might otherwise believe are beneficial to our business. Until we have regained and maintained timely compliance with our reporting obligations under the Exchange Act for a period of no less than twelve full consecutive calendar months, we will be ineligible to use shorter and less costly filings, such as a registration statement on Form S-3, to register our securities for sale. We may use a registration statement on Form S-1 to register a sale of our securities to raise capital or complete acquisitions, but doing so would likely increase transaction costs and the time required to raise capital and adversely impact our ability to raise capital or complete acquisitions in a timely manner.
We may not complete our pending acquisitions within the time frame we anticipate, or at all, which could have a negative effect on us.
Our pending acquisitions are subject to satisfaction of closing conditions, which could delay or prevent completion, cause us to incur additional costs, or both. If we do not consummate one or more pending acquisitions within the expected time frame, or at all, it could have a negative effect on our ability to execute on our growth strategy or financial performance. Additionally, if we incur substantial expenses in connection with the negotiation and completion of a particular transaction and it is not completed, we would have incurred these expenses without realizing the expected benefits of the transaction.
Acquisitions may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of a particular transaction may not be fully realized.
Travel centers that we acquire often require substantial improvements in order to be brought up to our standards, which improvements require an extended period of time to plan, design, permit and
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complete, often followed by a period of time to mature and become part of our customers' networks. We estimate that our travel center acquisitions generally will reach stabilization in approximately the third year after acquisition, but actual results can vary widely from this estimate. If improvements are more difficult, costly or time consuming than expected or if reaching maturity takes longer than expected or does not occur at all, our business, financial condition or results of operations could be negatively affected.
Additionally, the success of any acquisition, including the realization of anticipated benefits and cost savings, will depend, in part, on our ability to successfully combine the acquiree's business and ours. The integration may be more difficult, costly or time consuming than expected, may result in the loss of key employees or business disruption to us, or may adversely affect our ability to maintain relationships with customers, suppliers and employees or to fully achieve the anticipated benefits and cost savings of the acquisition. If we experience difficulties with the integration process for a particular acquisition, the anticipated benefits of the transaction may not be realized fully or at all, or may take longer to realize than expected. Integration efforts may also divert management attention and resources. These matters could have an adverse effect on us for an undetermined period after completion of a transaction.
The obligations and liabilities with respect to an acquisition, some of which may be unanticipated or unknown, may be greater than we have anticipated which may diminish the value of the acquisition to us.
We may acquire obligations and liabilities in a particular transaction, some of which may not have been disclosed to us, may not be reflected or reserved for in the acquiree's historical financial statements, or may be greater than we have anticipated. These obligations and liabilities could have a material adverse effect on our business, financial condition or results of operations.
We may not complete our planned travel center development projects within the time frame or for the investment we anticipate, or at all.
Our planned travel center development projects could be delayed or not completed or could require a greater investment of capital or management time, or both, than we expect. Additionally, if we design, plan, permit or construct a project but do not complete it, we may incur substantial costs without realizing any expected benefits.
We rely upon trade creditors for a significant amount of our working capital and the availability of alternative sources of financing may be limited.
Our fuel purchases are our largest operating cost. Historically, we have paid for our fuel purchases after delivery. In the past, as our fuel costs increased with the increase in commodity market prices, some of our fuel suppliers were unwilling to adjust the amounts of our available trade credit to accommodate the increased costs of the fuel volumes that we purchase; for example, a $10 million amount of trade credit will allow us to purchase 5 million gallons of fuel at $2.00 per gallon, but only 3.33 million gallons at $3.00 per gallon. Also, our historical financial results and general U.S. economic conditions have caused some fuel suppliers to request letters of credit or other forms of security for our purchases. We cannot predict how high or low fuel prices may be in the future, and fuel commodity prices significantly impact our working capital requirements.
In light of economic, industry and global credit market conditions and our historical operating losses, the availability and terms of any credit we may be able to obtain are uncertain. Although we maintain a credit facility permitting borrowings of up to $200 million, we typically utilize a large portion of that facility for issuances of letters of credit to our fuel suppliers to secure our fuel purchases and to taxing authorities (or surety bond providers) for fuel taxes. In addition, our qualified collateral historically has been below the amount required to permit the entire $200 million under the
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credit facility to be available to us for borrowings. At December 31, 2013, a total of $130.8 million was available to us for loans and letters of credit under the credit facility, of which we had used $44.9 million for outstanding letters of credit issued under that facility to secure certain purchases, insurance, fuel tax and other trade obligations. Any increased investment in working capital decreases our financial flexibility to use our capital for other business purposes or to fund our operations and may cause us to suffer losses. We received a waiver, until July 31, 2014, of the requirement under our credit facility to furnish unaudited consolidated financial statements as of and for the fiscal quarter ended March 31, 2014 within 45 days of such quarter end. If we are unable to furnish these financial statements within this time period or obtain an extension of the waiver, we may be unable to borrow under our credit facility, which could affect our ability to meet our business obligations or grow our business.
Our credit facility is secured by substantially all of our cash, accounts receivable, inventory, equipment and intangible assets and imposes restrictions on our ability to incur additional indebtedness or to grant security interests in our assets. Further, under the HPT Leases, subject to certain exceptions, our tenant subsidiaries may not incur debt secured by any of their assets used in the operation of the leased travel centers without HPT's consent. Because security interests in a significant amount of our assets have already been granted and we are contractually limited in our ability to incur additional debt or grant security interests, our ability to obtain additional financing may be limited.
Further, our failure to timely file this Annual Report with the SEC, consequent inability to use our shelf registration statement on Form S-3 until we have regained and maintained timely compliance with our reporting obligations under the Exchange Act for a period of not less than twelve full consecutive calendar months and the material weaknesses in our internal control over financial reporting may negatively impact our ability to issue new debt and equity securities or the timing and terms of such an issuance.
Our credit facility imposes restrictive covenants on us, and a default under the agreements relating to our credit facility or under our indenture governing our Senior Notes could have a material adverse effect on our business and financial condition.
Our credit facility requires us and our subsidiaries, among other obligations, to maintain a specified financial ratio under certain circumstances and to satisfy certain financial tests. These tests include maintenance of certain financial ratios any time that excess availability under the credit facility falls below 15% of the maximum credit limit of $200 million, until such time that the excess availability has been greater than 15% of the maximum credit limit for thirty consecutive days. In addition, our credit facility restricts, among other things, our ability to incur debt and liens, make certain investments and pay dividends and other distributions including, under certain circumstances, payments on the Senior Notes. Under certain circumstances, we are required to seek permission from the lenders under our credit facility to engage in specified corporate actions.
Our credit facility also requires that we furnish certain of our financial statements to our lenders within specified time periods. Additionally, the indenture governing our Senior Notes requires that we file our Exchange Act reports within prescribed time periods. If we are unable to furnish these financial statements or reports within the prescribed time periods, or, in the case of our credit facility, obtain a waiver, we may be in default under our credit facility or under the indenture governing the Senior Notes, which could give rise to adverse consequences, including giving lenders or holders of our Senior Notes the right to exercise certain remedies, such as demanding immediate repayment of amounts owed, and restrictions on our ability to borrow. If we are unable to borrow under our credit facility, we may be unable to meet our business obligations or grow our business. Effective May 31, 2014, we received a waiver from our lenders extending until July 31, 2014, our requirement to furnish our quarterly financial statements as of and for the fiscal quarter ended March 31, 2014.
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Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with these covenants (or similar covenants contained in future financing agreements) could result in a default under our credit facility, indenture and other agreements containing cross-default provisions, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. A default could permit lenders or holders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt and to terminate any commitments to lend. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations, including our obligations under the Senior Notes. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. If our indebtedness were to be accelerated, our assets may not be sufficient to repay such indebtedness in full. In such circumstances, we could be forced into bankruptcy or liquidation and, as a result, investors could lose their investment in our securities.
An interruption in our fuel supplies would materially adversely affect our business.
To mitigate the risks arising from fuel price volatility, we generally maintain limited fuel inventories. Accordingly, an interruption in our fuel supplies would materially adversely affect our business. Interruptions in fuel supplies may be caused by local conditions, such as a malfunction in a particular pipeline or terminal, by weather related events, such as hurricanes in the areas where petroleum or natural gas is extracted or refined, or by national or international conditions, such as government rationing, acts of terrorism, wars and the like. Further, our fuel suppliers may fail to provide us with fuel due to these or other reasons. Any limitation in available fuel supplies or on the fuel we can offer for sale may cause our profits to decline or us to experience losses.
Our storage and dispensing of petroleum products and natural gas create the potential for environmental damages, and compliance with environmental laws is often expensive.
Our business is subject to laws relating to the protection of the environment. The travel centers and convenience stores we operate include fueling areas, truck repair and maintenance facilities and tanks for the storage and dispensing of petroleum products, natural gas and other hazardous substances, all of which create the potential for environmental damage. As a result, we regularly incur environmental clean up costs. Our balance sheet as of December 31, 2013, included an accrued liability of $7.5 million for environmental remediation and related costs. Because of the uncertainties associated with environmental expenditures, it is possible that future expenditures could be substantially higher than this amount. Environmental laws expose us to the possibility that we may become liable to reimburse governments or others for damages and costs they incur in connection with environmental hazards or liable for fines and penalties for failure to comply with environmental laws. We cannot predict what environmental legislation or regulations may be enacted or how existing laws or regulations will be administered or interpreted with respect to our products or activities in the future; more stringent laws, more vigorous enforcement policies or stricter interpretation of existing laws in the future could cause us to expend significant amounts or experience losses.
In our experience, the risk of being subject to regulatory review and proceedings for environmental related matters is greater in certain jurisdictions, such as the State of California. We have significant operations in the State of California and are currently and have in the past been subject to regulatory review and proceedings for environmental related matters and may in the future be subject to similar reviews and proceedings in that state or elsewhere. Although to date our environmental regulatory matters in the State of California have not resulted in settlements or judgments against us, or otherwise resulted in our paying or agreeing to pay amounts, which have had, or which we expect would reasonably be likely to have, a material adverse effect on our business, there can be no assurance that
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they will not have such an effect or that environmental regulatory reviews or proceedings elsewhere would not have such an effect on us.
Under the leases between us and HPT, we generally have agreed to indemnify HPT from environmental liabilities it may incur arising at any of the properties we lease from HPT. Under our agreement with Shell, we have agreed to indemnify Shell and its affiliates from certain environmental liabilities they may incur with respect to our travel centers where natural gas fueling lanes have been installed. Although we maintain insurance policies which cover our environmental liabilities, that coverage may not adequately cover liabilities we may incur. To the extent we incur material amounts for environmental matters for which we do not receive insurance or other third party reimbursement or for which we have not recognized a liability in prior years, our operating results may be materially adversely affected. In addition, to the extent we fail to comply with environmental laws and regulations, or we become subject to costs and requirements not similarly experienced by our competitors, our competitive position may be harmed. Also, to the extent we are or become obligated to fund any such liabilities, such funding obligation could materially adversely affect our liquidity and financial position.
Consolidation of our competitors and the third party fuel card companies may negatively affect our business.
In 2010, the largest companies in our industry based on diesel fuel volume combined to form Pilot Flying J. As a result of this combination, increased competitive pressure could negatively impact our sales volumes and profitability and increase our site level operating expenses and selling, general and administrative expenses. In addition, most of our trucking customers transact business with us by use of fuel cards, which are issued by third party fuel card companies. The fuel card industry has only a few significant participants, including Comdata Network, Inc., or Comdata, the largest issuer of fuel cards, and Electronic Funds Source, LLC, or EFS, a company affiliated with Pilot Flying J. EFS is the product of the combination during 2011 and 2012 of the fuel card businesses of Transportation Clearing House LLC, EFS Transportation Services, Inc., and T-Check Systems, each previously one of the larger competitors to Comdata in the fuel card industry, making, we believe, EFS the second largest competitor in the fuel card industry. We are unable to determine the full extent and effect the combined Pilot Flying J may have on our financial position, results of operations, or competitive position, although we believe the combination enables Pilot Flying J to substantially alter the competitive conditions in the travel center industry. Further, we are unable to determine the extent of the effect that competition, or lack thereof, between Comdata and EFS in particular, may result in future increases in our transaction fee expenses or working capital requirements, or both.
Our convenience stores are subject to a number of risks particular to the convenience store industry that, if materialized, could have a material adverse effect on our business, results of operations or financial condition.
The convenience store industry in the U.S. and in the geographic areas in which we operate is highly competitive and fragmented with ease of entry and constant change in the number and types of retailers offering the products and services similar to those we provide. We compete with other convenience store chains, independent convenience stores, supermarkets, drugstores, discount clubs, motor fuel service stations, mass merchants, fast food operations and other similar retail outlets. In recent years, several non-traditional retailers, such as supermarkets, club stores and mass merchants, have begun to compete directly with convenience stores, particularly in the sale of motor fuel and their market share is expected to grow. Increased competition or new entrants to the industry could result in reduction of our gross margins. Additionally, a large number of our convenience stores are located in Kentucky, making our convenience store business particularly vulnerable to changes in economic conditions in Kentucky.
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Many of our labor costs are fixed and cannot be reduced without adversely affecting our business.
To maintain and manage our operations requires certain minimum staffing levels to operate our travel centers 24 hours per day, 365 days per year, and we attempt to manage our staffing so to avoid excess, unused capacity. As a result, it may be difficult for us to effect future reductions in our staff without adversely affecting our business prospects. Also, certain opportunities for sales may be lost when labor is reduced.
Our customers may become unable to pay us when we extend credit.
We sell some of our products on credit. Customers purchasing fuel or other goods or services on credit from us may default on their obligations to pay, or they may extend the payment periods, for products sold to them on credit. In light of the challenging economic conditions that have existed in the U.S. generally during and since the recent recession and in the trucking industry specifically, and the slow and uneven recovery and expansion of the U.S. economy since the recession, the risk that some of our customers may not pay us may be greater at present than it had been prior to the recession. Also, to the extent that we are unable to collect receivables owed to us in a timely fashion, we may be required to increase amounts invested in our working capital, which could have a material adverse effect on our business, results of operations or financial condition.
We are involved in litigation which is expensive and may have adverse impacts upon our business.
We are currently involved in litigation which is expensive and which may have adverse consequences to us. If these litigation matters or new litigation matters continue for extended periods or if they result in judgments adverse to us, our profits may decline or we may experience losses. We are named as a defendant in one lawsuit brought under U.S. federal antitrust laws that we have recently agreed to settle. This settlement is subject to court approval and other conditions, and if it is not completed and we were to be found liable for the claims made in the lawsuit, actual damages would be trebled and we would be subject to joint and several liability among the defendants, which could significantly magnify the effect of any adverse judgment. In our experience, the risk of litigation is greater in certain jurisdictions, such as the State of California. We have significant operations in the State of California and have in the past been, and may in the future be, party to employee and other litigation in that state or elsewhere. Although to date our litigation matters in the State of California have not resulted in settlements or judgments against us which have had a material adverse effect on our business, there can be no assurance that pending or future litigation in that jurisdiction or elsewhere would not have such an effect on us. We have defended, and will continue to defend, vigorously against litigation challenges. However, we or our subsidiaries may enter into settlement discussions in particular cases if we believe it is in our best interests to do so. Settlement of, or failure to successfully defend, litigation could result in liability that could have a material adverse effect on our results of operations, financial condition and cash flows. For additional information about material pending legal proceedings see Item 3, "Legal Proceedings", elsewhere in this Annual Report.
Our labor costs may significantly increase as a result of healthcare regulatory initiatives.
The adoption of the Patient Protection and Affordable Care Act and the related reconciliation measure, the Health Care and Education Reconciliation Act of 2010, and the regulations resulting from such legislation may significantly increase the costs of providing health care to our employees. Due to the complexity of the legislation and the uncertain timing and content of the related regulations, we are unable to predict the amount and timing of any such increased costs, but the cost may be material. In addition, it is likely that we will incur additional administrative costs to comply with certain provisions of this legislation. Because many of the rules and regulations continue to be defined, we are unable to predict the amount of these costs to comply with various provisions of this legislation. However,
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changes to our employee healthcare costs could have a significant, adverse impact on our business and results of operations.
Our franchisees may become unable to pay our rents, franchise royalties and other amounts due to us and we have limited control of our franchisees.
Five travel centers that we lease from HPT are subleased to franchisees. A failure by our franchisees to pay rents to us would not affect our minimum rent payable to HPT. As of December 31, 2013, an additional 25 travel centers not owned by us or HPT are operated by franchisees. For the year ended December 31, 2013, the rent, franchise royalty and other revenue generated from all of our franchisee relationships was $12.7 million. We believe the difficult business conditions that have affected the travel centers that we operate during and since the recent U.S. recession, including the effects of U.S. economic conditions and high and volatile fuel commodity prices, have also adversely affected our franchisees and may make it difficult for our franchisees to pay the rent, franchise royalties and other amounts due to us. In addition, our sublease and franchise agreements with our franchisees are subject to periodic renewal by us or the franchisee. Also, various laws and our existing franchise agreements limit the control we may exercise over our franchisees' business activities. A failure by our franchisees to pay rent, franchise royalties and other amounts due to us, or the termination or non-renewal of a significant number of our franchise agreements, may cause our profits to decline.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of information technology could harm our business.
We rely on information technology networks and systems including the Internet, or IT systems, to process, transmit and store electronic information, including financial records and personal identifying information such as employee and payroll data and workforce scheduling information, and to manage or support a variety of business processes, including our supply chain, retail sales, credit card payments and authorizations, financial transactions, banking and numerous other processes and transactions. We purchase some of the IT systems we use from vendors on whom our IT systems materially depend. We rely on commercially available and proprietary IT systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as payment card and credit information. In addition, the IT systems we use for transmission and approval of payment card transactions, and the technology utilized in payment cards themselves, may put payment card data at risk; and some of these IT systems are determined and controlled by the payment card suppliers and not by us. Although we have taken steps to protect and maintain the security of the IT systems we use and the data maintained in them, it is possible that our security measures will not prevent the improper functioning of or damage to the IT systems we use, or the improper access to such IT systems or disclosure of personally identifiable information, such as in the event of a cyber attack. Security breaches, including physical or electronic break ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any compromise or breach of our IT systems could cause material interruptions in our operations, damage our reputation, subject us to material liability claims or regulatory penalties, reduce our customers' willingness to conduct business with us and could have a material adverse effect on our business, financial condition and results of operations. Further, the failure of the IT systems we use to operate effectively, or problems we may experience with maintaining the IT systems we currently use or transitioning to upgraded or replacement systems, could significantly harm our business and operations and cause us to incur significant costs to remediate such problems.
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Our sales could be harmed if we or our suppliers, franchisors, licensors or franchisees become associated with negative publicity.
We operate our travel centers nationwide and operate convenience stores under a small number of brand names. We sell branded gasoline at most of our locations and many of our locations have QSRs operating under brands we do not own. In addition, we resell numerous other products we obtain from third parties. If the companies or brands associated with our products and offerings become associated with negative publicity, our customers may avoid purchasing these products and offerings, including at our locations, and may avoid visiting our locations because of our association with the particular company or brand. As noted elsewhere in this Annual Report, the control we may exercise over our franchisees is limited. Negative publicity or reputational damage relating to any of our franchisees may be imputed to our entire company and business. If we were to experience these or other instances of negative publicity or reputational damage, our sales and results of operations may be harmed.
Privatization of toll roads or of rest areas may negatively affect our business.
Some states have privatized their toll roads that are part of the interstate highway system. We believe it is likely that tolls will increase on privatized highways. In addition, some states may increase tolls for their own account. If tolls are introduced or increased on highways in the proximity of our locations, our business at those travel centers may decline because truckers and motorists may seek alternative routes. Similarly, some states have privatized or are considering privatizing their publicly owned highway rest areas. If publicly owned rest areas along highways are privatized and converted to travel centers in the proximity of some of our locations, our business at those locations may decline and we may experience losses.
We may be unable to utilize our net operating loss carryforwards.
Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, imposes limitations on the ability of a company taxable as a corporation that undergoes an "ownership change", as defined by the Code, to use its net operating loss carryforwards and certain other tax benefits and deductions to reduce its tax liability. As a result of certain trading in our shares during 2007, we experienced an ownership change. Consequently, we may be unable to use our net operating loss generated in 2007 to offset any future taxable income we may generate. If we experience additional ownership changes, our net operating losses and tax credit carryforwards generated after 2007 could be subject to limitations on usage and the existence of a net unrecognized built-in loss at the time of an ownership change could limit our future tax deductions for a five year period after the ownership change. In 2009, our bylaws were amended to impose certain restrictions on the transfer of our shares in order to help us preserve the tax treatment of our net operating losses and other tax benefits (see below for a discussion of the risks related to our ownership limitations under the heading "Risks arising from certain relationships of ours and our organization and structure").
If we fail to maintain effective internal control over financial reporting our financial reporting could be inaccurate.
Internal control systems are intended to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. We concluded that our internal controls over financial reporting were not effective as of December 31, 2013. As described in Item 9A of this Annual Report, during 2013 we identified certain deficiencies in our internal control over financial reporting with respect to income taxes, a lack of sufficient accounting department personnel and our financial statement close process. We cannot assure you that our actions will be completely effective or that we will not discover other material weaknesses in our controls. If we fail to maintain effective internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected, our business and financial condition could be harmed, investors may lose confidence in our
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reported financial information and the market price of our common shares or other securities may decline.
Risks arising from certain relationships of ours and our organization and structure
Our business is subject to possible conflicts of interest with HPT and RMR.
Our business is subject to possible conflicts of interest, as follows:
In connection with the agreement we entered as part of the HPT Transaction, we granted HPT a right of first refusal to purchase, lease, mortgage or otherwise finance any interest we own in a travel center before we sell, lease, mortgage or otherwise finance that travel center with another party, and we granted HPT and other entities to which RMR provides management services a right of first refusal to acquire or finance any real estate of the types in which they invest before we do, which could limit our ability to purchase or finance our properties or properties we may wish to invest in or acquire in the future. Also, under this agreement we agreed not to take any action that might reasonably be expected to have a material adverse impact on HPT's ability to qualify as a real estate investment trust, or REIT.
We believe that our historical and ongoing business dealings with HPT and RMR have benefited us and that, despite the foregoing possible conflicts of interest, the transactions we have entered with HPT and RMR since the HPT Transaction have been commercially reasonable and not less favorable than otherwise available to us. Nonetheless, in the past, in particular following periods of volatility in the overall market or declines in the market price of a company's securities, shareholder litigation, dissident shareholder director nominations and dissident shareholder proposals have often been instituted against companies alleging conflicts of interest in business dealings with affiliated and related persons and entities. Our relationships with HPT, RMR, Affiliates Insurance Company, or AIC, an
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Indiana insurance company, the other businesses and entities to which RMR provides management services, Barry Portnoy and other related parties of RMR may precipitate such activities. These activities, if instituted against us, could result in substantial costs and a diversion of our management's attention even if the action is unfounded.
We have significant commercial arrangements with RMR and HPT and we are dependent on those arrangements in operating our business.
We are party to a business management and shared services agreement with RMR, whereby RMR assists us with various aspects of our business, and a property management agreement with RMR, whereby RMR manages our headquarters office building. One of our Directors is the majority owner and Chairman of RMR. One of our other Directors, President and Chief Executive Officer, our Executive Vice President, Chief Financial Officer and Treasurer and our Executive Vice President and General Counsel are also officers of RMR. Most of the travel centers that we operate are leased by us, principally from HPT. As a result of these factors, we are dependent on our arrangements with RMR and HPT in operating our business and any adverse developments in those arrangements could have a material adverse effect on our business and our ability to conduct our operations.
Territorial restrictions placed on us by our leases with HPT and our franchise agreements with our franchisees could impair our ability to grow our business.
Under our leases with HPT, without the consent of HPT, we generally cannot own, franchise, finance, operate, lease or manage any travel center or similar property within 75 miles in either direction along the primary interstate on which a travel center owned by HPT is located. Under the terms of our franchise agreements for TA travel centers, generally we have agreed not to operate, or allow another person to operate, a travel center or travel center business that uses the TA brand in a specified territory for that TA branded franchise location. Under the terms of our franchise agreements for Petro travel centers, generally we have agreed not to operate, or allow another person to operate, a travel center or travel center business that uses the Petro brand in a specified territory for that Petro branded franchise location. As a result of these restrictions, we may be unable to develop, acquire or franchise a travel center in an area in which an additional travel center may be profitable, thereby losing an opportunity for future growth of our business.
Ownership limitations and certain other provisions in our limited liability company agreement, bylaws and certain material agreements may deter, delay or prevent a change in our control or unsolicited acquisition proposals.
Our limited liability company agreement, or our LLC agreement, and bylaws contain separate provisions which prohibit any shareholder from owning more than 9.8% and 5% of the number or value of any class or series of our outstanding shares. The 9.8% ownership limitation in our LLC agreement is consistent with our contractual obligations with HPT to not take actions that may conflict with HPT's status as a REIT under the Internal Revenue Code. The 5% ownership limitation in our bylaws is intended to help us preserve the tax treatment of our tax credit carryforwards, net operating losses and other tax benefits. We also believe these provisions promote good orderly governance. These provisions inhibit acquisitions of a significant stake in us and may deter, delay or prevent a change in our control or unsolicited acquisition proposals that a shareholder may consider favorable. Additionally, provisions contained in our LLC agreement and bylaws may have a similar impact, including, for example, provisions relating to:
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In addition, the HPT Leases, our shareholders agreement with respect to AIC, our business management and shared services agreement with RMR and our credit facility each provide that our rights and benefits under those agreements may be terminated in the event that anyone acquires more than 9.8% of our shares or we experience some other change in control, as defined in those agreements, without the consent of HPT, RMR or the lenders under the credit facility, respectively, and that AIC and the other shareholders of AIC may have rights to acquire our interests in AIC if such an acquisition occurs or if we experience some other change of control. In addition, our obligation to repay deferred rent then outstanding under our amended leases with HPT may be accelerated if, among other things, a Director not nominated or appointed by the then members of our Board of Directors is elected to our Board of Directors or if our shareholders adopt a proposal (other than a precatory proposal) not recommended for adoption by the then members of our Board of Directors. For these reasons, among others, our shareholders may be unable to realize a change of control premium for securities they own or otherwise effect a change of our policies or a change of our control.
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Our rights and the rights of our shareholders to take action against our Directors, officers, HPT and RMR are limited.
Our LLC agreement eliminates the personal liability of each of our Directors to us and our shareholders for monetary damages for breach of fiduciary duty as our Director, except for a breach of the Director's duty of loyalty to us or our shareholders as modified by our LLC agreement, for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, or for any transaction from which the Director derived an improper personal benefit. Our LLC agreement also provides that our Directors and officers, HPT, RMR, and the respective directors and officers of HPT and RMR shall not be liable for monetary damages to us or our shareholders for losses sustained or liabilities incurred as a result of any act or omission by any of them unless there has been a final, nonappealable judgment entered by a court determining that such person or entity acted in bad faith or engaged in fraud, willful misconduct or, in the case of a criminal matter, acted with knowledge that his, her or its conduct was unlawful.
Our LLC agreement also generally requires us to indemnify, to the fullest extent permitted by law, our present and former Directors and officers, HPT, RMR, and the respective directors and officers of HPT and RMR for losses they may incur arising from claims or actions in which any of them may be involved in connection with any act or omission by such person or entity in good faith on behalf of or with respect to us. We also have similar obligations to our Directors and officers under individual indemnification agreements with such persons. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former Directors and officers, HPT, RMR, and the respective directors and officers of HPT and RMR without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our shareholders may have more limited rights against our present and former Directors and officers, HPT, RMR, and the respective directors and officers of HPT and RMR than might otherwise exist absent the provisions in our LLC agreement and our indemnification agreements or that might exist with other companies, which could limit our shareholders' recourse in the event of actions not in our shareholders' best interest.
Disputes with HPT and RMR and shareholder litigation against us or our Directors and officers may be referred to binding arbitration proceedings.
Our contracts with HPT and RMR provide that any dispute arising under those contracts may be referred to binding arbitration proceedings. Similarly, our LLC agreement and bylaws provide that actions by our shareholders against us or against our Directors and officers, including derivative and class actions, may be referred to binding arbitration proceedings. As a result, we and our shareholders would not be able to pursue litigation for these disputes in courts against HPT, RMR or our Directors and officers if the disputes were referred to arbitration. In addition, the ability to collect attorney's fees or other damages may be limited in the arbitration proceedings, which may discourage attorneys from agreeing to represent parties wishing to commence such a proceeding.
We may experience losses from our business dealings with AIC.
As of May 9, 2014, we have invested approximately $6.1 million in AIC, we have purchased substantially all of our property insurance in a program designed and reinsured in part by AIC and we periodically consider the possibilities for expanding our relationship with AIC to other types of insurance. As of May 9, 2014, we, RMR and five other companies to which RMR provides management services each own 14.3% of AIC, and we and those other AIC shareholders participate in a combined insurance program designed and reinsured in part by AIC. Our principal reason for investing in AIC and for purchasing insurance in these programs is to seek to improve our financial results by obtaining improved insurance coverages at lower costs than may be otherwise available to us or by participating in any profits which we may realize as an owner of AIC. While we believe we have in the past benefitted from these arrangements, these beneficial financial results may not occur in the
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future, and we may need to invest additional capital in order to continue to pursue these results. AIC's business involves the risks typical of an insurance business, including the risk that it may be insufficiently capitalized. Accordingly, financial benefits from our business dealings with AIC may not be achieved in the future, and we may experience losses from these dealings.
The licenses, permits and related approvals for our operations may restrict our ownership or prevent or delay any change of control of us.
We have locations in Louisiana, Montana and Nevada which include gaming operations. As a result, we and our subsidiaries involved in these operations are subject to gaming regulations in those states. Under state gaming regulations, which can vary by jurisdiction:
As an owner of AIC, we are licensed and approved as an insurance holding company; and any shareholder who owns or controls 10% or more of our securities or anyone who wishes to solicit proxies for election of, or to serve as, one of our Directors or for another proposal of business not approved by our Board of Directors may be required to receive pre-clearance from the relevant insurance regulators.
The gaming and insurance regulations to which we are subject may discourage or prevent investors from nominating persons to serve as our Directors, from purchasing our securities, from attempting to acquire control of us or otherwise implementing changes that they consider beneficial.
Risks related to our securities
Our shares have experienced significant price and trading volume volatility and may continue to do so.
Since we became a publicly traded company in January 2007, our shares have experienced significant share price and trading volatility, which may continue. The market price of our common shares has fluctuated and could fluctuate significantly in the future in response to various factors and events, including, but not limited to, the risks set out in this Annual Report, as well as:
In addition, in the past, following periods of volatility in the overall market and the market price of a company's securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.
42
Our securities are subject to delisting from the New York Stock Exchange, or NYSE, as a result of our inability to timely file our Quarterly Report on Form 10-Q for the period ended March 31, 2014 with the SEC.
On May 13, 2014, we filed a Form 12b-25 indicating that as a result of the delay in completing this Annual Report, we were also unable to file our First Quarter 10-Q within the time period prescribed by the Exchange Act. While we are working to file the First Quarter 10-Q as soon as possible, there can be no assurance that we will do so in time to regain compliance with the relevant NYSE listing standards. Failure to regain compliance with the relevant NYSE listing standards could result in our securities being delisted.
If the NYSE determines to delist our securities, the delisting could decrease trading in our securities substantially, affect adversely the market liquidity of our securities, decrease the trading price of our securities, increase the volatility of our common stock price, decrease analyst coverage of our securities, decrease investor demand and information available concerning trading prices and volume of our securities and make it more difficult for investors to buy or sell our securities. Delisting could also harm our ability to obtain additional financing on acceptable terms.
Because we do not pay dividends, shareholders will benefit from an investment in our common shares only if our common shares appreciate in value.
We have never declared or paid any cash dividends on our common shares. For the foreseeable future, it is expected that any earnings generated from our operations will be used to finance the growth of our business, and that no dividends will be paid to holders of our common shares. In addition, our credit facility and rent deferral agreement with HPT generally restrict our ability to declare or pay dividends. Our lease agreements and our credit facility also generally restrict or prohibit us from repurchasing our shares. As a result, the success of an investment in our common shares will depend upon a future increase in the trading value of our common shares. There is no guarantee that our common shares will appreciate in value.
If securities or industry analysts do not publish research, or if they publish unfavorable research, about us, our share price and trading volume would likely decline.
The trading market for our common shares may be influenced by research and reports, or lack thereof, that industry or securities analysts publish about us, our business or our market. Currently, the number of analyst reports about us is limited. If no additional analysts publish research about us, the trading price and volume of our common shares could decline. If analysts publish research about us that is unfavorable or if analysts who publish research about us now or in the future cease to publish such research regularly our share price and trading volume may decline.
Additional future sales of a significant amount of our shares could cause our share price to decline.
Future sales of substantial amounts of our common shares by our shareholders in the public market, or the perception that these sales could occur, may cause the market price of our common shares to decline. As of December 31, 2013, HPT, our former parent company, owned 3,420,000 of our outstanding common shares, representing approximately 9.1% of our outstanding common shares at such date. Additionally, we grant restricted share awards which vest over a period of years to our employees, officers, Directors and others under our share award plan. As those shares vest, the recipients of those restricted share awards may seek to sell those shares in the public market. Increased sales of our common shares by HPT, our employees, officers, Directors or others could cause our share price to decline or make it more difficult for us to sell equity or equity related securities in the future.
Additionally, from time to time without seeking shareholder approval, we may issue additional common shares, preferred shares and other securities. We may file future shelf registration statements
43
with the SEC that we may use to sell common shares, preferred shares and other securities from time to time in connection with acquisitions or otherwise. Such securities could entitle their holders to greater voting rights or preferences to our common shares, including, without limitation, as to dividends and liquidation rights. To the extent that we are able to grow through acquisitions and are able to pay for such acquisitions with our common shares or other securities convertible into our common shares, the number of outstanding common shares that will be eligible for sale in the future is likely to increase substantially. Persons receiving our shares in connection with these acquisitions may be more likely to sell large quantities of their shares, which may influence the price of our common shares. In addition, the issuance or potential issuance of additional common shares could reduce demand for our common shares or adversely affect the market price for our common shares. To the extent we issue substantial additional common shares or other equity securities, the ownership of our existing shareholders would be diluted and our earnings per share could be reduced.
The indenture under which the Senior Notes were issued does not contain financial covenants and does not limit the amount of indebtedness that we may incur.
The indenture under which the Senior Notes were issued contains no financial covenants or other provisions that would afford the holders of the Senior Notes any substantial protection in the event we participate in a material transaction. In addition, the indenture does not limit the amount of indebtedness we may incur or our ability to pay dividends, make distributions or repurchase our common shares. As a result, noteholders are not protected under the indenture in the event of a highly leveraged transaction, reorganization, change of control, restructuring, sale of significant amount of assets, merger or similar transaction that may adversely affect them.
The Senior Notes are unsecured and effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
Upon any distribution to our creditors in a bankruptcy, liquidation, reorganization or similar proceeding relating to us or our property, the holders of our secured debt, including the lenders under our credit facility, will be entitled to exercise the remedies available to a secured lender under applicable law and pursuant to the instruments governing such debt and to be paid in full from the assets securing that secured debt before any payment may be made with respect to the Senior Notes. In that event, because the Senior Notes are not secured by any of our assets, it is possible that there will be no assets from which claims of holders of the Senior Notes can be satisfied or, if any assets remain, that the remaining assets will be insufficient to satisfy those claims in full. If the value of such remaining assets is less than the aggregate outstanding principal amount of the Senior Notes and accrued interest and all future debt ranking pari passu with the Senior Notes, we will be unable to fully satisfy our obligations under the Senior Notes. In addition, if we fail to meet our payment or other obligations under our secured debt, the holders of that secured debt would be entitled to foreclose on our assets securing that secured debt and liquidate those assets. Accordingly, we may not have sufficient funds to pay amounts due on the Senior Notes. As a result, noteholders may lose a portion of or the entire value of their investment in the Senior Notes.
Our credit facility is secured by substantially all of the personal property of the borrowers and the guarantors, including a first-priority security interest in 100% of the equity interests of the borrowers and each of their domestic majority owned subsidiaries, 65% of the equity interests of each of the borrowers' foreign majority owned subsidiaries, and all intercompany debt. The amount available to us under our credit facility is determined by reference to a borrowing base calculated based on eligible collateral. At December 31, 2013, this borrowing base calculation provided a total of $130.8 million available for loans and letters of credit under the credit facility. At December 31, 2013, there were no loans outstanding under the credit facility but we had outstanding $44.9 million of letters of credit issued under that facility securing certain purchases, insurance, fuel taxes and other trade obligations.
44
Further, the terms of the Senior Notes permit us to incur additional secured indebtedness. The Senior Notes will be effectively subordinated to any such additional secured indebtedness.
An active trading market for the Senior Notes may not be maintained or be liquid.
We can give no assurances concerning the liquidity of the market for the Senior Notes, the ability of any investor to sell the Senior Notes, or the price at which investors would be able to sell them. The market for the Senior Notes may not continue or it may not be sufficiently liquid to allow holders to resell any of the Senior Notes. Consequently, investors may not be able to liquidate their investment readily, and lenders may not readily accept the Senior Notes as collateral for loans.
The Senior Notes may trade at a discount from their initial issue price or principal amount, depending upon many factors, including prevailing interest rates, the market for similar securities and other factors, including general economic conditions and our financial condition, performance and prospects. Any decline in trading prices, regardless of cause, may adversely affect the liquidity and trading markets for the Senior Notes.
We depend upon our subsidiaries for cash flow to service our debt, and the Senior Notes are structurally subordinated to the payment of the indebtedness, lease and other liabilities and any preferred equity of our subsidiaries.
We are the sole obligor on the Senior Notes. We derive all of our revenue and cash flow from our subsidiaries and our ability to service our debt, including the Senior Notes, is substantially dependent upon the earnings of our subsidiaries and their ability to make cash available to us. In addition, most of our contractual and other obligations are obligations of our subsidiaries and thus structurally senior to our obligations on the Senior Notes. None of our subsidiaries guarantee the Senior Notes. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due on the Senior Notes, or to make any funds available therefore, whether by dividend, distribution, loan or other payments, and the rights of holders of Senior Notes to benefits from any of the assets of our subsidiaries are structurally subordinated to the claims of our subsidiaries' creditors and any preferred equity holders. As a result, the Senior Notes are structurally subordinated to the prior payment and satisfaction of all of the existing and future debts, liabilities and obligations, including payment obligations under the HPT lease agreements, trade payables and any preferred equity, of our subsidiaries. Any future subsidiary debt or obligation, whether or not secured, or any preferred equity of our subsidiaries will have priority over the Senior Notes. As of December 31, 2013, our subsidiaries had total indebtedness of $44.9 million, consisting solely of letters of credit outstanding under our credit facility under which our subsidiaries are either co-borrowers or guarantors. As of December 31, 2013, our subsidiaries also had deferred rent obligations of $150 million, which are structurally senior to the Senior Notes, and substantial ongoing obligations under our leases. Our deferred rent is due in two installments, $107.1 million will be due and payable on December 31, 2022, and $42.9 million will be due and payable on June 30, 2024.
The Senior Notes are not rated.
The Senior Notes are not rated by any rating agency. Unrated securities usually trade at a discount to similar rated securities. As a result, the Senior Notes may trade at a price that is lower than they might otherwise trade if rated by a rating agency. It is possible, however, that one or more rating agencies might independently determine to assign a rating to the Senior Notes. In addition, we may elect to issue other securities for which we may seek to obtain a rating. If any ratings are assigned to the Senior Notes in the future or if we issue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affect the market for or the market value of the Senior Notes.
45
Redemption may adversely affect noteholders' return on the Senior Notes.
We have the right to redeem some or all of the Senior Notes prior to maturity. We may redeem the Senior Notes at times when prevailing interest rates may be relatively low compared to prevailing rates at the time of issuance of the Senior Notes. Accordingly, noteholders may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the Senior Notes.
Item 1B.
Unresolved Staff Comments
None.
Our principal executive offices are located at 24601 Center Ridge Road, Suite 200, Westlake, Ohio 44145-5639. We operate two distribution centers in leased warehouse facilities located at 329 Mason Road, LaVergne, Tennessee 37086 and 3402 West Buckeye Road, Suite 115, Phoenix, Arizona 85043, and an electronics equipment depot in leased space located at 120 North Martinwood Road, Knoxville, Tennessee 37923. We also conduct some corporate office business from RMR's premises at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458.
As of December 31, 2013, our travel center business consisted of 247 travel centers, 184 of which were leased from HPT, 33 of which we owned, three of which were owned by parties other than HPT and leased to or managed by us, 25 of which were owned, or leased from others, by our franchisees and two of which we operated for a joint venture in which we own a minority interest. We operated 217 of these travel centers and our franchisees operated 30 of these travel centers. We own seven parcels of undeveloped land suitable for developing travel centers, and two parcels of land that previously included travel centers, and many of our operating travel centers are located on land parcels which are not fully developed; we may decide to build additional travel centers or other facilities on these parcels in the future.
As of December 31, 2013, our convenience store business consisted of 34 convenience stores, 27 of which we owned, one of which was leased from HPT, four of which were leased from others and two of which we operated for a joint venture in which we own a minority interest.
46
The table below summarizes by state information as of December 31, 2013, regarding branding and ownership of the properties we operate. Similar information for the locations our franchisees operate is included under the heading "Relationships with Franchisees" in Item 1 of this Annual Report. To be updated for number and ownership of convenience stores.
|
|
Brand Affiliation (1) | Ownership of Sites by: (1) | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
TA (3) | Petro |
Minit
Mart |
Other
Brands |
Total | TA (3) | HPT |
Joint
Venture |
Others (2) | |||||||||||||||||||
|
Alabama |
2 | 3 | — | — | 5 | 2 | 3 | — | — | |||||||||||||||||||
|
Arizona |
5 | 2 | — | — | 7 | 1 | 6 | — | — | |||||||||||||||||||
|
Arkansas |
2 | 2 | — | — | 4 | — | 4 | — | — | |||||||||||||||||||
|
California |
9 | 6 | — | — | 15 | 2 | 9 | 4 | — | |||||||||||||||||||
|
Colorado |
3 | — | — | — | 3 | — | 3 | — | — | |||||||||||||||||||
|
Connecticut |
3 | — | — | — | 3 | — | 3 | — | — | |||||||||||||||||||
|
Florida |
6 | 1 | — | — | 7 | — | 7 | — | — | |||||||||||||||||||
|
Georgia |
6 | 3 | — | — | 9 | 1 | 8 | — | — | |||||||||||||||||||
|
Idaho |
1 | — | — | — | 1 | — | 1 | — | — | |||||||||||||||||||
|
Illinois |
7 | 2 | — | — | 9 | 2 | 7 | — | — | |||||||||||||||||||
|
Indiana |
7 | 6 | — | 1 | 14 | 7 | 7 | — | — | |||||||||||||||||||
|
Iowa |
2 | — | — | — | 2 | 1 | 1 | — | — | |||||||||||||||||||
|
Kansas |
1 | 1 | — | — | 2 | 2 | — | — | — | |||||||||||||||||||
|
Kentucky |
2 | 2 | 28 | — | 32 | 25 | 3 | — | 4 | |||||||||||||||||||
|
Louisiana |
4 | 3 | — | — | 7 | 1 | 6 | — | — | |||||||||||||||||||
|
Maryland |
3 | — | — | — | 3 | — | 3 | — | — | |||||||||||||||||||
|
Michigan |
6 | — | — | — | 6 | 2 | 4 | — | — | |||||||||||||||||||
|
Minnesota |
1 | — | — | — | 1 | — | 1 | — | — | |||||||||||||||||||
|
Mississippi |
1 | 1 | — | — | 2 | — | 1 | — | 1 | |||||||||||||||||||
|
Missouri |
4 | 1 | — | — | 5 | — | 5 | — | — | |||||||||||||||||||
|
Nebraska |
2 | 1 | — | — | 3 | — | 3 | — | — | |||||||||||||||||||
|
Nevada |
3 | 3 | — | — | 6 | 1 | 5 | — | — | |||||||||||||||||||
|
New Hampshire |
1 | — | — | — | 1 | — | 1 | — | — | |||||||||||||||||||
|
New Jersey |
3 | 1 | — | — | 4 | — | 4 | — | — | |||||||||||||||||||
|
New Mexico |
5 | 2 | — | — | 7 | — | 6 | — | 1 | |||||||||||||||||||
|
New York |
5 | 1 | — | — | 6 | — | 6 | — | — | |||||||||||||||||||
|
North Carolina |
3 | 1 | — | — | 4 | 1 | 3 | — | — | |||||||||||||||||||
|
Ohio |
9 | 4 | — | 1 | 14 | — | 14 | — | — | |||||||||||||||||||
|
Oklahoma |
3 | 1 | — | — | 4 | — | 4 | — | — | |||||||||||||||||||
|
Oregon |
2 | 1 | — | — | 3 | — | 3 | — | — | |||||||||||||||||||
|
Pennsylvania |
8 | 2 | — | — | 10 | 1 | 9 | — | — | |||||||||||||||||||
|
Rhode Island |
1 | — | — | — | 1 | 1 | — | — | — | |||||||||||||||||||
|
South Carolina |
3 | 1 | — | — | 4 | 1 | 2 | — | 1 | |||||||||||||||||||
|
Tennessee |
6 | 2 | 3 | — | 11 | 4 | 7 | — | — | |||||||||||||||||||
|
Texas |
11 | 8 | — | — | 19 | 4 | 15 | — | — | |||||||||||||||||||
|
Utah |
2 | — | — | — | 2 | — | 2 | — | — | |||||||||||||||||||
|
Virginia |
4 | — | — | — | 4 | — | 4 | — | — | |||||||||||||||||||
|
Washington |
1 | 1 | — | — | 2 | — | 2 | — | — | |||||||||||||||||||
|
West Virginia |
2 | — | — | — | 2 | — | 2 | — | — | |||||||||||||||||||
|
Wisconsin |
2 | — | — | — | 2 | — | 2 | — | — | |||||||||||||||||||
|
Wyoming |
3 | 1 | — | — | 4 | — | 4 | — | — | |||||||||||||||||||
|
Ontario, Canada |
1 | — | — | — | 1 | 1 | — | — | — | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Total |
155 | 63 | 31 | 2 | 251 | 60 | 180 | 4 | 7 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
47
The disclosure under the heading "Legal Proceedings" in Note 18 to the Notes to Consolidated Financial Statements in Item 15 of this Annual Report is incorporated herein by reference.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Market for Our Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market information. Since April 1, 2013, our common shares have been traded on the NYSE, under the symbol "TA". Prior to that, our common shares traded on what is now known as the NYSE MKT since 2007. Set forth below, for the periods indicated, are the high and low sales prices for our common shares as reported on the NYSE and the NYSE MKT, as applicable:
|
2013
|
High | Low | |||||
|---|---|---|---|---|---|---|---|
|
First Quarter |
$ | 9.82 | $ | 4.75 | |||
|
Second Quarter |
$ | 12.50 | $ | 9.35 | |||
|
Third Quarter |
$ | 12.25 | $ | 7.35 | |||
|
Fourth Quarter |
$ | 11.17 | $ | 7.01 | |||
|
2012
|
High | Low | |||||
|---|---|---|---|---|---|---|---|
|
First Quarter |
$ | 6.84 | $ | 4.29 | |||
|
Second Quarter |
$ | 6.74 | $ | 4.21 | |||
|
Third Quarter |
$ | 5.84 | $ | 4.67 | |||
|
Fourth Quarter |
$ | 5.47 | $ | 4.18 | |||
The closing price of our common shares on the NYSE on June 4, 2014, was $8.07 per share.
Holders. As of May 15, 2014, there were 794 shareholders of record of our common shares.
Dividends. We have never paid or declared any cash dividends on our common shares. At present, we intend to retain our future earnings, if any, to fund the operations and growth of our business. Furthermore, our credit facility restricts our payment of cash dividends on our common shares, unless certain requirements under the credit facility are met, including that excess availability is not less than 20% after any such payment, and our rent deferral agreement with HPT prohibits us from paying any dividends while any deferred rent remains unpaid. Our future decisions concerning the payment of dividends on our common shares will depend upon our results of operations, financial condition and capital expenditure plans, as well as other factors as our Board of Directors, in its discretion, may consider relevant, and the extent to which the declaration or payment of dividends may be limited by agreements we have entered or cause us to lose the benefits of certain of our agreements.
Stock issuable under equity compensation plans. The equity compensation plan information set forth in Item 12 of this Annual Report is incorporated by reference herein.
Recent sales of unregistered securities. There were no sales of our unregistered securities by us during the fourth quarter of 2013.
48
Item 6.
Selected Financial Data
The following table presents selected historical financial information for each of the last five fiscal years. The information set forth below with respect to fiscal years 2013, 2012 and 2011 was derived from, and should be read in conjunction with, the audited consolidated financial statements included elsewhere in this Annual Report. The information set forth below with respect to fiscal years 2010 and 2009 was derived from, and should be read in conjunction with, the audited consolidated financial statements included in our 2010 Annual Report on Form 10-K. However, certain statement of income and comprehensive income data and balance sheet data presented in the following table for the years ended December 31, 2010 and 2009, were revised from originally reported financial data, as described in our 2011 Annual Report on Form 10-K. The following information should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report.
|
|
Years Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars and gallons in thousands, except per share data)
|
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
|
Statement of Operations and Comprehensive Income (Loss) Data: |
||||||||||||||||
|
Revenues: |
||||||||||||||||
|
Fuel |
$ | 6,481,252 | $ | 6,636,297 | $ | 6,603,329 | $ | 4,790,659 | $ | 3,588,682 | ||||||
|
Nonfuel |
1,450,792 | 1,344,755 | 1,271,085 | 1,158,343 | 1,097,279 | |||||||||||
|
Rent and royalties from franchisees |
12,687 | 14,672 | 14,443 | 13,479 | 13,859 | |||||||||||
| | | | | | | | | | | | | | | | | |
|
Total revenues |
7,944,731 | 7,995,724 | 7,888,857 | 5,962,481 | 4,699,820 | |||||||||||
|
Income (loss) from operations |
21,190 | 41,470 | 32,400 | (42,034 | ) | (80,994 | ) | |||||||||
|
Net income (loss) |
31,623 | 32,198 | 23,574 | (66,690 | ) | (95,085 | ) | |||||||||
|
Income (loss) per common share: |
||||||||||||||||
|
Basic and diluted |
$ | 1.06 | $ | 1.12 | $ | 0.98 | $ | (3.84 | ) | $ | (5.70 | ) | ||||
|
Balance Sheet Data (end of period): |
||||||||||||||||
|
Total assets |
$ | 1,257,282 | $ | 1,029,719 | $ | 1,016,531 | $ | 891,092 | $ | 877,610 | ||||||
|
Sale-leaseback financing obligation, noncurrent portion (1) |
83,762 | 82,195 | 97,765 | 99,960 | 102,006 | |||||||||||
|
Deferred rent obligation (2) |
150,000 | 150,000 | 150,000 | 150,000 | 90,000 | |||||||||||
|
Senior Notes due 2028 |
110,000 | — | — | — | — | |||||||||||
|
Other Operating Data: |
||||||||||||||||
|
Total fuel sold (gallons) (3) |
2,034,929 | 2,039,960 | 2,087,416 | 2,036,756 | 1,933,358 | |||||||||||
|
Number of sites (end of period): |
||||||||||||||||
|
Company operated travel centers (4) |
217 | 206 | 192 | 186 | 186 | |||||||||||
|
Company operated convenience stores |
34 | 4 | 4 | 4 | 4 | |||||||||||
|
Franchisee operated travel centers |
5 | 6 | 10 | 10 | 10 | |||||||||||
|
Franchisee owned and operated travel centers |
25 | 29 | 33 | 30 | 35 | |||||||||||
| | | | | | | | | | | | | | | | | |
|
Total locations |
281 | 245 | 239 | 230 | 235 | |||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Notes to Selected Financial Data
49
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands)
Overview
The following discussion should be read in conjunction with the financial statements included elsewhere in this Annual Report.
Our revenues and income are subject to potentially material changes as a result of the market prices and availability of fuel. These factors are subject to the worldwide petroleum products supply chain, which historically has incurred price and supply volatility and, in some cases, 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 significant volatility in the cost of fuel. Fuel prices increased during the first quarter of 2011 and were volatile for the remaining portion of the year as a result of, among other reasons, concerns the U.S. and global economies were sliding into another recession. During the first half of 2012, prices generally decreased due to continued global economic concerns, including economic conditions in Europe. However, during the third quarter of 2012 fuel prices generally rose due to tensions in the Middle East and economic stimulus programs in Europe and elsewhere. During the fourth quarter of 2012, fuel prices declined and at the end of 2012 were near the prices we experienced at the end of 2011. During the first quarter of 2013, prices generally declined and were at a lower level than the prices experienced during the first quarter of 2012. During the second quarter of 2013, fuel prices again rose and at the end of the second quarter of 2013 approximated the prices we experienced at the end of the second quarter of 2012. Then, during the third quarter of 2013, fuel prices again rose, but were generally at a lower level than the prices experienced during the third quarter of 2012. During the fourth quarter of 2013, fuel prices again rose and at the end of 2013, fuel prices approximated those experienced at the end of 2012. Recent gains in fuel supplies and sources within the United States and Canada have helped to maintain relative market price stability, but as export markets and capabilities increase for fuel that price stabilization factor may be less effective. We expect that changes in our costs for fuel products can largely be passed on to our customers, but often there are delays in passing on price changes that can affect our fuel gross margins. Although other factors have an effect, during periods of rising fuel commodity prices fuel gross margins per gallon tend to be lower than they otherwise may have been and during periods of falling fuel commodity prices fuel gross margins per gallon tend to increase. Also, fuel price increases and volatility can have negative effects on our sales and profitability and increase our working capital requirements. We expect that the fuel markets will continue to be volatile for the foreseeable future. For more information about fuel market risks that may affect us and our actions to mitigate those risks, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" elsewhere in this Annual Report.
We believe that recent U.S. economic data has been mixed, though generally positive, and the strength and sustainability of any economic expansion is uncertain. The condition of the U.S. economy generally, and the financial condition and activity of the trucking industry in the U.S. specifically, impacted our financial results during 2011 through 2013, and we expect that they will continue to impact our financial results in future periods. The trucking industry is the primary customer for our goods and services. Freight and trucking demand in the U.S. historically generally reflects the level of commercial activity in the U.S. economy. During the period from 2011 through 2013, the U.S. economy slowly improved and the financial condition and activity level in the trucking industry similarly slowly improved; however, these improvements appear to be uneven and may not affect all market participants equally. Further, recent improvements in U.S. export activity have been driven in large part by increased sales of natural resources, such as oil and gas, and by other products that typically are not transported by trucks; and, accordingly, such increased export activity has not resulted in proportional increases in trucking activity within the U.S. We believe that during 2013, demand for fuel by trucking
50
companies was negatively affected as compared to the prior year by the new regulatory hours of service rules for truck drivers, which went into effect in July 2013, and the driver shortage plaguing the trucking industry as these factors increase trucking company costs and lead trucking companies to focus on fuel efficiency and shippers to divert some business away from trucking. Technological innovations and other regulatory changes permitting and requiring improved fuel efficiency of motor vehicle engines and other fuel conservation practices employed by trucking companies have accelerated and continue to reduce demand for diesel fuel, including by reducing the amount of diesel fuel required to drive a given amount of trucking miles.
In part as a result of the aforesaid factors, our nonfuel revenues in 2013 increased on a same site basis over the prior year, but fuel sales volumes on a same site basis for 2013 declined compared to the prior year. Also, during the second and third quarters of 2013, TA's primary competitors engaged in aggressive sales efforts presumably to maintain and grow market share, which negatively impacted our fuel sales volume and fuel gross margin per gallon during this time period. These aggressive sales efforts by our competitors abated somewhat in the third and fourth quarters as compared to the second quarter. Despite the year over year declines in fuel sales volumes, our fuel gross margins per gallon for 2013 increased slightly on a same site basis over the prior year. We believe this trend primarily is attributable to our continued focus on managing our fuel pricing to balance sales volume and profitability considerations.
Our net income for the year ended December 31, 2013, was favorably impacted by a $26,618 benefit for income taxes that primarily resulted from the reversal during the 2013 fourth quarter of the valuation allowance we historically had maintained with respect to certain deferred tax assets; increased site level profitability from the travel centers we have had in our business since before 2011; and increased profitability earned at the properties we have acquired since the beginning of 2011. These favorable factors were partially offset by the $10,000 charge to expense in December 2013 in connection with a litigation settlement; the increases in depreciation and amortization expense attributable to the property acquisitions and other capital investments we made during 2012 and 2013; and the acquisition and financing costs related to our property acquisitions.
Since the beginning of 2011, we have invested or expect to invest $325,647 to acquire and improve 30 travel centers and 31 gasoline/convenience stores. While the costs of ownership are reflected in our results for the periods since each acquisition, we believe the returns from these acquired properties are not yet fully reflected in our results of operations. We believe that the improvements we have made and plan to make at the travel centers may continue to improve the financial results at these locations. Typical improvements we make at acquired travel centers include adding truck repair facilities and QSRs, paving parking lots, replacing outdated fuel dispensers, installing diesel exhaust fluid dispensing systems, changing signage, installing point of sale and other IT systems and general building upgrades. The improvements to travel center properties we acquire are often substantial and require a long period of time to plan, design, permit and complete, and after completed then require a period of time to produce stabilized financial results and become part of our customers' networks. We estimate that the travel centers we acquire generally will reach financial stabilization in approximately the third year after acquisition, but the actual result can vary widely from this estimate due to many factors.
We acquired 31 gasoline/convenience store properties for $67,922 on December 16, 2013. These convenience stores are high volume fuel locations with larger interior space for merchandise and food offerings than typical convenience stores and appear to have limited need for near term capital investment. In addition, we do not expect these convenience stores to require a lengthy period to achieve stabilized financial results. Nearly all of our existing travel centers currently offer gasoline for motorists, and most of these convenience stores' customer offerings are similar to certain of the products and food services available at our travel centers. Accordingly, we currently expect we may be able to realize synergies in purchasing and merchandising customer offerings at these convenience
51
stores which may make the financial results, relative to the acquisition cost, similar to that expected for travel center acquisitions.
The table below shows the number of properties we acquired by year, the amounts we have invested or currently expect to invest through and as of December 31, 2013, in these properties.
|
|
Site Count |
Cash Acquisition
Cost (1) |
Renovation Cost
Incurred Through December 31, 2013 |
Estimated
Renovation Cost to be Spent |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Properties acquired in 2011 |
6 | $ | 36,333 | $ | 47,731 | $ | — | ||||||
|
Properties acquired in 2012 |
14 | 46,910 | 32,513 | — | |||||||||
|
Properties acquired in 2013 (2) |
41 | 111,602 | 17,203 | 33,355 | |||||||||
| | | | | | | | | | | | | | |
|
Total |
61 | $ | 194,845 | $ | 97,447 | $ | 33,355 | ||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The operations at many of the 61 properties acquired during the three years ended December 31, 2013, have not yet reached the stabilized levels we currently expect. As of December 31, 2013, the travel centers we have acquired since the beginning of 2011 have been owned by us for an average of 17 months, with the planned renovations completed at only 23 of these properties for an average of 14 months. The 31 convenience stores we acquired on December 16, 2013, do not require significant renovations. The table below shows the gross revenues in excess of cost of goods sold and site level operating expenses for the properties we began to operate for our own account since the beginning of 2011, whether by way of acquisition from franchisees or others or takeover of operations upon termination of a franchisee sublease, from the beginning of the period shown (or the date we began to operate such property for our own account, if later). Because sites were acquired at various dates during the periods presented, these amounts are intended to indicate directional trends only.
|
|
Revenues in Excess of Cost of Goods Sold
and Site Level Operating Expenses |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Three Months Ended
December 31, |
Year Ended
December 31, |
|||||||||||
|
|
2013 | 2012 | 2013 | 2012 | |||||||||
|
Properties acquired in 2011 (6 sites) |
$ | 3,171 | $ | 1,130 | $ | 9,437 | $ | 5,260 | |||||
|
Properties acquired in 2012 (14 sites) |
3,833 | 555 | 14,100 | 643 | |||||||||
|
Properties acquired in 2013 (41 sites) (1) |
1,254 | — | 2,941 | — | |||||||||
| | | | | | | | | | | | | | |
|
Total |
$ | 8,258 | $ | 1,685 | $ | 26,478 | $ | 5,903 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The amounts presented in the above table are the gross amounts recognized during the periods presented. Certain of the travel centers we have acquired were franchises of ours from whom we generated revenues and incurred costs prior to our acquiring the site. The rent, royalties and fuel revenues in excess of the related cost of goods sold and site level operating expenses we recognized during the twelve month period prior to each of our acquisitions of travel centers previously operated by our franchisees for the properties acquired in 2011, 2012 and 2013, were $194, $3,705 and $1,417, respectively.
On January 2, 2013, the American Taxpayer Relief Act of 2012 became law. The law included the reinstatement, retroactive to January 1, 2012, of the "Blender's Credit for Biodiesel and Renewable
52
Diesel". This tax credit had previously expired on December 31, 2011, and, accordingly, we did not recognize any benefit directly related to these tax credits in our 2012 operating results, although, in the absence of the tax credits, market dynamics tend to adjust prices to compensate somewhat for the value of the lost tax credits. The reinstatement of this credit entitled us to receive in 2013 approximately $3,887 of refunds related to certain fuel purchases made during 2012. We recognized this amount, net of our estimate of uncollectible amounts, in our operating results for 2013. Under the new law, the credit expired on December 31, 2013, and we reflected any benefit from it in our operating results as we purchased qualifying fuel during 2013. Congress did not extend this tax credit before the end of 2013 or since; consequently, to date during 2014 we have not received rebates as a result of this tax credit for any fuel purchases we have made during 2014. We do not expect that this situation will have a significant effect on our 2014 fuel gross margin because of the expected market pricing dynamics that take the lack of the tax credit into account, but our fuel gross margin may be negatively affected to some extent.
There can be no assurance that industry conditions will not deteriorate or that any one or more of the risks identified under the sections "Risk Factors," "Warning Concerning Forward Looking Statements" or elsewhere in our Annual Report; or some other unidentified risk will not manifest itself in a manner which is material and adverse to our results of operations, cash flow or financial position.
Summary of Site Counts
The changes in the number of our sites and in their method of operation (company operated, franchisee leased and operated or franchisee owned and operated) can be significant factors influencing the changes in our results of operations. The following table summarizes the changes in the composition of our business during the past three years:
|
|
Company
Operated Travel Centers (1) |
Franchisee
Operated Travel Centers |
Franchisee
Owned and Operated Travel Centers |
Total
Travel Centers (1) |
Company
Operated Convenience Stores (2) |
Total
Sites |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Number of sites at December 31, 2010 (3) |
186 | 10 | 30 | 226 | 4 | 230 | |||||||||||||
|
2011 Activity: |
|||||||||||||||||||
|
Acquired sites |
6 | — | (1 | ) | 5 | — | 5 | ||||||||||||
|
New franchised travel centers |
— | — | 4 | 4 | — | 4 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
|
Number of sites at December 31, 2011 (3) |
192 | 10 | 33 | 235 | 4 | 239 | |||||||||||||
|
2012 Activity: |
|||||||||||||||||||
|
Acquired sites |
6 | — | — | 6 | — | 6 | |||||||||||||
|
Acquisition of franchised travel centers |
8 | (4 | ) | (4 | ) | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
|
Number of sites at December 31, 2012 (3) |
206 | 6 | 29 | 241 | 4 | 245 | |||||||||||||
|
2013 Activity: |
|||||||||||||||||||
|
Acquired sites |
6 | — | — | 6 | 31 | 37 | |||||||||||||
|
Acquisition of franchised travel centers |
4 | (1 | ) | (3 | ) | — | — | — | |||||||||||
|
Conversion of convenience store to travel center |
1 | — | — | 1 | (1 | ) | — | ||||||||||||
|
Terminated franchised travel centers |
— | — | (1 | ) | (1 | ) | — | (1 | ) | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
|
Number of sites at December 31, 2013 |
217 | 5 | 25 | 247 | 34 | 281 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
53
In January 2014, we acquired an additional travel center that we now operate. We currently intend to continue to selectively acquire additional travel centers and convenience stores and to otherwise expand our business.
Relevance of Fuel Revenues and Fuel Volumes
Due to the price volatility of fuel products and our pricing to fuel customers, we believe that fuel revenue is not a reliable metric for analyzing our results of operations from period to period. As a result solely of changes in fuel prices, our fuel revenue may materially increase or decrease, in both absolute amounts and on a percentage basis, without a comparable change in fuel sales volumes or in fuel gross margin per gallon. We consider fuel volumes and fuel gross margin to be better measures of comparative performance than fuel revenues. However, fuel pricing and revenues can impact our working capital requirements; see "Liquidity and Capital Resources" below.
Results of Operations (dollars and gallons in thousands)
Year ended December 31, 2013 compared to December 31, 2012
The following table presents changes in our operating results for the year ended December 31, 2013, as compared with the year ended December 31, 2012.
|
|
Years Ended
December 31, |
|
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
%
Change |
|||||||||||
|
(dollars in thousands)
|
2013 | 2012 | Change | ||||||||||
|
Revenues: |
|||||||||||||
|
Fuel |
$ | 6,481,252 | $ | 6,636,297 | $ | (155,045 | ) | (2.3 | )% | ||||
|
Nonfuel |
1,450,792 | 1,344,755 | 106,037 | 7.9 | % | ||||||||
|
Rent and royalties from franchisees |
12,687 | 14,672 | (1,985 | ) | (13.5 | )% | |||||||
| | | | | | | | | | | | | | |
|
Total revenues |
7,944,731 | 7,995,724 | (50,993 | ) | (0.6 | )% | |||||||
|
Cost of goods sold (excluding depreciation) |
|||||||||||||
|
Fuel |
6,139,080 | 6,310,250 | (171,170 | ) | (2.7 | )% | |||||||
|
Nonfuel |
652,824 | 599,474 | 53,350 | 8.9 | % | ||||||||
| | | | | | | | | | | | | | |
|
Total cost of goods sold (excluding depreciation) |
6,791,904 | 6,909,724 | (117,820 | ) | (1.7 | )% | |||||||
|
Operating expenses: |
|||||||||||||
|
Site level operating expenses |
755,942 | 698,522 | 57,420 | 8.2 | % | ||||||||
|
Selling, general & administrative expense |
107,447 | 95,547 | 11,900 | 12.5 | % | ||||||||
|
Real estate rent |
209,320 | 198,927 | 10,393 | 5.2 | % | ||||||||
|
Depreciation and amortization expense |
58,928 | 51,534 | 7,394 | 14.3 | % | ||||||||
| | | | | | | | | | | | | | |
|
Total operating expenses |
1,131,637 | 1,044,530 | 87,107 | 8.3 | % | ||||||||
| | | | | | | | | | | | | | |
|
Income from operations |
21,190 | 41,470 | (20,280 | ) | (48.9 | )% | |||||||
|
Acquisition costs |
(2,523 | ) | (785 | ) | (1,738 | ) | 221.4 | % | |||||
|
Interest income |
1,314 | 1,485 | (171 | ) | (11.5 | )% | |||||||
|
Interest expense |
(17,650 | ) | (10,358 | ) | (7,292 | ) | 70.4 | % | |||||
| | | | | | | | | | | | | | |
|
Income before income taxes and income from equity investees |
2,331 | 31,812 | (29,481 | ) | (92.7 | )% | |||||||
|
Benefit (provision) for income taxes |
26,618 | (1,491 | ) | 28,109 | (1,885.2 | )% | |||||||
|
Income from equity investees |
2,674 | 1,877 | 797 | 42.5 | % | ||||||||
| | | | | | | | | | | | | | |
|
Net income |
$ | 31,623 | $ | 32,198 | $ | (575 | ) | (1.8 | )% | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
54
Same Site Results Comparisons
As part of the discussion and analysis of our operating results we sometimes refer to increases and decreases in results on a same site basis. For purposes of these comparisons, we include a location in the following same site comparisons only if we (or a franchisee of ours for purposes only of the rent and royalty revenues results) continuously operated it from January 1, 2012, through December 31, 2013. We do not exclude locations from the same site comparisons as a result of expansions in their size or changes in the services offered. We excluded from the same site comparisons the two travel centers and two convenience stores we operate for a joint venture in which we own a 40% interest because we account for this investment using the equity method of accounting and, therefore, the related revenues and expenses are not included in the respective line items in our consolidated results of operations.
|
|
Years Ended December 31, |
|
%
Change Favorable/ (Unfavorable) |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(gallons and dollars in thousands)
|
2013 | 2012 | Change | ||||||||||
|
Number of company operated locations |
191 | 191 | — | ||||||||||
|
Fuel: (1) |
|
|
|
|
|||||||||
|
Fuel sales volume (gallons) |
1,865,018 | 1,924,646 | (59,628 | ) | (3.1 | )% | |||||||
|
Fuel revenues |
$ | 5,945,639 | $ | 6,270,663 | $ | (325,024 | ) | (5.2 | )% | ||||
|
Fuel gross margin |
$ | 321,075 | $ | 319,840 | $ | 1,235 | 0.4 | % | |||||
|
Fuel gross margin per gallon |
$ | 0.172 | $ | 0.166 | $ | 0.006 | 3.6 | % | |||||
|
Nonfuel: (1) |
|
|
|
|
|||||||||
|
Nonfuel revenues |
$ | 1,353,534 | $ | 1,318,581 | $ | 34,953 | 2.7 | % | |||||
|
Nonfuel gross margin |
$ | 744,940 | $ | 730,919 | $ | 14,021 | 1.9 | % | |||||
|
Nonfuel gross margin percentage |
55.0 | % | 55.4 | % | (40 | )b.p. | |||||||
|
Total gross margin (1) |
$ |
1,066,015 |
$ |
1,050,759 |
$ |
15,256 |
1.5 |
% |
|||||
|
Site level operating expenses (1) |
$ |
701,204 |
$ |
679,237 |
$ |
21,967 |
(3.2 |
)% |
|||||
|
Site level operating expenses as a percentage of nonfuel revenues (1) |
51.8 |
% |
51.5 |
% |
(30 |
)b.p. |
|||||||
|
Site level gross margin in excess of site level operating expenses (1) |
$ | 364,811 | $ | 371,522 | $ | (6,711 | ) | (1.8 | )% | ||||
|
Number of franchisee operated locations |
30 |
30 |
— |
||||||||||
|
Rent and royalty revenues |
$ |
11,666 |
$ |
10,483 |
$ |
1,183 |
11.3 |
% |
|||||
Revenues. Revenues for 2013, were $7,944,731, which represented a decrease from 2012, of $50,993, or 0.6%, primarily resulting from a decrease in fuel revenue partially offset by an increase in nonfuel revenue.
55
Fuel revenues for 2013, were $6,481,252, a decrease of $155,045, or 2.3%, compared to 2012. The table below shows the changes in fuel revenues between periods that resulted from price and volume changes:
|
(gallons and dollars in thousands)
|
Gallons
Sold |
Fuel
Revenues |
|||||
|---|---|---|---|---|---|---|---|
|
Results for 2012 |
2,039,960 | $ | 6,636,297 | ||||
|
Decrease due to same site petroleum products price changes |
— |
(133,511 |
) |
||||
|
Decrease due to same site volume changes |
(59,628 | ) | (191,513 | ) | |||
|
Increase due to locations opened |
104,433 | 328,941 | |||||
|
Decrease in wholesale sales to nonfranchisees |
(1,965 | ) | (9,144 | ) | |||
|
Decrease in sales to franchisees on a wholesale basis |
(47,871 | ) | (149,818 | ) | |||
| | | | | | | | |
|
Net change from prior year period |
(5,031 | ) | (155,045 | ) | |||
| | | | | | | | |
|
Results for 2013 |
2,034,929 | $ | 6,481,252 | ||||
| | | | | | | | |
| | | | | | | | |
The decrease in fuel revenue resulted largely from declines in same site sales volume and fuel volume sold on a wholesale basis to franchisees and from lower market prices for fuel, partially offset by sales volume growth at sites we acquired during 2012 and 2013. On a same site basis, fuel sales volume for our company operated locations decreased by 59,628 gallons, or 3.1%, during 2013, compared to 2012. We believe that the effect of the new regulatory truck driver hours of services rules on miles driven and truck utilization, the trend of improved fuel efficiency of heavy truck engines and other fuel conservation efforts by trucking customers and our decision to avoid certain lower margin fuel sales contributed to decreased same site fuel sales volume despite the slight and slow improvement in the U.S. economy. In addition, as noted above under "Overview," competitive pressures from other industry participants also negatively affected our fuel sales volume during 2013. The decreased level of sales volume to franchisees resulted from the sublease renewals we entered into with our franchisees in the second half of 2012 that eliminated the requirement that these subtenants purchase their diesel fuel from us and our acquisitions during 2012 and 2013 of the operations of five of the 10 such subtenants we had at the start of 2012.
Nonfuel revenues for 2013, were $1,450,792, an increase of $106,037, or 7.9%, compared to 2012. The majority of the change between periods resulted from an increase in revenues at those sites we acquired during 2012 and 2013, but also reflected a same site nonfuel revenue increase. On a same site basis for our company operated sites, nonfuel revenues increased by $34,953, or 2.7%, during 2013, compared to 2012. We believe the same site nonfuel revenue increase reflects increased customer spending due to increased customer traffic, certain price increases we have instituted as a result of increased prices we paid for nonfuel inventory purchases and the effects of certain of our marketing initiatives.
Rent and royalty revenues for 2013, were $12,687, a decrease of $1,985, or 13.5%, compared to 2012. Rent and royalties decreased largely as a result of our acquisitions during 2012 and 2013 of 12 franchise travel centers that we now operate, including five that we had subleased to one franchisee. This decrease was partially offset by increased rents at six sites we subleased to franchisees that became effective during the second half of 2012. In October 2013, the sublease for one of these six sites was terminated and we began to operate that travel center.
Cost of goods sold (excluding depreciation). Cost of goods sold for 2013, was $6,791,904, a decrease of $117,820, or 1.7%, compared to 2012.
Fuel cost of goods sold for 2013, of $6,139,080 decreased by $171,170, or 2.7%, compared to 2012. This decrease in fuel cost of goods sold primarily resulted from the decrease in same site fuel sales
56
volumes, the lower level of market prices for fuel in 2013 and the decrease in fuel sold to franchisees on a wholesale basis partially offset by sales volume growth due to sites we acquired during 2012 and 2013. The fuel gross margin per gallon of $0.172 on a same site basis for 2013, was $0.006 per gallon higher than for 2012, primarily as a result of variations in market prices for fuel and our decision to forgo certain low margin sales. In addition, during 2013, we recognized $3,887 as a reduction of our fuel cost of goods sold as a result of refunds paid or due to us in relation to certain fuel purchases during 2012 as a result of the retroactive reinstatement of biodiesel tax credits. We also recognized, during the fourth quarter, a $1,097 charge to fuel cost of goods sold in connection with a claim related to invalid biodiesel renewable identification numbers we acquired and sold in 2010 and 2011; we may be able to recover all or a portion of this amount from our suppliers, but we have not recognized a benefit for such recovery in our 2013 results.
Nonfuel cost of goods sold for 2013, was $652,824, an increase of $53,350, or 8.9%, compared to 2012. Nonfuel cost of goods sold increased primarily due to the nonfuel sales increases noted above, combined with increases in product unit costs. Nonfuel gross margin for 2013, was $797,968, compared to $745,281 during 2012. Nonfuel gross margin was 55.0% and 55.4% of nonfuel revenues during 2013 and 2012, respectively. The nonfuel gross margin percentage decreased largely as a result of a change in the mix of products and services sold, as well as increases in our cost of tires that we were not able to pass on completely to our customers.
Site level operating expenses. Site level operating expenses for 2013, were $755,942, an increase of $57,420, or 8.2%, compared to 2012. The increase in site level operating expenses was primarily due to the locations we acquired during 2011, 2012 and 2013, including $1,416 of start up expenses at these sites.
On a same site basis for our company operated sites, site level operating expenses increased by $21,967, or 3.2%, for 2013, compared to 2012, primarily due to labor costs that increased as the level of nonfuel sales grew and increased utilities expenses and insurance costs, including property and general liability premiums and claims. Site level operating expenses as a percentage of nonfuel revenues on a same site basis for 2013, were 51.8%, compared to 51.5% in 2012. The increase in operating expenses as a percentage of nonfuel revenues on a same site basis was a result of increases in our utility costs, costs related to self insurance reserves for general liability claims and certain taxes other than income taxes.
Selling, general and administrative expenses. Selling, general and administrative expenses for 2013, were $107,447, compared to $95,547 during 2012, an increase of $11,900, or 12.5% that primarily resulted from the $10,000 loss we accrued in connection with the settlement of litigation. Our selling, general and administrative expenses also reflected an increase in personnel costs, including a $1,713 increase in share based compensation expense that resulted from our increased share price since 2012, and an increase in audit fees, partially offset by a decrease in legal expenses.
Real estate rent expense. Rent expense for 2013, was $209,320, an increase of $10,393, or 5.2%, compared to 2012 that is attributable to rent increases related to improvements acquired by HPT since January 1, 2012, and percentage rent recognized under the TA Lease based on increases in 2013 fuel and nonfuel revenues over the base amount.
Depreciation and amortization expense. Depreciation and amortization expense for 2013, was $58,928, an increase of $7,394, or 14.3%, compared to 2012, that primarily resulted from the acquisitions and other capital investments we completed (and did not subsequently sell to HPT) during 2012 and 2013. The increase over 2012 also reflects charges during the 2013 fourth quarter of $1,690 related to asset impairments and write offs.
Acquisition costs. Acquisition costs represent costs incurred for the legal, due diligence and related activities associated with our consideration and completion of possible and actual acquisitions,
57
including for closed, pending and abandoned acquisitions. Total acquisition costs for the year ended December 31, 2013, were $2,523, an increase of $1,738, or 221.4%, compared to 2012 that primarily resulted from the increased level of due diligence activity in 2013 in connection with the acquisition of a company operating 31 convenience stores and the evaluation of a chain of travel centers and convenience stores that we ultimately determined not to pursue.
Interest expense. Interest expense for 2013, was $17,650, an increase of $7,292 compared to 2012. The increase was primarily due to the issuance of our Senior Notes in January 2013 and consisted of the following:
|
|
Year Ended
December 31, |
|
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands)
|
2013 | 2012 | Change | |||||||
|
Interest related to our Senior Notes and Credit Facility |
$ | 10,537 | $ | 2,096 | $ | 8,441 | ||||
|
HPT rent classified as interest |
7,400 | 7,330 | 70 | |||||||
|
Amortization of deferred financing costs |
667 | 352 | 315 | |||||||
|
Capitalized interest |
(1,033 | ) | — | (1,033 | ) | |||||
|
Other |
79 | 580 | (501 | ) | ||||||
| | | | | | | | | | | |
|
Total interest expense |
$ | 17,650 | $ | 10,358 | $ | 7,292 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
We capitalize the portion of our interest expense that is attributable under GAAP to our more significant construction projects over the duration of the respective construction periods. Capitalized interest is amortized to depreciation and amortization expense over the estimated useful life of the corresponding asset.
Income tax provision (benefit). Our benefit for income taxes for the year ended December 31, 2013, was $26,618, primarily as a result of the $29,853 beneficial effect from the reversal of the valuation allowance we historically had maintained with respect to certain of our deferred tax assets.
58
Year ended December 31, 2012 compared to December 31, 2011
The following table presents changes in our operating results for the year ended December 31, 2012, as compared with the year ended December 31, 2011.
|
|
Years Ended
December 31, |
|
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
%
Change |
|||||||||||
|
(dollars in thousands)
|
2012 | 2011 | Change | ||||||||||
|
Revenues: |
|||||||||||||
|
Fuel |
$ | 6,636,297 | $ | 6,603,329 | $ | 32,968 | 0.5 | % | |||||
|
Nonfuel |
1,344,755 | 1,271,085 | 73,670 | 5.8 | % | ||||||||
|
Rent and royalties from franchisees |
14,672 | 14,443 | 229 | 1.6 | % | ||||||||
| | | | | | | | | | | | | | |
|
Total revenues |
7,995,724 | 7,888,857 | 106,867 | 1.4 | % | ||||||||
|
Cost of goods sold (excluding depreciation) |
|||||||||||||
|
Fuel |
6,310,250 | 6,301,947 | 8,303 | 0.1 | % | ||||||||
|
Nonfuel |
599,474 | 548,092 | 51,382 | 9.4 | % | ||||||||
| | | | | | | | | | | | | | |
|
Total cost of goods sold (excluding depreciation) |
6,909,724 | 6,850,039 | 59,685 | 0.9 | % | ||||||||
|
Operating expenses: |
|||||||||||||
|
Site level operating expenses |
698,522 | 677,958 | 20,564 | 3.0 | % | ||||||||
|
Selling, general & administrative expense |
95,547 | 89,196 | 6,351 | 7.1 | % | ||||||||
|
Real estate rent |
198,927 | 191,798 | 7,129 | 3.7 | % | ||||||||
|
Depreciation and amortization expense |
51,534 | 47,466 | 4,068 | 8.6 | % | ||||||||
| | | | | | | | | | | | | | |
|
Total operating expenses |
1,044,530 | 1,006,418 | 38,112 | 3.8 | % | ||||||||
| | | | | | | | | | | | | | |
|
Income from operations |
41,470 | 32,400 | 9,070 | 28.0 | % | ||||||||
|
Acquisition costs |
(785 | ) | (446 | ) | (339 | ) | 76.0 | % | |||||
|
Interest income |
1,485 | 835 | 650 | 77.8 | % | ||||||||
|
Interest expense |
(10,358 | ) | (9,005 | ) | (1,353 | ) | 15.0 | % | |||||
| | | | | | | | | | | | | | |
|
Income before income taxes and income from equity investees |
31,812 | 23,784 | 8,028 | 33.8 | % | ||||||||
|
(Provision) for income taxes |
(1,491 | ) | (1,379 | ) | (112 | ) | 8.1 | % | |||||
|
Income from equity investees |
1,877 | 1,169 | 708 | 60.6 | % | ||||||||
| | | | | | | | | | | | | | |
|
Net income |
$ | 32,198 | $ | 23,574 | $ | 8,624 | 36.6 | % | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Same Site Results Comparisons
As part of the discussion and analysis of our operating results we sometimes refer to increases and decreases in results on a same site basis. For purposes of these comparisons, we include a location in the following same site comparisons only if we (or a franchisee of ours for purposes only of the rent and royalty revenues results) continuously operated it from January 1, 2011, through December 31, 2012. We do not exclude locations from the same site comparisons as a result of expansions in their size or changes in the services offered. We excluded from the same site comparisons the two travel centers and two convenience stores we operate for a joint venture in which we own a 40% interest because we account for this investment using the equity method of accounting and, therefore, the related revenues and expenses are not included in the respective line items in our consolidated results
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of operations. Two company operated travel centers were excluded from this same site comparison because they were temporarily closed during significant portions of 2011 as a result of flooding.
|
|
Years Ended December 31, |
|
%
Change Favorable/ (Unfavorable) |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(gallons and dollars in thousands)
|
2012 | 2011 | Change | ||||||||||
|
Number of company operated locations |
184 | 184 | — | ||||||||||
|
Fuel: (1) |
|||||||||||||
|
Fuel sales volume (gallons) |
1,868,867 | 1,951,359 | (82,492 | ) | (4.2 | )% | |||||||
|
Fuel revenues |
$ | 6,089,938 | $ | 6,182,799 | $ | (92,861 | ) | (1.5 | )% | ||||
|
Fuel gross margin |
$ | 311,404 | $ | 292,987 | $ | 18,417 | 6.3 | % | |||||
|
Fuel gross margin per gallon |
$ | 0.167 | $ | 0.150 | $ | 0.017 | 11.3 | % | |||||
|
Nonfuel: (1) |
|||||||||||||
|
Nonfuel revenues |
$ | 1,288,936 | $ | 1,249,467 | $ | 39,469 | 3.2 | % | |||||
|
Nonfuel gross margin |
$ | 714,918 | $ | 710,807 | $ | 4,111 | 0.6 | % | |||||
|
Nonfuel gross margin percentage |
55.5 | % | 56.9 | % | (140 | )b.p. | |||||||
|
Total gross margin (1) |
$ | 1,026,322 | $ | 1,003,794 | $ | 22,528 | 2.2 | % | |||||
|
Site level operating expenses (1) |
$ | 660,663 | $ | 658,559 | $ | 2,104 | (0.3 | )% | |||||
|
Site level operating expenses as a percentage of nonfuel revenues (1) |
51.3 | % | 52.7 | % | 140 | b.p. | |||||||
|
Site level gross margin in excess of site level operating expenses (1) |
$ | 365,659 | $ | 345,235 | $ | 20,424 | 5.9 | % | |||||
|
Number of franchisee operated locations |
31 | 31 | — | ||||||||||
|
Rent and royalty revenues |
$ | 11,062 | $ | 10,025 | $ | 1,037 | 10.3 | % | |||||
Revenues. Revenues for 2012, were $7,995,724, which represented an increase from 2011, of $106,867, or 1.4%, primarily related to an increase in nonfuel revenue.
Fuel revenues for 2012, were $6,636,297, an increase of $32,968, or 0.5%, compared to 2011. This increase was principally the result of increases in fuel prices and fuel sales at travel centers we acquired during 2011 and 2012. These increases were partially offset by decreases in same site fuel sales volume and also offset by decreases in gallons sold to franchisees. The decreased level of sales volume to franchisees resulted from the sublease renewals entered in the second half of 2012, which increased our rent revenue but eliminated the requirement that these subtenants purchase diesel fuel from us. The table below shows the changes in fuel revenues between periods that resulted from price and volume changes:
|
(gallons and dollars in thousands)
|
Gallons
Sold |
Fuel
Revenues |
|||||
|---|---|---|---|---|---|---|---|
|
Results for 2011 |
2,087,416 | $ | 6,603,329 | ||||
|
Increase due to petroleum products price changes |
— | 189,335 | |||||
|
Decrease due to same site volume changes |
(82,492 | ) | (269,694 | ) | |||
|
Increase due to locations opened |
54,559 | 177,480 | |||||
|
Decrease in sales to franchisees |
(19,464 | ) | (63,808 | ) | |||
|
Other changes, net |
(59 | ) | (345 | ) | |||
| | | | | | | | |
|
Net change from prior year period |
(47,456 | ) | 32,968 | ||||
| | | | | | | | |
|
Results for 2012 |
2,039,960 | $ | 6,636,297 | ||||
| | | | | | | | |
| | | | | | | | |
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On a same site basis, fuel sales volume for our company operated locations decreased by 82,492 gallons, or 4.2%, during 2012, compared to 2011. We believe that improved fuel efficiency of heavy truck engines and other fuel conservation efforts by trucking customers, capital projects that required us to take certain diesel dispensers temporarily out of service during the year, and our decision to avoid certain lower margin fuel sales contributed to decreased same site fuel sales volume despite the slight and slow improvement in the U.S. economy generally and the trucking industry specifically.
Nonfuel revenues for 2012, were $1,344,755, an increase of $73,670, or 5.8%, compared to 2011. The majority of the change between years related to those sites we operated continuously since January 1, 2011. On a same site basis for our company operated sites, nonfuel revenues increased by $39,469, or 3.2%, during 2012, compared to 2011. We believe the same site nonfuel revenue increase reflects increased customer spending due to increased customer traffic, certain price increases we have instituted as a result of increased prices we paid for nonfuel inventory purchases and the effects of certain of our capital investments and marketing initiatives. The increase in nonfuel revenues was also the result of sales at the travel centers we acquired or opened during 2011 and 2012.
Rent and royalty revenues for 2012, were $14,672, an increase of $229, or 1.6%, compared to the same period in 2011. Rent and royalties increased as a result of increased nonfuel revenues at our franchisee locations, the addition of four franchisee locations since the beginning of 2011 and increased rents at six sites currently subleased to franchisees that became effective during the second half of 2012. These increases were partially offset by our acquisitions during 2011 and 2012 of five franchisee locations and the operations of the businesses of franchisees at four locations that had been subleased from us.
Cost of goods sold (excluding depreciation). Cost of goods sold for 2012, was $6,909,724, an increase of $59,685, or 0.9%, compared to 2011. Fuel cost of goods sold for 2012 was $6,310,250, an increase of $8,303, or 0.1%, compared to 2011. This increase in fuel cost of goods sold resulted from the increase in fuel prices that was partially offset by the decrease in fuel sales volumes. The fuel gross margin per gallon of $0.167 on a same site basis for 2012 increased $0.017 per gallon, primarily as a result of our decision to avoid certain lower margin sales.
Nonfuel cost of goods sold for 2012, was $599,474, an increase of $51,382, or 9.4%, compared to 2011. Nonfuel cost of goods sold increased due to the nonfuel sales increases noted above, combined with increases in product unit costs. Nonfuel gross margin for 2012, was $745,281, compared to $722,993 during 2011. Nonfuel gross margin was 55.4% and 56.9% of nonfuel revenues during 2012 and 2011, respectively. The nonfuel gross margin percentage decreased primarily as a result of a shift in our mix of products and services sold, margin compression in our truck service sales largely due to increased tire prices and increased price competition, a decision to lower our retail prices for tobacco products in order to encourage higher sales volumes of store products, and delays in reflecting certain product cost increases in our retail sales pricing.
Site level operating expenses. Site level operating expenses for 2012, were $698,522, an increase of $20,564, or 3.0%, compared to 2011. The increase in site level operating expenses primarily was due to the locations and businesses we acquired or opened during 2011 and 2012, including site conversion or startup costs of $1,623 in 2012 and $411 in 2011, and also resulted from adjustments to reserves for certain environmental and litigation matters of $2,525 in 2012 compared to $1,622 in 2011.
On a same site basis for our company operated sites, site level operating expenses increased by $2,104, or 0.3%, for 2012, compared to 2011, primarily due to increased labor costs resulting from the increased level of nonfuel sales. Site level operating expenses as a percentage of nonfuel revenues for 2012, were 51.3%, compared to 52.7% for 2011 on a same site basis. The decrease in operating expenses as a percentage of nonfuel revenues primarily was because certain of our expenses are fixed, or otherwise do not vary directly with sales so that increases in our revenues did not result in corresponding increases in those site level operating expenses.
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Selling, general and administrative expenses. Selling, general and administrative expenses for 2012, were $95,547, an increase of $6,351, or 7.1%, compared to 2011. This increase primarily resulted from increases in legal expenses and personnel costs. The increased personnel costs resulted in part from increased headcount in regional operations management due to the increased number of company operated locations during 2012.
Real estate rent expense. Rent expense for 2012 was $198,927, an increase of $7,129, or 3.7%, compared to 2011 that primarily resulted from the increases in rent as a result of improvements sold to HPT during 2011 and 2012 and percentage rent recognized under the TA Lease based on increases in 2012 fuel and nonfuel revenues over the 2011 amounts at the sites leased under the TA Lease.
Depreciation and amortization expense. Depreciation and amortization expense for 2012, was $51,534, an increase of $4,068, or 8.6%, compared to 2011, that primarily resulted from an increase in depreciable assets due in large part to the acquisitions we completed during 2011 and 2012.
Interest expense. Interest expense consisted of the following:
|
|
Year Ended
December 31, |
|
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands)
|
2012 | 2011 | Change | |||||||
|
Interest related to Credit Facility |
$ | 2,096 | $ | 1,036 | $ | 1,060 | ||||
|
HPT rent classified as interest |
7,330 | 7,390 | (60 | ) | ||||||
|
Amortization of deferred financing costs |
352 | 403 | (51 | ) | ||||||
|
Other |
580 | 176 | 404 | |||||||
| | | | | | | | | | | |
|
Total interest expense |
$ | 10,358 | $ | 9,005 | $ | 1,353 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Income tax provision. Our provision for income taxes was $1,491 and $1,379 for 2012 and 2011, respectively. During 2012 and 2011, we did not recognize the benefit of all of our deferred tax assets, but our tax loss and credit carryforwards did offset any federal and certain state income taxes associated with our current taxable income. Our income tax provision represents certain minimum income based state taxes payable without regard to our tax loss carryforwards as well as the recognition of deferred tax liabilities that cannot be used to reduce existing deferred tax assets related to the tax amortization of indefinite lived intangible assets and to foreign currency translation adjustments.
Critical Accounting Policies
The preparation of our financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The critical accounting policies we employ in the preparation of our consolidated financial statements are those which involve allowances for doubtful accounts receivable, reserves for excess and obsolete inventories, asset impairments, loyalty program reserves, reserves for self insurance, environmental liabilities and recoveries, legal contingencies, income tax accounting and accounting for leases.
We maintain our allowances for doubtful accounts receivable based on historical payment patterns, aging of accounts receivable, periodic review of customers' financial condition, and actual write off history. If the financial conditions of customers deteriorate, resulting in impairments of their ability to make payments, additional allowances may be required.
We maintain reserves for the estimated amounts of obsolete and excess inventories. These estimates are based on unit sales histories and on hand inventory quantities, known market trends for inventory items and assumptions regarding factors such as future inventory needs, our ability and the related cost to return items to our suppliers and our ability to sell inventory at a discount when
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necessary. To the extent an estimate is inaccurate, our assets, expenses and net income may be understated or overstated.
Our accounting policies require recording impairment losses on long lived assets to reduce the carrying value of certain assets to their fair value. For purposes of our impairment analysis of property and equipment, we perform the test at the individual site level, since this is the lowest grouping of assets and liabilities at which the related cash flows are largely independent of other assets and liabilities. The need to recognize impairment losses may occur under our policies in two types of circumstances. First, when assets are used in operations and events and circumstances indicate that the assets might be impaired, we record impairments whenever the carrying values of those assets exceed the estimated fair values of those assets at the specific location. Second, when assets are to be disposed of and their carrying values exceed the estimated fair value of the asset less the estimated cost to sell the asset, we record an impairment charge. Our estimates of fair value are based on our estimates of likely market participant assumptions. Key assumptions include our current expectations for projected fuel sales volumes, nonfuel revenues, fuel and nonfuel gross margins, site level operating expenses and rent expense. If the business climate deteriorates, our actual results may not be consistent with these assumptions and estimates. The discount rate, which is used to measure the present value of the projected future cash flows, is set using a weighted average cost of capital method that considers market and industry data as well as our specific risk factors and that is likely to be used by a market participant. The weighted-average cost of capital is our estimate of the overall after tax rate of return required by equity and debt holders of a business enterprise. We also annually assess intangible assets with indefinite lives for impairment. We use a number of assumptions and methods in preparing valuations underlying impairment tests, including estimates of future cash flows and discount rates. During 2013, our assumptions resulted in total impairment charges of $659 related to three travel centers. Applying significantly different assumptions or valuation methods could result in different results from these impairment tests. For example, assuming a 10% decline in projected fuel sales volume and a three cents per gallon decline in projected fuel gross margins per gallon would result in an additional $3,996 of impairment charges related to an additional five travel centers.
We have reserves for customer loyalty programs we offer to customers, similar to frequent shopper programs offered by other retailers. Drivers enrolled in these programs earn points for certain fuel and nonfuel purchases that can be redeemed for discounts on future nonfuel products and services at our travel centers. In determining these reserves, we must estimate future expected point expirations. These estimates are based on historical point expiration patterns, adjusted for expected future changes. To the extent an estimate is inaccurate, our liabilities, expenses and net income may be understated or overstated.
We are exposed to losses under insurance programs for which we pay deductibles and for which we are partially self insured up to certain stop loss amounts, including claims under our general liability, workers' compensation, motor vehicle and group health benefits policies and programs. Accruals are established under these insurance programs for both estimated losses on known claims and potential claims incurred but not asserted, based on claims histories and using actuarial methods. The most significant risk of this methodology is its dependence on claims histories, which are not always indicative of future claims. To the extent an estimate is inaccurate, our liabilities, expenses and net income may be understated or overstated.
We establish or adjust environmental contingency reserves when the responsibility to remediate becomes probable and the amount of associated costs is reasonably determinable. We also have a receivable for expected recoveries of certain of these estimated future environmental expenditures, resulting in an estimated net amount to be funded by us in the future. The process of determining both our estimated future costs of remediation and our estimated future recoveries of costs from insurers or others involves a high degree of management judgment based on past experiences and current and
63
expected regulatory and insurance market conditions. To the extent an estimate is inaccurate, our liabilities, expenses and net income may be understated or overstated.
We record legal contingency reserves when our liability becomes probable and when we can reasonably estimate the amount of our contingent loss. The process of estimating our liability for legal matters involves a high degree of management judgment, which is based on facts and circumstances specific to each matter and our prior experiences with similar matters that may not be indicative of future results. To the extent an estimate is inaccurate, our liabilities, expenses and net income may be understated or overstated.
As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for financial statement and tax reporting purposes. These timing differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. We are required to record a valuation allowance to reduce deferred tax assets if we are not able to conclude that it is more likely than not these assets will be realized. In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or a portion of the deferred tax assets. Judgment is required in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. At year end 2013, we concluded that our profitability over the past three years and our current expectations regarding future income creates sufficient positive evidence such that it is more likely than not the previously unrecognized benefit of certain of our deferred tax assets will be realized. As a result, we reversed the valuation allowance against the majority of our deferred tax assets and we recorded the resulting income tax benefit of $29,853 in the consolidated statement of income and comprehensive income for the year ended December 31, 2013. We continue to maintain a valuation allowance against the deferred tax assets related to certain net operating loss and tax credit carryforwards in certain state and foreign jurisdictions. Our conclusions were based on estimates of future profitability based largely on the profits we have generated over the past three years but these conclusions still could prove to be inaccurate. To the extent our estimates and assumptions prove inaccurate we may need to recognize additional amounts of valuation allowance, which would increase our income tax expense and reduce our net income in future periods.
Also with respect to income tax accounting, we are required to account for uncertain tax positions we take in our income tax returns. The two step process of recognition and measurement required with respect to uncertain tax positions can require a great deal of management judgment regarding the probability that a tax position, based solely on its technical merits, will be sustained upon examination by the taxing authority, and the measurement of the amount of benefit that is more likely than not to be realized upon ultimate resolution. Many assumptions and estimates may be taken into account in the determination of whether a tax position will be recognized in the financial statements and, if the tax position is to be recognized, the amount of benefit to be recognized. These assumptions and estimates are subject to change due to many factors. To the extent our estimates and assumptions prove inaccurate we may need to adjust the amounts recognized in our financial statements, which could increase or decrease our assets, liabilities, income tax expense, and net income in future periods.
With respect to accounting for leases, each time we enter a new lease or materially modify an existing lease we evaluate its classification as either a capital lease or an operating lease. The classification of a lease as capital or operating affects whether and how the transaction is reflected in our balance sheet, as well as our recognition of rental payments as rent or interest expense. These evaluations require us to make estimates of, among other things, the remaining useful life and residual value of leased properties, appropriate discount rates and future cash flows that may be realized from the leased properties. Incorrect assumptions or estimates may result in misclassification of our leases.
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Other aspects of our lease accounting policies relate to the accounting for sale-leaseback transactions, including the appropriate amortization of related deferred liabilities and any deferred gains or losses, and the accounting for lease incentives. Our lease accounting policies involve significant judgments based upon our experience, including judgments about current valuations, estimated useful lives, and salvage or residual values. In the future we may need to revise our assessments to incorporate information which is not known at the time of our previous assessments, and such revisions could increase or decrease our depreciation expense related to properties that we lease, result in the classification of some of our leases as other than operating leases or decrease the carrying values of some of our assets.
Any or all of these policies, applied in the future with the benefit of additional facts or better estimates which were not known or available at the time the various required evaluations were made, could result in revisions to estimated liabilities, adjustments to reduce assets to their fair value or recognition of expenses that may be material. However, other than as disclosed in the preceding paragraphs, we do not believe our estimates are reasonably likely to change materially in the near term.
Liquidity and Capital Resources
Our principal liquidity requirements are to meet our operating and financing expenses and to fund our capital expenditures, acquisitions and working capital requirements. Our principal sources of liquidity to meet these requirements are:
Additionally, the unencumbered operating real estate and vacant land that we own may be financed or sold as a source of additional liquidity over time.
We believe that the primary risks we currently face with respect to our operating cash flow are:
A reduction in our revenue without an offsetting reduction in our operating expenses may cause us to use our cash at a rate that we cannot sustain for extended periods. Further, certain of our expenses
65
are fixed in nature, which may restrict our ability to realize a reduction in our expenses to offset a reduction in our revenues. Additional increases in the prices we must pay to obtain fuel, decreases in the amount of time we have to pay our trade creditors, or an increase in cash deposits required by our suppliers to secure our credit lines, may increase our working capital funding requirements materially. Also, because of the current economic, industry and global credit market conditions and our historical operating losses, credit may be expensive and difficult for us to obtain.
At December 31, 2013 and 2012, we had cash and cash equivalents of $85,657 and $35,189, respectively. During the year ended December 31, 2013, we had net cash inflows from operating activities of $71,513, cash outflows from investing activities of $196,039, and cash inflows from financing activities of $175,027. During 2013, our cash balance increased primarily as a result of the $110,000 proceeds we received from the issuance of our Senior Notes, the $65,102 net proceeds of our issuance and sale of 7,475,000 common shares, our operating profit and the $83,912 of proceeds from our sales to HPT of improvements to the properties leased from HPT; $6,319 of these proceeds related to improvements at the sites that did not qualify for operating lease treatment under the sale-leaseback accounting guidance and are therefore classified as cash from financing activities. These sources of cash were partially offset by investments of $109,978 for the acquisition of 41 properties, and our other capital investments of $164,242.
During the year ended December 31, 2012, we had net cash inflows from operating activities of $83,072, cash outflows from investing activities of $172,474, and cash inflows from financing activities of $6,322. During 2012, our cash balance decreased primarily as a result of investing $52,070 for 14 travel center business acquisitions, our other capital investments of $188,694 and an increase in our working capital investment. These uses of cash were partially offset by our operating profit and the $76,754 of proceeds from our sales to HPT of improvements to the properties leased from HPT; $8,598 of these proceeds related to improvements at the sites that did not qualify for operating lease treatment under the sale-leaseback accounting guidance and are therefore classified as cash from financing activities.
During the year ended December 31, 2011, we had net cash inflows from operating activities of $30,141, cash outflows from investing activities of $86,798, and cash inflows from financing activities of $49,547. During 2011, our cash balance decreased primarily as a result of our travel center acquisitions, our other capital investments and an increase in our working capital investment. These decreases were partially offset by the $53,135 of net proceeds from our common share offering, $69,122 of proceeds from our sale to HPT of improvements to the properties leased from HPT and our cash from operations.
Our business requires substantial amounts of working capital, including cash liquidity, and our working capital requirements are especially large because of the level and volatility of fuel prices which has existed in the past several years and which we expect will continue. Further, our growth strategy of selectively acquiring additional properties and businesses requires us to expend substantial additional capital. Although we had a cash balance of $85,657 on December 31, 2013, and generated net income and net cash from operating activities in 2013, there can be no assurances that we will generate future profits or positive cash flows or that we will be able to obtain additional financing to fund and grow our business.
On March 17, 2014, we filed a Form 12b-25 with the SEC indicating that we were unable to file this Annual Report within the time period prescribed by the Exchange Act due to unanticipated delays encountered in connection with our accounting for income taxes as well as general delays encountered in connection with the completion of our accounting processes and procedures. On May 13, 2014, we filed a second Form 12b-25 indicating that as a result of the delay in completing this Annual Report, we were also unable to file our First Quarter 10-Q within the time period prescribed by the Exchange Act. Our failure to timely file this Annual Report, our consequent inability to use our shelf registration statement on Form S-3 and material weaknesses in our internal control over financial reporting as
66
discussed further in Item 9A—"Controls and Procedures" may negatively impact our ability to issue new debt and equity securities and thus adversely impact our liquidity. Furthermore, the late filing of our First Quarter 10-Q could lead to breaches of our revolving credit facility or our indenture governing our Senior Notes, which could give rise to adverse consequences including giving our lenders or holders of the Senior Notes the right to exercise remedies, such as demanding immediate repayment of amounts owed and restricting our ability to borrow. If we are unable to borrow under our credit facility, we may be unable to meet our business obligations or to grow our business.
Assets and Liabilities
Our total current assets at December 31, 2013, were $470,394, compared to $404,926 at December 31, 2012. Our total current liabilities were $303,613 at December 31, 2013, compared to $283,127 at December 31, 2012. Inventory and accounts payable at December 31, 2013, were $8,195 and $6,040 higher than at December 31, 2012, respectively, principally due to increases in the amounts of inventories required by our additional locations. Accounts receivable decreased principally as a result of reduced fuel sales volumes in December 2013, as compared to December 2012; fuel sales prices in December 2013 were at about the same level as in December 2012.
Revolving Credit Facility
In October 2011, we entered into an amended and restated loan and security agreement, or our credit facility, with a group of commercial banks. The credit facility amended and restated our preexisting credit facility. Under this credit facility, a maximum of $200,000 may be drawn, repaid and redrawn until maturity in October 2016. The availability of this maximum amount is subject to limits based on qualified collateral. Subject to available collateral and lender participation, the maximum amount may be increased to $300,000. 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. Borrowings under the credit facility bear interest at a rate based on, at our option, LIBOR or a base rate, plus a premium (which premium is subject to adjustment based upon facility availability, utilization and other matters). The annual interest rate for our credit facility was 4.5% as of December 31, 2013. Pursuant to the credit facility, we pay a monthly unused line fee which is subject to adjustment according to the average daily principal amount of unused commitment under the credit facility. For further information regarding how the interest and fees charged under the credit facility are determined, see Note 11 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report.
The credit facility requires us to maintain certain levels of collateral, limits our ability to incur debt and liens, restricts us from making certain investments and paying dividends and other distributions, requires us to maintain a minimum fixed charge ratio under certain circumstances and contains other customary covenants and conditions. Our credit facility also requires that we furnish certain of our financial statements to our lenders within specified time periods. Effective May 31, 2014, we received a waiver from our lenders extending until June 30, 2014, our requirement to furnish our financial statements as of and for the year ended December 31, 2013, and extending until July 31, 2014 our requirement to furnish our quarterly financial statements as of and for the fiscal quarter ended March 31, 2014. If we are unable to furnish the quarterly financial statements as of and for the fiscal quarter ended March 31, 2014, by July 31, 2014, or obtain an extension of the waiver, we may be in default under our credit facility. The credit facility provides for the acceleration of principal and interest payments upon an event of default including, but 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 under certain contracts, including the HPT Leases and our business management and shared services agreement with RMR.
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Our credit facility is secured by substantially all of our cash, accounts receivable, inventory, equipment and intangible assets and the amount available to us is determined by reference to a borrowing base calculation based on eligible collateral. At December 31, 2013, a total of $130,783 was available to us for loans and letters of credit under the credit facility. At December 31, 2013, there were no loans outstanding under the credit facility but we had outstanding $44,866 of letters of credit issued under that facility, securing certain purchases, insurance, fuel tax and other trade obligations.
Senior Notes Issuance
On January 15, 2013, we issued at par $110,000 aggregate principal amount of our 8.25% Senior Notes, or the Senior Notes, in an underwritten public offering. The Senior Notes are our senior unsecured obligations. The Senior Notes bear interest at 8.25% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning on April 15, 2013. The Senior Notes mature on January 15, 2028. We may, at our option, at any time on or after January 15, 2016, redeem some or all of the Senior Notes by paying 100% of the principal amount of the Senior Notes to be redeemed plus accrued but unpaid interest, if any, to, but not including, the redemption date. The indenture governing the Senior Notes does not limit the amount of indebtedness we may incur. We may issue additional debt from time to time. During 2013, we paid $4,750 of debt issuance costs related to this offering.
The indenture requires that we file our Exchange Act reports with the indenture trustee within a prescribed time period. We did not maintain compliance with this covenant for the year ended December 31, 2013, but the filing of this Annual Report cures this breach. Our failure to timely file our First Quarter 10-Q, if not cured within a specified time period, could lead to an event of default under the indenture.
Common Shares Issuance
In December 2013, we issued and sold 7,475,000 common shares in an underwritten public offering for net proceeds of $65,102.
Investment Activities
Our business of operating high sales volume travel centers open 24 hours every day requires that we make regular capital investments in our business to maintain our competitiveness. During the year ended December 31, 2013, we made capital expenditures of $164,242, including $45,338 to upgrade the travel centers and businesses we acquired in 2011, 2012 and 2013 and including certain capital expenditures which were sold to HPT.
During the year ended December 31, 2013, we acquired, for an aggregate amount of $46,245, nine travel centers and the business of one franchisee at a travel center that this franchisee previously subleased from us. We acquired one travel center for $3,000 in January 2014. We have entered agreements to acquire two additional travel centers for a total of $21,500. We expect to complete these acquisitions before September 30, 2014; but these purchases are subject to conditions and may not occur, may be delayed or the terms may change. We currently intend to continue our efforts to selectively acquire additional travel centers and convenience stores and to otherwise expand our business.
On December 16, 2013, we acquired 31 convenience stores for $67,922, including net working capital assets and liabilities.
During 2013, we received $83,912 of proceeds from the sale to HPT of improvements we previously made to travel centers leased from HPT, and as a result our annual rent increased by $7,133, pursuant to the terms of our HPT Leases. At December 31, 2013, our property and equipment balance
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included $5,096 of completed improvement projects and an additional $23,636 in ongoing improvement projects that we expect to request that HPT purchase for an increase in rent in the future; however, HPT is not obligated to purchase those assets. In March 2014, we sold to HPT $6,063 of improvements for an increase in annual rent payable to HPT of $515.
During the year ended December 31, 2012, we acquired, for an aggregate amount of $52,310, ten travel centers and the businesses of four franchisees at travel centers that these franchisees previously subleased from us. During 2012, we also made sustaining capital expenditures of $148,650 and we made capital expenditures of $40,044 to improve the travel centers and businesses we acquired in 2011 and 2012. During 2012, we received $76,754 of proceeds from the sale to HPT of improvements we previously made to travel centers leased from HPT, and as a result our rent increased pursuant to the terms of our HPT Leases.
During the year ended December 31, 2011, we acquired, for an aggregate of $37,975, eight travel centers. During 2011, we also made capital expenditures of $106,182 for improvements to existing travel centers and of $12,065 to improve the eight travel centers we acquired in 2011. During 2011, we received $69,122 of proceeds from the sale to HPT of improvements we previously made to travel centers leased from HPT, and as a result our rent increased pursuant to the terms of our HPT Leases.
We estimate that during 2014 our sustaining capital investments in our existing business will be approximately $65,000 to $75,000, some of which is expected to be of the type of improvements we typically request HPT purchase from us, and that the capital investment for improvements to those locations we had acquired during 2012 and 2013 or agreed to acquire as of December 31, 2013, will be approximately $36,500. We may also make additional investments in our business for expansion or other projects and at substantial costs.
Litigation Settlement
In January 2014, we reached a settlement with the plaintiffs in a long running litigation (for further details, see Note 18 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report). We made our related $10,000 payment in March 2014.
Off Balance Sheet Arrangements
As of December 31, 2013, we had no off balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, other than with respect to the debt described below owed by Petro Travel Plaza Holdings LLC, or PTP, an entity in which we own a minority interest. We own a 40% interest in a joint venture, PTP, which owns travel centers and convenience stores that we operate. These travel centers are encumbered by debt of $17,358 as of December 31, 2013, that is secured by PTP's real property and that matures in December 2018. We account for our investment in PTP under the equity method of accounting and, therefore, we have not recorded a liability for this debt. We are not directly liable for this debt, but the carrying value of our investment in this joint venture ($17,672 at December 31, 2013) could be adversely affected if PTP defaulted on this debt and PTP's property was used to satisfy this debt. Also, in connection with the loan agreement entered by PTP, we and Tejon Development Corporation, the owner of the majority interest in PTP, each agreed to indemnify the lender against liability from environmental matters related to PTP's sites.
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Related Party Transactions
Relationships with HPT, RMR and AIC
We have relationships and historical and continuing transactions with our Directors, our executive officers, HPT, RMR, AIC and other companies to which RMR provides management services and others affiliated with them. For example:
For further information about these and other such relationships and related person transactions, please see Note 17 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report, which is incorporated herein by reference, and the section captioned "Business—Our Leases With HPT" above in Part I, Item 1 of this Annual Report. In addition, for more information about these transactions and relationships and about the risks that may arise as a result of these and other related person transactions and relationships, please see elsewhere in this Annual Report, including "Warning Concerning Forward Looking Statements" and Part I, Item 1A, "Risk Factors." Copies of certain of our agreements with these related parties, including our leases and related amendments with HPT, our business management agreement and property management agreement with RMR and our shareholders agreement with AIC and its shareholders, are publicly available as exhibits to our public filings with the SEC and accessible at the SEC's website, www.sec.gov.
We believe that our agreements with HPT, RMR and AIC are on commercially reasonable terms. We also believe that our relationships with HPT, RMR and AIC and their affiliated and related persons and entities benefit us and, in fact, provide us with competitive advantages in operating and growing our business.
Relationship with PTP
We own a 40% interest in PTP and operate the two travel centers and two convenience stores that PTP owns. Additional information regarding our relationship and transactions with PTP can be found in Note 17 to the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report, which is incorporated herein by reference.
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Summary of Contractual Obligations and Commitments
At December 31, 2013, our primary outstanding trade commitments were $44,866 for letters of credit. The following table summarizes our obligations to make future payments under various agreements as of December 31, 2013:
|
|
Payments due by period | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Total |
Less than
one year |
1 - 3 years | 3 - 5 years |
More than
5 years |
|||||||||||
|
|
(In Thousands)
|
|||||||||||||||
|
Leases with HPT (1) |
$ | 2,282,768 | $ | 228,330 | $ | 453,493 | $ | 449,335 | $ | 1,151,610 | ||||||
|
Other operating leases |
17,992 | 4,894 | 5,361 | 2,341 | 5,396 | |||||||||||
|
Senior Notes (2) |
237,423 | 9,075 | 18,150 | 18,150 | 192,048 | |||||||||||
|
Letters of credit (3) |
44,866 | — | 44,866 | — | — | |||||||||||
|
Purchase obligations (4) |
3,000 | 3,000 | — | — | — | |||||||||||
|
Other long term liabilities (5) |
33,392 | 15,533 | 11,281 | 3,737 | 2,841 | |||||||||||
| | | | | | | | | | | | | | | | | |
|
Total contractual obligations |
$ | 2,619,441 | $ | 260,832 | $ | 533,151 | $ | 473,563 | $ | 1,351,895 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Inflation and Deflation
Inflation, or a general increase in prices, will likely have more negative than positive impacts on our business. Rising prices may allow us to increase revenues, but also will likely increase our operating costs. Also, rising prices for fuel and other products we sell increase our working capital requirements and in the past have caused some of our customers to reduce their purchases of our goods and services. Because significant components of our expenses are fixed, we may not be able to realize expense reductions which match declines in general price levels, or deflation.
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Seasonality
Assuming little variation in fuel prices, our revenues are usually lowest in the first quarter of the year when movement of freight by professional truck drivers and motorist travel are typically at their lowest levels of the year, and our revenues in the fourth quarter of a year are often somewhat lower than those of the second and third quarters because, although the beginning of the fourth quarter is often positively impacted by increased movement of freight in preparation for various national holidays, that positive impact is often more than offset by a reduction in freight movement caused by vacation time associated with those holidays taken by professional truck drivers toward the end of the year. While our revenues are modestly seasonal, the quarterly variations in our operating results may reflect greater seasonal differences because our rent and certain other costs do not vary seasonally.
Environmental and Climate Change Matters
At December 31, 2013, we had an accrued liability of $7,487 for environmental matters as well as a receivable for expected recoveries of certain of these estimated future expenditures of $1,611, resulting in an estimated net amount of $5,876 that we expect to need to fund in the future. We do not have a reserve for unknown current or potential future environmental matters. Accrued liabilities related to environmental matters are recorded on an undiscounted basis because of the uncertainty associated with the timing of the related future payments. We cannot precisely know the ultimate costs we will incur in connection with currently known or future potential environmental related violations, corrective actions, investigation and remediation; however, based on our current knowledge we do not expect that our net costs for such matters to be incurred at our locations, individually or in the aggregate, would be material to our financial condition or results of operations.
We have insurance of up to $10,000 per incident and up to $40,000 in the aggregate for certain unknown environmental liabilities, subject, in each case, to certain limitations and deductibles. However, we can provide no assurance that we will be able to maintain similar environmental insurance coverage in the future on acceptable terms.
While the costs of our environmental compliance in the past have not had a material adverse impact on us, it is impossible to predict the ultimate effect changing circumstances and changing environmental laws may have on us in the future. We cannot be certain that 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 we discover additional environmental issues, or if government agencies impose additional environmental requirements, increased environmental compliance or remediation expenditures may be required, which could have a material adverse effect on us. In addition, legislation and regulation regarding climate change, including greenhouse gas emissions, and other environmental matters and market reaction to any such legislation or regulation or to climate change concerns, may decrease the demand for our major product, diesel fuel, and may require us to expend significant amounts. For instance, federal and state governmental requirements addressing emissions from trucks and other motor vehicles, such as the U.S. Environmental Protection Agency's gasoline and diesel sulfur control requirements that limit the concentration of sulfur in motor vehicle gasoline and diesel fuel, as well as President Obama's recent order that his administration develop and implement new fuel efficiency standards for medium and heavy duty commercial trucks by March 2016, could negatively impact our business. Further, legislation and regulations that limit carbon emissions may cause our energy costs at our locations to increase.
There have recently been severe weather activities in different parts of the country that some observers believe evidence global climate change, including the recent Hurricane Sandy that impacted portions of the eastern United States in October 2012. Such severe weather that may result from climate change may have an adverse effect on individual properties we own, lease or operate. We mitigate these risks by owning, leasing and operating a diversified portfolio of properties, by procuring
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insurance coverage we believe adequate to protect us from material damages and losses and by attempting to monitor and be prepared for such activities. However, there can be no assurance that our mitigation efforts will be sufficient or that storms that may occur due to future climate change or otherwise could not have a material adverse effect on our business.
For further information about these and other environmental and climate change matters, see the disclosure under the heading "Environmental Matters" in Note 18 to the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report, which disclosure is incorporated herein by reference. In addition, for more information about these environmental and climate change matters and about the risks which may arise as a result of these environmental and climate change matters, see elsewhere in this Annual Report, including "Warning Concerning Forward Looking Statements", "Environmental and Climate Change Matters" in Item 1 and Item 1A, "Risk Factors".
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk (dollars in thousands)
We have a line of credit that is secured by substantially all of our cash, accounts receivable, inventory, equipment and intangible assets. As of December 31, 2013, no loans were outstanding under this credit facility. We borrow under this credit facility in U.S. dollars and those borrowings require us to pay interest at floating interest rates, which are based on LIBOR or a base rate plus a premium. Accordingly, we are vulnerable to changes in U.S. dollar based short term interest rates. There have been recent governmental inquiries regarding the setting of LIBOR, which may result in changes to that process that may have the effect of increasing LIBOR. Increases in LIBOR would increase the amount of interest we would have to pay under our credit facility. A change in interest rates generally would not affect the value of any outstanding floating rate debt but could affect our operating results. For example, if the $200,000 stated maximum amount was drawn under our credit facility and interest rates decreased or increased by 100 basis points per annum, our interest expense would decrease or increase by $2,000 per year, or $0.07 per share, based on the number of outstanding common shares as of December 31, 2013. If interest rates were to change gradually over time, the impact would occur over time. At December 31, 2013, we had outstanding $110,000 aggregate principal amount of our Senior Notes. The Senior Notes have a fixed interest rate; therefore, changes in market interest rates will not affect our operating results.
We are exposed to risks arising from market price changes for fuel. These risks have historically resulted from changes in supply and demand for fuel and from market speculation about future supply and demand for fuel. Some supply changes may arise from local conditions, such as a malfunction in a particular pipeline or at a particular terminal. However, in the recent past most of the supply risks have arisen from national or international conditions, such as weather related shutdowns of oil drilling or refining capacities, political instability in oil producing regions of the world or terrorism. Risks may also arise from changes in the demand for and the price of fuel. Because petroleum products are traded in commodity markets, material changes in demand for and the price of fuel worldwide and financial speculation in these commodities markets may have a material effect upon the prices we have to pay for fuel and may also impact our customers' demand for fuel and other products. Almost all of these risks are beyond our control. Nevertheless, we attempt to mitigate our exposure to fuel commodity price market risks in three ways. First, whenever possible, we attempt to maintain supply contracts for diesel fuel with several different suppliers for each of our travel centers; if one supplier has a local problem we may be able to obtain fuel supplies from other suppliers. Second, we maintain modest fuel inventories, generally less than three days of fuel sales. Modest inventories may mitigate the risk that we are required by competitive or contract conditions to sell fuel for less than its cost in the event of rapid price changes; however, the modest level of fuel inventory could exacerbate our fuel supply risks. Third, we sell a majority of our diesel fuel at prices determined by reference to a benchmark which is reflective of the market costs for fuel; by selling on such terms we may be able to substantially maintain our margin per gallon despite changes in the price we pay for fuel. Based on our fuel inventory volume
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as of, and our fuel sales volume for the year ended, December 31, 2013, each one cent change in the price of fuel would change our inventory value by $162 and our fuel revenues by $20,349.
Item 8.
Financial Statements and Supplementary Data
The information required by this item is included in Item 15 of this Annual Report.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 and Rule 15d-15. Based upon that evaluation, and as a result of the existence of certain material weaknesses in our internal control over financial reporting as described below in this Item 9A, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective at December 31, 2013.
Management Report on Assessment of Internal Control over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control systems are intended to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (1992 Framework) . Based on this assessment, our management concluded that, as of December 31, 2013, our internal control over financial reporting was not effective because of the material weaknesses described below. We determined that we had a material weakness in our internal controls over accounting for income taxes; specifically, our internal controls did not provide for timely and thorough reconciliation and review of the income tax accounts and related disclosures. In addition, we also determined we had a material weakness in our internal controls due to a lack of sufficient personnel with requisite accounting competencies. We also identified deficiencies in both design and operating effectiveness of certain of our internal controls, which, when aggregated, represent a material weakness in our financial statement close process. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Although none of the identified errors that our internal control over financial reporting failed to prevent or detect on a timely basis were considered material, we concluded that it was reasonably possible that a material misstatement would not have been prevented or detected on a timely basis.
Management's assessment of the effectiveness of internal control over financial reporting excludes our wholly owned subsidiary, Girkin Development, LLC, which we acquired on December 16, 2013. Girkin Development, LLC represents approximately 7.3% of our consolidated total assets and
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approximately 0.1% of our consolidated total revenues as of and for the year ended December 31, 2013.
The effectiveness of our internal control over financial reporting as of December 31, 2013, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears in Item 15 of this Annual Report.
Remediation of Material Weakness in Internal Control Over Financial Reporting
We are in the process of improving our internal controls to remediate the material weaknesses that existed as of December 31, 2013, as set forth above in our Management Report on Assessment of Internal Control over Financial Reporting. These remediation efforts include an expansion of our corporate accounting department.
Changes in Internal Control over Financial Reporting
Except for the material weaknesses noted above, there have been no changes in our internal control over financial reporting during the quarter ended December 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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Item 10.
Directors, Executive Officers and Corporate Governance
Our LLC agreement provides that the number of Directors shall be determined by our Board of Directors. Currently, the number of our Directors is fixed at five. Our LLC agreement also provides that our Board of Directors shall be divided into three groups, with Directors in each group serving three-year terms.
The following are the ages and recent principal occupations, as of May 29, 2014, of our Directors and executive officers. The business address of our Directors and executive officers is c/o TravelCenters of America LLC, 24601 Center Ridge Road, Suite 200, Westlake, Ohio 44145. Included in each Director's biography below is an assessment of such Director based on the qualifications, attributes, skills and experience our Board of Directors has determined are important to be represented on our Board of Directors.
Barbara D. Gilmore
Independent Director since: 2007
Group/Term: Group II with a term expiring at our 2015 Annual Meeting of Shareholders
Age: 63
Board Committees: Audit; Compensation (Chair); Nominating and Governance
Other Public Company Boards: Five Star Quality Care, Inc. (since 2004); Government Properties Income Trust (since 2009)
Ms. Gilmore has served as a professional law clerk at the United States Bankruptcy Court, Central Division of the District of Massachusetts, since 2001. Ms. Gilmore was a partner of the law firm of Sullivan & Worcester LLP from 1993 to 2000, during which time she was appointed and served as trustee or examiner in various cases involving business finance matters.
Specific Qualifications, Attributes, Skills and Experience:
Lisa Harris Jones
Independent Director since: 2013
Group/Term: Group III with a term expiring at our 2016 Annual Meeting of Shareholders
Age: 46
Board Committees: Audit; Compensation; Nominating and Governance (Chair)
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Ms. Jones is the founding member of Harris Jones & Malone, LLC, a law firm based in Maryland. Since founding Harris Jones & Malone, LLC in 2000, Ms. Jones has represented a wide range of clients, focusing her practice in government relations and procurement at both the state and local levels. Prior to founding Harris Jones & Malone, LLC, Ms. Jones was an associate with the law firms of Shapiro and Olander from 1993 to 1997 and Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC from 1997 to 1999, during which time she represented the City of Baltimore and many of its agencies and related quasi-public entities in various real estate development and financing transactions. In addition to her professional accomplishments, Ms. Jones has held leadership positions in many community service and civic organizations for which she has received recognitions and awards, including being the recipient of the YWCA Greater Baltimore Special Leadership Award in 2012.
Specific Qualifications, Attributes, Skills and Experience:
Arthur G. Koumantzelis
Independent Director since: 2007
Group/Term: Group I with a term expiring at our 2014 Annual Meeting of Shareholders
Age: 83
Board Committees: Audit (Chair); Compensation; Nominating and Governance
Other Public Company Boards: RMR Real Estate Income Fund (and its predecessor funds) (since 2002)
Mr. Koumantzelis has been principally a private investor since 2007. Mr. Koumantzelis was President and Chief Executive Officer of Gainesborough Investments LLC, a private investment company, from 1998 until his retirement from that position in 2007. Mr. Koumantzelis was formerly Chief Financial Officer of Cumberland Farms, Inc., a company engaged in the convenience store business and the sale of petroleum products principally under the name "Gulf Oil" and related trademarks. Before that, Mr. Koumantzelis was a partner at the public accounting firm Ernst & Young LLP or one of its predecessors, Arthur Young & Co., for more than two decades. Mr. Koumantzelis has also served on several state appointed commissions and boards of civic organizations. Mr. Koumantzelis was an Independent Trustee of RMR Funds Series Trust from shortly after its formation in 2007 until its dissolution in 2009 (RMR Funds Series Trust, together with RMR Real Estate Income Fund and its predecessor funds, are collectively referred to herein as the "RMR Funds"). Mr. Koumantzelis was an Independent Director of Five Star Quality Care, Inc., from 2001 to 2010.
Specific Qualifications, Attributes, Skills and Experience:
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Thomas M. O'Brien
Managing Director since: 2006
President and Chief Executive Officer since 2007
Group/Term: Group II with a term expiring at our 2015 Annual Meeting of Shareholders
Age: 47
Other Public Company Boards: VirnetX Holding Corporation (since 2007)
Mr. O'Brien has been an Executive Vice President of RMR since 2008, was a Senior Vice President of RMR prior to that time since 2006 and was a Vice President of RMR prior to that time since 1996. Since 2007, Mr. O'Brien has been a Director of the National Association of Truck Stop Operators, a not for profit trade association engaged in activities intended to support the travel center industry. Mr. O'Brien was the President and a Director of RMR Advisors Inc., or RMR Advisors, an SEC registered investment advisor, from 2002 until 2007 and President of certain predecessor funds of RMR Real Estate Income Fund since their respective formations (the earliest of which was in 2002) until 2007. From 2002 through 2003, Mr. O'Brien was Executive Vice President of Hospitality Properties Trust, where he had previously served as Treasurer and Chief Financial Officer since 1996.
Specific Qualifications, Attributes, Skills and Experience:
Barry M. Portnoy
Managing Director since: 2006
Group/Term: Group I with a term expiring at our 2014 Annual Meeting of Shareholders
Age: 68
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Other Public Company Boards: Hospitality Properties Trust (since 1995); Senior Housing Properties Trust (since 1999); Five Star Quality Care, Inc. (since 2001); RMR Real Estate Income Fund (and its predecessor funds) (since 2002); Government Properties Income Trust (since 2009); Select Income REIT (since 2011); CommonWealth REIT (1986-2014)
Mr. Portnoy is an owner of RMR and of RMR Advisors. Mr. Portnoy has been an owner and a Director of RMR (and its predecessor) since its founding in 1986, a full time employee of RMR since 1997, the Chairman of RMR since 1998 and a Director and Vice President of RMR Advisors since 2002. Mr. Portnoy was an Interested Trustee of RMR Funds Series Trust from shortly after its formation in 2007 until its dissolution in 2009. Mr. Portnoy practiced law for many years as a partner in, and chairman of, a law firm until 1997.
Specific Qualifications, Attributes, Skills and Experience:
Thomas M. O'Brien
President and Chief Executive Officer since: 2007
Mr. O'Brien has been our President and Chief Executive Officer since 2007, in addition to being one of our Managing Directors and having other experience as described above.
Andrew J. Rebholz
Executive Vice President, Chief Financial Officer and Treasurer since: 2007
Age: 49
Mr. Rebholz has been a Senior Vice President of RMR since 2007. Previously, Mr. Rebholz served as our Senior Vice President and Controller since 2007. Prior to that time, he served as Vice President and Controller of TravelCenters of America, Inc., our predecessor, since 2002, and as Corporate Controller of our predecessor prior to that since 1997.
Mark R. Young
Executive Vice President and General Counsel since: 2007
Age: 51
Mr. Young has been a Senior Vice President of RMR since 2011. Previously, Mr. Young served as Vice President of Leasing and Associate General Counsel of RMR from 2006 to 2007. Prior to that time, he served as Assistant Vice President and Associate General Counsel of RMR since 2001. Prior
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to 2001, Mr. Young held various positions at CMGI, Inc., Staples, Inc., Wilmer, Cutler, Pickering, Hale and Dorr LLP and Sullivan & Worcester LLP.
Michael J. Lombardi
Executive Vice President since: 2007
Age: 62
Mr. Lombardi served our predecessor in this capacity since 2007 and previously as Senior Vice President of Sales since 2006. Prior to joining our predecessor, Mr. Lombardi was employed for seven years in senior positions in the global marketing and customer service divisions of Ford Motor Company and prior to that for thirteen years in the retail marketing division of British Petroleum plc.
Barry A. Richards
Executive Vice President since: 2010
Age: 61
Mr. Richards served as our Senior Vice President, Food, since 2008 and prior to that as Vice President, Restaurants since 2007. Prior to that time, Mr. Richards served our predecessor as a Regional Vice President since 2007 and as a District Manager since 2001.
There are no family relationships among any of our Directors or executive officers. Our executive officers serve at the discretion of our Board of Directors.
RMR is a privately owned company that provides management services to public and private companies, including us, Government Properties Income Trust, Hospitality Properties Trust, Select Income REIT, Senior Housing Properties Trust and Five Star Quality Care, Inc. Government Properties Income Trust is a publicly traded REIT that primarily invests in properties that are majority leased to government tenants. Hospitality Properties Trust is a publicly traded REIT that primarily owns hotels and travel centers. Select Income REIT is a publicly traded REIT that primarily owns net leased, single tenant office and industrial properties and leased lands in Hawaii. Senior Housing Properties Trust is a publicly traded REIT that primarily owns senior living properties and medical office buildings. Five Star Quality Care, Inc. is a publicly traded real estate based operating company in the healthcare and senior living services business. RMR Advisors, an affiliate of RMR, is an SEC registered investment adviser to the RMR Funds, which are or were investment companies registered under the Investment Company Act of 1940, as amended. Because certain of our officers and Directors also serve as officers, directors or trustees of RMR and of the foregoing entities, RMR and these entities may be considered to be affiliates of us. RMR also provides management services to CommonWealth REIT, a publicly traded REIT that primarily owns office buildings; however, none of the principals or officers of RMR serve as officers, directors or trustees of CommonWealth REIT, and we do not consider CommonWealth REIT to be our affiliate.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Our executive officers, Directors and certain persons who own more than 10% of our outstanding common shares are required by Section 16(a) of the Exchange Act and related regulations:
We received written representations from each such person who did not file an annual statement on Form 5 with the SEC that no Form 5 was due. Based on our review of the reports and representations, we believe that all Section 16(a) reports were filed timely in 2013.
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CODE OF BUSINESS CONDUCT AND ETHICS
We have a Code of Business Conduct and Ethics that applies to all our representatives, including our officers, Directors and employees and employees of RMR. Our Code of Business Conduct and Ethics is posted on our website, www.tatravelcenters.com. A printed copy of our Code of Business Conduct and Ethics is also available free of charge to any person who requests a copy by writing to our Secretary, TravelCenters of America LLC, Two Newton Place, 255 Washington Street, Newton, MA 02458. We intend to disclose any amendments to or waivers of our Code of Business Conduct and Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer and controller (or any person performing similar functions) on our website.
There have been no material changes to the procedures by which shareholders may recommend nominees to our Board of Directors as described in our Definitive Proxy Statement for our 2013 Annual Meeting of Shareholders filed with the SEC on March 18, 2013.
Our Board of Directors has a standing Audit Committee which was established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee is comprised solely of our Independent Directors: Barbara D. Gilmore, Lisa Harris Jones and Arthur G. Koumantzelis. Mr. Koumantzelis serves as Chair of the Audit Committee. Each member of the Audit Committee meets the independence requirements of the NYSE, the Exchange Act and our Governance Guidelines. Each member of the Audit Committee is financially literate, knowledgeable and qualified to review financial statements. Our Board of Directors has determined that Mr. Koumantzelis is the Audit Committee's "financial expert" and is independent as defined by the rules of the SEC and the NYSE. Our Board of Directors' determination that Mr. Koumantzelis is the Audit Committee's financial expert was based upon his experience as: (i) a member of the audit committees of other publicly owned companies; (ii) the chief financial officer of a company which was required to file reports with the SEC; and (iii) a certified public accountant who was responsible for auditing companies which filed SEC reports.
Item 11.
Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
Compensation Overview
This Compensation Discussion and Analysis provides a detailed description of our executive compensation philosophy and programs, the compensation decisions our Compensation Committee made under those programs in 2013 and the factors which impacted those decisions. This Compensation Discussion and Analysis discusses the compensation of our "named executive officers"
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for 2013, who are the officers for whom compensation disclosure is required to be made in this Annual Report on Form 10-K under SEC rules. For 2013, our named executive officers were:
|
Name
|
Title | |
|---|---|---|
| Thomas M. O'Brien | President and Chief Executive Officer | |
|
Andrew J. Rebholz |
|
Executive Vice President, Chief Financial Officer and Treasurer |
|
Michael J. Lombardi |
|
Executive Vice President |
|
Mark R. Young |
|
Executive Vice President and General Counsel |
|
Ara A. Bagdasarian* |
|
Executive Vice President |
|
Barry A. Richards |
|
Executive Vice President |
Compensation Philosophy and Process
Our compensation program is designed to help us achieve our business objectives, which include increasing, on a long-term basis, the value of us by improving our financial and operating performance, improving our competitive position within our industry and managing risks facing us.
Individual performance is an important factor in determining each element of compensation. Our Compensation Committee determines the compensation of our Chief Executive Officer, Chief Financial Officer and General Counsel, and determines the amount and terms of share grants to all of our executive officers. Our Compensation Committee recommends to our Board of Directors and our Board of Directors determines all compensation, other than share grants, for our executive officers other than our Chief Executive Officer, Chief Financial Officer and General Counsel. There is no formulaic approach to the determinations of an executive officer's compensation; these determinations are made in the discretion of our Compensation Committee and our Board of Directors. Determinations of an executive officer's compensation are also not made as a direct result of benchmarking compensation against that of other companies.
Our Compensation Committee and our Board of Directors believe it is important to further align the interests of our executive officers with those of our shareholders and therefore have determined that a significant portion of each executive officer's annual compensation will be paid in the form of share awards that vest subject to continued employment over periods ranging from four to nine years from the date of grant. Our Compensation Committee and our Board of Directors also believe that performance of our executive officers may be improved by paying a substantial portion of each executive officer's cash compensation as an annual bonus. Our Compensation Committee and our Board of Directors currently limit the annual base salaries of our executive officers and utilize changes in annual cash bonus amounts as the primary mechanism for effecting annual compensation adjustments for our executive officers.
The primary factor considered by our Compensation Committee and our Board of Directors when determining discretionary compensation for our executive officers is the historical cash and equity compensation paid to each executive officer and to our other executive officers with similar responsibilities. However, our Compensation Committee and our Board of Directors also consider, among other things, the executive officer's:
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In addition to the consideration of the various factors described in the preceding paragraphs, our Compensation Committee and our Board of Directors consider available compensation data for public companies that are engaged in businesses similar to our business or that possess size or other characteristics that are similar to us. None of the Company's direct competitors are public companies and therefore the Company does not have access to the compensation practices and amounts of those companies. Consequently, in order to obtain a general understanding of current trends in compensation practices and ranges of amounts being awarded by other public companies, we compiled and reviewed comparative data gleaned from public filings regarding compensation paid by a group of public companies in the following industries: specialty retail; hotels, restaurants and leisure; food retail; and food and staples retailing industries. 1
Because the primary factor considered by our Compensation Committee and our Board of Directors is the historical compensation paid to each individual executive officer and to other executives with similar responsibilities, our Compensation Committee and our Board of Directors believe that our compensation philosophy with respect to our executive officers helps limit incentives for management to take excessive risk for short-term benefit.
Details of 2013 Compensation Process
In September 2013, Ms. Gilmore, the Chair of our Compensation Committee, met with Mr. Barry Portnoy, our (non-employee) Managing Director, Mr. Adam Portnoy, President and Chief Executive Officer of RMR, and the chairs of the compensation committees of the other public companies for which RMR provides services. RMR provides management services to us, CommonWealth REIT, Government Properties Income Trust, Hospitality Properties Trust, Select Income REIT, Senior Housing Properties Trust and Five Star Quality Care, Inc. The purposes of this meeting were, among other things, to discuss compensation philosophy regarding potential share grants to be made by us and to consider the compensation payable to our Director of Internal Audit (who provides services to us and to other companies to which RMR provides management services), as well as to consider the allocation of internal audit and related services costs among us and other companies to which RMR provides such services.
At a Compensation Committee meeting in November 2013, our Compensation Committee conducted a review of executive and employee compensation and considered recommendations arising from the September 2013 meeting, recommendations provided by management and other factors such as: (i) the amount of cash compensation historically paid to each executive officer; (ii) the amounts and value of historical share awards made to each executive officer; (iii) the amounts of cash compensation
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and share awards paid to persons with similar levels of responsibility; (iv) the then current market prices of our common shares; (v) the performance of each executive officer during 2013; (vi) each executive officer's expected future contributions to us; (vii) each executive officer's relative mix of cash and noncash compensation; (viii) the comparative data about executive compensation trends and amounts that we assembled; and (ix) our financial position and operating performance in the past year and our perceived future prospects. Our Compensation Committee did not engage a compensation consultant to participate in the determination or recommendation of the amounts or form of compensation for our executive officers. Messrs. O'Brien, Rebholz and Young participated in parts of the Compensation Committee meeting with regard to consideration of compensation generally and to our other officers, but they left that meeting and did not participate in the Compensation Committee's determination and recommendation of their compensation. Mr. Barry Portnoy participated in parts of the Compensation Committee meeting, but left the meeting and did not participate in the final decisions and recommendations made by our Compensation Committee. All members of our Board of Directors participated in the Board of Directors' decisions on compensation which were not determined by our Compensation Committee.
Compensation Components
The mix of base salary, cash bonus and equity compensation that we pay to our executive officers varies depending on the executive officer's position and responsibilities with us. Our Compensation Committee does not follow a set formula or specific guidelines in determining how to allocate the compensation components for our executives.
The components of the compensation packages of our executive officers are as follows:
Base Salary
Base salaries are reviewed annually and adjusted, if appropriate, on a subjective basis based upon consideration of a number of factors including, but not limited to, the individual performance factors described above, as well as (i) the historical amount paid to each executive officer; (ii) a comparison of the executive officer's pay to that of other individuals within our company and the relative responsibilities, titles, roles, experiences and capabilities of such other individuals; (iii) the comparative data about executive compensation trends and amounts that we assembled; (iv) our financial position and operating performance throughout the relevant year; and (v) for officers other than our Chief Executive Officer and Chief Financial Officer, an evaluation of the officers' performance provided by Messrs. O'Brien, Rebholz and Young. In 2013, we continued our practice of limiting the annual base salaries of our executive officers to a maximum of $300,000, with the exception of Mr. Lombardi whose annual base salary continues to be limited to $339,000, which is the annual base salary amount that was established for him by our predecessor. For 2013, our Compensation Committee also determined to maintain the annual base salary for each of our named executive officers at its prior level, except in the cases of Mr. Bagdasarian, whose annual base salary was increased, effective January 1, 2014, from $260,000 to $265,000, and Mr. Richards, whose annual base salary was increased, effective January 1, 2014, from $240,000 to $255,000.
Annual Bonus and Share Award Plan
Each of our executive officers is eligible to receive an annual cash bonus and share award. There is no formulaic approach used in determining the amount of these annual cash and share awards. The cash bonus and share awards are determined on a subjective basis by our Compensation Committee and our Board of Directors, as the case may be, based upon consideration of a number of factors, which include the factors taken into account in connection with the base salary determinations discussed above. In addition, in determining cash bonus and share awards for our executive officers, our Compensation Committee and our Board of Directors also consider the recommendations of the
84
Chair of our Compensation Committee, Ms. Gilmore, following her meeting with Messrs. Portnoy and the chairs of the compensation committees of other public companies for which RMR provides services. In light of the limitations imposed on the annual base salaries of our executive officers that are described above, changes in annual cash bonus amounts are the primary mechanism for effecting annual compensation adjustments for our executive officers. For bonus amounts paid to our executive officers for 2013, there were no bonus targets established. In addition, no bonus targets have been established for purposes of bonus amounts that may be paid to our executive officers in 2014.
For 2013, our Compensation Committee awarded Mr. O'Brien a bonus of $1,600,000 in cash and also awarded him 150,000 of our common shares that will vest in ten equal annual installments beginning on the grant date. The shares awarded had a value at the grant date of $1,602,000; the vested portion of the share award was therefore $160,200 as of the grant date. In making this cash bonus and this share award, our Compensation Committee considered, among other things, Mr. O'Brien's performance in leading us through 2013; his role in expanding our business and profitability; his management of capital and operating expenditures in relation to the prevailing business levels; his role in maintaining fuel sales and pricing in order to maintain fuel margin; his role in assessing capital market opportunities and opportunistically procuring capital; his role in our regulatory compliance; his development of new, and enhancement of existing, marketing programs, operating initiatives, products and services that take advantage of our competitive strengths to grow our business in a slowly recovering economy and position us for future growth; his role in identifying potential acquisitions and structuring and negotiating acquisitions for us; his role in the integration of travel centers we acquired in 2011, 2012 and 2013 with our existing operations; his role in negotiating a natural gas initiative with Shell; and his role in negotiating other agreements with our suppliers and customers and managing risks facing us. Our Compensation Committee determined that the share award would vest over time to ensure a continuing commonality of interest between Mr. O'Brien and our shareholders, to provide Mr. O'Brien with an incentive to remain with us to earn the unvested portion of the award and to encourage appropriate levels of risk taking in his decisions affecting our business in the short-term and in the long-term. The foregoing description of the share award to Mr. O'Brien during 2013 does not include the share award granted to him in his capacity as one of our Managing Directors.
The annual cash bonuses for Mr. Rebholz and Mr. Young were determined by our Compensation Committee after consideration of the same criteria described above with regard to Mr. O'Brien as applied to Mr. Rebholz's and Mr. Young's respective performances and after consideration of the other matters noted above, as applicable, that our Compensation Committee considers in determining compensation generally. The annual cash bonuses for our executive officers, other than Messrs. O'Brien, Rebholz and Young, were recommended by our Compensation Committee and approved by our Board of Directors based upon the consideration and evaluation of each executive's performance and level of total compensation as well as the other matters noted above, with regard to the compensation paid to Messrs. O'Brien, Rebholz and Young. These considerations included, but were not limited to, each executive officer's historical level of total compensation and our financial and operating performance during 2013 and each executive officer's level of total compensation.
Because at least 80% of Messrs. O'Brien's, Rebholz's and Young's business time is devoted to services to us, 80% of Messrs. O'Brien's, Rebholz's and Young's total cash compensation (that is, the combined base salary and cash bonus paid by us and RMR) was paid by us and the remainder was paid by RMR. Messrs. O'Brien, Rebholz and Young are also eligible to participate in certain RMR benefit plans.
We made equity awards under our Amended and Restated TravelCenters of America 2007 Equity Compensation Plan, or the Plan, to our executive officers and others based upon factors that our Compensation Committee considered relevant to align the interests of the persons to whom awards were made with our business objectives, which include, but are not limited to, increasing, on a
85
long-term basis, the value of us by improving our prospects, competitive position within our industry and financial and operating performance, managing risks facing us, as well as achieving strategic initiatives and objectives. In addition to the award of our common shares made to Mr. O'Brien during 2013, our Compensation Committee awarded our common shares to each of our other executive officers who were employed by us at the grant date. These awards ranged in size and value from 37,500 common shares, having a grant date value of $400,500, to 75,000 common shares, having a grant date value of $801,000. In determining the size of each share award, our Compensation Committee considered the responsibilities of the executive, the prior year's share grant, the relation of the size of the award to the size of the share award made to Mr. O'Brien and other factors, including their past and expected future performances and cash bonuses, the total value of the granted shares relative to the value of past grants, 2013 annual cash salaries, the executive officer's tenure with us and our operational results during 2013. In each case, our Compensation Committee determined that the share awards would vest in five equal annual installments for those other executive officers (other than Mr. Rebholz whose shares vest in ten equal annual installments), in each case with the first tranche being vested on the date of the grant, to ensure a continuing commonality of interest between the recipients and our shareholders, to provide our executives with an incentive to remain with us to earn the unvested portion of the award and to encourage appropriate levels of risk taking in their long-term decisions affecting our business.
Other Benefits
Our executive officers are entitled to participate in our benefit plans on the same terms as our other employees. These plans include medical, dental and life insurance plans and a defined contribution retirement plan. We suspended matching contribution payments to our defined contribution retirement plan in May 2009 and such payments had not been reinstated as of December 31, 2013. We do not provide other executive perquisites.
All Other Payments
The Summary Compensation Table below includes a column for amounts described as "All Other Compensation". For each of those years, there no such amounts paid by us to our executive officers.
Say on Pay Results
Our current policy, consistent with the prior vote of our shareholders, is to provide shareholders with an opportunity to approve, on an advisory basis, the compensation of our named executive officers once every three years at our Annual Meeting of Shareholders. In evaluating our compensation process for 2013, our Compensation Committee generally considered the results of the advisory vote of our shareholders on the compensation of the executive officers named in the proxy statement for our 2012 Annual Meeting of Shareholders. Our Compensation Committee noted that more than 93% of votes cast approved the compensation of the named executive officers as described in our 2012 proxy statement. Our Compensation Committee considered these voting results as supportive of the committee's general executive compensation practices, which have been consistently applied since that prior vote of our shareholders on our executive compensation.
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Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on such review and discussions, our Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended December 31, 2013.
Barbara
D. Gilmore,
Chair
Lisa Harris Jones
Arthur G. Koumantzelis
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee is comprised entirely of our three Independent Directors listed above. No member of our Compensation Committee is a current, or during 2013 was a former, officer or employee of ours. During 2013, no member of our Compensation Committee had a relationship that must be described under SEC rules relating to disclosure of related person transactions. In 2013, none of our executive officers served (i) on the compensation committee of any entity that had one or more of its executive officers serving on our Board of Directors or our Compensation Committee, or (ii) on the board of directors or board of trustees of any entity that had one or more of its executive officers serving on our Compensation Committee. A majority of the members of our Compensation Committee serve as independent directors or independent trustees and compensation committee members of other public companies to which RMR or its affiliates provide management services.
The following tables, narratives and footnotes discuss the compensation of our Chief Executive Officer, Chief Financial Officer and all of our other executive officers at December 31, 2013, who are our named executive officers. The compensation information for the persons included in the compensation tables are for services rendered to us and our subsidiaries and do not include information regarding any compensation received by such persons for services rendered to RMR.
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2013 Summary Compensation Table
|
Name and Principal Position
|
Year | Salary ($) | Bonus ($) |
Stock
Awards ($)* |
All Other
Compensation ($) |
Total ($) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Thomas M. O'Brien (1) |
2013 | $ | 300,000 | $ | 1,600,000 | $ | 1,684,875 | $ | — | $ | 3,584,875 | ||||||||
|
President and Chief |
2012 | 300,000 | 1,540,000 | 910,400 | — | 2,750,400 | |||||||||||||
|
Executive Officer |
2011 | 300,000 | 1,400,000 | 907,250 | — | 2,607,520 | |||||||||||||
|
Andrew J. Rebholz |
2013 |
300,000 |
516,000 |
801,000 |
— |
1,617,000 |
|||||||||||||
|
Executive Vice President, |
2012 | 300,000 | 490,000 | 436,000 | — | 1,226,000 | |||||||||||||
|
Chief Financial Officer and |
2011 | 300,000 | 450,000 | 424,000 | — | 1,174,000 | |||||||||||||
|
Treasurer |
|||||||||||||||||||
|
Michael J. Lombardi |
2013 |
339,000 |
316,000 |
400,500 |
— |
1,055,500 |
|||||||||||||
|
Executive Vice President |
2012 | 339,000 | 295,000 | 218,000 | — | 852,000 | |||||||||||||
|
|
2011 | 339,000 | 275,000 | 212,000 | — | 826,000 | |||||||||||||
|
Mark. R. Young |
2013 |
300,000 |
320,000 |
400,500 |
— |
1,020,500 |
|||||||||||||
|
Executive Vice President and |
2012 | 300,000 | 300,000 | 218,000 | — | 818,000 | |||||||||||||
|
General Counsel |
2011 | 300,000 | 275,000 | 212,000 | — | 787,000 | |||||||||||||
|
Ara A. Bagdasarian (2) |
2013 |
265,000 |
278,000 |
400,500 |
— |
943,500 |
|||||||||||||
|
Executive Vice President |
2012 | 260,000 | 250,000 | 218,000 | — | 728,000 | |||||||||||||
|
|
2011 | 250,000 | 250,000 | 212,000 | — | 712,000 | |||||||||||||
|
Barry A. Richards |
2013 |
255,000 |
283,000 |
400,500 |
— |
938,500 |
|||||||||||||
|
Executive Vice President |
2012 | 240,000 | 275,000 | 218,000 | — | 733,000 | |||||||||||||
2013 Grants of Plan Based Awards
Share awards granted by us to our Chief Executive Officer and Chief Financial Officer in 2013 provide that one tenth of each award vests on the grant date and one tenth vests on each of the next nine anniversaries of the grant date. Share awards granted by us to our other named executive officers in 2013 provide that one fifth of each award vests on the grant date and one fifth vests on each of the next four anniversaries of the grant date. In the event a recipient who has been granted a share award ceases to perform duties for us or ceases to be an officer or an employee of RMR or any company that RMR manages or that is affiliated with RMR during the vesting period, at our option, the recipient shall forfeit the common shares that have not yet vested. Holders of vested and unvested shares awarded under the Plan are eligible to receive distributions that the we make, if any, on our shares on the same terms as other holders of our common shares.
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The following table shows shares granted in 2013, including vested and unvested grants.
|
Name
|
Grant Date |
All Other Stock Awards:
Number of Shares of Stock or Units (#) |
Grant Date Fair Value
of Stock and Option Awards* |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Thomas M. O'Brien |
5/20/2013 | 7,500 | ** | $ | 82,875 | |||||
|
|
11/19/2013 | 150,000 | 1,602,000 | |||||||
|
Andrew J. Rebholz |
11/19/2013 | 75,000 | 801,000 | |||||||
|
Michael J. Lombardi |
11/19/2013 | 37,500 | 400,500 | |||||||
|
Mark R. Young |
11/19/2013 | 37,500 | 400,500 | |||||||
|
Ara A. Bagdasarian |
11/19/2013 | 37,500 | 400,500 | |||||||
|
Barry A. Richards |
11/19/2013 | 37,500 | 400,500 | |||||||
2013 Outstanding Equity Awards at Fiscal Year-End
|
|
|
Stock Awards | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Name
|
Year Granted |
Number of Shares or
Units of Stock That Have Not Vested (#)* |
Market Value of Shares or
Units of Stock That Have Not Vested ($)** |
|||||||
|
Thomas M. O'Brien (1) |
2013 | 135,000 | $ | 1,314,900 | ||||||
|
|
2012 | 160,000 | 1,558,400 | |||||||
|
|
2011 | 140,000 | 1,363,600 | |||||||
|
|
2010 | 120,000 | 1,168,800 | |||||||
|
|
2009 | 100,000 | 974,000 | |||||||
|
|
2008 | 80,000 | 779,200 | |||||||
|
|
2007 | 60,000 | 584,400 | |||||||
|
Andrew J. Rebholz (1) |
2013 |
67,500 |
657,450 |
|||||||
|
|
2012 | 80,000 | 779,200 | |||||||
|
|
2011 | 70,000 | 681,800 | |||||||
|
|
2010 | 60,000 | 584,400 | |||||||
|
Michael J. Lombardi |
2013 |
30,000 |
292,200 |
|||||||
|
|
2012 | 30,000 | 292,200 | |||||||
|
|
2011 | 20,000 | 194,800 | |||||||
|
|
2010 | 9,000 | 87,660 | |||||||
|
Mark R. Young |
2013 | 30,000 | 292,200 | |||||||
|
|
2012 | 30,000 | 292,200 | |||||||
|
|
2011 | 20,000 | 194,800 | |||||||
|
|
2010 | 9,000 | 87,660 | |||||||
|
Ara A. Bagdasarian |
2013 |
30,000 |
292,200 |
|||||||
|
|
2012 | 30,000 | 292,200 | |||||||
|
|
2011 | 20,000 | 194,800 | |||||||
|
|
2010 | 9,000 | 87,660 | |||||||
|
Barry A. Richards |
2013 |
30,000 |
292,200 |
|||||||
|
|
2012 | 30,000 | 292,200 | |||||||
|
|
2011 | 20,000 | 194,800 | |||||||
|
|
2010 | 9,000 | 87,660 | |||||||
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the grant date. The shares granted in 2013 were granted on November 19, 2013; the shares granted in 2012 were granted on December 4, 2012; the shares granted in 2011 were granted on November 29, 2011; the shares granted in 2010 were granted on December 1, 2010; the shares granted in 2009 were granted on December 8, 2009; the shares granted in 2008 were granted on November 24, 2008; and the shares granted in 2007 were granted on November 26, 2007. At our option, in the event a recipient who has been granted a share award ceases to perform duties for us, RMR or any company that RMR manages or that is affiliated with RMR during the vesting period, the recipient shall forfeit all or a portion of the shares that have not yet vested.
2013 Stock Vested
The following table shows share grants that vested in 2013, including shares granted in prior years.
|
|
Stock Awards | ||||||
|---|---|---|---|---|---|---|---|
|
Name
|
Number of Shares
Acquired on Vesting (#) |
Value Realized
on Vesting ($)* |
|||||
|
Thomas M. O'Brien |
142,500 | $ | 1,512,875 | ||||
|
Andrew J. Rebholz |
52,500 | 552,950 | |||||
|
Michael J. Lombardi |
45,500 | 479,860 | |||||
|
Mark R. Young |
45,500 | 479,860 | |||||
|
Ara A. Bagdasarian |
40,500 | 427,810 | |||||
|
Barry A. Richards |
40,500 | 427,810 | |||||
Potential Payments upon Termination or Change in Control
From time to time, we have entered into arrangements with former employees of ours or RMR in connection with the termination of their employment with us or RMR, providing for the acceleration of vesting of restricted shares previously granted to them under the Plan and, in certain instances, payments for future services to us as a consultant or part time employee and continuation of health care and other benefits. Although we have no formal policy, plan or arrangement for payments to employees of ours or RMR in connection with their termination of employment with us or RMR, we may in the future provide on a discretionary basis for similar payments depending on various factors we then consider relevant and if we believe it is in the its best interests to do so.
On January 31, 2014, we entered into a retirement agreement with Ara Bagdasarian, our Executive Vice President. Pursuant to the retirement agreement, Mr. Bagdasarian resigned effective as of April 30, 2014. Pursuant to the retirement agreement, from May 1, 2014 through December 31, 2014, Mr. Bagdasarian will provide transition services to us and our subsidiaries. The retirement agreement provides that Mr. Bagdasarian will continue to receive his base salary of $267,000 and other benefits through December 31, 2014, and subject to certain conditions, will receive a bonus of $200,000 on January 9, 2015. The retirement agreement also provides that, in exchange for providing services to us through December 31, 2014, we will accelerate the vesting date of any unvested shares Mr. Bagdasarian owns as of January 1, 2015. The retirement agreement contains other customary terms and conditions, including non-solicitation, non-competition, confidentiality and other covenants.
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On November 19, 2013, our Compensation Committee approved grants of 150,000 common shares to Mr. Thomas O'Brien, 75,000 common shares to Mr. Andrew Rebholz and 37,500 common shares to each of Messrs. Mark Young, Michael Lombardi, Ara Bagdasarian and Barry Richards. These grants were valued at $10.68 per common share, the closing price of our common shares on the NYSE on the date of grant, and were made under the Plan. The award letter for the grants to Messrs. O'Brien and Rebholz provides for vesting of the common shares in ten equal installments beginning on the date of grant and acceleration of vesting of all share grants (including those previously awarded) upon the occurrence of (i) a change in control of us, or a Change in Control, or (ii) RMR ceasing to be the manager or shared services provider to us, or a Termination Event. The award letter for the grants to each of Messrs. Young, Lombardi, Bagdasarian and Richards provides for vesting of the common shares in five equal installments beginning on the date of grant and acceleration of vesting of all share grants (including those previously awarded) upon the occurrence of a Change in Control or Termination Event.
The following table describes the potential payments to our named executive officers upon a Change in Control or Termination Event as of December 31, 2013.
|
Name
|
Number of Shares
Vested Upon Change in Control or Termination Event (#) |
Value Realized on
Change in Control or Termination Event as of December 31, 2013 ($)* |
|||||
|---|---|---|---|---|---|---|---|
|
Thomas M. O'Brien |
795,000 | $ | 7,743,300 | ||||
|
Andrew J. Rebholz |
277,500 | 2,702,850 | |||||
|
Michael J. Lombardi |
89,000 | 866,860 | |||||
|
Mark R. Young |
89,000 | 866,860 | |||||
|
Ara A. Bagdasarian |
89,000 | 866,860 | |||||
|
Barry A. Richards |
89,000 | 866,860 | |||||
The Compensation Committee is responsible for reviewing and determining the grants of our common shares awarded to our Directors and making recommendations to our Board of Directors regarding cash compensation paid to our Directors for Board, committee and committee chair services. Under our Compensation Committee's Charter, the committee is authorized to engage consultants or advisors in connection with its review and analysis of Director compensation, though it did not engage any consultants or advisors in 2013 with respect to Director compensation. Our Managing Directors do not receive cash compensation for their services as Directors but do receive grants of our common shares. The number of our common shares granted to each of our Managing Directors is the same as the number granted to each our Independent Directors.
All of our Directors receive compensation in common shares to further align the interests of our Directors with those of our shareholders. In determining the amount and composition of each of our Director's compensation, our Compensation Committee takes various factors into consideration, including, but not limited to, the responsibilities of our Directors generally, as well as for service on committees and as committee chairs, and the forms of compensation paid to directors or trustees by comparable companies, including the compensation of directors and trustees of other companies managed by RMR. Our Board of Directors reviews our Compensation Committee's recommendations regarding Director cash compensation and determines the amount of such compensation.
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2013 Annual Compensation
After giving effect to the changes approved by our Board of Directors on May 20, 2013, each of our Independent Directors receives an annual fee of $35,000 for services as a Director, plus a fee of $1,000 for each meeting attended (prior to such date the meeting fee was $750). Up to two $1,000 fees (or, if prior to May 20, 2013, two $750 fees) are paid to each of our Independent Directors if a Board of Directors meeting and one or more Board of Directors committee meetings are held on the same date. In addition, each of our Directors received a grant of 7,500 of our common shares in 2013.
Each of our Independent Directors who served as a committee chair of our Audit, Compensation and Nominating and Governance Committees received an additional annual fee of $17,500, $7,500 and $7,500, respectively. Our Directors are reimbursed for out of pocket costs they incur from attending continuing education programs and for travel expenses incurred in connection with their service as Directors.
The following table details the total compensation of our Directors for the year ended December 31, 2013.
|
Name
|
Fees Earned or
Paid in Cash ($)** |
Stock
Awards ($)*** |
All Other
Compensation ($) |
Total ($) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Patrick F. Donelan (1) |
$ | 60,750 | $ | 82,875 | $ | — | $ | 143,625 | |||||
|
Barbara D. Gilmore |
60,750 | 82,875 | — | 143,625 | |||||||||
|
Lisa Harris Jones (2) |
20,500 | 80,100 | — | 100,600 | |||||||||
|
Arthur G. Koumantzelis |
70,750 | 82,875 | — | 153,625 | |||||||||
|
Thomas M. O'Brien* |
— | 82,875 | — | 82,875 | |||||||||
|
Barry M. Portnoy* |
— | 82,875 | — | 82,875 | |||||||||
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Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
We may grant options and common shares from time to time to our officers, Directors, employees and other individuals who render services to us, subject to vesting requirements, as applicable, under our Amended and Restated TravelCenters of America 2007 Equity Compensation Plan, or the Plan. An aggregate of 6,000,000 of our common shares have been reserved for issuance under the Plan. In 2013 we issued 619,075 common shares to our Directors, officers, employees and others who provide services to us. The terms of grants made under the Plan are determined by the Compensation Committee of our Board of Directors at the time of the grant. The following table is as of December 31, 2013.
|
Plan Category
|
Number of securities
to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted average
exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining
available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
|||
|---|---|---|---|---|---|---|
|
Equity compensation plans approved by security holders |
None | None | 1,533,300 | |||
|
Equity compensation plans not approved by security holders |
None | None | None | |||
| | | | | | | |
|
Total |
None | None | 1,533,300 |
93
OWNERSHIP OF EQUITY SECURITIES
Directors and Executive Officers
The following table sets forth information regarding beneficial ownership of our common shares by each Director, each individual named in the 2013 Summary Compensation Table above and our Directors and executive officers as a group, all as of May 7, 2014. Unless otherwise noted, voting power and investment power in our common shares are exercisable solely by the named person.
|
Name and Address*
|
Aggregate
Number of Shares Beneficially Owned |
Percent of
Outstanding Shares** |
Additional
Information |
||||
|---|---|---|---|---|---|---|---|
|
Thomas M. O'Brien |
1,453,190.5 | 3.9% | |||||
|
Andrew J. Rebholz |
440,000 | 1.2% | |||||
|
Michael J. Lombardi |
275,000 | *** | |||||
|
Mark R. Young |
272,515 | *** | |||||
|
Barry A. Richards |
165,800 | *** | |||||
|
Ara A. Bagdasarian (1) |
132,500 | *** | |||||
|
Barry M. Portnoy |
69,911.6 | *** | HPT owns 3,420,000 common shares. In his capacity as a managing trustee of HPT and as Chairman, a director and majority beneficial owner of RMR, Mr. Barry Portnoy may also be deemed to beneficially own (and have shared voting and dispositive power over) the 3,420,000 common shares beneficially owned by HPT, but Mr. Barry Portnoy disclaims such beneficial ownership. | ||||
|
Arthur G. Koumantzelis |
48,061.4 | *** | |||||
|
Barbara D. Gilmore |
57,500 | *** | Includes 10,000 common shares owned by Ms. Gilmore's husband. Ms. Gilmore disclaims beneficial ownership of these shares, except to the extent of her pecuniary interest in the shares. | ||||
|
Lisa Harris Jones |
7,500 | *** | |||||
|
All Directors and executive officers as a group (nine persons) |
2,789,478.5 | 7.4% | |||||
94
Principal Stockholders
Set forth in the table below is information about the number of shares held by persons we know to be the beneficial owners of more than 5% of our common shares.
|
Name and Address
|
Aggregate
Number of Shares Beneficially Owned* |
Percent of
Outstanding Shares** |
Additional Information | |||||
|---|---|---|---|---|---|---|---|---|
|
Hospitality Properties Trust |
3,420,000 | 9.1 | % | HPT owns and has sole voting and | ||||
|
Two Newton Place
|
dispositive power over 3,420,000 common shares, Barry M. Portnoy and Adam D. Portnoy are managing trustees of HPT. RMR manages HPT. RMR is indirectly beneficially owned by Barry M. Portnoy and Adam D. Portnoy; Barry Portnoy is Chairman and a director of RMR and Adam Portnoy is President, Chief Executive Officer and a director of RMR. Barry Portnoy directly owns 69,911.6 common shares and Adam Portnoy directly owns 75,263.8 common shares (including 21,600 common shares subject to vesting periodically through 2017). Under certain regulatory definitions, RMR and Messrs. Barry and Adam Portnoy may be deemed to beneficially own (or to have shared voting and dispositive power over) the common shares owned by HPT; however, RMR and Messrs. Barry and Adam Portnoy have each disclaimed such beneficial ownership. | |||||||
|
Capital Research Global Investors |
2,423,750 |
6.4 |
% |
Based solely on a Schedule 13G filed |
||||
|
("Capital Research")
|
with the SEC on February 13, 2014 by Capital Research:
• Capital Research is a division of Capital Research and Management Company ("CRMC"). Capital Research is deemed to be the beneficial owner of 2,423,750 common shares as a result of CRMC acting as adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940. |
|||||||
95
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Note 17 to the Notes to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K is incorporated herein by reference.
The foregoing descriptions of our agreements with HPT, RMR and AIC are summaries and are qualified in their entirety by the terms of the agreements. Copies of certain of the agreements evidencing these relationships are filed with the SEC and may be obtained from the SEC's website, www.sec.gov.
We believe that our agreements with HPT, RMR and AIC are on commercially reasonable terms. We also believe that our relationships with HPT, RMR and AIC and their affiliated and related persons and entities benefit us, and, in fact, provide us with competitive advantages in operating and growing our business.
Under the corporate governance listing standards of the NYSE, our Board of Directors must consist of a majority of independent directors. Under NYSE corporate governance listing standards, to be considered independent:
Our LLC agreement and bylaws also require that a majority of our Board of Directors be Independent Directors. Under our LLC agreement and bylaws, Independent Directors are not employees of ours or RMR, are not involved in our day to day activities and are persons who qualify as independent under the applicable rules of the NYSE and SEC.
Our Board of Directors regularly, and at least annually, affirmatively determines whether Directors have a direct or indirect material relationship with us, including our subsidiaries, other than serving as our Directors. In making independence determinations, our Board of Directors observes NYSE and SEC criteria, as well as the requirements of our LLC agreement and bylaws. When assessing a Director's relationship with us, our Board of Directors considers all relevant facts and circumstances, not merely from the Director's standpoint, but also from that of the persons or organizations with
96
which the Director has an affiliation. As a result of its annual review, our Board of Directors has determined that Barbara D. Gilmore, Lisa Harris Jones and Arthur G. Koumantzelis currently qualify as independent directors under applicable NYSE rules and SEC criteria and are Independent Directors under our LLC agreement and bylaws. In making these determinations, our Board of Directors reviewed and discussed additional information provided by the Directors and us with regard to each of the Independent Directors' relationships with RMR and the companies to which RMR and its affiliates provide management and advisory services. Our Board of Directors has concluded that none of these three Directors possessed or currently possesses any relationship that could impair his or her judgment in connection with his or her duties and responsibilities as an Independent Director or that could otherwise be a direct or indirect material relationship under applicable NYSE standards.
Item 14.
Principal Accounting Fees and Services
Audit Fees and Other Fees
The following table shows the fees for audit and other services provided by Ernst & Young LLP for the fiscal years 2013 and 2012.
|
|
2013 Fees* | 2012 Fees | |||||
|---|---|---|---|---|---|---|---|
|
Audit Fees |
$ | 2,628,798 | $ | 1,786,518 | |||
|
Audit-Related Fees |
— | — | |||||
|
Tax Fees |
25,000 | 25,000 | |||||
|
All Other Fees |
— | — | |||||
Audit Fees. This category includes fees associated with the annual financial statements audit and related audit procedures, the audit of internal control over financial reporting, work performed in connection with any registration statements and applicable Current Reports on SEC Form 8-K and the review of our Quarterly Reports on SEC Form 10-Q.
Audit-Related Fees. This category consists of services that are reasonably related to the performance of the audit or review of financial statements and are not included in "Audit Fees". These services principally include due diligence in connection with acquisitions, consultation on accounting and internal control matters, audits in connection with proposed or consummated acquisitions, information systems audits and other attest services.
Tax Fees. This category consists of fees for tax services, including tax compliance, tax advice and tax planning.
All Other Fees. This category consists of services that are not included in the above categories.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
Our Audit Committee has established policies and procedures that are intended to control the services provided by our independent auditors and to monitor their continuing independence. Under these policies, no services may be undertaken by the independent auditors unless the engagement is specifically approved by our Audit Committee or the services are included within a category that has been approved by our Audit Committee. The maximum charge for services is established by our Audit
97
Committee when the specific engagement or the category of services is approved. In certain circumstances, our management is required to notify our Audit Committee when approved services are undertaken and our Audit Committee or its Chair may approve amendments or modifications to the engagement or the maximum fees. Our Director of Internal Audit is responsible for reporting to our Audit Committee regarding compliance with these policies and procedures.
Our Audit Committee will not approve engagements of the independent auditors to perform non-audit services for us if doing so will cause the independent auditors to cease to be independent within the meaning of applicable SEC or NYSE rules. In other circumstances, our Audit Committee considers, among other things, whether our independent auditors are able to provide the required services in a more or less effective and efficient manner than other available service providers and whether the services are consistent with the Public Company Accounting Oversight Board Rules.
All services for which we engaged our independent auditors in 2013 and 2012 were approved by our Audit Committee. The total fees for audit and non-audit services provided by Ernst & Young LLP in 2013 and 2012 are set forth above and include estimated fee amounts. The tax fees charged by Ernst & Young LLP during 2013 and 2012 were for tax compliance services, including those related to our income tax returns for the fiscal years ended December 31, 2012 and 2011, respectively. Our Audit Committee approved the engagement of Ernst & Young LLP to provide these non-audit services because it determined that Ernst & Young LLP providing these services would not compromise Ernst & Young LLP's independence and that the firm's familiarity with our record keeping and accounting systems would permit the firm to provide these services with equal or higher quality, more quickly and at a lower cost than we could obtain these services from other providers.
98
Item 15.
Exhibits and Financial Statement Schedules
The following consolidated financial statements of TravelCenters of America LLC are included on the pages indicated:
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable or the required information is shown in the consolidated financial statements or notes to the consolidated financial statements and, therefore, have been omitted.
| 2.1 | Agreement and Plan of Merger, dated as of September 15, 2006, by and among TravelCenters of America, Inc., Hospitality Properties Trust, HPT TA Merger Sub Inc. and Oak Hill Capital Partners, L.P. (Incorporated by reference to Exhibit 2.1 of our Registration Statement on Form S-1 filed on December 12, 2006, File No. 333-139272) | ||
| 2.2 | Amendment No. 1 to the Agreement and Plan of Merger, dated as of January 30, 2007, by and among TravelCenters of America, Inc., Hospitality Properties Trust, HPT TA Merger Sub Inc. and Oak Hill Capital Partners, L.P. (Incorporated by reference to Exhibit 2.2 of our Current Report on Form 8-K filed on February 2, 2007) | ||
| 2.3 | Purchase Agreement, dated as of May 30, 2007, by and among TravelCenters of America LLC, Petro Stopping Centers, L.P., Petro Stopping Centers Holdings, L.P. and the partners of Petro Stopping Centers, L.P. and of Petro Stopping Centers Holdings, L.P. (Incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed on June 4, 2007) | ||
| 2.4 | Securities Purchase Agreement, dated as of November 14, 2013, by and among Frederick M. Higgins, Frederick M. Higgins Charitable Remainder Unitrust, Heather Higgins, Leslie Higgins Embry, Cathy Howard, Glenn Howard, Stacy Howard Jones, Wesley Howard, Jamie Gaddie Higgins Family Trust, Jamie Gaddie Higgins Marital Trust, Rita Barks, Danny Evans, Jerry Goff, Helen Jernigan, Martha Miller-Webb, Donna Carlyle, Betsy Monroe, Owen Monroe Trust Under Will, Carrie Leigh Porcel, Frederick M. Higgins, as Sellers' Representative, Girkin Development, LLC and TravelCenters of America LLC (filed herewith) | ||
| 3.1 | Certificate of Formation of TravelCenters of America LLC (Incorporated by reference to Exhibit 3.1 of our Registration Statement on Form S-1 filed on December 12, 2006, File No. 333-139272) | ||
|
|
99
| 3.2 | Amended and Restated Limited Liability Company Agreement of TravelCenters of America LLC (Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on May 24, 2013) | ||
| 3.3 | Amended and Restated Bylaws of TravelCenters of America LLC, as amended and restated on February 21, 2013 (Incorporated by reference to Exhibit 3.3 of our Current Report on Form 8-K filed on February 27, 2013) | ||
| 4.1 | Form of share certificate (Incorporated by reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year ended December 31, 2009, filed on February 24, 2010) | ||
| 4.2 | Indenture by and between TravelCenters of America LLC and U.S. Bank National Association, as trustee, dated as of January 15, 2013 (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed January 15, 2013) | ||
| 4.3 | First Supplemental Indenture by and between TravelCenters of America LLC and U.S. Bank National Association, as trustee, dated as of January 15, 2013 (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed January 15, 2013) | ||
| 4.4 | Form of 8.25% Senior Notes due 2028 (included in Exhibit 4.3 above) | ||
| 10.1 | Transaction Agreement, dated as of January 29, 2007, by and among Hospitality Properties Trust, HPT TA Properties Trust, HPT TA Properties LLC, TravelCenters of America LLC and Reit Management & Research LLC (Incorporated by reference to Exhibit 10.1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed on March 20, 2007) | ||
| 10.2 | Lease Agreement, dated as of January 31, 2007, by and among HPT TA Properties Trust and HPT TA Properties LLC, as Landlord, and TA Leasing LLC, as Tenant (Incorporated by reference to Exhibit 10.3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed on March 20, 2007) | ||
| 10.3 | Guaranty Agreement, dated as of January 31, 2007, made by TravelCenters of America LLC, TravelCenters of America Holding Company LLC and TA Operating LLC, as Guarantors, for the benefit of HPT TA Properties Trust and HPT TA Properties LLC, as Landlord, under the Lease Agreement, dated as of January 31, 2007, by and among such Landlord and TA Leasing LLC (Incorporated by reference to Exhibit 10.4 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed on March 20, 2007) | ||
| 10.4 | Lease Agreement, dated as of May 30, 2007, by and among HPT PSC Properties Trust and HPT PSC Properties LLC, as Landlord, and TA Operating LLC (as successor to Petro Stopping Centers, L.P.), as Tenant (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 4, 2007) | ||
| 10.5 | Guaranty Agreement, dated as of May 30, 2007, made by TravelCenters of America LLC, as Guarantor, for the benefit of HPT PSC Properties Trust and HPT PSC Properties LLC, as Landlord, under the Lease Agreement, dated as of May 30, 2007, by and among such Landlord and TA Operating LLC (as successor to Petro Stopping Centers, L.P.) (Incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on June 4, 2007) | ||
| 10.6 | First Amendment to Lease Agreement, dated as of March 17, 2008, by and among HPT PSC Properties Trust, HPT PSC Properties LLC and TA Operating LLC (as successor to Petro Stopping Centers, L.P.) (Incorporated by reference to Exhibit 10.5 of our Quarterly Report on Form 10-Q for the Quarterly period ended September 30, 2008, filed on November 10, 2008) | ||
| 10.7 | First Amendment to Lease Agreement, dated as of May 12, 2008, by and among HPT TA Properties Trust, HPT TA Properties LLC and TA Leasing LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on May 14, 2008) |
100
101
102
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Shareholders of
TravelCenters of America LLC
We have audited the accompanying consolidated balance sheets of TravelCenters of America LLC as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TravelCenters of America LLC at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), TravelCenters of America LLC's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated June 6, 2014, expressed an adverse opinion thereon.
| /s/ Ernst & Young LLP |
Boston,
Massachusetts
June 6, 2014
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Shareholders of
TravelCenters of America LLC
We have audited TravelCenters of America LLC's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). TravelCenters of America LLC's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Assessment of Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment. Management has identified a material weakness in internal controls over accounting for income taxes, specifically, that these internal controls did not provide for timely and thorough reconciliation and review of the income tax accounts and related disclosures. Management has also identified a material weakness in internal controls due to lack of sufficient personnel with requisite accounting competencies. Deficiencies also were identified in both design and operating effectiveness, which, when aggregated, represent a material weakness in the financial statement close process.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of TravelCenters of America LLC as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive
F-2
income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2013. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2013 consolidated financial statements, and this report does not affect our report dated June 6, 2014, which expressed an unqualified opinion on those financial statements.
As indicated in the accompanying Management's Report on Assessment of Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Girkin Development, LLC, which is included in the 2013 consolidated financial statements of TravelCenters of America LLC and constituted 7.3% of consolidated total assets as of December 31, 2013, and 0.1% of consolidated total revenues for the year then ended. Our audit of internal control over financial reporting of TravelCenters of America LLC also did not include an evaluation of the internal control over financial reporting of Girkin Development, LLC.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, TravelCenters of America LLC has not maintained effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
| /s/ Ernst & Young LLP |
Boston,
Massachusetts
June 6, 2014
F-3
TravelCenters of America LLC
Consolidated Balance Sheets
(in thousands, except share data)
|
|
December 31,
2013 |
December 31,
2012 |
|||||
|---|---|---|---|---|---|---|---|
|
Assets |
|||||||
|
Current assets: |
|||||||
|
Cash and cash equivalents |
$ | 85,657 | $ | 35,189 | |||
|
Accounts receivable (less allowance for doubtful accounts of $1,304 and $1,516 as of December 31, 2013, and December 31, 2012, respectively) |
105,932 | 106,273 | |||||
|
Inventories |
199,201 | 191,006 | |||||
|
Other current assets |
79,604 | 72,458 | |||||
| | | | | | | | |
|
Total current assets |
470,394 | 404,926 | |||||
|
Property and equipment, net |
704,866 |
576,512 |
|||||
|
Goodwill and intangible assets, net |
48,772 | 20,041 | |||||
|
Other noncurrent assets |
33,250 | 28,240 | |||||
| | | | | | | | |
|
Total assets |
$ | 1,257,282 | $ | 1,029,719 | |||
| | | | | | | | |
| | | | | | | | |
|
Liabilities and Shareholders' Equity |
|||||||
|
Current liabilities: |
|||||||
|
Accounts payable |
$ | 149,645 | $ | 143,605 | |||
|
Current HPT Leases liabilities |
29,935 | 28,354 | |||||
|
Other current liabilities |
124,033 | 111,168 | |||||
| | | | | | | | |
|
Total current liabilities |
303,613 | 283,127 | |||||
|
Noncurrent HPT Leases liabilities |
343,926 |
351,135 |
|||||
|
Senior Notes due 2028 |
110,000 | — | |||||
|
Other noncurrent liabilities |
45,866 | 42,023 | |||||
| | | | | | | | |
|
Total liabilities |
803,405 | 676,285 | |||||
|
Commitments and contingencies (Note 18) |
|
|
|||||
|
Shareholders' equity: |
|
|
|||||
|
Common shares, no par value, 39,158,666 and 31,683,666 shares authorized at December 31, 2013 and 2012, respectively, and 37,625,366 and 29,536,466 shares issued and outstanding at December 31, 2013 and 2012, respectively |
674,391 | 605,106 | |||||
|
Accumulated other comprehensive income |
834 | 1,299 | |||||
|
Accumulated deficit |
(221,348 | ) | (252,971 | ) | |||
| | | | | | | | |
|
Total shareholders' equity |
453,877 | 353,434 | |||||
| | | | | | | | |
|
Total liabilities and shareholders' equity |
$ | 1,257,282 | $ | 1,029,719 | |||
| | | | | | | | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
TravelCenters of America LLC
Consolidated Statements of Income and Comprehensive Income
(in thousands, except per share data)
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Revenues: |
||||||||||
|
Fuel |
$ | 6,481,252 | $ | 6,636,297 | $ | 6,603,329 | ||||
|
Nonfuel |
1,450,792 | 1,344,755 | 1,271,085 | |||||||
|
Rent and royalties from franchisees |
12,687 | 14,672 | 14,443 | |||||||
| | | | | | | | | | | |
|
Total revenues |
7,944,731 | 7,995,724 | 7,888,857 | |||||||
|
Cost of goods sold (excluding depreciation): |
||||||||||
|
Fuel |
6,139,080 | 6,310,250 | 6,301,947 | |||||||
|
Nonfuel |
652,824 | 599,474 | 548,092 | |||||||
| | | | | | | | | | | |
|
Total cost of goods sold (excluding depreciation) |
6,791,904 | 6,909,724 | 6,850,039 | |||||||
|
Operating expenses: |
||||||||||
|
Site level operating |
755,942 | 698,522 | 677,958 | |||||||
|
Selling, general & administrative |
107,447 | 95,547 | 89,196 | |||||||
|
Real estate rent |
209,320 | 198,927 | 191,798 | |||||||
|
Depreciation and amortization |
58,928 | 51,534 | 47,466 | |||||||
| | | | | | | | | | | |
|
Total operating expenses |
1,131,637 | 1,044,530 | 1,006,418 | |||||||
| | | | | | | | | | | |
|
Income from operations |
21,190 | 41,470 | 32,400 | |||||||
|
Acquisition costs |
(2,523 | ) | (785 | ) | (446 | ) | ||||
|
Interest income |
1,314 | 1,485 | 835 | |||||||
|
Interest expense |
(17,650 | ) | (10,358 | ) | (9,005 | ) | ||||
| | | | | | | | | | | |
|
Income before income taxes and income from equity investees |
2,331 | 31,812 | 23,784 | |||||||
|
Benefit (provision) for income taxes |
26,618 | (1,491 | ) | (1,379 | ) | |||||
|
Income from equity investees |
2,674 | 1,877 | 1,169 | |||||||
| | | | | | | | | | | |
|
Net income |
$ | 31,623 | $ | 32,198 | $ | 23,574 | ||||
|
Other comprehensive income (loss), net of tax: |
|
|
|
|||||||
|
Foreign currency translation adjustment, net of taxes of $(133), $55 and $(55), respectively |
(415 | ) | 143 | (136 | ) | |||||
|
Equity interest in investee's unrealized gain (loss) on investments |
(50 | ) | 22 | 77 | ||||||
| | | | | | | | | | | |
|
Other comprehensive income (loss) |
(465 | ) | 165 | (59 | ) | |||||
| | | | | | | | | | | |
|
Comprehensive income |
$ | 31,158 | $ | 32,363 | $ | 23,515 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
|
Net income per common share: |
||||||||||
|
Basic and diluted |
$ | 1.06 | $ | 1.12 | $ | 0.98 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
TravelCenters of America LLC
Consolidated Statements of Cash Flows
(in thousands)
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Cash flows from operating activities: |
||||||||||
|
Net income |
$ | 31,623 | $ | 32,198 | $ | 23,574 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||
|
Noncash rent expense |
(8,828 | ) | (9,628 | ) | (4,946 | ) | ||||
|
Share based compensation expense |
4,183 | 2,470 | 2,435 | |||||||
|
Depreciation and amortization expense |
58,928 | 51,534 | 47,466 | |||||||
|
Income from equity investees |
(2,674 | ) | (1,877 | ) | (1,169 | ) | ||||
|
Distribution from equity investee |
— | 4,800 | — | |||||||
|
Amortization of deferred financing costs |
667 | 352 | 403 | |||||||
|
Deferred income tax (benefit) provision |
(29,386 | ) | 641 | 429 | ||||||
|
Provision for (recovery of) doubtful accounts |
(274 | ) | 349 | 99 | ||||||
|
Changes in operating assets and liabilities, net of effects of business acquisitions: |
||||||||||
|
Accounts receivable |
2,138 | 24,200 | (48,444 | ) | ||||||
|
Inventories |
(2,411 | ) | (17,045 | ) | (27,048 | ) | ||||
|
Other assets |
8,309 | 6,529 | (6,916 | ) | ||||||
|
Accounts payable and other liabilities |
9,543 | (13,131 | ) | 43,847 | ||||||
|
Other, net |
(305 | ) | 1,680 | 411 | ||||||
| | | | | | | | | | | |
|
Net cash provided by operating activities |
71,513 | 83,072 | 30,141 | |||||||
| | | | | | | | | | | |
|
Cash flows from investing activities: |
||||||||||
|
Proceeds from sales of improvements to HPT |
77,593 | 68,156 | 69,122 | |||||||
|
Acquisitions of businesses, net of cash acquired |
(109,978 | ) | (52,070 | ) | (31,216 | ) | ||||
|
Capital expenditures |
(164,242 | ) | (188,694 | ) | (124,851 | ) | ||||
|
Proceeds from asset sales |
588 | 134 | 147 | |||||||
| | | | | | | | | | | |
|
Net cash used in investing activities |
(196,039 | ) | (172,474 | ) | (86,798 | ) | ||||
| | | | | | | | | | | |
|
Cash flows from financing activities: |
||||||||||
|
Proceeds from issuance of common shares, net of offering costs |
65,102 | — | 53,135 | |||||||
|
Proceeds from Senior Notes issuance |
110,000 | — | — | |||||||
|
Proceeds from borrowings under credit facility |
— | — | 1,000 | |||||||
|
Repayment of borrowings under credit facility |
— | — | (1,000 | ) | ||||||
|
Payment of deferred financing fees |
(4,750 | ) | (187 | ) | (1,542 | ) | ||||
|
Proceeds from sale-leaseback transactions with HPT |
6,319 | 8,598 | — | |||||||
|
Sale-leaseback financing obligation payments |
(1,644 | ) | (2,089 | ) | (2,046 | ) | ||||
| | | | | | | | | | | |
|
Net cash provided by financing activities |
175,027 | 6,322 | 49,547 | |||||||
| | | | | | | | | | | |
|
Effect of exchange rate changes on cash |
(33 | ) | 14 | (31 | ) | |||||
| | | | | | | | | | | |
|
Net increase (decrease) in cash and cash equivalents |
50,468 | (83,066 | ) | (7,141 | ) | |||||
|
Cash and cash equivalents at the beginning of the year |
35,189 | 118,255 | 125,396 | |||||||
| | | | | | | | | | | |
|
Cash and cash equivalents at the end of the year |
$ | 85,657 | $ | 35,189 | $ | 118,255 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
|
Supplemental disclosure of cash flow information: |
||||||||||
|
Interest paid (including rent classified as interest and net of capitalized interest) |
$ | 15,226 | $ | 10,227 | $ | 10,462 | ||||
|
Income taxes paid (net of refunds) |
750 | 1,127 | 658 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
TravelCenters of America LLC
Consolidated Statements of Shareholders' Equity
(in thousands, except share data)
|
|
Number of
Common Shares |
Common
Shares |
Accumulated
Other Comprehensive Income (Loss) |
Accumulated
Deficit |
Total
Shareholders' Equity |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2010 |
18,016,196 | $ | 547,066 | $ | 1,193 | $ | (308,743 | ) | $ | 239,516 | ||||||
|
Grants under share award plan and share based compensation, net of forfeitures |
759,475 |
2,435 |
— |
— |
2,435 |
|||||||||||
|
Shares issued in public offering |
10,000,000 | 53,135 | — | — | 53,135 | |||||||||||
|
Other comprehensive loss, net of tax |
— | — | (59 | ) | — | (59 | ) | |||||||||
|
Net income |
— | — | — | 23,574 | 23,574 | |||||||||||
| | | | | | | | | | | | | | | | | |
|
December 31, 2011 |
28,775,671 | 602,636 | 1,134 | (285,169 | ) | 318,601 | ||||||||||
|
Grants under share award plan and share based compensation, net of forfeitures |
760,795 |
2,470 |
— |
— |
2,470 |
|||||||||||
|
Other comprehensive income, net of tax |
— | — | 165 | — | 165 | |||||||||||
|
Net income |
— | — | — | 32,198 | 32,198 | |||||||||||
| | | | | | | | | | | | | | | | | |
|
December 31, 2012 |
29,536,466 | 605,106 | 1,299 | (252,971 | ) | 353,434 | ||||||||||
|
Grants under share award plan and share based compensation, net of forfeitures |
613,900 |
4,183 |
— |
— |
4,183 |
|||||||||||
|
Shares issued in public offering, net of offering costs |
7,475,000 | 65,102 | — | — | 65,102 | |||||||||||
|
Other comprehensive loss, net of tax |
— | — | (465 | ) | — | (465 | ) | |||||||||
|
Net income |
— | — | — | 31,623 | 31,623 | |||||||||||
| | | | | | | | | | | | | | | | | |
|
December 31, 2013 |
37,625,366 | $ | 674,391 | $ | 834 | $ | (221,348 | ) | $ | 453,877 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
TravelCenters of America LLC
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
1. Basis of Presentation, Business Description and Organization
TravelCenters of America LLC, which we refer to as the Company or we, us and our, operates and franchises travel centers under the "TravelCenters of America," "TA" or related brand names, or the TA brand, and the "Petro Stopping Centers" and "Petro" brand names, or the Petro brand, primarily along the U.S. interstate highway system. Our travel center customers include long haul trucking fleets and their drivers, independent truck drivers and motorists. We also operate convenience stores with retail gasoline stations, primarily under the Minit Mart brand name, that generally serve motorists.
At December 31, 2013, our geographically diverse business included 247 travel centers in 42 U.S. states and in Canada, including 172 travel centers operating under the TA or related brands, and 75 travel centers operating under the Petro brand. As of December 31, 2013, we operated 217 of these travel centers, which we refer to as company operated sites, and our franchisees operated 30 of these travel centers. Of our 247 travel centers at December 31, 2013, we owned 33, we leased or managed 189 from or for others, including 184 that we leased from Hospitality Properties Trust, or HPT, and franchisees owned or leased from others 25. We sublease to franchisees five of the travel centers we lease from HPT.
Our travel centers typically include over 25 acres of land and offer customers 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 stores and other driver amenities. We also collect rents, royalties and other fees from our franchisees.
As of December 31, 2013, we operated 34 convenience stores in four states, primarily Kentucky. Our typical convenience store includes ten fueling positions and approximately 5,000 square feet of interior space offering merchandise and QSRs. Of our 34 convenience stores at December 31, 2013, we owned 27, we leased five, including one that we leased from HPT, and we operated two for a joint venture in which we own a minority interest.
We were formed as a Delaware limited liability company on October 10, 2006, by HPT. We were a wholly owned, indirect subsidiary of HPT, and we conducted no business activities until January 31, 2007. On January 31, 2007, HPT acquired TravelCenters of America, Inc., our predecessor, through a merger of one of its subsidiaries with TravelCenters of America, Inc. HPT then restructured the business of our predecessor and distributed our then outstanding shares to its 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 HPT became owners of the real estate at substantially all of the travel centers and certain other assets previously owned by our predecessor as of January 31, 2007, (iii) we entered a lease for that real estate and those other assets, which we refer to as the TA Lease, and (iv) all of the outstanding indebtedness of our predecessor was repaid in full. Herein we refer to this series of transactions as the HPT Transaction. We retained the balance of the assets previously owned by our predecessor and continue their operation.
On May 30, 2007, we acquired Petro Stopping Centers, L.P., or Petro, from Petro Stopping Centers Holdings, L.P., or Petro Holdings. Also on May 30, 2007, HPT acquired Petro Holdings, which owned the real estate of 40 Petro travel centers. Simultaneously with HPT's acquisition of this real estate, we leased these 40 travel centers from HPT. We refer to this lease as the Petro Lease and we refer to the TA Lease and the Petro Lease collectively as the HPT Leases. Herein we refer to our acquisition of Petro as the Petro Acquisition.
F-8
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies
Principles of Consolidation. Our consolidated financial statements include the accounts of TravelCenters of America LLC and its wholly owned subsidiaries (collectively, we, us or the Company). All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. We use the equity method of accounting for investments in entities when we have the ability to significantly influence, but not control, the investee's operating and financial policies, typically when we own 20% to 50% of the investee's voting stock. See Note 16 for more information about our equity investments.
Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segment Reporting. We manage our business on the basis of one operating segment and, therefore, have one reportable segment. Our locations sell similar products and services, use similar processes to sell those products and services, and sell their products and services to similar groups of customers. We make specific disclosures concerning fuel and nonfuel products and services because it facilitates our discussion of trends and operational initiatives within our business and industry. We have a single travel center located in a foreign country, Canada, and, accordingly, the revenues and assets related to our operations in Canada are considered to be not material.
Revenue Recognition. We recognize sales revenues and related costs at the time of final sale to consumers at our company operated locations for retail fuel and nonfuel sales and at the time of delivery of motor fuel to customers at either the terminal or the customer's facility for wholesale fuel sales. We record the estimated cost to us of the redemption by customers of our loyalty program points as a discount against gross sales in determining net sales presented in our consolidated statement of income and comprehensive income.
For those travel centers that we sublease to a franchisee, we recognize rent revenue based on the amount of rent payment due for each period. These leases specify rent increases each year based on inflation rates for the respective periods or capital improvements we make at the travel center. Because the rent increases related to these factors are contingent upon future events, we recognize the related rent revenue after such events have occurred.
We collect and recognize franchise royalty revenues monthly as earned. We determine royalty revenues as a percentage of the franchisees' revenues. We recognize initial franchise fee revenues when the franchisee opens for business under our brand name, which is when we have fulfilled all of our initial obligations under the related agreements.
Motor Fuel and Sales Taxes. We collect the cost of certain motor fuel and sales taxes from consumers and remit those amounts to the supplier or the appropriate governmental agency. We present these collections and remittances net in the accompanying consolidated statements of income and comprehensive income.
Earnings Per Share. We calculate basic earnings per common share by dividing net income or loss available to common shareholders (and, if applicable, income from continuing operations, cumulative effect of a change in accounting, extraordinary items and discontinued operations) for the period by the
F-9
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
weighted average number of common shares outstanding during the period. The net income or loss attributable to participating securities is deducted from our total net income or loss to determine the net income or loss attributable to common shareholders. We calculate diluted earnings per common share by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive share securities, using the treasury stock method; but we had no dilutive share securities outstanding as of December 31, 2013, nor at any time during the three year period then ended. Unvested shares issued under our share award plan are deemed participating securities because they participate equally in earnings or losses with all of our other common shares.
Cash and Cash Equivalents. We consider all liquid investments with an initial maturity of three months or less at date of purchase to be cash equivalents. The carrying amount of cash and cash equivalents is equal to its fair value.
Accounts Receivable and Allowance for Doubtful Accounts. We record trade accounts receivable at the invoiced amount and those amounts do not bear interest. The recorded allowance for doubtful accounts is our best estimate of the amount of probable losses in our existing accounts receivable. We base the allowance on customer risk assessment and historical write off experience. We individually review for collectability past due balances over specific amounts. We review all other balances for collectability on a pooled basis by the type of receivable. We charge off account balances against the allowance when we believe it is probable the receivable will not be recovered.
Inventories. We state our inventories at the lower of cost or market value. We determine cost principally on the weighted average cost method.
Other current assets. Other current assets primarily consisted of prepaid expenses, the current portion of expected future recoveries of environmental expenditures, and supplier deposits. The most significant item included in other current assets is supplier deposits, which amounted to $29,443 and $39,487 at December 31, 2013 and 2012, respectively.
Property and Equipment. We recorded property and equipment that we acquired as a result of the HPT Transaction, Petro Acquisition or any subsequent business combination based on their fair market values as of the date of the respective transaction. We charge to expense the costs we incur in evaluating and effecting a business combination, including legal fees, due diligence costs and closing costs, in the period that the costs are incurred. We record all other property and equipment at cost. We depreciate our property and equipment on a straight line basis generally over the following estimated useful lives of the assets:
| Buildings and site improvements | 15 to 40 years | |
| Machinery and equipment | 3 to 15 years | |
| Furniture and fixtures | 5 to 10 years |
We depreciate leasehold improvements over the shorter of the lives shown above or the remaining term of the underlying lease. Although the assets related to the qualifying tenant improvements funded by HPT under the tenant improvements allowance that we had fully utilized as of September 30, 2010, are legally owned by HPT, they remained on our balance sheet after the funding by HPT and are amortized over the estimated useful lives of the assets or the remaining term of the lease, whichever is shorter, as depreciation and amortization expense. We account for these leasehold improvements
F-10
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
funded through a rental allowance as lease incentives. Amortization expense related to assets recorded in connection with the sale-leaseback financing obligation pertaining to certain travel centers we lease under the TA Lease is included in depreciation and amortization expense over the estimated useful lives of the assets.
We charge repair and maintenance costs to expense as incurred, while we capitalize renewals and betterments. We remove from the accounts the cost and related accumulated depreciation of property and equipment sold, replaced or otherwise disposed. We recognize any resulting gains or losses in depreciation and amortization in the accompanying consolidated statements of income and comprehensive income.
Capitalized Interest. We capitalize the portion of our interest expense that is attributable under GAAP to our more significant construction projects over the duration of the respective construction periods. Capitalized interest is amortized to depreciation and amortization expense over the estimated useful life of the corresponding asset.
Goodwill and Intangible Assets. We initially recognize our acquired intangible assets, other than goodwill, based on their fair values in accordance with the Financial Accounting Standards Board, or FASB's, guidance regarding business combinations. This guidance requires an allocation of purchase price to all assets and liabilities acquired, including those intangible assets that arise from contractual or other legal rights or are otherwise capable of being separated or divided from the acquired entity (but excluding goodwill), based on the fair values of the acquired assets and liabilities. Any excess of acquisition cost over the fair value of the acquired net assets is recognized as goodwill. We expense as incurred the costs of internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate lives or that are inherent in a continuing business and related to the entity as a whole. We amortize the recorded cost of intangible assets with finite lives on a straight line basis over their estimated lives, principally the terms of the related contractual agreements giving rise to them. We do not amortize goodwill or intangible assets with indefinite lives but instead we review these assets for impairment each year (or more frequently if impairment indicators arise). See Note 8 for more information about our intangible assets.
Internal Use Software Costs. During the application development stage of an internal use computer software project, we capitalize (i) the external direct costs of materials and services consumed in developing or obtaining the internal use computer software, (ii) to the extent of time spent directly on the project, payroll costs of employees directly associated with, and who devote time to, the project, and (iii) related interest costs incurred. Internal and external costs incurred in the preliminary project stage and post-implementation stage, such as for exploring alternative technologies, vendor selection and maintenance, are expensed as incurred, as are all training costs. We account for the costs of significant upgrades and enhancements that result in additional functionality in the same manner as similar costs for new software projects. We expense as incurred the costs of all other upgrades and enhancements. The amounts capitalized in accordance with this policy are included in the property and equipment balances in our consolidated balance sheets.
Impairment. We review definite lived assets for indicators of impairment during each reporting period. We recognize impairment charges when (a) the carrying value of a long lived or indefinite lived asset group to be held and used in the business is not recoverable and exceeds its fair value and (b) when the carrying value of a long lived asset to be disposed of exceeds the estimated fair value of
F-11
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
the asset less the estimated cost to sell the asset. Our estimates of fair value are based on our estimates of likely market participant assumptions, including projected operating results, rental payments and the discount rate used to measure the present value of projected future cash flows. If the business climate deteriorates actual results may not be consistent with these assumptions and estimates. We recognize impairment charges in the period during which the circumstances surrounding an asset to be held and used have changed such that the carrying value is no longer recoverable, or during which a commitment to a plan to dispose of the asset is made. The lowest level of asset groupings for which the cash flows are largely independent of the cash flows of other assets and liabilities is the individual location and, accordingly, it is at the individual location level that we perform our impairment analysis for substantially all of our property and equipment.
We evaluate definite lived intangible assets for impairment when indicators exist and we evaluate goodwill and indefinite lived intangible assets for impairment at least annually. GAAP permits that we first perform a qualitative assessment to determine whether a quantitative assessment is required. We subject goodwill and intangible assets to further evaluation and recognize impairment charges when events and circumstances indicate the carrying value of the goodwill or intangible asset exceeds the fair market value of the asset. With respect to goodwill, if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of impairment to be recognized, if any. In the first step of the review process, we compare the estimated fair value of the reporting unit with its carrying value. If the estimated fair value of the reporting unit is less than its carrying value, we recognize an impairment loss for the excess, if any, of the carrying value over the implied fair value of the reporting unit's goodwill amount. We determine the estimated fair value of a reporting unit using a combination of market and income approaches. We include impairment charges, when required, in depreciation and amortization expense in our consolidated statements of income and comprehensive income.
Deferred Financing Costs. We capitalize costs incurred to borrow and we amortize those costs as interest expense over the term of the related borrowing using the effective interest method. Deferred financing costs were $5,594 and $1,511 at December 31, 2013 and 2012, respectively, net of accumulated amortization of $1,083 and $416, respectively, and are included in other noncurrent assets in our consolidated balance sheets. We recognized $107 of expense to write off deferred financing fees when we entered into an amended and restated loan and security agreement, or the credit facility, in October 2011 and we capitalized $1,542 of costs related to entering the credit facility in 2011. In 2012 we capitalized $165 of costs related to the issuance of our 8.25% Senior Notes due on January 15, 2028, or the Senior Notes, and in 2013 capitalized an additional $4,750 of costs related to the Senior Notes offering. We estimate we will recognize future amortization of deferred financing fees of approximately $680 in 2014 and 2015, $616 in 2016 and $328 in 2017 and 2018. We recognized interest expense from the amortization of deferred financing fees, of $667, $352 and $403 for the years ended December 31, 2013, 2012 and 2011, respectively.
Classification of Costs and Expenses. Cost of goods sold (excluding depreciation) represents the costs of fuels and other products sold, including freight. Site level operating expenses principally represent costs incurred in operating our locations, consisting primarily of labor (including labor that is sold as service in our truck service facilities), maintenance, supplies, utilities, property taxes, inventory losses, environmental costs, and credit card transaction fees.
F-12
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
Share Based Employee Compensation. We recognize compensation cost related to share based payment transactions in the financial statements based on the fair value at the grant date. The awards made under our share award plan to date have consisted of share grants and not share options. Shares issued to directors vest immediately. Shares issued to others vest in five to ten equal annual installments beginning on the date of grant. The compensation expense related to share grants is determined based on the market value of our shares on either the date of grant for employees or the vesting date for nonemployees, as appropriate, with the aggregate value of the granted shares amortized to expense over the related vesting period. We include share based compensation expense in selling, general and administrative expenses in our consolidated statements of income and comprehensive income.
Environmental Remediation. We record the expense of remediation costs and penalties when the obligation to remediate is probable and the amount of associated costs is reasonably determinable. We include remediation expenses within site level operating expenses in our consolidated statements of income and comprehensive income. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Accrued liabilities related to environmental matters are recorded on an undiscounted basis because of the uncertainty associated with the timing of the related future payments. We record a receivable if recoveries of remediation costs from third parties are probable. In our consolidated balance sheets, the accrual for environmental matters is included in other noncurrent liabilities, with the amount estimated to be expended within the subsequent twelve months included in other current liabilities and the related receivable for probable expected recoveries is included in other noncurrent assets.
Self Insurance Accruals. For insurance programs for which we pay deductibles and for which we are partially self insured up to certain stop loss amounts, we establish accruals for both estimated losses on known claims and claims incurred but not reported, based on claims histories and using actuarial methods. In our consolidated balance sheets, the accrual for self insurance costs is included in other noncurrent liabilities, with the amount estimated to be expended within the subsequent twelve months included in other current liabilities.
Asset Retirement Obligations. We recognize the future costs for our obligations related to the removal of our underground storage tanks and certain improvements we own at leased properties over the estimated useful lives of each asset requiring removal. We record a liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long lived asset at the time such an asset is installed. We amortize the amount recorded as property and equipment and recognize accretion expense in depreciation and amortization in our consolidated statements of income and comprehensive income in connection with the discounted liability over the remaining life of the respective asset. We base the estimated liability on our historical experiences in removing these assets, their estimated useful lives, external estimates as to the cost to remove the assets in the future and regulatory or contractual requirements. The liability is a discounted liability using a credit adjusted risk free rate. Revisions to the liability could occur due to changes in removal costs, asset useful lives or if new regulations regarding the removal of underground storage tanks are enacted and/or amendments to the lease contracts are negotiated. See Note 7 for more information about our asset retirement obligations.
F-13
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
Leasing Transactions. Leasing transactions are a material part of our business. The following discussion summarizes various aspects of our accounting for leasing transactions and the related balances.
F-14
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
Income Taxes. We establish deferred income tax assets and liabilities to reflect the future tax consequences of differences between the tax bases and financial statement bases of assets and liabilities. We reduce the measurement of deferred tax assets, if necessary, by a valuation allowance when it is more likely than not the deferred tax asset will not be realized.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount we recognize in the financial statements is the largest benefit that we estimate has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of interest expense and selling, general and administrative expenses, respectively.
Concentration of Credit Risk. We grant credit to some of our trucking company customers and are therefore exposed to a concentration of our accounts receivable from that one industry. We may require letters of credit or other collateral from customers based on our evaluation of their credit worthiness.
Certain Significant Risks and Uncertainties. We are exposed to risks arising from the changes in the demand for and the price of fuel. Because petroleum products are traded in commodity markets, material changes in demand for and the price of fuel worldwide and financial speculation in these commodities markets may have a material effect upon the prices we have to pay for fuel and may also impact our customers' demand for fuel and other products.
Fair Value of Financial Instruments. The fair values of financial instruments classified as current assets or current liabilities approximate the carrying values due to the short term maturity of the instruments. We estimate the fair value of our Senior Notes based on their closing trading price as of the balance sheet date.
Revisions to prior year financial statements and disclosures. During the fourth quarter of 2013, we determined that our historical approach to assessing the accounting impact of ownership changes on our net operating loss carryforwards did not consider all of the provisions of Section 382 of the Internal Revenue Code, or the Code. We also identified errors in the recognition and reporting of other deferred tax assets and liabilities disclosed in prior years. For all prior years, we recorded a full valuation allowance against our net deferred tax assets. Therefore these errors in the recorded amounts of our tax carryforwards and other deferred tax assets and liabilities were offset by errors in the related valuation allowance and liability for uncertain tax positions and had no effect on the income tax provision recognized in any period. However, these errors did result in misstatements in the presentation of income tax related amounts on our balance sheets as well as disclosures related to income taxes. We have assessed the misstatements in our historical financial statements and determined them to be immaterial.
F-15
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
We have revised the presentation of our deferred tax assets and liabilities in our consolidated balance sheet as of December 31, 2012, to correct these errors, resulting in an increase to other current assets and an increase to other noncurrent liabilities of $11,438 in comparison to the amounts originally presented.
We have also revised our disclosure of the significant components of our deferred tax assets and liabilities as of December 31, 2012, to reflect the correction of these errors. These revisions resulted in a decrease in our net deferred tax assets of $66,100, a decrease in our valuation allowance of $71,500, and an increase in our recognized liability for uncertain tax positions of $5,400, in comparison to the amounts originally presented. We have also reclassified certain components of our disclosure of our deferred tax assets and liabilities to conform to current year presentation.
We failed to properly consider the application of FASB Accounting Standards Codification, or ASC, 740 to uncertain tax positions related to our historical approach to evaluating Section 382 of the Code. As a result, we failed to identify and disclose that we had approximately $60,138 of unrecognized tax benefits as of December 31, 2012, and overstated our unrestricted federal net operating loss carryforwards as of December 31, 2012, by approximately $108,250. That is, as of December 31, 2012, we disclosed that we had tax carryforwards resulting in deferred tax assets that were offset by a valuation allowance but, upon further analysis, we determined that under GAAP we should have instead disclosed that we had unrecognized tax benefits for the uncertain tax positions we had taken in our tax returns. Our tax footnote disclosure for 2013 includes disclosures for uncertain tax positions.
These errors do not affect our consolidated statements of income and comprehensive income or consolidated statements of cash flows for the years ended December 31, 2012 and 2011.
Reclassifications. Certain prior year amounts have been reclassified to be consistent with the current year presentation.
Recently Issued Accounting Pronouncements
In January 2013, we adopted FASB Accounting Standards Update, or ASU, 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income . This update requires companies to report, in one place, information about reclassifications out of accumulated other comprehensive income. Companies are also required to present details of reclassifications in the disclosure of changes in accumulated other comprehensive income balances. The update is effective for interim and annual reporting periods beginning after December 15, 2012. The implementation of this update as of January 1, 2013, caused no changes to our consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists , which sets forth explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. This guidance is effective for fiscal years and interim reporting periods beginning after December 15, 2013, with early adoption permitted. We elected to adopt early the guidance in ASU 2013-11 in our consolidated financial statements for the year ended December 31, 2013, and have applied this guidance retroactively to our consolidated financial statements for the year ended December 31, 2012. Accordingly, our unrecognized tax benefits have been presented as a reduction of our net operating loss and tax credit carryforwards in the accompanying consolidated balance sheets as of December 31, 2013 and 2012.
F-16
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP. The new standard will apply for annual periods beginning after December 15, 2016, including interim periods therein. Early adoption is prohibited. We have not yet determined the effects, if any, adoption of this update may have on our consolidated financial statements.
3. Earnings Per Share
Unvested shares issued under our share award plan are deemed participating securities because they participate equally in earnings with all of our other common shares. The following table presents a reconciliation from net income to the net income available to common shareholders and the related earnings per share.
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Net income, as reported |
$ | 31,623 | $ | 32,198 | $ | 23,574 | ||||
|
Less: net income attributable to participating securities |
1,957 | 1,851 | 1,384 | |||||||
| | | | | | | | | | | |
|
Net income available to common shareholders |
$ | 29,666 | $ | 30,347 | $ | 22,190 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
|
Weighted average common shares (1) |
28,081,790 | 27,193,889 | 22,689,063 | |||||||
|
Basic and diluted net income per share |
$ | 1.06 | $ | 1.12 | $ | 0.98 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
4. Accounts Receivable
Changes in, and balances of, the allowance for doubtful accounts receivable were as follows:
|
|
Balance at
Beginning of Period |
Amounts
Charged/ (Credited) To Expense |
Amounts
Charged Off, Net of Recoveries |
Balance at
End of Period |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31, 2013 |
|||||||||||||
|
Deducted from accounts receivable for doubtful accounts |
$ | 1,516 | $ | (274 | ) | $ | 62 | $ | 1,304 | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
Year Ended December 31, 2012 |
|||||||||||||
|
Deducted from accounts receivable for doubtful accounts |
$ | 1,679 | $ | 349 | $ | (512 | ) | $ | 1,516 | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
Year Ended December 31, 2011 |
|||||||||||||
|
Deducted from accounts receivable for doubtful accounts |
$ | 2,023 | $ | 99 | $ | (443 | ) | $ | 1,679 | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
F-17
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
5. Inventories
Inventories at December 31, 2013 and 2012, consisted of the following:
|
|
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
|
Nonfuel products |
$ | 150,600 | $ | 144,025 | |||
|
Fuel products |
48,601 | 46,981 | |||||
| | | | | | | | |
|
Total inventories |
$ | 199,201 | $ | 191,006 | |||
| | | | | | | | |
| | | | | | | | |
6. Acquisitions
During the year ended December 31, 2013, we acquired, for an aggregate amount of $46,245, nine travel centers and the business of one of our franchisees at a travel center that this franchisee previously subleased from us, and we accounted for these transactions as business combinations, except that one of the acquired travel centers was closed at the time we acquired it and was accounted for as an asset acquisition, as required by GAAP. See Note 17 below for further information regarding the acquisition of a former franchisee business and certain lease accounting effects resulting from that transaction.
On December 16, 2013, we acquired all of the issued and outstanding membership units of Girkin Development, LLC, a Kentucky limited liability company that owns a total of 31 convenience stores in Kentucky and Tennessee, operating under the proprietary Minit Mart brand, for an aggregate purchase price of approximately $67,922. We intend to continue to use the Minit Mart brand name, which we own. Four of the Minit Mart sites are leased by us from third parties.
During the year ended December 31, 2012, we acquired, for an aggregate amount of $52,310, ten travel centers in six business combination transactions and the businesses of our franchisees at four travel centers that these franchisees previously subleased from us in two business combination transactions. Each of these transactions was the purchase of assets for cash and was accounted for as a business combination. See Note 17 below for further information regarding the acquisitions of former franchisee businesses and certain lease accounting effects resulting from those transactions.
F-18
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
6. Acquisitions (Continued)
The following table summarizes the amounts assigned, based on their fair values, to the assets we acquired and liabilities we assumed in the business combinations described above.
|
|
Year Ended
December 31, 2013 |
|||
|---|---|---|---|---|
|
Cash |
$ | 2,651 | ||
|
Accounts receivable |
1,701 | |||
|
Inventories |
5,831 | |||
|
Other current assets |
164 | |||
|
Property and equipment |
96,167 | |||
|
Leasehold interests |
173 | |||
|
Agreements with franchisors |
2,836 | |||
|
Trademarks |
3,800 | |||
|
Goodwill |
23,250 | |||
|
Other noncurrent assets |
295 | |||
|
Accounts payable and other current liabilities |
(7,272 | ) | ||
|
Deferred tax liabilities |
(15,780 | ) | ||
|
Other noncurrent liabilities |
(1,187 | ) | ||
| | | | | |
|
Total purchase price |
$ | 112,629 | ||
| | | | | |
| | | | | |
During 2013, 2012 and 2011, we incurred $2,523, $785 and $446, respectively, of acquisition costs related to the business combinations described above, which amounts are included in our consolidated statements of income and comprehensive income. We have included the results of these sites in our consolidated financial statements from their respective dates of acquisition. The pro forma impact of including the results of operations of these acquisitions from the beginning of the period is not material to our consolidated financial statements.
As of December 31, 2013, we had entered an agreement to acquire a travel center property for approximately $3,000. We completed this acquisition in January 2014.
7. Property and Equipment
Property and equipment, at cost, as of December 31, 2013 and 2012, consisted of the following:
|
|
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
|
Land and improvements |
$ | 214,483 | $ | 176,313 | |||
|
Buildings and improvements |
203,416 | 120,529 | |||||
|
Machinery, equipment and furniture |
252,951 | 205,195 | |||||
|
Leasehold improvements |
200,972 | 182,955 | |||||
|
Construction in progress |
88,361 | 95,744 | |||||
| | | | | | | | |
|
|
960,183 | 780,736 | |||||
|
Less: accumulated depreciation and amortization |
255,317 | 204,224 | |||||
| | | | | | | | |
|
Property and equipment, net |
$ | 704,866 | $ | 576,512 | |||
| | | | | | | | |
| | | | | | | | |
F-19
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
7. Property and Equipment (Continued)
Total depreciation expense for the years ended December 31, 2013, 2012 and 2011, was $57,456, $46,888 and $42,344, respectively, including impairment charges of $659, $351 and $302 for the years ended December 31, 2013, 2012 and 2011, respectively.
The following table shows the amounts of property and equipment owned by HPT but recognized in our consolidated balance sheets and included within the balances of property and equipment shown in the table above, as a result of the required accounting for the assets funded by HPT under the tenant improvements allowance and for the assets that we lease from HPT that did not qualify for sale-leaseback accounting. During 2012, we acquired the businesses of the former franchisees at four travel centers that we subleased to the franchisees and that did not previously qualify for sale-leaseback accounting. Those acquisitions eliminated the sublease such that these sites then qualified for sale-leaseback accounting. Accordingly, we derecognized the undepreciated and unamortized balances of the assets and liabilities related to those sites as of the dates of the respective acquisitions. We reduced our property and equipment balance by $22,229 and our sale-leaseback financing obligation balance by $24,646, resulting in a gain of $2,417 that was deferred and will be amortized as a reduction of rent expense over the remaining term of the TA Lease. In October 2013, the sublease at another one of these travel centers was terminated and we began to operate that travel center. As a result, we reduced our property and equipment balance by $2,030 and our sale-leaseback financing obligation balance by $2,463, resulting in a gain of $433 that was deferred and will be amortized as a reduction of rent expense over the remaining term of the TA Lease.
|
|
December 31, | ||||||
|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | |||||
|
Land and improvements |
$ | 60,908 | $ | 62,818 | |||
|
Buildings and improvements |
27,498 | 21,999 | |||||
|
Machinery, equipment and furniture |
5,972 | 5,925 | |||||
|
Leasehold improvements |
115,735 | 115,820 | |||||
| | | | | | | | |
|
|
210,113 | 206,562 | |||||
|
Less: accumulated depreciation and amortization |
64,144 | 53,527 | |||||
| | | | | | | | |
|
Property and equipment, net |
$ | 145,969 | $ | 153,035 | |||
| | | | | | | | |
| | | | | | | | |
At December 31, 2013, our property and equipment balance included $5,096 of completed improvement projects and an additional $23,636 in ongoing improvement projects that we expect to request that HPT purchase for an increase in rent in the future; however, HPT is not obligated to purchase those assets.
F-20
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
7. Property and Equipment (Continued)
The following table shows a reconciliation of our asset retirement obligation liability for the sites we operate that we do not lease from HPT. This liability is included within other noncurrent liabilities in our consolidated balance sheets.
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Balance at beginning of period |
$ | 1,430 | $ | 829 | $ | 485 | ||||
|
Liabilities acquired |
693 | 505 | 361 | |||||||
|
Liabilities settled |
(114 | ) | — | (74 | ) | |||||
|
Accretion expense |
147 | 96 | 57 | |||||||
| | | | | | | | | | | |
|
Balance at end of period |
$ | 2,156 | $ | 1,430 | $ | 829 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
8. Goodwill and Intangible Assets
Goodwill and intangible assets, net, as of December 31, 2013 and 2012, consisted of the following:
|
|
Year Ended December 31, 2013 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
Cost |
Accumulated
Amortization |
Net | |||||||
|
Amortizable intangible assets: |
||||||||||
|
Agreements with franchisees |
$ | 16,189 | $ | (7,044 | ) | $ | 9,145 | |||
|
Leasehold interests |
2,267 | (2,097 | ) | 170 | ||||||
|
Agreements with franchisors |
2,836 | (25 | ) | 2,811 | ||||||
|
Other |
3,200 | (3,200 | ) | — | ||||||
| | | | | | | | | | | |
|
Total amortizable intangible assets |
24,492 | (12,366 | ) | 12,126 | ||||||
|
Carrying value of trademarks (indefinite lived) |
11,706 | — | 11,706 | |||||||
| | | | | | | | | | | |
|
Total intangible assets |
36,198 | (12,366 | ) | 23,832 | ||||||
|
Goodwill |
24,940 | — | 24,940 | |||||||
| | | | | | | | | | | |
|
Total goodwill and intangible assets |
$ | 61,138 | $ | (12,366 | ) | $ | 48,772 | |||
| | | | | | | | | | | |
| | | | | | | | | | | |
F-21
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
8. Goodwill and Intangible Assets (Continued)
|
|
Year Ended December 31, 2012 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
Cost |
Accumulated
Amortization |
Net | |||||||
|
Amortizable intangible assets: |
||||||||||
|
Agreements with franchisees |
$ | 18,258 | $ | (7,813 | ) | $ | 10,445 | |||
|
Leasehold interests |
2,094 | (2,094 | ) | — | ||||||
|
Other |
3,200 | (3,200 | ) | — | ||||||
| | | | | | | | | | | |
|
Total amortizable intangible assets |
23,552 | (13,107 | ) | 10,445 | ||||||
|
Carrying value of trademarks (indefinite lived) |
7,906 | — | 7,906 | |||||||
| | | | | | | | | | | |
|
Total intangible assets |
31,458 | (13,107 | ) | 18,351 | ||||||
|
Goodwill |
1,690 | — | 1,690 | |||||||
| | | | | | | | | | | |
|
Total goodwill and intangible assets |
$ | 33,148 | $ | (13,107 | ) | $ | 20,041 | |||
| | | | | | | | | | | |
| | | | | | | | | | | |
Total amortization expense for amortizable intangible assets for the years ended December 31, 2013, 2012 and 2011 was $1,325, $3,606 and $3,892, respectively, including $282, $215 and $1,034, respectively, related to write offs related to early terminations of franchise and lease agreements for various reasons.
We amortize our amortizable intangible assets over a weighted average period of 9 years. During 2013, we acquired leasehold interests and agreements with franchisors with weighted average remaining lives of 10 and 6 years, respectively. We estimate the aggregate amortization expense for our amortizable intangible assets to be as follows for each of the next five years:
Goodwill. Goodwill results from our business combinations and represents the excess of amounts paid to the sellers over the fair values of the identifiable assets acquired. During 2013 and 2012, we recognized $23,250 and $1,690, respectively, of goodwill in connection with our business combinations. We had not recognized any goodwill as of December 31, 2011. Our goodwill balance includes $9,068
F-22
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
8. Goodwill and Intangible Assets (Continued)
that is deductible for tax purposes. The table below shows the changes in our goodwill during the periods presented.
|
|
Goodwill | |||
|---|---|---|---|---|
|
Balance as of December 31, 2011 |
$ | — | ||
|
Add: Goodwill from business combinations |
1,690 | |||
| | | | | |
|
Balance as of December 31, 2012 |
1,690 | |||
|
Add: Goodwill from business combinations |
23,250 | |||
| | | | | |
|
Balance as of December 31, 2013 |
$ | 24,940 | ||
| | | | | |
| | | | | |
The estimate of the value of our goodwill acquired during 2013 was based upon our estimates and assumptions about the fair value of the identifiable assets and liabilities assumed we acquired are subject to change if we obtain additional information during the respective measurement period (up to one year from the acquisition date), which may impact the value of our goodwill.
9. Other Current Liabilities
Other current liabilities, as of December 31, 2013 and 2012, consisted of the following:
|
|
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
|
Taxes payable, other than income taxes |
$ | 34,096 | $ | 35,127 | |||
|
Accrued wages and benefits |
14,529 | 13,494 | |||||
|
Self insurance program accruals, current portion |
15,534 | 14,797 | |||||
|
Loyalty programs accruals |
16,700 | 11,967 | |||||
|
Accrued capital expenditures |
10,261 | 15,327 | |||||
|
Litigation and claims reserve |
11,321 | 1,961 | |||||
|
Environmental reserve, current portion |
5,639 | 7,988 | |||||
|
Other |
15,953 | 10,507 | |||||
| | | | | | | | |
|
Total other current liabilities |
$ | 124,033 | $ | 111,168 | |||
| | | | | | | | |
| | | | | | | | |
10. Other Noncurrent Liabilities
Other noncurrent liabilities, as of December 31, 2013 and 2012, consisted of the following:
|
|
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
|
Self insurance program accruals, noncurrent portion |
$ | 17,858 | $ | 16,573 | |||
|
Asset retirement obligations |
2,156 | 1,430 | |||||
|
Environmental reserve, noncurrent portion |
1,848 | 2,367 | |||||
|
Deferred tax liabilities, noncurrent portion |
18,510 | 18,367 | |||||
|
Other noncurrent liabilities |
5,494 | 3,286 | |||||
| | | | | | | | |
|
Total other noncurrent liabilities |
$ | 45,866 | $ | 42,023 | |||
| | | | | | | | |
| | | | | | | | |
F-23
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
11. Revolving Credit Facility
In October 2011, we entered into the credit facility with a group of commercial banks that amended and restated our preexisting credit facility. Under this credit facility, a maximum of $200,000 may be drawn, repaid and redrawn until maturity in October 2016. The availability of this maximum amount is subject to limits based on qualified collateral. Subject to available collateral and lender participation, the maximum amount may be increased to $300,000. 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. Borrowings under the credit facility bear interest at a rate based on, at our option, LIBOR or a base rate, plus a premium (which premium is subject to adjustment based upon facility availability, utilization and other matters). The annual interest rate for our credit facility was 4.5% as of December 31, 2013. Pursuant to the credit facility, we pay a monthly unused line fee which is subject to adjustment according to the average daily principal amount of unused commitment under the credit facility.
The credit facility requires us to maintain certain levels of collateral, limits our ability to incur debt and liens, restricts us from making certain investments and paying dividends and other distributions, requires us to maintain a minimum fixed charge ratio under certain circumstances and contains other customary covenants and conditions. The credit facility provides for the acceleration of principal and interest payments upon an event of default including, but 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 under certain contracts, including the HPT Leases and our business management and shared services agreement with Reit Management & Research LLC, or RMR. We received a waiver, until June 30, 2014, from lenders under our credit facility of the requirement under our credit facility to furnish audited consolidated financial statements for the year ended December 31, 2013, within 90 days of the end of such year. We also received a waiver, until July 31, 2014, of the requirement under our credit facility to furnish unaudited consolidated financial statements as of and for the fiscal quarter ended March 31, 2014, within 45 days of such quarter end.
Our credit facility is secured by substantially all of our cash, accounts receivable, inventory, equipment and intangible assets and the amount available to us is determined by reference to a borrowing base calculation based on eligible collateral. At December 31, 2013, a total of $130,783 was available to us for loans and letters of credit under the credit facility. At December 31, 2013, there were no loans outstanding under the credit facility but we had outstanding $44,866 of letters of credit issued under that facility, securing certain purchases, insurance, fuel tax and other trade obligations. These letters of credit reduce the amount available for borrowing under the credit facility.
12. Senior Notes
On January 15, 2013, we issued at par $110,000 aggregate principal amount of our 8.25% Senior Notes, or the Senior Notes, in an underwritten public offering. The Senior Notes are our senior unsecured obligations. The Senior Notes bear interest at 8.25% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning on April 15, 2013. The Senior Notes mature on January 15, 2028 and no principal payments are required prior to that date. We may, at our option, at any time on or after January 15, 2016, redeem some or all of the Senior Notes by paying 100% of the principal amount of the Senior Notes to be redeemed plus accrued but unpaid interest, if any, to, but not including, the redemption date. The indenture governing our Senior Notes
F-24
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
12. Senior Notes (Continued)
does not limit the amount of indebtedness we may incur. We may issue additional debt from time to time. The indenture also requires that we file our Exchange Act reports with the indenture trustee within a prescribed time period. We did not maintain compliance with this covenant for the year ended December 31, 2013, but the filing of this Annual Report cures this breach. Our failure to timely file our First Quarter 10-Q, if not cured within a specified time period, could lead to an event of default under the indenture.
Total costs of the offering of $4,915 were capitalized as deferred financing costs, which are included in other noncurrent assets in our consolidated balance sheet and which are being amortized over the term of the Senior Notes as interest expense.
We estimate that the fair value of our Senior Notes was $115,192 based on the closing trading price (a Level 1 input) of our Senior Notes on December 31, 2013. The fair value of the Senior Notes exceeds the book value because the Senior Notes were trading at a premium to their par value.
13. Leasing Transactions
As a lessee. We have entered into lease agreements covering a majority of our retail locations, our warehouse space, and various equipment and vehicles, with the most significant leases being the two we have entered with HPT as further described below. Certain leases include renewal options, and certain leases include escalation clauses and purchase options. Future minimum lease payments required under leases that had remaining noncancelable lease terms in excess of one year, as of December 31, 2013, were as follows (included herein are the full payments due under the HPT Leases including the amount attributed to those sites that are accounted for as a financing in our consolidated balance sheet as reflected in the sale-leaseback financing obligation):
|
Year ending December 31,
|
Total | |||
|---|---|---|---|---|
|
2014 |
$ | 233,224 | ||
|
2015 |
230,581 | |||
|
2016 |
228,273 | |||
|
2017 |
226,724 | |||
|
2018 |
224,952 | |||
|
Thereafter |
1,157,006 | |||
| | | | | |
|
Total |
$ | 2,300,760 | ||
| | | | | |
| | | | | |
The expenses related to our operating leases are included in the site level operating expense; selling, general and administrative expense; and real estate rent lines of the operating expenses section
F-25
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
13. Leasing Transactions (Continued)
of our consolidated statements of income and comprehensive income. Rent expense under our operating leases consisted of the following:
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Minimum rent |
$ | 205,413 | $ | 195,964 | $ | 189,984 | ||||
|
Sublease rent |
8,697 | 8,736 | 8,625 | |||||||
|
Contingent rent |
2,540 | 1,710 | 790 | |||||||
| | | | | | | | | | | |
|
Total rent expense |
$ | 216,650 | $ | 206,410 | $ | 199,399 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Pursuant to two leases with HPT, the TA Lease and the Petro Lease, which we refer to collectively as the HPT Leases, we lease 185 properties from HPT. Our TA Lease is for 145 properties that we operate primarily under the TA brand. The TA Lease became effective on January 31, 2007. Our Petro Lease is for 40 properties that we operate under the Petro brand name. Our Petro Lease became effective on May 30, 2007. The TA Lease expires on December 31, 2022. The Petro Lease expires on June 30, 2024, and may be extended by us for up to two additional periods of 15 years each. We have the right to use the "TA", "TravelCenters of America" and other trademarks, which are owned by HPT, during the term of the TA Lease.
The HPT Leases are "triple net" leases that require us to pay all costs incurred in the operation of the leased properties, including personnel, utilities, acquiring inventories, providing services to customers, insurance, paying real estate and personal property taxes, environmental related expenses, underground storage tank removal costs and ground lease payments at those properties at which HPT leases the property from the owner and subleases it to us. We also are required generally to indemnify HPT for certain environmental matters and for liabilities which arise during the terms of the leases from ownership or operation of the leased properties. The HPT Leases also include arbitration provisions for the resolution of certain disputes, claims and controversies. See Note 17 for a further description of the HPT Leases and related transactions and relationships.
As a lessor. As of December 31, 2013, 2012 and 2011, five, six and ten, respectively, of the travel centers we lease from HPT were subleased to franchisees under operating lease agreements. Prior to the HPT Transaction, our predecessor owned these sites and leased them to these franchisees. During 2013 and 2012, we acquired the operations at one and four, respectively, of the travel centers that previously had been subleased from us to former franchisees. The current terms of the five remaining sublease agreements expire between June and September 2017. Four of the five subleases have one remaining renewal option for an additional five year period; the fifth sublease has no further renewal option. These leases include rent escalations that are contingent on future events, namely inflation or our investing in capital improvements at these travel centers. Rent revenue from these operating leases totaled $4,869, $5,724 and $5,152 for the years ended December 31, 2013, 2012 and 2011, respectively.
F-26
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
13. Leasing Transactions (Continued)
Future minimum lease payments due to us for the five subleased sites under these operating leases as of December 31, 2013, were as follows:
|
Year ending December 31,
|
Total | |||
|---|---|---|---|---|
|
2014 |
$ | 4,292 | ||
|
2015 |
4,292 | |||
|
2016 |
4,292 | |||
|
2017 |
2,412 | |||
| | | | | |
|
Total |
$ | 15,288 | ||
| | | | | |
| | | | | |
14. Shareholders' Equity
In December 2013 and May 2011, we issued 7,475,000 and 10,000,000, respectively, common shares in public offerings, raising proceeds of approximately $65,102 and $53,135, respectively, after underwriters' discounts and commissions and other costs of the offering.
Share Award Plan. An aggregate of 6,000,000 of our common shares were authorized for issuance under the terms of our Amended and Restated 2007 Equity Compensation Plan, or the Plan. We awarded a total of 619,075, 767,925 and 760,875 common shares under the Plan during the years ended December 31, 2013, 2012 and 2011, respectively, with aggregate market values of $6,626, $3,377 and $3,363, respectively, based on the closing prices of our common shares on the exchange on which they were traded on the dates of the awards. During the years ended December 31, 2013, 2012 and 2011, we recognized total share based compensation expense of $4,183, $2,470 and $2,435, respectively. During the years ended December 31, 2013, 2012 and 2011, the vesting date fair value of common shares that vested was $6,454, $2,554 and $2,301, respectively.
The weighted average grant date fair value of common shares issued in 2013, 2012 and 2011 was $10.70, $4.40 and $4.42, per share, respectively. Shares issued to directors vest immediately and the related compensation expense is recognized on the grant date. Shares issued to others vest in five to ten equal annual installments beginning on the date of grant. The related compensation expense is determined based on the market value of our shares on either the date of grant for employees or the vesting date for nonemployees, as appropriate, with the aggregate value of the granted shares expensed over the related vesting period. As of December 31, 2013, 1,533,300 shares remained available for issuance under the Plan. As of December 31, 2013, there was a total of $10,930 of share based compensation related to unvested shares that will be expensed over a weighted average remaining service period of 5.3 years. The following table sets forth the number and weighted average grant date
F-27
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
14. Shareholders' Equity (Continued)
fair value of unvested common shares and common shares issued under the Plan for the year ended December 31, 2013.
|
|
Number
of Shares |
Weighted Average
Grant Date Fair Value Per Share |
|||||
|---|---|---|---|---|---|---|---|
|
Unvested shares balance as of December 31, 2012 |
1,838,165 | $ | 4.45 | ||||
|
Granted during 2013 |
619,075 | $ | 10.70 | ||||
|
Vested during 2013 |
(609,640 | ) | $ | 5.89 | |||
|
Forfeited/canceled during 2013 |
(5,175 | ) | $ | 4.67 | |||
| | | | | | | | |
|
Unvested shares balance as of December 31, 2013 |
1,842,425 | $ | 6.08 | ||||
| | | | | | | | |
| | | | | | | | |
Accumulated Other Comprehensive Income. Accumulated other comprehensive income at December 31, 2013, 2012 and 2011, consisted of the following:
|
|
Foreign
currency translation adjustment |
Equity interest in
investee's unrealized gain (loss) on investments |
Accumulated
other comprehensive income |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Balance at December 31, 2010 |
$ | 1,193 | $ | — | $ | 1,193 | ||||
|
2011 foreign currency translation adjustment, net of tax of $(55) |
(136 |
) |
— |
(136 |
) |
|||||
|
2011 equity interest in investee's unrealized gain on investments |
— | 77 | 77 | |||||||
| | | | | | | | | | | |
|
Balance at December 31, 2011 |
$ | 1,057 | $ | 77 | $ | 1,134 | ||||
|
2012 foreign currency translation adjustment, net of tax of $55 |
143 |
— |
143 |
|||||||
|
2012 equity interest in investee's unrealized gain on investments |
— | 22 | 22 | |||||||
| | | | | | | | | | | |
|
Balance at December 31, 2012 |
$ | 1,200 | $ | 99 | $ | 1,299 | ||||
|
2013 foreign currency translation adjustment, net of tax of $(133) |
(415 |
) |
— |
(415 |
) |
|||||
|
2013 equity interest in investee's unrealized loss on investments |
— | (50 | ) | (50 | ) | |||||
| | | | | | | | | | | |
|
Balance at December 31, 2013 |
$ | 785 | $ | 49 | $ | 834 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
F-28
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
15. Income Taxes
Our tax provision (benefit) amounts for the years ended December 31, 2013, 2012 and 2011, were $(26,618), $1,491, and $1,379, respectively. The amount for 2013 includes a $29,853 benefit from changes in the valuation allowance that primarily resulted from the reversal of the valuation allowance we historically had maintained with respect to certain of our deferred tax assets. Included in tax expense for the years ended December 31, 2013, 2012 and 2011, were $822, $850 and $950, respectively, for certain state taxes on operating income that are payable without regard to our tax loss carryforwards. During 2012 and 2011, tax expense also included $641 and $429, respectively, related to a noncash deferred liability that arose from the amortization of indefinite lived intangible assets for tax purposes but not for GAAP purposes and foreign currency translation adjustments that were unavailable to offset our deferred tax assets while we maintained a valuation allowance against our net deferred tax assets. Our income tax provision differed from the amounts of provision expected to be calculated at statutory rates primarily due to the impact of the valuation allowance. The following tables present the components of our income tax provision (benefit) and the principal reasons for the difference between our income tax provision (benefit) and the income tax provision (benefit) at the U.S. Federal statutory income tax rate of 35%.
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Current tax provision: |
||||||||||
|
Federal |
$ | 1,836 | $ | — | $ | — | ||||
|
State |
822 | 850 | 950 | |||||||
|
Foreign |
110 | — | — | |||||||
| | | | | | | | | | | |
|
Total current tax provision |
2,768 | 850 | 950 | |||||||
|
Deferred tax provision (benefit): |
||||||||||
|
Federal |
(22,312 | ) | 587 | 383 | ||||||
|
State |
(7,074 | ) | 54 | 46 | ||||||
| | | | | | | | | | | |
|
Total deferred tax provision (benefit) |
(29,386 | ) | 641 | 429 | ||||||
| | | | | | | | | | | |
|
Total tax provision (benefit) |
$ | (26,618 | ) | $ | 1,491 | $ | 1,379 | |||
| | | | | | | | | | | |
| | | | | | | | | | | |
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
U.S. federal statutory rate applied to income before taxes |
$ | 1,752 | $ | 11,791 | $ | 8,734 | ||||
|
State income taxes |
938 | 1,817 | 1,544 | |||||||
|
Nondeductible expenses |
1,643 | 1,564 | 846 | |||||||
|
Benefit of tax credits |
(1,101 | ) | (6,010 | ) | (1,316 | ) | ||||
|
Taxes on foreign income at different than U.S. rate |
19 | 125 | (377 | ) | ||||||
|
Change in valuation allowance |
(29,853 | ) | (8,341 | ) | (9,381 | ) | ||||
|
Other—net |
(16 | ) | 545 | 1,329 | ||||||
| | | | | | | | | | | |
|
Total tax provision (benefit) |
$ | (26,618 | ) | $ | 1,491 | $ | 1,379 | |||
| | | | | | | | | | | |
| | | | | | | | | | | |
F-29
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
15. Income Taxes (Continued)
In measuring our deferred tax assets, we considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or a portion of the deferred tax assets. Judgment is required in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is unnecessary. In order to assess the likelihood of realizing the benefit of these deferred tax assets, we are required to rely on our projections of future income. Because we historically did not have sufficient history of generating taxable income, prior to the fourth quarter of 2013 we did not recognize in our income tax provision the future benefit of all of our deferred tax assets. During the fourth quarter of 2013, based on our continued recent history of generating income, including for the year ended December 31, 2013, and our expectation that we will continue to generate income in future periods, we concluded that it is more likely than not that we will realize most of our deferred tax assets. Accordingly, we reversed the valuation allowance we historically had recognized with respect to our deferred tax assets, other than $957 of valuation allowance related to certain of our deferred tax assets in certain jurisdictions for which we continue to believe it is more likely than not that we will not realize those assets due to the specific circumstances in those jurisdictions.
In 2012 and 2011, we used $20,191 and $49,338, respectively, of our federal net operating loss carryforward generated in 2009 and 2010 to reduce the amount of tax that would otherwise have been payable. As of December 31, 2013, we had net operating loss and tax credit carryforwards of approximately $144,761 and $9,094, respectively, for tax purposes, which will be available to offset
F-30
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
15. Income Taxes (Continued)
future taxable income. If not used, these carryforwards will expire between 2022 and 2033. Significant components of our deferred tax assets and liabilities at December 31, 2013 and 2012, were as follows:
|
|
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
|
Current deferred tax assets: |
|||||||
|
Reserves |
$ | 21,498 | $ | 17,881 | |||
|
Deferred tenant improvements allowance |
2,614 | 2,633 | |||||
|
Straight line rent accrual |
920 | 681 | |||||
|
Tax credits |
524 | — | |||||
|
Tax loss carryforwards |
2,403 | — | |||||
|
Other |
2,796 | 1,558 | |||||
| | | | | | | | |
|
Total current deferred tax asset before valuation allowance |
30,755 | 22,753 | |||||
|
Valuation allowance |
(39 | ) | (5,914 | ) | |||
| | | | | | | | |
|
Total current deferred tax assets |
30,716 | 16,839 | |||||
|
Noncurrent deferred tax assets: |
|||||||
|
Straight line rent accrual |
21,549 | 22,591 | |||||
|
Reserves |
7,092 | 6,310 | |||||
|
Sale-leaseback financing obligation |
33,538 | 33,060 | |||||
|
Asset retirement obligation |
673 | 556 | |||||
|
Tax credits |
— | 457 | |||||
|
Tax loss carryforwards |
5,801 | 7,175 | |||||
|
Deferred tenant improvements allowance |
20,911 | 23,696 | |||||
|
Other |
844 | 24 | |||||
| | | | | | | | |
|
Total noncurrent deferred tax asset before valuation allowance |
90,408 | 93,869 | |||||
|
Valuation allowance |
(918 | ) | (24,921 | ) | |||
| | | | | | | | |
|
Total noncurrent deferred tax assets |
89,490 | 68,948 | |||||
| | | | | | | | |
|
Total deferred tax assets |
120,206 | 85,787 | |||||
|
Noncurrent deferred tax liabilities: |
|||||||
|
Depreciable assets |
(102,008 | ) | (83,993 | ) | |||
|
Intangible assets |
(4,730 | ) | (2,232 | ) | |||
|
Other |
(1,262 | ) | (1,090 | ) | |||
| | | | | | | | |
|
Total |
(108,000 | ) | (87,315 | ) | |||
| | | | | | | | |
|
Net deferred tax assets (liabilities) |
$ | 12,206 | $ | (1,528 | ) | ||
| | | | | | | | |
| | | | | | | | |
F-31
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
15. Income Taxes (Continued)
The following table presents the location in our consolidated balance sheets of the deferred tax assets and liabilities presented in the table above.
|
|
December 31,
2013 |
December 31,
2012 |
|||||
|---|---|---|---|---|---|---|---|
|
Deferred tax amounts are included in: |
|||||||
|
Other current assets |
$ | 30,716 | $ | 16,839 | |||
|
Other noncurrent liabilities |
$ | 18,510 | $ | 18,367 | |||
Changes in, and balances of, our valuation allowance for deferred tax assets were as follows:
|
|
Balance at
Beginning of Year |
Additions/
(Reversals) Recorded in the Provision for Income Taxes |
Other
Changes |
Balance at
End of Year |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31, 2013 |
$ | 30,835 | $ | (29,853 | ) | $ | (25 | ) | $ | 957 | |||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
Year Ended December 31, 2012 |
$ | 39,176 | $ | (8,341 | ) | $ | — | $ | 30,835 | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
Year Ended December 31, 2011 |
$ | 48,557 | $ | (9,381 | ) | $ | — | $ | 39,176 | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Section 382 of the Code, as amended, provides an annual limitation on the utilization of net operating loss and tax credit carryforwards when a corporation has undergone an ownership change as defined by U.S. federal tax law. The annual utilization limitation is an amount equal to the value of the corporation immediately before the ownership change multiplied by the long-term tax-exempt rate as published by the Internal Revenue Service, or IRS, in the month of the ownership change. If it is determined that a company has a "net unrecognized built-in loss" at the time of the ownership change, then certain deductions claimed for the first five years after the ownership change are also subject to the annual limitation. A "net unrecognized built-in loss" is defined as the amount by which the fair market value of the assets immediately before the change in ownership is less than the aggregate adjusted tax basis of the assets at the time of such ownership change. Similar rules apply in most of the states in which we operate.
As a result of an ownership change for federal income tax purposes that we experienced as a result of certain trading in our common shares during 2007, we have not recognized for financial reporting purposes all of our 2007 federal net operating loss carryforward of $49,230 and other tax credit carryforwards of $887 due to the application of ASC 740 to uncertain tax positions, as further described below; $11,753 is available to us for the purpose of offsetting future taxable income through 2032, subject to an annual limitation. In addition, we determined in 2013 that at the time of the ownership change in 2007 it was more likely than not that there was a net unrecognized built-in loss. As a result, an additional $117,440 of our post-2007 net operating losses have not been recognized in our consolidated financial statements due to the application of ASC 740 to uncertain tax positions. As of December 31, 2013 and 2012, the total federal and state income tax benefits not recognized in our deferred tax assets and liabilities in the table above as a result of the ownership change are $58,487 and $58,566, respectively.
F-32
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
15. Income Taxes (Continued)
At December 31, 2013, we had approximately $16,153 of net operating loss carryforwards subject to an annual limitation and will expire in future years through 2032. At December 31, 2013, we also had $524 of tax credits available to reduce future income taxes payable in jurisdictions within the United States, of which $186 have no expiration and the remainder expire through 2033.
As of December 31, 2013, 2012 and 2011, we had unrecognized tax benefits of $59,557, $60,138 and $57,448, respectively. These unrecognized tax benefits relate to uncertainties concerning our value as of the date of the 2007 ownership change, whether certain capital contributions made in the year of the ownership change should be included in the computation of the annual limitation, and uncertainties as to the measurement of the net unrecognized built-in loss and allocation of the net unrecognized built-in loss, if any, to our various assets as of the date of the ownership change. These uncertainties impact the amount of the loss carryforwards that are subject to the annual limitation as well as the annual limitation itself.
The following table summarizes the activity related to our unrecognized tax benefits:
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Balance at beginning of period |
$ | 60,138 | $ | 57,448 | $ | 52,291 | ||||
|
Reductions to current year tax positions |
(502 | ) | (471 | ) | (233 | ) | ||||
|
Additions (reductions) to prior year tax positions |
(79 | ) | 3,161 | 5,390 | ||||||
|
Settlements |
— | — | — | |||||||
|
Lapse of statute of limitations |
— | — | — | |||||||
| | | | | | | | | | | |
|
Balance at end of period |
$ | 59,557 | $ | 60,138 | $ | 57,448 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The amount of the uncertain tax benefits if settled favorably that would have an impact on the effective tax rate is $57,228, $57,280 and $54,119 for the years ended December 31, 2013, 2012 and 2011, respectively. However, with respect to the years ended December 31, 2012 and 2011, the impact would have been fully offset by an increase in the valuation allowance. As of December 31, 2013 and 2012, $57,721 and $60,138, respectively, of the uncertain tax benefits were classified as a reduction to our deferred tax assets and $1,836 and $0 were classified as a noncurrent liability at December 31, 2013 and 2012, respectively. We have not accrued interest or penalties due the existence of net operating loss and credit carryforwards to offset any additional income tax liability. We do not anticipate the amount of the existing unrecognized tax benefits will significantly change in the next twelve months.
We file income tax returns in the United States, various states, and Canada. Our federal income tax returns are subject to tax examinations for the tax years ended December 31, 2010 through December 31, 2013. Our state and Canadian income tax returns are generally subject to examination for the tax years ended December 31, 2009 through December 31, 2013. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted to the extent the carryforwards are claimed in a future year by the IRS and state tax authorities. We have been notified by the IRS that it will examine the Company's federal income tax return for the year ended December, 31, 2012, including the net operating loss carryforwards. We believe we have made adequate provision for income taxes and interest and penalties on unpaid income taxes that may become payable.
F-33
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
16. Equity Investments
Affiliates Insurance Company
At December 31, 2013, we owned 12.5% of Affiliates Insurance Company, or AIC. Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because a majority of our Directors are also directors of AIC. This investment had a carrying value of $5,913 and $5,629 as of December 31, 2013 and 2012, respectively, and is presented in our consolidated balance sheets in other noncurrent assets. During 2013, 2012 and 2011, we recognized income of $334, $316 and $140, respectively, related to this investment. In May 2014, we acquired additional shares of AIC from a former shareholder of AIC, such that our ownership percentage increased to approximately 14.3%. See Note 17 for a further description of our transactions with AIC and our purchase of additional shares of AIC.
Petro Travel Plaza Holdings LLC
We own a 40% interest in Petro Travel Plaza Holdings LLC, or PTP, and operate two travel centers and two convenience stores that PTP owns for which we receive management and accounting fees. This investment is accounted for under the equity method. The carrying value of this investment as of December 31, 2013 and 2012, was $17,672 and $15,332, respectively and was included in other noncurrent assets in our consolidated balance sheets. The carrying value of our investment in PTP exceeded the amount of underlying equity in net assets of PTP by $3,246 as of the date we acquired Petro. This difference arose through the valuation process that was applied to the assets acquired in the Petro Acquisition and is being amortized over a period of 15 years, the estimated useful life of the assets whose values resulted in this difference. The equity income recorded from this investment for the years ended December 31, 2013, 2012 and 2011, was $2,340, $1,561 and $1,029, respectively. See Note 17 for a further description of our transactions with PTP.
The following tables set forth summarized financial information of PTP and do not represent the amounts we have included in our consolidated financial statements in connection with our investment in PTP.
|
|
December 31, | ||||||
|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | |||||
|
Total current assets |
$ | 14,832 | $ | 9,578 | |||
|
Total noncurrent assets |
$ | 44,158 | $ | 44,442 | |||
|
Total current liabilities |
$ | 2,383 | $ | 2,823 | |||
|
Total noncurrent liabilities |
$ | 16,755 | $ | 17,499 | |||
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Total revenues |
$ | 125,804 | $ | 133,962 | $ | 128,344 | ||||
|
Total cost of sales (excluding depreciation) |
$ | 102,766 | $ | 111,894 | $ | 108,278 | ||||
|
Operating income |
$ | 6,707 | $ | 6,047 | $ | 3,908 | ||||
|
Interest expense, net |
$ | (553 | ) | $ | (803 | ) | $ | (1,219 | ) | |
|
Net income |
$ | 6,154 | $ | 5,244 | $ | 2,689 | ||||
F-34
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
16. Equity Investments (Continued)
The locations owned by PTP are encumbered by debt with a balance due of approximately $17,358 as of December 31, 2013. Since we account for our investment in PTP under the equity method of accounting, we have not recorded a liability for this debt. We are not directly liable for this loan, but the carrying value of our investment in this joint venture could be adversely affected if the joint venture defaulted on this debt and the joint venture's property, which is collateral for this loan, was sold. In connection with the loan agreement entered by PTP in 2009, we and our joint venture partner each agreed to indemnify the lender against liability from environmental matters related to PTP's sites.
Fair Value
It is not practicable to estimate the fair value of TA's investment in the equity of AIC or PTP because of the lack of quoted market prices and the inability to estimate current fair value without incurring excessive costs. However, management believes that the carrying amounts of AIC and PTP at December 31, 2013, were not impaired given these companies' overall financial conditions and earnings trends.
17. Related Party Transactions
Governance Guidelines
We have adopted written Governance Guidelines that describe the consideration and approval of any related person transactions. Under these Governance Guidelines, we may not enter into any transaction in which any Director or executive officer, any member of the immediate family of any Director or executive officer or any other related person, has or will have a direct or indirect material interest unless that transaction has been disclosed or made known to our Board of Directors and our Board of Directors reviews and approves or ratifies the transaction by the affirmative vote of a majority of the disinterested Directors, even if the disinterested Directors constitute less than a quorum. If there are no disinterested Directors, the transaction must be reviewed and approved or ratified by both (1) the affirmative vote of a majority of our Board of Directors and (2) the affirmative vote of a majority of our Independent Directors. In determining whether to approve or ratify a transaction, our Board of Directors, or disinterested Directors or Independent Directors, as the case may be, shall act in accordance with any applicable provisions of our limited liability company agreement, consider all of the relevant facts and circumstances and approve only those transactions that are fair and reasonable to us and our shareholders. All related person transactions described below were reviewed and approved or ratified by a majority of the disinterested Directors or otherwise in accordance with our policies and limited liability company agreement, each as described above. In the case of any transaction with us in which any other employee of ours who is subject to our Code of Business Conduct and Ethics and who has a direct or indirect material interest in the transaction, the employee must seek approval from an executive officer who has no interest in the matter for which approval is being requested. Copies of our Governance Guidelines and Code of Business Conduct and Ethics are available on our website, www.tatravelcenters.com.
Relationship with HPT
HPT was our parent company until 2007 and is our principal landlord and our largest shareholder. We were created as a separate public company in 2007 as a result of a spin off from HPT. As of
F-35
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
December 31, 2013, HPT owned 3,420,000 of our common shares (which included the 880,000 shares of our common shares that HPT purchased from the underwriters in our public offering that we completed in December 2013), representing approximately 9.1% of our outstanding common shares. One of our Managing Directors, Mr. Barry Portnoy, is a managing trustee of HPT. Mr. Barry Portnoy's son, Mr. Adam Portnoy, is also a managing trustee of HPT, and Mr. Barry Portnoy's son-in-law, Mr. Ethan Bornstein, is an executive officer of HPT. Our other Managing Director, Mr. Thomas O'Brien, who is also our President and Chief Executive Officer, was a former executive officer of HPT. One of our Independent Directors, Mr. Arthur Koumantzelis, was an independent trustee of HPT prior to our spin-off from HPT.
We have two leases with HPT, the TA Lease and the Petro Lease, pursuant to which we lease 185 properties from HPT. Our TA Lease is for 145 properties that we operate primarily under the TA brand. Our Petro Lease is for 40 properties that we operate under the Petro brand. The TA Lease expires on December 31, 2022. The Petro Lease expires on June 30, 2024, and may be extended by us for up to two additional periods of 15 years each. We have the right to use the "TA", "TravelCenters of America" and other trademarks, which are owned by HPT, during the term of the TA Lease.
The HPT Leases are "triple net" leases that require us to pay all costs incurred in the operation of the leased properties, including personnel, utilities, acquiring inventories, providing services to customers, insurance, paying real estate and personal property taxes, environmental related expenses, underground storage tank removal costs and ground lease payments at those properties at which HPT leases the property from the owner and subleases it to us. We also are required generally to indemnify HPT for certain environmental matters and for liabilities which arise during the terms of the leases from ownership or operation of the leased properties. In addition, we are obligated to pay HPT at lease expiration an amount equal to an estimate of the cost of removing underground storage tanks on the leased properties.
As amended by the Amendment Agreement that we entered into with HPT in January 2011, or the Amendment Agreement, which is further described below, the TA Lease required us to pay minimum rent to HPT of $135,139 per year for the period from January 1, 2011 through January 31, 2012, and $140,139 per year for the period from February 1, 2012 through December 31, 2022. These amounts are exclusive of any increase in minimum rent as a result of subsequent amendments and, as described below, as a result of HPT's purchasing improvements to the leased TA properties. During 2013, 2012 and 2011 our minimum annual rent under the TA Lease increased by $4,730, $4,656 and $4,184, respectively, due to such purchases. As amended by the Amendment Agreement, the Petro Lease required us to pay minimum rent to HPT of $54,160 per year through June 30, 2024. This amount is exclusive of any increase in minimum rent to HPT as a result of subsequent amendments and, as described below, as a result of HPT's purchasing improvements to the leased Petro properties. During 2013, 2012 and 2011 our minimum annual rent under the Petro Lease increased by $2,403, $1,868 and $1,691, respectively, due to such purchases. Taking into account the increases in minimum rents due to both HPT's purchasing improvements at the leased properties and the lease amendments during 2013 described below, as of December 31, 2013, our annual minimum lease payments due to HPT under the TA Lease and the Petro Lease were $159,333 and $60,227, respectively.
Effective January 2012 and 2013, we began to incur percentage rent payable to HPT under the TA Lease and the Petro Lease, respectively. In each case, the percentage rent equals 3% of increases in
F-36
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
nonfuel gross revenues and 0.3% of increases in gross fuel revenues at the leased properties over base amounts. The increases in percentage rents attributable to fuel revenues are subject to a maximum each year calculated by reference to changes in the consumer price index. Also, as discussed below, HPT has agreed to waive payment of the first $2,500 of percentage rent that may become due under our Petro Lease; HPT waived $366 of percentage rent under our Petro Lease for the year ended December 31, 2013, pursuant to that waiver. The total amount of percentage rent (which is net of the waived amount) that we incurred during the years ended December 31, 2013 and 2012, was $2,050 and $1,465, respectively.
Under the HPT Leases, we may request that HPT purchase approved amounts for renovations, improvements and equipment at the leased properties in return for increases in our minimum annual rent according to the following formula: the minimum rent per year will be increased by an amount equal to the amount paid by HPT multiplied by the greater of (i) 8.5% or (ii) a benchmark U.S. Treasury interest rate plus 3.5%. During 2013, 2012 and 2011, pursuant to the terms of the HPT Leases, we sold to HPT $83,912, $76,754 and $69,122 of improvements we previously made to properties leased from HPT, and, as a result, our minimum annual rent payable to HPT increased by approximately $7,133, $6,524 and $5,875, respectively. At December 31, 2013, our property and equipment balance included $28,732 of improvements that we expect to request that HPT purchase for an increase in rent in the future; however, HPT is not obligated to purchase these improvements. In March 2014, we sold to HPT $6,063 of improvements for an increase in minimum annual rent payable to HPT of $515.
The following table sets forth the amounts of minimum lease payments required under the HPT Leases as of December 31, 2013, in each of the years shown.
|
Year ending December 31,
|
Minimum
Rent (1) |
Rent for Ground
Leases Acquired by HPT (1) |
Total Minimum
Lease Payments Due to HPT (1) |
Rent for Ground
Leases Subleased from HPT (1) |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 |
$ | 214,473 | $ | 5,087 | $ | 219,560 | $ | 8,770 | |||||
|
2015 |
214,473 | 4,932 | 219,405 | 8,257 | |||||||||
|
2016 |
214,473 | 4,983 | 219,456 | 6,375 | |||||||||
|
2017 |
214,473 | 5,047 | 219,520 | 5,528 | |||||||||
|
2018 |
214,473 | 4,915 | 219,388 | 4,899 | |||||||||
|
2019 |
214,473 | 4,508 | 218,981 | 3,087 | |||||||||
|
2020 |
214,473 | 2,518 | 216,991 | 2,435 | |||||||||
|
2021 |
214,473 | 1,563 | 216,036 | 2,197 | |||||||||
|
2022 (2) |
346,079 | — | 346,079 | 1,483 | |||||||||
|
2023 |
60,227 | — | 60,227 | 846 | |||||||||
|
2024 (3) |
82,424 | — | 82,424 | 618 | |||||||||
F-37
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
In 2008, we entered into a rent deferral agreement with HPT, pursuant to which we were permitted to defer up to $150,000 of rent payable to HPT. We were not permitted to defer any additional amounts of rent after December 31, 2010. As of December 31, 2010, we had deferred $150,000 of rent, which remained outstanding as of December 31, 2013. The deferral agreement also included a prohibition on share repurchases and dividends by us while any deferred rent remains unpaid and provided that all deferred rent and interest thereon, at 1% per month, would become immediately due and payable by us to HPT if certain events described in that agreement occurred, including a change of control of us (as defined in the agreement) while any deferred rent remains unpaid. Also, in connection with the deferral agreement, we entered into a registration rights agreement with HPT, which provides HPT with certain rights to require us to conduct a registered public offering with respect to our common shares issued to HPT pursuant to the deferral agreement, which rights continue through the date that is twelve months following the latest of the expiration of the terms of the TA Lease and the Petro Lease.
In January 2011, we and HPT entered the Amendment Agreement that amended the TA Lease, the Petro Lease and our 2008 rent deferral agreement with HPT. This Amendment Agreement provided for the following:
RMR provides management services to both us and HPT and, as noted above, there are other current and historical relationships between us and HPT. Accordingly, the terms of the Amendment Agreement were negotiated and approved by special committees of our Independent Directors and HPT's independent trustees, none of whom are directors or trustees of the other company, and each special committee was represented by separate counsel.
F-38
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
The following table summarizes the various amounts related to the HPT Leases and other lessors that are reflected in real estate rent expense in our consolidated statements of income and comprehensive income.
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Cash payments for rent under the HPT Leases and interest on the deferred rent obligation |
$ | 216,659 | $ | 207,653 | $ | 196,364 | ||||
|
Change in accrued estimated percentage rent |
327 | (11 | ) | — | ||||||
|
Adjustments to recognize expense on a straight line basis |
(1,734 | ) | (2,664 | ) | 3,021 | |||||
|
Less sale-leaseback financing obligation amortization |
(1,644 | ) | (2,089 | ) | (2,046 | ) | ||||
|
Less portion of rent payments recognized as interest expense |
(7,400 | ) | (7,330 | ) | (7,390 | ) | ||||
|
Less interest paid on deferred rent |
— | — | (1,450 | ) | ||||||
|
Less deferred tenant improvements allowance amortization |
(6,769 | ) | (6,769 | ) | (6,769 | ) | ||||
|
Amortization of deferred gain on sale-leaseback transactions |
(354 | ) | (103 | ) | — | |||||
| | | | | | | | | | | |
|
Rent expense related to HPT Leases |
199,085 | 188,687 | 181,730 | |||||||
|
Rent paid to others (1) |
10,206 | 9,915 | 9,764 | |||||||
|
Adjustments to recognize expense on a straight line basis for other leases |
29 | 325 | 304 | |||||||
| | | | | | | | | | | |
|
Total real estate rent expense |
$ | 209,320 | $ | 198,927 | $ | 191,798 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
F-39
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
The following table summarizes the various amounts related to the HPT Leases that are included in our consolidated balance sheets.
During 2012, the subleases at four of these properties were terminated and we began operating these properties, qualifying the related properties for sale-leaseback accounting. Accordingly, we reduced our property and equipment balance by $22,229 and our sale-leaseback financing obligation balance by $24,646, resulting in a deferred gain of $2,417. In October 2013, the sublease at another one of these properties was terminated and we began to operate that property, qualifying it for sale-leaseback accounting. Accordingly, we reduced our property and equipment
F-40
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
balance by $2,030 and our sale-leaseback financing obligation balance by $2,463, resulting in a deferred gain of $433. See footnote (3) below for further discussion regarding the deferred gains.
On April 15, 2013, we entered an agreement with Equilon Enterprises LLC doing business as Shell Oil Products US, or Shell, pursuant to which Shell has agreed to construct a network of natural gas fueling lanes at up to 100 of our travel centers located along the U.S. interstate highway system, including travel centers we lease from HPT. In connection with that agreement, on April 15, 2013, we and HPT amended the HPT Leases to revise the calculation of percentage rent payable by us under the HPT Leases, with the intended effect that the amount of percentage rent would be unaffected by the type of fuel sold, whether diesel fuel or natural gas. That amendment also made certain administrative changes to the terms of the HPT Leases. Also on that date, in order to facilitate our agreement with Shell, HPT entered into a subordination, non-disturbance and attornment agreement with Shell, whereby HPT agreed to recognize Shell's license and other rights with respect to the natural gas fueling lanes at our HPT leased travel centers on certain conditions and in certain circumstances.
F-41
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
On July 1, 2013, HPT purchased land that was previously leased by HPT from a third party and subleased to us under the TA Lease. Effective as of that date, rents due to that third party and our paying of those rents of approximately $545 annually on behalf of HPT under the terms of the TA Lease ceased. Also on that date, we and HPT amended the TA Lease to reflect our direct lease from HPT of that land and certain minor properties adjacent to other existing properties included in the TA Lease that also had been purchased by HPT, and to increase annual rent due under the TA Lease by $537, which was 8.5% of HPT's investment.
On December 23, 2013, HPT purchased property adjacent to a property we lease from HPT under the Petro Lease. Effective as of that date, we and HPT amended the Petro Lease to add that property to that lease and to increase annual rent due under the Petro Lease by $105, which was 8.5% of HPT's investment.
On August 13, 2013, the travel center located in Roanoke, VA that we leased from HPT under the TA Lease was taken by eminent domain proceedings brought by the Virginia Department of Transportation, or VDOT, in connection with planned highway construction. The TA Lease provides that the annual rent payable by us is reduced by 8.5% of the amount of the proceeds HPT receives from the taking or, at HPT's option, the fair market value rent of the property on the commencement date of the TA Lease. In January 2014, HPT received proceeds from VDOT of $6,178, which is a portion of VDOT's estimate of the value of the property, and as a result our annual rent under the TA Lease was reduced by $525 effective January 6, 2014. We and HPT intend to challenge VDOT's estimate of the property's value. HPT has entered a lease agreement with VDOT to lease this property through August 2014 for $40 per month. We entered into a sublease for this property with HPT and we plan to continue operating it as a travel center through August 2014, and under the terms of the TA Lease we will be responsible to pay this ground lease rent.
Relationship with RMR
RMR provides business management and shared services to us pursuant to a business management and shared services agreement, or our business management agreement. One of our Managing Directors, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR. Mr. Barry Portnoy's son, Mr. Adam Portnoy, is an owner of RMR and serves as President, Chief Executive Officer and a director of RMR. Our other Managing Director, Mr. Thomas O'Brien, who is also our President and Chief Executive Officer, Mr. Andrew Rebholz, our Executive Vice President, Chief Financial Officer and Treasurer, and Mr. Mark Young, our Executive Vice President and General Counsel, are officers of RMR. RMR provides management services to HPT and HPT's executive officers are officers of RMR. Two of our Independent Directors also serve as independent directors or independent trustees of other public companies to which RMR or its affiliates provide management services. Mr. Barry Portnoy serves as a managing director or managing trustee of a majority of those companies and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies. In addition, officers of RMR serve as officers of those companies.
Because at least 80% of Messrs. O'Brien's, Rebholz's and Young's business time is devoted to services to us, 80% of Messrs. O'Brien's, Rebholz's and Young's total cash compensation (that is, the combined base salary and cash bonus paid by us and RMR) was paid by us and the remainder was paid by RMR (for Mr. Young, this arrangement was not in place prior to October 2011). Messrs. O'Brien,
F-42
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
Rebholz and Young are also eligible to participate in certain RMR benefit plans. We believe the compensation we paid to these officers reasonably reflected their division of business time; however, periodically, these individuals may divide their business time differently than they do currently and their compensation from us may become disproportionate to this division.
Our Board of Directors has given our Compensation Committee, which is comprised exclusively of our Independent Directors, authority to act on our behalf with respect to our business management agreement with RMR. The charter of our Compensation Committee requires the committee to annually review the terms of the business management agreement, evaluate RMR's performance under this agreement and determine whether to renew, amend or terminate the business management agreement.
Pursuant to the business management agreement, RMR 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, advice and supervision with respect to 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 our daily business activities, including legal and tax matters, human resources, insurance programs, management information systems and the like. Under our business management agreement, we pay RMR an annual business management fee equal to 0.6% of the sum of our gross fuel margin (which is our fuel sales revenues less our cost of fuel sales) plus our total nonfuel revenues. The fee is payable monthly based on the prior month's margins and revenues. This fee totaled $10,758, $10,025 and $9,435 for the years ended December 31, 2013, 2012 and 2011, respectively. These amounts are included in selling, general and administrative expenses in our consolidated statements of income and comprehensive income.
RMR also provides internal audit services to us in return for our share of the total internal audit costs incurred by RMR for us and other companies managed by RMR and its affiliates, which amounts are subject to approval by our Compensation Committee. Our Audit Committee appoints our Director of Internal Audit. Our share of RMR's costs of providing this internal audit function was approximately $208, $193 and $240 for the years ended December 31, 2013, 2012 and 2011, respectively. These allocated costs are in addition to the business management fees paid to RMR.
The current term of our business management agreement with RMR ends on December 31, 2014, and automatically renews for successive one year terms unless we or RMR give notice of non-renewal before the end of an applicable term. We or RMR may terminate the business management agreement upon 60 days prior written notice. RMR may also terminate the business management agreement upon five business days' notice if we undergo a change of control, as defined in the business management agreement.
Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, including HPT. The fact that RMR has responsibilities to other entities, including our largest landlord, HPT, could create conflicts; and in the event of such conflicts, our business management agreement allows RMR to act on its own behalf and on behalf of HPT or such other entity rather than on our behalf.
F-43
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
We are also generally responsible for all of our expenses and certain expenses incurred by RMR on our behalf. Pursuant to our business management agreement, RMR may from time to time negotiate on our behalf with certain third party vendors and suppliers for the procurement of services to us. As part of this arrangement, we may enter agreements with RMR and other companies to which RMR provides management services for the purpose of obtaining more favorable terms from such vendors and suppliers.
In July 2011, we entered a property management agreement with RMR under which RMR provides building management services to us for our headquarters building. The charter of our Compensation Committee requires that annually the committee review the property management agreement, evaluate RMR's performance under this agreement and renew, amend or terminate this agreement. We paid RMR $143, $132 and $58 for property management services at our headquarters building for the years ended December 31, 2013, 2012 and 2011, respectively. These amounts are included in selling, general and administrative expenses in our consolidated statements of income and comprehensive income.
Under the Plan, we grant restricted shares to certain employees of RMR who are not also Directors, officers or employees of ours. We granted a total of 48,950, 59,725 and 61,350 shares with an aggregate value of $523, $260 and $260 to such persons in 2013, 2012 and 2011, respectively, based upon the closing price of our common shares on the NYSE (for grants made in 2013) or NYSE MKT (for grants made in 2012 and 2011) on the dates of the grants. One fifth of those shares vested on the grant dates and one fifth vests on each of the next four anniversaries of the grant dates. These share grants to RMR employees are in addition to both the fees we pay to RMR and our share grants to our Directors, officers and employees. On occasion, we have entered into arrangements with former employees of ours or RMR in connection with the termination of their employment with us or RMR, providing for the acceleration of vesting of shares previously granted to them under the Plan. Additionally, each of our President and Chief Executive Officer, Executive Vice President, Chief Financial Officer and Treasurer, and Executive Vice President and General Counsel received grants of restricted shares of other companies to which RMR provides management services, including HPT, in their capacities as officers of RMR.
Other Relationships with HPT and RMR
In connection with our spin off from HPT in 2007, we entered a transaction agreement with HPT and RMR, pursuant to which we granted HPT a right of first refusal to purchase, lease, mortgage or otherwise finance any interest we own in a travel center before we sell, lease, mortgage or otherwise finance that travel center to or with another party, and we granted HPT and any other company managed by RMR a right of first refusal to acquire or finance any real estate of the types in which they invest before we do. We also agreed that for so long as we are a tenant of HPT we will not permit: the acquisition by any person or group of beneficial ownership of 9.8% or more of the voting shares or the power to direct the management and policies of us or any of our subsidiary tenants or guarantors under our leases with HPT; the sale of a material part of our assets or of any such tenant or guarantor; or the cessation of our continuing Directors to constitute a majority of our Board of Directors or any such tenant or guarantor. Also, we agreed not to take any action that might
F-44
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
reasonably be expected to have a material adverse impact on HPT's ability to qualify as a REIT and to indemnify HPT for any liabilities it may incur relating to our assets and business.
In connection with a shareholder derivative litigation on behalf of us against members of our Board of Directors, HPT and RMR that we settled in 2011, we paid $119 to HPT and $51 to RMR pursuant to our indemnity obligations under our limited liability company agreement and our agreements with HPT and RMR.
Relationship with AIC
We, RMR and six other companies to which RMR provides management services each owned 12.5% of AIC, an Indiana insurance company, as of December 31, 2013. A majority of our Directors and most of the trustees and directors of the other AIC shareholders currently serve on the board of directors of AIC. RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. Our Governance Guidelines provide that any material transaction between us and AIC shall be reviewed, authorized and approved or ratified by the affirmative votes of both a majority of our Board of Directors and a majority of our Independent Directors.
As of December 31, 2013, we have invested $5,229 in AIC since its formation in 2008. Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC as a majority of our Directors are also directors of AIC. Our investment in AIC had a carrying value of $5,913 and $5,629 as of December 31, 2013 and 2012, respectively, which amounts are included in other noncurrent assets on our consolidated balance sheets. We recognized income of $334, $316 and $140, related to our investment in AIC for 2013, 2012 and 2011, respectively. In June 2013, we and the other shareholders of AIC purchased a one-year property insurance policy providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. We paid AIC a premium, including taxes and fees, of $2,743 in connection with that policy, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in the policy. Our annual premiums for this property insurance in 2012 and 2011 were $3,183 and $1,664, respectively, before adjustments made for acquisitions or dispositions we made during these periods. We may determine to renew our participation in this program in June 2014 We periodically consider the possibilities for expanding our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange. We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so. By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by reducing our insurance expenses and by realizing our pro rata share of any profits of this insurance business. See Note 16 for a further description of our investment in AIC.
On March 25, 2014, as a result of the removal, without cause, of all of the trustees of CommonWealth REIT, or CWH, CWH underwent a change in control, as defined in the shareholders agreement among us, the other shareholders of AIC and AIC. As a result of that change in control and in accordance with the terms of the shareholders agreement, we and the other non-CWH shareholders exercised our rights to purchase shares of AIC that CWH then owned. Pursuant to that exercise, on
F-45
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
17. Related Party Transactions (Continued)
May 9, 2014, we and those other shareholders purchased pro rata the AIC shares CWH owned. In accordance with that exercise, we purchased 2,857 AIC shares from CWH for $825. Following these purchases, we and the other remaining six shareholders each owned approximately 14.3% of AIC.
Relationship with PTP
PTP is a joint venture between us and Tejon Development Corporation, which owned the land on which PTP has built two travel centers and two convenience stores in California. We own a 40% interest in PTP and operate the two travel centers and two convenience stores PTP owns for which we receive management and accounting fees. The carrying value of our investment in PTP as of December 31, 2013 and 2012, was $17,672 and $15,332, respectively. During each of the years ended December 31, 2013, 2012 and 2011, we recognized management and accounting fee income of $800. At December 31, 2013 and 2012, we had a net payable to PTP of $1,147 and $575, respectively. We recognized income of $2,340, $1,561 and $1,029 during the years ended December 31, 2013, 2012 and 2011, respectively, related to this investment. During 2012, we received distributions from PTP totaling $4,800. These distributions represented a return on our investment and, accordingly, are included as operating activities in the accompanying consolidated statements of cash flows. See Note 16 for a further description of our investment in PTP.
18. Commitments and Contingencies
Purchase Commitments
As of December 31, 2013, we had entered an agreement to acquire an additional travel center property for $3,000. We completed this acquisition in January 2014.
Guarantees
In the normal course of our business we periodically enter into agreements that contain guarantees or indemnification provisions. While we cannot estimate the maximum amount to which we may be exposed under these agreements, we do not believe that any potential guaranty or indemnification is likely to have a material adverse effect on our consolidated financial position or results of operations.
We offer a warranty of our workmanship in our truck maintenance and repair facilities, but we believe the annual warranty expense and corresponding liability are not material to us.
Environmental Matters
Extensive environmental laws regulate our operations and properties. These laws may require us to investigate and clean up hazardous substances, including petroleum or natural gas products, released at our owned and leased properties. Governmental entities or third parties may hold us liable for property damage and personal injuries, and for investigation, remediation and monitoring costs incurred in connection with any contamination and regulatory compliance. We use both underground storage tanks and above ground storage tanks to store petroleum products, natural gas and waste at our locations. We must comply with environmental laws regarding tank construction, integrity testing, leak detection and monitoring, overfill and spill control, release reporting and financial assurance for corrective action in the event of a release. At some locations we must also comply with environmental laws relative to
F-46
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
18. Commitments and Contingencies (Continued)
vapor recovery or discharges to water. Under the terms of our leases, we generally have agreed to indemnify HPT for any environmental liabilities related to properties that we lease from HPT and we are required to pay all environmental related expenses incurred in the operation of the properties. Under our agreement with Shell, we have agreed to indemnify Shell and its affiliates from certain environmental liabilities incurred with respect to our travel centers where natural gas fueling lanes are installed.
From time to time we have received, and in the future likely will receive, notices of alleged violations of environmental laws or otherwise have become or will become aware of the need to undertake corrective actions to comply with environmental laws at our locations. Investigatory and remedial actions were, and regularly are, undertaken with respect to releases of hazardous substances at our locations. In some cases we received, and may receive, contributions to partially offset our environmental costs from insurers, from state funds established for environmental clean up associated with the sale of petroleum products or from indemnitors who agreed to fund certain environmental related costs at locations purchased from those indemnitors. To the extent we incur material amounts for environmental matters for which we do not receive insurance or other third party reimbursement or for which we have not previously recorded a reserve, our operating results may be materially adversely affected. In addition, to the extent we fail to comply with environmental laws and regulations, or we become subject to costs and requirements not similarly experienced by our competitors, our competitive position may be harmed.
At December 31, 2013, we had a gross accrued liability of $7,487 for environmental matters as well as a receivable for expected recoveries of certain of these estimated future expenditures of $1,611, resulting in an estimated net amount of $5,876 that we expect to need to fund in the future. We do not have a reserve for unknown current or potential future environmental matters. Accrued liabilities related to environmental matters are recorded on an undiscounted basis because of the uncertainty associated with the timing of the related future payments. We cannot precisely know the ultimate costs we will incur in connection with currently known or future potential environmental related violations, corrective actions, investigation and remediation; however, based on our current knowledge we do not expect that our net costs for such matters to be incurred at our locations, individually or in the aggregate, would be material to our financial condition or results of operations.
We have insurance of up to $10,000 per incident and up to $40,000 in the aggregate for certain environmental liabilities not known by us at the time the policies were issued, subject, in each case, to certain limitations and deductibles. However, we can provide no assurance that we will be able to maintain similar environmental insurance coverage in the future on acceptable terms.
F-47
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
18. Commitments and Contingencies (Continued)
The following table sets forth the various amounts regarding environmental matters, as of December 31, 2013 and 2012, recorded in our consolidated balance sheets as either current or noncurrent assets or liabilities.
|
|
December 31, | ||||||
|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | |||||
|
Gross liability for environmental matters: |
|||||||
|
Included in other current liabilities |
$ | 5,639 | $ | 7,988 | |||
|
Included in other noncurrent liabilities |
1,848 | 2,367 | |||||
| | | | | | | | |
|
Total recorded liabilities |
7,487 | 10,355 | |||||
|
Less-expected recoveries of future expenditures, included in other noncurrent assets |
(1,611 | ) | (2,718 | ) | |||
| | | | | | | | |
|
Net estimated environmental costs to be funded by future operating cash flows |
$ | 5,876 | $ | 7,637 | |||
| | | | | | | | |
| | | | | | | | |
While the costs of our environmental compliance in the past have not had a material adverse impact on us, it is impossible to predict the ultimate effect changing circumstances and changing environmental laws may have on us in the future or the ultimate outcome of matters currently pending. We cannot be certain that 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 we discover additional environmental issues, or if government agencies impose additional environmental requirements, increased environmental compliance or remediation expenditures may be required, which could have a material adverse effect on us. In addition, legislation and regulation regarding climate change, including greenhouse gas emissions, and other environmental matters and market reaction to any such legislation or regulation or to climate change concerns, may decrease the demand for our major product, diesel fuel, and may require us to expend significant amounts. For instance, federal and state governmental requirements addressing emissions from trucks and other motor vehicles, such as the U.S. Environmental Protection Agency's gasoline and diesel sulfur control requirements that limit the concentration of sulfur in motor vehicle gasoline and diesel fuel, as well as President Obama's recent order that his administration develop and implement new fuel efficiency standards for medium and heavy duty commercial trucks by March 2016, could negatively impact our business and has caused us to add certain services and provide certain products to our customers. Further, legislation and regulations that limit carbon emissions also may cause our energy costs at our locations to increase.
As of December 31, 2013, the estimated gross amounts of the cash outlays by year related to the matters for which we have accrued an environmental liability are $5,639, $836, $348, $348 and $316 for the years 2014, 2015, 2016, 2017 and 2018, respectively. These cash expenditure amounts do not reflect any amounts for the expected recoveries as we cannot accurately predict the timing of those cash receipts. These estimated future gross cash disbursements are subject to change based on, among other things, changes in the underlying remediation activities and changes in the regulatory environment.
F-48
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
18. Commitments and Contingencies (Continued)
Legal Proceedings
In May 2010, the California Attorney General commenced litigation on behalf of the California State Water Resources Control Board, or the State Water Board, against various defendants, including us, HPT TA Properties Trust (which is a subsidiary of HPT), PTP and Tejon in the Superior Court of California for Alameda County seeking unspecified civil penalties and injunctive relief for alleged violations of underground storage tank laws and regulations at various facilities in Kern and Merced Counties, which alleged violations do not include release of contamination into the environment. On July 26, 2010, the California Attorney General voluntarily dismissed this litigation against us and the other named defendants, and on September 2, 2010, refiled its complaint against the same defendants in the Superior Court of California for Merced County, or the Superior Court, seeking unspecified civil penalties and injunctive relief. We have denied the material allegations in the complaint and asserted various affirmative defenses. Under the TA Lease and our expired lease agreement with Tejon for a travel center that was closed in 2009, we are liable to indemnify HPT TA Properties Trust and Tejon for any liabilities, costs and expenses they incur in connection with this litigation. In February 2014, the parties reached an agreement to settle these claims for a cash payment of $1,800, suspended penalties of $1,000 that may become payable by us in the future if, prior to March 2019, we fail to comply with specified underground storage tank laws and regulations; and our agreement to invest, prior to March 2018, up to $2,000 of verified costs that are directly related to the development and implementation of a comprehensive California Enhanced Environmental Compliance Program for the underground storage tank systems at all of our California facilities that is above and beyond minimum requirements of California law and regulations related to underground storage tank systems. During 2013, we incurred $206 of such verified compliance costs that qualify towards the $2,000 requirement. To the extent that we do not incur the full $2,000 of eligible environmental compliance costs by March 2018, the difference between the amount we incur and $2,000 will be payable to the State Water Board. The parties submitted to the Superior Court for approval a form of Proposed Final Consent Judgment and Permanent Injunction, which also included injunctive relief provisions requiring that we comply with certain California environmental laws and regulations applicable to underground storage tank systems and the Superior Court approved the related Proposed Final Consent Judgment and Permanent Injunction on February 20, 2014. As of December 31, 2013, we have a liability of $3,594 recorded with respect to this matter. The expense related to this matter was recognized in prior years. We believe that the probability of triggering any portion of the $1,000 of suspended penalties is remote and have not recognized a loss or a liability for that amount, but it is possible that such events will occur and some portion or all of the $1,000 may become payable and would be charged to expense at the time of that future event.
Beginning in December 2006, a series of class action lawsuits was filed against numerous companies in the petroleum industry, including our predecessor and our subsidiaries, in U.S. district courts in over 20 states. Major petroleum refiners and retailers were named as defendants in one or more of these lawsuits. The plaintiffs in the lawsuits generally alleged that they are retail purchasers who purchased motor fuel at temperatures greater than 60 degrees Fahrenheit at the time of sale. One theory alleged that the plaintiffs purchased smaller amounts of motor fuel than the amount for which defendants charged them because the defendants measured the amount of motor fuel they delivered by volumes which, at higher temperatures, contain less energy. A second theory alleged that fuel taxes are calculated in temperature adjusted 60 degree gallons and are collected by governmental agencies from
F-49
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
18. Commitments and Contingencies (Continued)
suppliers and wholesalers, who are reimbursed in the amount of the tax by the defendant 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 unjust benefit because the customers pay more tax than the retailer pays. A third theory alleged that all purchasers of fuel at any temperature are harmed because the defendants do not use equipment that adjusts for temperature or disclose the temperature of fuel being sold, and thereby deprive customers of information they allegedly require to make an informed purchasing decision. All of these cases were consolidated in the U.S. District Court for the District of Kansas pursuant to multi-district litigation procedures. On May 28, 2010, that Court ruled that, with respect to two cases originally filed in the U.S. District Court for the District of Kansas, it would grant plaintiffs' motion to certify a class of plaintiffs seeking injunctive relief (implementation of fuel temperature equipment and/or posting of notices regarding the effect of temperature on fuel). On January 19, 2012, the Court amended its prior ruling, and certified a class with respect to plaintiffs' claims for damages as well. A TA entity was named in one of those two Kansas cases, but the Court ruled that the named plaintiffs were not sufficient to represent a class as to TA. TA was thereafter dismissed from the Kansas case. Several defendants in the Kansas cases, including major petroleum refiners, have entered into multi-state settlements. Following a September 2012 trial against the remaining defendants in the Kansas cases, the jury returned a unanimous verdict in favor of those Kansas defendants, and the judge likewise ruled in the Kansas defendants' favor on the sole non-jury claim. In early 2013, the Court announced its intention to remand three cases originally filed in federal district courts in California back to their original courts. On April 9, 2013, the Court granted plaintiffs' motion for class certification in connection with the California claims in the California cases. On August 14, 2013, the Court granted summary judgment for the defendants with respect to all California claims in the California cases, and in February 2014, the U.S. District Court for the Northern District of California entered judgment in favor of the defendants with respect to those claims. The plaintiffs in the California cases all dismissed their non-California claims against TA, except for one individual plaintiff, who continues to assert claims based on purchases of fuel in states other than California. In January 2014, TA was dismissed with prejudice in all the non-California cases in all states in which it remained a defendant at that time. Therefore, the only case in which TA remains a defendant is the case in which one remaining plaintiff is pursuing non-California claims. We believe there are substantial factual and legal defenses to the allegations made in this remaining case. While we do not expect that we will incur a material loss in this case, we cannot estimate our ultimate exposure to loss or liability, if any, related to the lawsuit.
On April 6, 2009, five independent truck stop owners, who are plaintiffs in a purported class action suit against Comdata Network, Inc., or Comdata, in the U.S. District Court for the Eastern District of Pennsylvania, filed a motion to amend their complaint to add us as a defendant, which was allowed on March 25, 2010. The amended complaint also added as defendants Ceridian Corporation, Pilot Travel Centers LLC and Love's Travel Stops & Country Stores, Inc. Comdata markets fuel cards which are used for payments by trucking companies at truck stops. The amended complaint alleged antitrust violations arising out of Comdata's contractual relationships with truck stops in connection with its fuel cards. The plaintiffs have sought unspecified damages and injunctive relief. On March 24, 2011, the Court dismissed the claims against TA in the amended complaint, but granted plaintiffs leave to file a new amended complaint. Four independent truck stop owners, as plaintiffs, filed a new amended
F-50
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
18. Commitments and Contingencies (Continued)
complaint against us on April 21, 2011, repleading their claims. On May 6, 2011, we renewed our motion to dismiss the complaint with prejudice while discovery otherwise proceeded. The Court denied our renewed motion to dismiss on March 29, 2012, and we filed an answer to the complaint on April 30, 2012. During December 2013, we entered into settlement discussions among the co-defendants and the plaintiffs that continued into 2014. On February 28, 2014, we entered into a Definitive Master Class Settlement Agreement with the plaintiffs, or the settlement agreement. The settlement agreement provides for the Company and the co-defendants to pay an aggregate of $130,000 to a settlement fund for class members, including $10,000 from us, in exchange for the dismissal with prejudice of the litigation and the unconditional release of all claims that class members brought or could have brought against us and the co-defendants with respect to the litigation and related actions. The settlement agreement is subject to the approval of the Court. On March 17, 2014, the Court preliminarily approved the settlement agreement, authorized notice to the class and scheduled a hearing for July 14, 2014, to consider the final approval of the settlement. We recognized a $10,000 loss in connection with this matter in December 2013 and made the cash payment in March 2014.
In addition to the legal proceedings referenced above, we are routinely involved in various other legal and administrative proceedings, including tax audits, incidental to the ordinary course of our business, none of which we expect, individually or in the aggregate, to have a material adverse effect on our business, financial condition, results of operations or cash flows.
19. Other Information
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Operating expenses included the following: |
||||||||||
|
Repairs and maintenance expenses |
$ | 40,946 | $ | 38,893 | $ | 35,871 | ||||
|
Advertising expenses |
$ | 22,748 | $ | 20,563 | $ | 18,768 | ||||
|
Taxes other than payroll and income taxes |
$ | 17,463 | $ | 15,818 | $ | 16,252 | ||||
Interest expense consisted of the following:
|
|
Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | |||||||
|
Interest related to our Senior Notes and Credit Facility |
$ | 10,537 | $ | 2,096 | $ | 1,036 | ||||
|
HPT rent classified as interest |
7,400 | 7,330 | 7,390 | |||||||
|
Amortization of deferred financing costs |
667 | 352 | 403 | |||||||
|
Capitalized interest |
(1,033 | ) | — | — | ||||||
|
Other |
79 | 580 | 176 | |||||||
| | | | | | | | | | | |
|
Interest expense |
$ | 17,650 | $ | 10,358 | $ | 9,005 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
We capitalize the portion of our interest expense that is attributable under GAAP to our more significant construction projects over the duration of the respective construction periods. Capitalized interest is amortized to depreciation and amortization expense over the estimated useful life of the corresponding asset.
F-51
TravelCenters of America LLC
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
20. Selected Quarterly Financial Data (unaudited)
The following is a summary of our unaudited quarterly results of operations for 2013 and 2012:
|
|
Year Ended December 31, 2013 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
|||||||||
|
Total revenues |
$ | 1,957,351 | $ | 2,018,754 | $ | 2,062,096 | $ | 1,906,530 | |||||
|
Gross profit (excluding depreciation) |
263,807 | 301,228 | 307,141 | 280,651 | |||||||||
|
Income (loss) from operations |
(8,460 | ) | 19,971 | 20,938 | (11,259 | ) | |||||||
|
Net income (loss) |
$ | (12,139 | ) | $ | 15,984 | $ | 15,803 | $ | 11,975 | ||||
|
Net income (loss) per share: |
|||||||||||||
|
Basic and diluted |
$ | (0.41 | ) | $ | 0.54 | $ | 0.53 | $ | 0.39 | ||||
|
|
Year Ended December 31, 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
|||||||||
|
Total revenues |
$ | 1,994,869 | $ | 2,041,507 | $ | 2,034,153 | $ | 1,925,195 | |||||
|
Gross profit (excluding depreciation) |
243,352 | 294,223 | 288,306 | 260,119 | |||||||||
|
Income (loss) from operations |
(11,309 | ) | 32,017 | 20,933 | (171 | ) | |||||||
|
Net income (loss) |
$ | (14,185 | ) | $ | 29,852 | $ | 18,990 | $ | (2,459 | ) | |||
|
Net income (loss) per share: |
|||||||||||||
|
Basic and diluted |
$ | (0.49 | ) | $ | 1.04 | $ | 0.66 | $ | (0.08 | ) | |||
During the fourth quarter of 2013 we recognized a $10,000 charge related to a litigation settlement; an asset impairment charge of $659; an increase of $1,500 to our inventory reserves for excess and obsolete parts; a $1,097 charge for a claim against us related to invalid biodiesel renewable identification numbers; and $29,853 related to the reversal of a portion of the valuation allowance for deferred tax assets. Additionally, during the fourth quarter of 2013 we recognized a charge of $2,435 to correct for certain misstatements in our historical financial statements that we determined to be immaterial.
F-52
Pursuant to the requirements of Section 13 or 15(d) 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.
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|---|---|---|---|---|---|---|
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TRAVELCENTERS OF AMERICA LLC | |||||
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June 6, 2014 |
By: |
/s/ ANDREW J. REBHOLZ
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|
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Name: | Andrew J. Rebholz | ||||
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Title: |
Executive Vice President,
Chief Financial Officer and Treasurer |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|---|---|---|---|---|
|
|
|
|
|
|
|
/s/ THOMAS M. O'BRIEN
Thomas M. O'Brien |
Managing Director, President and Chief Executive Officer (Principal Executive Officer) | June 6, 2014 | ||
|
/s/ ANDREW J. REBHOLZ Andrew J. Rebholz |
|
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
|
June 6, 2014 |
|
/s/ BARRY M. PORTNOY Barry M. Portnoy |
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Managing Director |
|
June 6, 2014 |
|
/s/ BARBARA D. GILMORE Barbara D. Gilmore |
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Independent Director |
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June 6, 2014 |
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/s/ LISA HARRIS JONES Lisa Harris Jones |
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Independent Director |
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June 6, 2014 |
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/s/ ARTHUR G. KOUMANTZELIS Arthur G. Koumantzelis |
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Independent Director |
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June 6, 2014 |
Exhibit 2.4
Execution
SECURITIES PURCHASE AGREEMENT
among
FREDERICK M. HIGGINS, FREDERICK M. HIGGINS CHARITABLE REMAINDER UNITRUST, HEATHER HIGGINS, LESLIE HIGGINS EMBRY, CATHY HOWARD, GLENN HOWARD, STACY HOWARD JONES, WESLEY HOWARD, JAMIE GADDIE HIGGINS FAMILY TRUST, JAMIE GADDIE HIGGINS MARITAL TRUST, RITA BARKS, DANNY EVANS, JERRY GOFF, HELEN JERNIGAN, MARTHA MILLER-WEBB, DONNA CARLYLE, BETSY MONROE, OWEN MONROE TRUST UNDER WILL, CARRIE LEIGH PORCEL,
FREDERICK M. HIGGINS, AS SELLERS’ REPRESENTATIVE,
GIRKIN DEVELOPMENT, LLC
and
TRAVELCENTERS OF AMERICA LLC
dated as of
November 14, 2013
TABLE OF CONTENTS
|
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Page |
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|
ARTICLE I DEFINITIONS |
1 |
|
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ARTICLE II PURCHASE AND SALE |
10 |
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SECTION 2.01 Purchase and Sale |
10 |
|
SECTION 2.02 Purchase Price |
10 |
|
SECTION 2.03 Transactions to be Effected Immediately Prior to or at the Closing |
10 |
|
SECTION 2.04 Purchase Price Adjustment |
12 |
|
SECTION 2.05 Closing |
14 |
|
SECTION 2.06 Withholding Tax |
14 |
|
|
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS |
14 |
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SECTION 3.01 Authority of Sellers |
14 |
|
SECTION 3.02 Organization, Authority and Qualification of the Company |
15 |
|
SECTION 3.03 Capitalization |
15 |
|
SECTION 3.04 No Subsidiaries |
15 |
|
SECTION 3.05 No Conflicts; Consents |
15 |
|
SECTION 3.06 Financial Statements |
16 |
|
SECTION 3.07 Undisclosed Liabilities |
16 |
|
SECTION 3.08 Absence of Certain Changes, Events and Conditions |
16 |
|
SECTION 3.09 Material Contracts |
18 |
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SECTION 3.10 Title to Assets; Real Property |
19 |
|
SECTION 3.11 Condition And Sufficiency of Assets |
21 |
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SECTION 3.12 Intellectual Property |
22 |
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SECTION 3.13 Inventory |
23 |
|
SECTION 3.14 Accounts Receivable |
23 |
|
SECTION 3.15 Suppliers |
23 |
|
SECTION 3.16 Insurance |
23 |
|
SECTION 3.17 Legal Proceedings; Governmental Orders |
24 |
|
SECTION 3.18 Compliance With Laws; Permits |
24 |
|
SECTION 3.19 Environmental Matters |
24 |
|
SECTION 3.20 Employee Benefit Matters |
26 |
|
SECTION 3.21 Employment Matters |
28 |
|
SECTION 3.22 Taxes |
29 |
|
SECTION 3.23 Books and Records |
32 |
|
SECTION 3.24 Bank Accounts |
32 |
|
SECTION 3.25 Brokers |
32 |
|
SECTION 3.26 Full Disclosure |
33 |
|
SECTION 3.27 No Other Representations and Warranties |
33 |
|
|
|
|
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER |
33 |
|
SECTION 4.01 Organization and Authority of Buyer |
33 |
|
SECTION 4.02 No Conflicts; Consents |
33 |
|
SECTION 4.03 Investment Purpose |
33 |
|
SECTION 4.04 Brokers |
34 |
|
SECTION 4.05 Sufficiency of Funds |
34 |
|
SECTION 4.06 Legal Proceedings |
34 |
|
SECTION 4.07 No Other Representations and Warranties |
34 |
|
|
|
|
ARTICLE V COVENANTS AND AGREEMENTS |
34 |
|
SECTION 5.01 Conduct of Business Prior to the Closing |
34 |
|
SECTION 5.02 Access to Information |
36 |
|
SECTION 5.03 No Solicitation of Other Bids |
36 |
|
SECTION 5.04 Notice of Certain Events |
37 |
|
SECTION 5.05 Resignations |
38 |
|
SECTION 5.06 Confidentiality |
38 |
|
SECTION 5.07 Governmental Approvals and Consents |
39 |
|
SECTION 5.08 Books and Records |
39 |
|
SECTION 5.09 Closing Conditions |
39 |
|
SECTION 5.10 Public Announcements |
39 |
|
SECTION 5.11 Release |
40 |
|
SECTION 5.12 Financials |
41 |
|
SECTION 5.13 Employees and Benefit Plans |
42 |
|
SECTION 5.14 Remediation and Other Obligations |
43 |
|
SECTION 5.15 Further Assurances |
43 |
|
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|
ARTICLE VI TAX MATTERS |
43 |
|
SECTION 6.01 Tax Covenants |
43 |
|
SECTION 6.02 Termination of Existing Tax Sharing Agreements |
45 |
|
SECTION 6.03 Tax Indemnification |
45 |
|
SECTION 6.04 Contests |
46 |
|
SECTION 6.05 Cooperation and Exchange of Information |
47 |
|
SECTION 6.06 Survival |
47 |
|
SECTION 6.07 Overlap |
47 |
|
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|
ARTICLE VII CONDITIONS TO CLOSING |
47 |
|
SECTION 7.01 Conditions to Obligations of All Parties |
47 |
|
SECTION 7.02 Conditions to Obligations of Buyer |
48 |
|
SECTION 7.03 Conditions to Obligations of Sellers |
50 |
|
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|
|
ARTICLE VIII INDEMNIFICATION |
51 |
|
SECTION 8.01 Survival |
51 |
|
SECTION 8.02 Indemnification By Sellers |
51 |
|
SECTION 8.03 Indemnification By Buyer |
52 |
|
SECTION 8.04 Certain Limitations |
52 |
|
SECTION 8.05 Indemnification Procedures |
53 |
|
SECTION 8.06 Payments |
55 |
|
SECTION 8.07 Tax Treatment of Indemnification Payments |
56 |
|
SECTION 8.08 Effect of Investigation |
56 |
|
SECTION 8.09 Calculation of Losses |
56 |
|
SECTION 8.10 Exclusive Remedies |
57 |
|
|
|
|
ARTICLE IX TERMINATION; CASUALTY AND CONDEMNATION |
57 |
|
SECTION 9.01 Termination |
57 |
|
SECTION 9.02 Casualty and Condemnation |
59 |
|
|
|
|
ARTICLE X SELLERS’ REPRESENTATIVE |
60 |
|
SECTION 10.01 Appointment of Sellers’ Representative |
60 |
|
SECTION 10.02 Authority |
60 |
|
SECTION 10.03 Liability |
61 |
|
SECTION 10.04 Sellers’ Representative Fund |
61 |
|
SECTION 10.05 Replacement of Sellers’ Representative |
61 |
|
|
|
|
ARTICLE XI MISCELLANEOUS |
61 |
|
SECTION 11.01 Expenses |
61 |
|
SECTION 11.02 Notices |
62 |
|
SECTION 11.03 Interpretation |
63 |
|
SECTION 11.04 Headings |
63 |
|
SECTION 11.05 Severability |
63 |
|
SECTION 11.06 Entire Agreement |
63 |
|
SECTION 11.07 Successors and Assigns |
64 |
|
SECTION 11.08 No Third-party Beneficiaries |
64 |
|
SECTION 11.09 Amendment and Modification; Waiver |
64 |
|
SECTION 11.10 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial |
64 |
|
SECTION 11.11 Specific Performance |
65 |
|
SECTION 11.12 Counterparts |
65 |
|
SECTION 11.13 Disclosure Schedule |
66 |
|
Exhibits: |
|
|
|
|
|
Exhibit A - |
Form of Earnest Money Escrow Agreement |
|
Exhibit B - |
Form of Indemnity Escrow Agreement |
|
Exhibit C - |
Form of Assumption Agreement |
|
Exhibit D - |
Form of Guaranty |
|
Exhibit E - |
Form of Assignment and Withdrawal Agreement |
|
Exhibit F - |
Form of FIRPTA Certificate |
|
|
|
|
Annex A- |
Form of Closing Working Capital Statement |
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this “ Agreement ”), dated as of November 14, 2013, is entered into among Frederick M. Higgins, Frederick M. Higgins Charitable Remainder Unitrust, Heather Higgins, Leslie Higgins Embry, Cathy Howard, Glenn Howard, Stacy Howard Jones, Wesley Howard, Jamie Gaddie Higgins Family Trust, Jamie Gaddie Higgins Marital Trust, Rita Barks, Danny Evans, Jerry Goff, Helen Jernigan, Martha Miller-Webb, Donna Carlyle, Betsy Monroe, Owen Monroe Trust Under Will, and Carrie Leigh Porcel (each a “ Seller ” and collectively “ Sellers ”), Girkin Development, LLC, a Kentucky limited liability company (the “ Company ”), TravelCenters of America LLC, a Delaware limited liability company (“ Buyer ”), and Frederick M. Higgins, as Sellers’ Representative (“ Sellers’ Representative ”).
RECITALS
Sellers own all of the issued and outstanding units of membership interest (the “ Interests ”) of the Company.
Sellers wish to sell to Buyer, and Buyer wishes to purchase from Sellers, the Interests, subject to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
The following terms have the meanings specified or referred to in this Article I :
“ Acquisition Proposal ” has the meaning set forth in Section 5.03(a) .
“ Action ” means any claim, action, cause of action, demand, lawsuit, arbitration, audit, notice of violation, notice of responsibility, proceeding, litigation, citation, summons or subpoena of any nature, civil, criminal, administrative, regulatory or otherwise, whether at law or in equity.
“ Affiliate ” of a Person means any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. The term “control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.
“ Agreement ” has the meaning set forth in the preamble.
“ Assignment and Withdrawal Agreement ” has the meaning set forth in Section 2.03(e)(i) .
“ Assumption Agreement ” has the meaning set forth in Section 2.03(d).
“ Audited Financial Statements ” has the meaning set forth in Section 3.06 .
“ Balance Sheet ” has the meaning set forth in Section 3.06 .
“ Balance Sheet Date ” has the meaning set forth in Section 3.06 .
“ Benefit Plan ” has the meaning set forth in Section 3.20(a) .
“ Broker ” means Raymond James & Associates, Inc.
“ Business Day ” means any day except Saturday, Sunday or any other day on which commercial banks located in the City of New York are authorized or required by Law to be closed for business.
“ Buyer ” has the meaning set forth in the preamble.
“ Buyer Causes of Action ” has the meaning set forth in Section 5.11(c).
“ Buyer Indemnitees ” has the meaning set forth in Section 8.02 .
“ Buyer Released Parties ” has the meaning set forth in Section 5.11(a).
“ Buyer Releasing Parties ” has the meaning set forth in Section 5.11(c).
“ Buyer’s Accountants ” means Ernest & Young LLP.
“CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §§ 9601 et seq.
“ CERCLIS ” means the Comprehensive Environmental Response, Compensation, and Liability Information System.
“ Closing ” has the meaning set forth in Section 2.05 .
“ Closing Adjustment ” has the meaning set forth in Section 2.04(a)(ii) .
“ Closing Date ” has the meaning set forth in Section 2.05 .
“ Closing Working Capital ” means: (a) the Current Assets of the Company, less (b) the Current Liabilities of the Company, determined as of the Effective Time on the Closing Date.
“ Closing Working Capital Statement ” has the meaning set forth in Section 2.04(b)(i) .
“ Code ” means the Internal Revenue Code of 1986.
“ Company ” has the meaning set forth in the preamble.
“ Company Intellectual Property ” has the meaning set forth in Section 3.12(a) .
“ Company Site ” means each parcel of Real Property.
“ Confidentiality Agreement” means that certain letter by and between Travel Centers of America, LLC and Raymond James & Associates, for itself and on behalf of Girkin Development, LLC, dated June 17, 2013.
“ Contracts ” means all contracts, leases, deeds, mortgages, licenses, instruments, notes, commitments, undertakings, indentures, joint ventures and all other agreements, commitments and legally binding arrangements or offers, whether written or oral.
“ Current Assets ” means cash and cash equivalents, accounts receivable, inventory and prepaid expenses, but excluding (a) the portion of any prepaid expense related to or benefiting the Transferred Properties or relating to the Remediation of the sites listed in Section 5.14(a) of the Disclosures Schedules, (b) receivables representing Indebtedness, (c) deferred Tax assets, and (d) receivables from any of the Company’s Affiliates, members, managers or employees, and any of their respective Affiliates, determined in accordance with GAAP applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation methodologies that were used in the preparation of the Audited Financial Statements for the most recent fiscal year end as if such accounts were being prepared and audited as of a fiscal year end.
“ Current Liabilities ” means all accounts payable and accrued Taxes (increased by any incremental Tax resulting from the transfer or sale of the Transferred Properties and/or the assets identified in items 7, 8 and 9 of Section 5.01 of the Disclosure Schedules at or prior to the Closing, computed without reduction for any federal and state net operating loss carry forwards), and accrued expenses, whether or not then due, but excluding, deferred Tax liabilities and Indebtedness (including interest payable), determined in accordance with GAAP applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation methodologies that were used in the preparation of the Audited Financial Statements for the most recent fiscal year end as if such accounts were being prepared and audited as of a fiscal year end. For the avoidance of doubt, Current Liabilities shall also include any and all unpaid costs and expenses of the Company or its Affiliates incurred in connection with, or as a result of or related to, the sale process with respect to the Interests and the negotiation, preparation, execution and closing of the transactions contemplated by this Agreement, including, but not limited to, all unpaid costs and expenses incurred in connection with the transfer or sale of the Transferred Properties and/or the assets identified in items 7, 8 and 9 of Section 5.01 of the Disclosure Schedules and the unpaid fees and expenses of all professional advisors, investment bankers, brokers, accountants, attorneys, consultants, engineers and representatives of the Company or its Affiliates.
“ Datasite ” means the password protected website maintained by the Broker through OneHub for purposes of sharing documents relating to the Company to Buyer.
“ Direct Claim ” has the meaning set forth in Section 8.05(c) .
“ Disclosure Schedules ” means the Disclosure Schedules delivered by Sellers concurrently with the execution and delivery of this Agreement.
“ Disputed Amounts ” has the meaning set forth in Section 2.04(c)(iii) .
“ Earnest Money ” has the meaning set forth in Section 2.02(b) .
“ Earnest Money Escrow Agreement ” has the meaning set forth in Section 2.02(b) .
“ Effective Time ” has the meaning set forth in Section 2.05 .
“ Encumbrance ” means any charge, claim, community property interest, pledge, condition, equitable interest, lien (statutory or other), option, security interest, mortgage, easement, encroachment, right of way, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership.
“ Environmental Claim ” means any Action, Governmental Order, lien, fine, penalty, or, as to each, any settlement or judgment arising therefrom, by or from any Person alleging liability of whatever kind or nature (including liability or responsibility for the costs of enforcement proceedings, investigations, cleanup, governmental response, removal or Remediation, natural resources damages, property damages, personal injuries, medical monitoring, penalties, contribution, indemnification and injunctive relief) arising out of, based on or resulting from: (a) the presence of, Release or threat of Release of, or exposure to, any Hazardous Materials; or (b) any actual or alleged non-compliance with any Environmental Law or term or condition of any Environmental Permit.
“ Environmental Law ” means any applicable Law, and any Governmental Order or Contract with any Governmental Authority: (a) relating to pollution (or the cleanup thereof) or the protection of natural resources, endangered or threatened species, human health or safety, or the environment (including ambient air, soil, sediment, surface water, groundwater, or subsurface strata); or (b) concerning the presence of, exposure to, or management, manufacture, use, containment, storage, recycling, reclamation, reuse, treatment, generation, discharge, transportation, processing, production, disposal or Remediation of any Hazardous Materials. The term “Environmental Law” includes, without limitation, the following (including their implementing regulations and any state analogs): the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §§ 9601 et seq.; the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. §§ 6901 et seq.; the Federal Water Pollution Control Act of 1972, as amended by the Clean Water Act of 1977, 33 U.S.C. §§ 1251 et seq.; the Toxic Substances Control Act of 1976, 15 U.S.C. §§ 2601 et seq.; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. §§ 11001 et seq.; the Clean Air Act of 1966, as amended by the Clean Air Act Amendments of 1990, 42 U.S.C. §§ 7401 et seq.; and the Occupational Safety and Health Act of 1970, 29 U.S.C. §§ 651 et seq.
“ Environmental Notice ” means any written directive, notice of violation or infraction, notice of responsibility, or notice respecting any Environmental Claim relating to actual or alleged non-compliance with any Environmental Law or any term or condition of any Environmental Permit or the Release of any Hazardous Materials.
“ Environmental Permit ” means any Permit required under or issued, granted, given, authorized by or made pursuant to Environmental Law.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, and the regulations promulgated thereunder.
“ ERISA Affiliate ” means, with respect to any Person, any other Person that, together with such first Person, would be treated as a single employer within the meaning of Section 414(b), (c), (m) or (o) of the Code or Sections 4001(a)(14) or 4001(b)(1) of ERISA.
“ Escrow Agent ” means Commonwealth Land Title Insurance Company.
“ Estimated Closing Working Capital ” has the meaning set forth in Section 2.04(a)(i) .
“ Estimated Closing Working Capital Statement ” has the meaning set forth in Section 2.04(a)(i) .
“ Excluded Obligations and Liabilities ” means (a) all costs and expenses of whatever kind incurred in connection with the Remediation of the sites listed in Section 5.14(a) of the Disclosure Schedules and (b) all obligations and liabilities arising out of or relating to the ownership or operation of, or any event or condition existing on, the Transferred Properties, whether arising prior to or after transfer or sale to Falcon.
“ Falcon ” has the meaning set forth in Section 2.03(b) .
“ Financial Statements ” has the meaning set forth in Section 3.06 .
“ Former Company Site ” means any real property formerly owned, operated or leased (as lessee) by the Company and not including any Company Site or Transferred Property.
“ GAAP ” means United States generally accepted accounting principles in effect from time to time.
“ Governmental Authority ” means any federal, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction.
“ Governmental Order ” means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.
“ Guaranty ” has the meaning set forth in Section 2.03(d) .
“ Hazardous Materials ” means: (a) any material, substance, or waste, in each case, whether solid, liquid, or gas and whether naturally occurring or manmade, that is defined or regulated as a pollutant or contaminant or as hazardous, acutely hazardous, toxic, or words of
similar import, under any Environmental Law; and (b) any petroleum or petroleum-derived products, radon, radioactive materials or wastes, asbestos in any form, lead or lead-containing materials, urea formaldehyde foam insulation, and polychlorinated biphenyls.
“ Indebtedness ” means without duplication, (a) any indebtedness for borrowed money, (b) any obligations evidenced by notes, bonds, debentures or similar contracts, (c) any obligations for the deferred purchase price of property, goods or services (other than trade payables not more than sixty (60) days past due), (d) any capital lease obligations, (e) any obligations in respect of letters of credit and bankers’ acceptances, (f) any obligations under interest rate protection agreements or hedging agreements or (g) any guaranty of any such obligations described in clauses (a) through (f) above.
“ Indemnified Party ” has the meaning set forth in Section 8.05 .
“ Indemnifying Party ” has the meaning set forth in Section 8.05 .
“ Indemnity Escrow Amount ” has the meaning set forth in Section 2.03(c)(i) .
“ Indemnity Escrow Agreement ” has the meaning set forth in Section 2.03(c)(ii) .
“ Independent Accountants ” has the meaning set forth in Section 2.04(c)(iii) .
“ Insurance Policies ” has the meaning set forth in Section 3.16 .
“ Intellectual Property ” has the meaning set forth in Section 3.12(a) .
“ Intellectual Property Registrations ” has the meaning set forth in Section 3.12(b) .
“ Interim Balance Sheet ” has the meaning set forth in Section 3.06 .
“ Interim Balance Sheet Date ” has the meaning set forth in Section 3.06 .
“ Interim Financial Statements ” has the meaning set forth in Section 3.06 .
“ Interests ” has the meaning set forth in the Recitals.
“ Knowledge of Sellers or Sellers’ Knowledge ” or any other similar knowledge qualification, means the actual knowledge of Frederick M. Higgins, Catherine Higgins Howard, Bud Young and Jerry Goff, each in such person’s capacity as an employee of the Company, after having made reasonable inquiry.
“ Law ” means any statute, law, ordinance, regulation, rule, code, order, constitution, treaty, common law, judgment, decree, other requirement or rule of law of any Governmental Authority.
“ Leased Real Property ” means any real property leased (as lessee) by the Company other than Transferred Properties, together with all appurtenances thereto and buildings, structures, fixtures, facilities and improvements located thereon.
“ Liabilities ” means any debt, liability, obligation or commitment (whether direct or indirect, known or unknown, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, or due or to become due), and including all costs and expenses relating thereto.
“ Licensed Intellectual Property ” has the meaning set forth in Section 3.12(a) .
“ Losses ” means losses, damages, liabilities, deficiencies, Actions, judgments, interest, awards, penalties, fines, costs or expenses of whatever kind, including reasonable attorneys’ fees and the cost of enforcing any right to indemnification hereunder and the cost of pursuing any insurance providers; provided, however , that “Losses” shall not include lost profits, special, punitive, speculative or exemplary damages, except to the extent actually awarded to a Governmental Authority or other third party.
“ Material Adverse Effect ” means any event, occurrence, fact, condition or change that (a) is, or would reasonably be expected to become, individually or in the aggregate, materially adverse to the business, results of operations, condition (financial or otherwise) or assets of the Company, taken as a whole; or (b) has prevented or materially delayed the ability of Sellers to consummate the sale of the Interests, as contemplated by this Agreement; provided , however , that “Material Adverse Effect” shall not include any event, occurrence, fact, condition, or change, directly or indirectly, arising out of or attributable to: (i) any changes, conditions or effects in financial, credit or securities markets, general economy or business conditions, or political, social or regulatory conditions; (ii) changes, conditions or effects that generally affect the industries in which the Company operates; (iii) any change, effect or circumstance resulting from an action required or permitted by this Agreement or from any action taken at the request of Buyer or any of its Affiliates; (iv) conditions caused by acts of terrorism or war (whether or not declared); (v) the announcement or pendency of the transactions contemplated by this Agreement; (vi) a change in GAAP; (vii) any change in any Law or other requirement of any Governmental Authority; (viii) the failure of the Company to meet, with respect to any period or periods, any internal forecasts or projections, estimates of earnings or revenues, or business plans; provided further , however , that any event, occurrence, fact, condition, or change referred to in clauses (i), (ii), (iv) or (vii) immediately above shall be taken into account in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur to the extent that such event, occurrence, fact, condition, or change has a substantially disproportionate effect on the Company compared to other participants in the industries in which the Company operates.
“ Material Contracts ” has the meaning set forth in Section 3.09(a) .
“ Material Suppliers ” has the meaning set forth in Section 3.15 .
“ Minority Sellers ” means Rita Barks, Danny Evans, Jerry Goff, Helen Jernigan, Martha Miller-Webb, Donna Carlyle, Betsy Monroe and Owen Monroe Trust Under Will.
“ Multi-Employer Plan ” has the meaning set forth in Section 3.20(c) .
“ Organizational Documents ” means (i) the articles or certificate of incorporation or organization and bylaws of a corporation; (ii) the partnership agreement and any statement or certificate of formation of a general partnership; (iii) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (iv) the articles or certificate of
formation or organization and limited liability company agreement or comparable documents of a limited liability company; (v) the declaration or indenture of trust of any trust; and (vi) similar constituent documents for other entities.
“ Owned Real Property ” means any real property owned in fee simple by the Company, or to be transferred to the Company as required by Section 2.03(f) , together with all appurtenances thereto and buildings, structures, fixtures, facilities and improvements located thereon, but excluding the Transferred Properties.
“ Permits ” means all permits, licenses, franchises, approvals, authorizations, registrations, certificates, waivers, or other similar authorizations, from Governmental Authorities.
“ Permitted Encumbrances ” has the meaning set forth in Section 3.10(a) .
“ Person ” means an individual, corporation, partnership, joint venture, limited liability company, Governmental Authority, unincorporated organization, trust, association or other entity.
“ Post-Closing Adjustment ” has the meaning set forth in Section 2.04(b)(ii) .
“ Post-Closing Tax Period ” means any taxable period of the Company beginning after the Closing Date and, with respect to any taxable period of the Company beginning before and ending after the Closing Date, the portion of such taxable period beginning after the Closing Date.
“ Pre-Closing Tax Period ” means any taxable period of the Company ending on or before the Closing Date and, with respect to any taxable period of the Company beginning before and ending after the Closing Date, the portion of such taxable period ending on and including the Closing Date.
“ Pre-Closing Taxes ” has the meaning set forth in Section 6.03(c) .
“ Purchase Price ” has the meaning set forth in Section 2.02 .
“ Real Property ” means the Owned Real Property and the Leased Real Property.
“ Remediation ” means all activities, whether undertaken pursuant to judicial or administrative order or otherwise, that are required to investigate, monitor, clean up, remove, treat, or in any other way address or respond to a Release of Hazardous Materials.
“ Release ” means any actual release, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, abandonment, disposing or allowing to escape or migrate into or through the environment (including, without limitation, ambient air (indoor or outdoor), surface water, groundwater, land surface or subsurface strata or within any building, structure, facility or fixture).
“ Representative ” means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person.
“ Resolution Period ” has the meaning set forth in Section 2.04(c)(ii) .
“ Review Period ” has the meaning set forth in Section 2.04(c)(i) .
“ SEC ” has the meaning set forth in Section 5.10 .
“ Seller Causes of Action ” has the meaning set forth in Section 5.11(a) .
“ Seller Indemnitees ” has the meaning set forth in Section 8.03 .
“ Seller Released Parties ” has the meaning set forth in Section 5.11(c).
“ Seller Releasing Parties ” has the meaning set forth in Section 5.11(a).
“ Sellers ” has the meaning set forth in the preamble.
“ Sellers’ Accountants ” means Rayburn, Bates & Fitzgerald, P.C.
“ Sellers’ Actual Knowledge ” means the actual knowledge of Frederick H. Higgins, Catherine Higgins Howard, Bud Young and Jerry Goff.
“ Sellers’ Representative ” has the meaning set forth in the preamble.
“ Sellers’ Representative Fund ” means an account as designated by Sellers’ Representative to the Buyer not less than three (3) Business Days prior to the Closing Date.
“ Sellers’ Representative Fund Amount ” has the meaning set forth in Section 2.03(c)(i) .
“ Statement of Objections ” has the meaning set forth in Section 2.04(c)(ii) .
“ Target Working Capital ” means $0.00.
“ Taxes ” means all federal, state, local, foreign and other income, gross receipts, gains, margins, business organization, sales, use, production, ad valorem, transfer, capital stock, franchise, recording, registration, value added, alternative or add-on minimum, profits, license, leasing, lease, user, service, service use, withholding, payroll, employment, unemployment, social security (or similar, including FICA), disability, estimated, excise, severance, environmental, fuel, stamp, occupation, premium, escheat, property (real or personal), real property gains, windfall profits, customs, duties or other taxes, fees, assessments, levies or charges of any kind whatsoever, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties, whether disputed or not.
“ Tax Claim ” has the meaning set forth in Section 6.04(a) .
“ Tax Return ” means any return, declaration, report, form, claim for refund, information return or statement of any kind or other document relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.
“ Third Party Claim ” has the meaning set forth in Section 8.05(a) .
“ Title Company ” means Commonwealth Land Title Insurance Company.
“ Transaction Documents ” has the meaning set forth in Section 10.01 .
“ Transfer Taxes ” has the meaning set forth in Section 6.01(b).
“ Transferred Properties ” has the meaning set forth in Section 2.03(b).
“Transition Period End Date ” has the meaning set forth in Section 5.13(c) .
“ Undisputed Amounts ” has the meaning set forth in Section 2.04(c)(iii) .
“ Union ” has the meaning set forth in Section 3.21(b) .
“ WARN Act ” means the federal Worker Adjustment and Retraining Notification Act of 1988, and similar Laws related to plant closings, relocations, mass layoffs and employment losses.
ARTICLE II
PURCHASE AND SALE
SECTION 2.01 Purchase and Sale . Subject to the terms and conditions set forth herein, at the Closing, Sellers shall sell to Buyer, and Buyer shall purchase from Sellers, the Interests, free and clear of all Encumbrances, for the consideration specified in Section 2.02 .
SECTION 2.02 Purchase Price. The aggregate purchase price for the Interests is $66,197,500, subject to adjustment pursuant to Section 2.04 (the “ Purchase Price ”).
(a) Within two (2) Business Days after the execution and delivery of this Agreement, Buyer shall deliver to the Escrow Agent $6,700,000 (together with all interest earned thereon, the “ Earnest Money ”) to be held in accordance with the terms of the Earnest Money Escrow Agreement in the form of Exhibit A (the “ Earnest Money Escrow Agreement ”), which shall be executed by the parties thereto on the date of this Agreement. The Earnest Money shall be non-refundable to Buyer except as provided for in Sections 9.01(a)(i), (ii), (iv) and (v) . Unless this Agreement has been terminated pursuant to Section 9.01 , the Earnest Money shall be paid to Sellers at Closing and credited against the Purchase Price due at Closing.
SECTION 2.03 Transactions to be Effected Immediately Prior to or at the Closing.
(a) Immediately prior to the Closing, Sellers will pay all outstanding Indebtedness of the Company; and
(b) Immediately prior to the Closing, the Company shall transfer or sell all of its right, title and interest in the real property described in Section 2.03(b) of the Disclosure Schedules (“ Transferred Properties ”) to Falcon, LLC, a Kentucky limited liability company (“ Falcon ”), or its designee, by quitclaim deed, without any representations or warranties of any kind whatsoever, or by lease assignment, as applicable, and Falcon will assume and agree to pay, perform and observe all Liabilities arising out of or relating to the ownership or operation of the Transferred Properties, including the Contracts listed in Section 2.03(b) of the Disclosure Schedules, whether arising before or after the date of transfer.
(c) At the Closing, Buyer shall:
(i) Pay the Purchase Price, increased or decreased, as applicable, by any Closing Adjustment, less $4,690,000 (the “ Indemnity Escrow Amount ”) and less $250,000 (the “ Sellers’ Representative Fund Amount ”) to Sellers by wire transfer of immediately available funds to the account or accounts specified in writing by Sellers’ Representative to Buyer (which instructions shall be delivered no later than three (3) Business Days prior to the Closing Date);
(ii) Deposit the Indemnity Escrow Amount with the Escrow Agent to be held in accordance with the terms of the Indemnity Escrow Agreement in the form of Exhibit B (the “ Indemnity Escrow Agreement ”), which shall be executed by the parties thereto on the Closing Date;
(iii) Deposit the Sellers’ Representative Fund Amount into the Sellers’ Representative Fund; and
(iv) Deliver to the Company all other agreements, documents, instruments or certificates required to be delivered by Buyer at or prior to the Closing pursuant to Section 7.03 .
(d) At the Closing the Excluded Obligations and Liabilities shall be assumed by Falcon pursuant to an assumption agreement in the form of Exhibit C (“ Assumption Agreement ”) and Frederick M. Higgins shall have guaranteed the obligations of Falcon pursuant to a guaranty in the form of Exhibit D (“Guaranty”).
(e) At the Closing, each Seller shall deliver to Buyer:
(i) An assignment of his/her/its respective Interest and withdrawal as a member of the Company, which Assignment and Withdrawal Agreement shall be in the form of Exhibit D (“ Assignment and Withdrawal Agreement ”); and
(ii) All other agreements, documents, instruments or certificates required to be delivered by such Seller at or prior to the Closing pursuant to Section 7.02 .
(f) Prior to the Closing, the Company shall cause the fee ownership in the real property listed on Section 2.03(f) of the Disclosure Schedules to be held of record in the name of the Company, which shall include recording any applicable deeds, certificates of merger, certificates of name change and the like with the applicable land records, terminating any applicable leases between the Company, as lessee, and the fee owner of record, as lessor, which terminations shall include a full, unconditional release of the Company from any covenants or obligations under such leases, whether arising prior to or after such termination, and the Company shall have received evidence reasonably satisfactory to the Buyer that all Indebtedness secured by such real property has been, or will be as of the Closing, paid and all Encumbrances securing such Indebtedness released. The costs associated with performing the obligations under this Section 2.03(f) shall be borne by the Company and shall be included in the Current Liabilities of the Company for purposes of determining Closing Working Capital.
SECTION 2.04 Purchase Price Adjustment.
(a) Closing Adjustment.
(i) At least two (2) Business Days before the Closing, the Company shall prepare and deliver to Buyer a statement setting forth its good faith estimate of Closing Working Capital (the “ Estimated Closing Working Capital ”), which statement shall contain an estimated balance sheet of the Company as of the Closing Date, a calculation of Estimated Closing Working Capital (the “ Estimated Closing Working Capital Statement ”), and a certificate of the chief financial officer of the Company that the Estimated Closing Working Capital Statement was prepared in accordance with GAAP applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation methodologies that were used in the preparation of the Audited Financial Statements for the most recent fiscal year end and including only the categories of assets and liabilities set forth in the form of Closing Working Capital statement attached as Annex A .
(ii) The “ Closing Adjustment ” shall be an amount equal to the Estimated Closing Working Capital minus the Target Working Capital. If the Closing Adjustment is a positive number, the Purchase Price shall be increased by the amount of the Closing Adjustment. If the Closing Adjustment is a negative number, the Purchase Price shall be reduced by the amount of the Closing Adjustment.
(b) Post-Closing Adjustment.
(i) Within sixty (60) days after the Closing Date, Buyer shall prepare and deliver to Sellers’ Representative a statement setting forth its calculation of Closing Working Capital, which statement shall contain an unaudited balance sheet of the Company as of the Closing Date (the “ Closing Working Capital Statement ”) and a certificate of the chief financial officer of Buyer that the Closing Working Capital Statement was prepared in accordance with GAAP applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation methodologies that were used in the preparation of the Audited Financial Statements for the most recent fiscal year end, and including only the categories of assets and liabilities set forth in the form of Closing Working Capital statement attached as Annex A .
(ii) The post-closing adjustment shall be an amount equal to the Closing Working Capital minus the Estimated Closing Working Capital (the “ Post-Closing Adjustment ”). If the Post-Closing Adjustment is a positive number, Buyer shall pay to Sellers’ Representative an amount equal to the Post-Closing Adjustment as provided in Section 2.04(c)(vi) . If the Post-Closing Adjustment is a negative number, Sellers shall pay to Buyer an amount equal to the absolute value of the Post-Closing Adjustment as provided in Section 2.04(c)(vi) .
(c) Examination and Review.
(i) Examination . After receipt of the Closing Working Capital Statement, Sellers’ Representative shall have thirty (30) days (the “ Review Period ”) to review the
Closing Working Capital Statement. During the Review Period, Sellers’ Representative and Sellers’ Accountants shall have access during normal business hours to the books and records of the Company, the personnel of, and work papers prepared by, Buyer and/or Buyer’s Accountants to the extent that they relate to the Closing Working Capital Statement as Sellers’ Representative may reasonably request, provided such access shall not interfere with the normal business operations of Buyer or the Company.
(ii) Objection . On or prior to the last day of the Review Period, Sellers’ Representative may object to the Closing Working Capital Statement by delivering to Buyer a written statement setting forth Sellers’ Representative’s objections in reasonable detail, indicating each disputed item or amount and the basis for Sellers’ Representative’s disagreement therewith (the “ Statement of Objections ”). If Sellers’ Representative fails to timely deliver a Statement of Objections, the Closing Working Capital Statement and the Post-Closing Adjustment reflected in the Closing Working Capital Statement shall be deemed to have been accepted by Sellers’ Representative. If Sellers’ Representative timely delivers the Statement of Objections, Buyer and Sellers’ Representative shall negotiate in good faith to resolve such objections within thirty (30) days after the delivery of the Statement of Objections (the “ Resolution Period ”), and, if the same are so resolved within the Resolution Period, the Post-Closing Adjustment and the Closing Working Capital Statement with such changes as may have been previously agreed in writing by Buyer and Sellers’ Representative, shall be final and binding.
(iii) Resolution of Disputes . If Sellers’ Representative and Buyer fail to reach an agreement with respect to all of the matters set forth in the Statement of Objections before expiration of the Resolution Period, then any amounts remaining in dispute (“ Disputed Amounts ” and any amounts not so disputed, the “ Undisputed Amounts ”) shall be submitted for resolution to Deloitte & Touche LLP (the “ Independent Accountants ”) who shall resolve the Disputed Amounts and make any required adjustments to the Post-Closing Adjustment and the Closing Working Capital Statement. The Independent Accountants shall only decide the Disputed Amounts and their decision for each Disputed Amount must be within the range of values assigned to each such item in the Closing Working Capital Statement and the Statement of Objections, respectively.
(iv) Fees of the Independent Accountants . The costs, fees and expenses of the Independent Accountants shall be paid fifty percent (50%) by Sellers and fifty percent (50%) by Buyer. Each party shall bear its own attorneys’ fees, costs and expenses related to such dispute.
(v) Determination by Independent Accountants . The Independent Accountants shall make a determination as soon as practicable within thirty (30) days after their engagement, and their resolution of the Disputed Amounts and their adjustments to the Closing Working Capital Statement and/or the Post-Closing Adjustment shall be conclusive and binding.
(vi) Payments of Post-Closing Adjustment . Payment of the Post-Closing Adjustment, together with interest, shall (A) be due (x) within five (5) Business Days of acceptance of the applicable Closing Working Capital Statement or (y) if there are Disputed Amounts, within five (5) Business Days of the final resolution of all Disputed Amounts pursuant to this Section 2.04(c) ; and (B) be paid by wire transfer of immediately available funds to such
account as is directed by Buyer or Sellers’ Representative, as the case may be; provided, however, the Post-Closing Adjustment due Buyer shall be satisfied first from the Indemnity Escrow Amount to the extent of funds available therefor pursuant to the Indemnity Escrow Agreement and then by payment of immediately available funds from Sellers. The amount of any Post-Closing Adjustment shall bear interest from and including the Closing Date to but excluding the date of payment at an annual rate of one percent (1%). Such interest shall be calculated daily on the basis of a 365-day year and the actual number of days elapsed, without compounding.
(d) Adjustments for Tax Purposes . Any payments made pursuant to Section 2.04 shall be treated as an adjustment to the Purchase Price by the parties for Tax purposes, unless otherwise required by applicable Law.
SECTION 2.05 Closing. Subject to the terms and conditions of this Agreement, the purchase and sale of the Interests shall take place at a closing (the “ Closing ”) to be held at 10:00 a.m., Eastern Standard Time, three (3) Business Days after the last of the conditions to Closing set forth in Article VII have been satisfied or waived (other than conditions which, by their nature, are to be satisfied on the Closing Date), at the offices of Sullivan & Worcester LLP, One Post Office Square, Boston, MA, or at such other date or at such other place as Sellers’ Representative and Buyer may mutually agree upon in writing (the day on which the Closing takes place being the “ Closing Date ”). The Closing shall be deemed to have been consummated at 11:59 p.m., Central Time, on the Closing Date (the “ Effective Time ”).
SECTION 2.06 Withholding Tax. Each party to this Agreement, the Earnest Money Escrow Agreement, or the Indemnity Escrow Agreement shall be entitled to deduct and withhold from any amounts payable by such party to any other Person such amounts as such party determines it is required to deduct and withhold under any provision of Tax Law, provided, however , the withholding party shall first notify the other party of its intent to withhold and give the other party an opportunity to demonstrate that no withholding (or a lesser amount) is required. All such withheld amounts shall be treated for all purposes as having been paid to the Person in respect of which such deduction and withholding was made.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
Except as set forth in the correspondingly numbered Section of the Disclosure Schedules, Sellers, jointly and severally (subject to the limitations of Section 8.04(e) ), represent and warrant to Buyer that the statements contained in this Article III are true and correct.
SECTION 3.01 Authority of Sellers. The execution and delivery of this Agreement by the Company and each Seller which is not a natural person, the performance by the Company and each such Seller of its obligations hereunder and the consummation by such Sellers of the transactions contemplated hereby have been duly authorized by all requisite action on the part of the Company and each such Seller. This Agreement has been duly executed and delivered by the Company and each Seller, and (assuming due authorization, execution and delivery by Buyer) this Agreement constitutes a legal, valid and binding obligation of the Company and each Seller enforceable against the Company and each Seller in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar Laws affecting creditors’ rights and remedies generally and to general principles of equity.
SECTION 3.02 Organization, Authority and Qualification of the Company . The Company is a limited liability company duly organized, validly existing and in good standing under the Laws of the state of Kentucky and has full limited liability company power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on its business as it is currently conducted. Complete copies of each Organizational Document of the Company have been made available to Buyer on the Datasite. Section 3.02 of the Disclosure Schedules sets forth each jurisdiction in which the Company is licensed or qualified to do business, and the Company is duly licensed or qualified to do business and is in good standing in each jurisdiction in which real properties are owned or leased by it and, except where the failure to be so licensed or qualified has not resulted, and would not reasonably be expected to result in, individually or in the aggregate, a material Liability to the Company, in each jurisdiction where the operation of its business as currently conducted makes such licensing or qualification necessary. Except for the ownership, leasing and operation of the Company Sites and the Transferred Properties, the Company does not conduct any material business.
SECTION 3.03 Capitalization. The Interests consist of 578,884.18 units of limited liability company membership interest. All of the Interests have been duly authorized and are validly issued. Each Seller is the record and beneficial owner of the units of limited liability company membership interest set forth opposite such Seller’s name in Section 3.03(a) of the Disclosure Schedules, free and clear of all Encumbrances. Upon consummation of the transactions contemplated by this Agreement, Buyer shall own all of the Interests, free and clear of all Encumbrances.
(a) All of the Interests were issued in compliance with applicable Laws and the Organizational Documents of the Company. None of the Interests were issued in violation of any agreement, arrangement or commitment to which any Seller or the Company is a party or is subject to or in violation of any preemptive or similar rights of any Person.
(b) Other than as set forth in Section 3.03(c) of the Disclosure Schedules, there are no outstanding or authorized options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to the membership interests of the Company or obligating any Seller or the Company to issue or sell any units of membership interest in the Company. The Company does not have outstanding or authorized any appreciation, phantom equity, profit participation or similar rights. Other than as set forth in Section 3.03(c) of the Disclosure Schedules, there are no voting trusts, member agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any of the Interests.
SECTION 3.04 No Subsidiaries. The Company does not own, or have any legal or beneficial ownership or investment (whether debt or equity) in any other Person.
SECTION 3.05 No Conflicts; Consents. Except as set forth in Section 3.05 of the Disclosure Schedules, the execution, delivery and performance by each Seller and the Company of this Agreement and the consummation of the transactions contemplated hereby, do not and will
not: (a) conflict with or result in a violation or breach of, or default under, any provision of the Organizational Documents of the Company or any Seller that is not a natural person; (b) conflict with, in any material respect, or result in a material violation or breach of any provision of any Law or Governmental Order applicable to any Seller or the Company; (c)(i) require notice to, or (ii) require the consent of or other action by, any Person under, conflict with, result in a violation or breach of, constitute a default or an event that, with or without notice or lapse of time or both, would constitute a default under, result in the acceleration of or create in any party the right to accelerate, terminate, modify or cancel any material Contract or material Permit to which any Seller or the Company is a party or bound or to which any of their respective properties and assets or the business of the Company is subject; or (d) result in the creation or imposition of any Encumbrance on any of the Interests or any properties or assets of the Company. Except as set forth in Section 3.05 of the Disclosure Schedule, no Governmental Order, or declaration or filing with, or notice to, any Governmental Authority or any material Permit is required by or with respect to any Seller or the Company in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby.
SECTION 3.06 Financial Statements. Complete copies of the Company’s audited financial statements consisting of the balance sheet of the Company as at December 31 in each of 2010, 2011 and 2012 and the related statements of income and retained earnings, members’ equity and cash flow for the years then ended (the “ Audited Financial Statements ”), and unaudited financial statements consisting of the balance sheet of the Company as at September 30, 2013 and the related statements of income and retained earnings, members’ equity and cash flow for the nine-month period then ended (the “ Interim Financial Statements ” and together with the Audited Financial Statements, the “ Financial Statements ”) have been made available to Buyer on the Datasite. The Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved, subject, in the case of the Interim Financial Statements, to normal and recurring year-end adjustments (the effect of which will not be materially adverse) and the absence of notes (that, if presented, would not differ materially from those presented in the Audited Financial Statements). The Financial Statements are based on the books and records of the Company, and fairly present, in all material respects, the financial condition of the Company as of the respective dates they were prepared and the results of the operations of the Company for the periods indicated. The balance sheet of the Company as of December 31, 2012 is referred to herein as the “ Balance Sheet ” and the date thereof as the “ Balance Sheet Date ” and the balance sheet of the Company as of September 30, 2013 is referred to herein as the “ Interim Balance Sheet ” and the date thereof as the “ Interim Balance Sheet Date ”. The Company maintains a standard system of accounting established and administered in accordance with GAAP.
SECTION 3.07 Undisclosed Liabilities . Except as set forth in Section 3.07 of the Disclosure Schedule, the Company has no material Liabilities except (a) those which are stated or adequately reflected or reserved against in the Interim Balance Sheet as of the Interim Balance Sheet Date, (b) those which have been incurred in connection with the transactions contemplated hereby, and (c) those which have been incurred in the ordinary course of business consistent with past practice since the Interim Balance Sheet Date.
SECTION 3.08 Absence of Certain Changes, Events and Conditions. Except as set forth in Section 3.08 of the Disclosure Schedule, since the Interim Balance Sheet Date (i) through
the date hereof, the Company has conducted its business, in all material respects, in the ordinary course of business and (ii) there has not been any:
(a) event, occurrence or development that has had, or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;
(b) amendment of the Organizational Documents of the Company;
(c) change in the number of units of membership interest representing the Interests;
(d) issuance, sale or other disposition of any of membership interests in the Company, or grant of any options, warrants or other rights to purchase or obtain (including upon conversion, exchange or exercise) any membership interests in the Company;
(e) change in any method of accounting or accounting practice of the Company, except as required by GAAP or as disclosed in the notes to the Financial Statements;
(f) change in the Company’s cash management practices and its policies, practices and procedures with respect to collection of accounts receivable, establishment of reserves for uncollectible accounts, accrual of accounts receivable, inventory control, prepayment of expenses, payment of trade accounts payable, accrual of other expenses, deferral of revenue and acceptance of customer deposits;
(g) cancellation of any debt owed to the Company or waiver of any right, claim or entitlement having a value in excess of $100,000 or otherwise material to the operation of the Company’s business in the ordinary course;
(h) loan to (or forgiveness of any loan to) any of its members, managers or employees (excluding advancement of expenses in accordance with Company policy and past practice);
(i) entry into a new line of business or abandonment or discontinuance of existing lines of business;
(j) with respect to the Company, adoption of any plan of merger, consolidation, reorganization, liquidation or dissolution or filing of a petition in bankruptcy under any provisions of federal or state bankruptcy Law or consent to the filing of any bankruptcy petition against it under any similar Law;
(k) purchase, lease or other acquisition by the Company of the right to own, use or lease any property or assets (other than inventory or supplies) for an amount in excess of $100,000, individually (in the case of a lease, annually) or $500,000 in the aggregate (in the case of a lease, for the entire term of the lease, not including any option term), except in the ordinary course of business consistent with past practice;
(l) purchase of inventory or supplies, except in the ordinary course of business consistent with past practices;
(m) acquisition (whether by merger, consolidation or purchase of assets or stock) of a substantial portion of the assets or business of any Person or any division thereof;
(n) action by the Company to (i) make, change or rescind any material Tax election or amend any Tax Return or (ii) take any position on any Tax Return, take any action, omit to take any action or enter into any other transaction that would have the effect of materially increasing the Tax liability or materially reducing any Tax asset of Buyer or the Company in respect of any Post-Closing Tax Period; or
(o) any Contract to do any of the foregoing, or any action or omission that would result in any of the foregoing.
SECTION 3.09 Material Contracts.
(a) Except for any Contracts that constitute Permitted Encumbrances and any Contracts that relate solely to the Transferred Properties, Section 3.09(a) of the Disclosure Schedules lists each of the following Contracts of the Company (such Contracts, together with the Contracts set forth in Section 3.10(b) and Section 3.12(d) of the Disclosure Schedules, being “ Material Contracts ”):
(i) each Contract of the Company involving aggregate consideration in excess of $100,000 and which, in each case, cannot be cancelled by the Company without penalty and without more than ninety (90) days’ notice including any such Contract that renews automatically or contains an “evergreen” provision which is not terminable by the Company without penalty and without more than ninety (90) days’ notice;
(ii) all Contracts that require the Company to purchase its total requirements of any product or service from a third party or that contain “take or pay” provisions;
(iii) all Contracts (excluding “standard form” Contracts for the purchase, sale or license of products or services in the ordinary course of business as made available to Buyer on the Datasite) that provide for the indemnification by the Company of any Person or the assumption of any Tax, environmental or other Liability of any Person;
(iv) all Contracts that impose continuing obligations on the Company, as of the Effective Time, that relate to the acquisition or disposition of any business operation, a material amount of stock or assets of any other Person or any real property (whether by merger, sale of stock, sale of assets or otherwise) in the last five (5) years;
(v) all broker, distributor, dealer, manufacturer’s representative, franchise, agency, sales promotion, market research, marketing consulting and advertising Contracts involving aggregate consideration in excess of $35,000 to which the Company is a party or bound;
(vi) all employment, severance or consulting Contracts (other than Benefit Plans) with employees or independent contractors or consultants (or similar arrangements) to which the Company is a party and which are not cancellable without penalty and without more than ninety (90) days’ notice;
(vii) all Contracts representing or evidencing Indebtedness (including, without limitation, guarantees) of the Company or an Encumbrance, other than Permitted Encumbrances, on any Company asset;
(viii) all Contracts (excluding Permits) involving aggregate consideration in excess of $100,000 with any Governmental Authority to which the Company is a party or bound;
(ix) all Contracts that relate to gift cards, rewards programs or any similar promotional programs;
(x) all Contracts that limit or purport to limit the ability of the Company to compete in any line of business or with any Person or in any geographic area or during any period of time;
(xi) any Contracts to which the Company is a party that provide for any joint venture, partnership or similar arrangement by the Company;
(xii) all Contracts between or among the Company on the one hand and a Seller or any Affiliate of any Seller (other than the Company) on the other hand; and
(xiii) all Contracts for the purchase or supply of inventory or supplies from a Material Supplier.
(b) Each Material Contract is valid and binding on the Company in accordance with its terms and is in full force and effect with respect to the Company, and to Sellers’ Knowledge, each other party thereto, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar Law affecting creditors’ rights and remedies generally and to general principles of equity. Neither the Company nor, to Sellers’ Actual Knowledge, any other party thereto is in breach of or default under (or is alleged to be in breach of or default under) any Material Contract in any material respect. The Company has not provided nor has any other party thereto provided, to the Company, written notice of any intention to terminate any Material Contract (other than termination of Contracts described in Section 3.09(a)(vii) ). To Sellers’ Actual Knowledge, no event or circumstance has occurred that, with notice or lapse of time or both, would constitute an event of default under any Material Contract or result in a termination thereof or would cause or permit the acceleration or other changes of any right or obligation or the loss of any benefit thereunder. Complete and correct copies of each Material Contract (including all modifications, amendments and supplements thereto and waivers thereunder) have been made available to Buyer on the Datasite.
SECTION 3.10 Title to Assets; Real Property.
(a) The Company has fee simple title (or will have at Closing fee simple title) to all Owned Real Property, good and marketable leasehold title to all Leased Real Property and good and valid title to all personal property and other assets reflected in the Audited Financial Statements or acquired after the Balance Sheet Date, other than personal property sold or otherwise disposed of in the ordinary course of business consistent with past practice since the Balance Sheet Date. All such properties and assets (including leasehold interests) are free and
clear of Encumbrances except for those Encumbrances evidencing or securing Indebtedness that are properly recorded in the land records for the county where any applicable Company Site is located or which an accurate and current title search of such Company Site would reveal, in each case as of October 1, 2013, those Encumbrances set forth in Section 7.02(i) of the Disclosure Schedules and the following (clauses (i) through (v) below, collectively, the “ Permitted Encumbrances ”):
(i) those items set forth in Section 3.10(a)(i) of the Disclosure Schedules;
(ii) statutory liens for current Taxes not yet due and payable or being contested in good faith by appropriate procedures or proceedings and for which there are adequate accruals or reserves on the Balance Sheet which contested Taxes, if material, are more particularly described in Section 3.10(a)(ii) of the Disclosure Schedules;
(iii) mechanics, carriers’, workmen’s, repairmen’s or other like liens arising or incurred in the ordinary course of business consistent with past practice or amounts that are not delinquent and which are not, individually or in the aggregate, material to the business of the Company;
(iv) easements, rights of way, zoning ordinances and other Encumbrances (other than Encumbrances evidencing or securing Indebtedness) affecting any Company Site which either (A) do not, individually or in the aggregate, detract from or impair in any material respect the value or continued use of such Company Site, or (B) are properly recorded in the land records for the county where such Company Site is located or which an accurate and current title search, survey or inspection of such Company Site would reveal, in each case as of October 1, 2013; or
(v) other than with respect to any Company Site, liens arising under original purchase price conditional sales contracts and equipment leases with third parties entered into in the ordinary course of business consistent with past practice which are not, individually or in the aggregate, material to the business of the Company.
(b) Section 3.10(b) of the Disclosure Schedules lists (i) the street address and legal description of each Company Site; (ii) if such Company Site is Leased Real Property, the applicable lease documents (including any amendments and modifications thereto), the landlord under the lease, the base rental amount currently being paid, and the expiration of the term of such lease or sublease; and (iii) if such Company Site is leased in whole or in part to a third party, the applicable lease documents (including any amendments and modifications thereto), the tenant under the lease, the base rental amount currently being paid, and the expiration of the term of such lease or sublease. The Company has delivered or made available to Buyer on the Datasite complete and correct copies of any leases affecting the Owned Real Property or the Leased Real Property pursuant to which the Company is either the lessor or the lessee. Except for the Company Sites and the Transferred Properties, the Company does not have any interest in any real property. Except as set forth in Section 3.10(b) of the Disclosure Schedules, the Company is not a sublessor or grantor under any sublease or other instrument granting to any other Person any right to the possession, lease, occupancy or enjoyment of any Company Site.
(c) There are no Actions (nor to Sellers’ Actual Knowledge, any investigations) pending nor, to Sellers’ Actual Knowledge, threatened against or affecting any Company Site or any portion thereof or interest therein in the nature or in lieu of condemnation or eminent domain proceedings.
(d) On the Closing Date, no Company Site will be subject to any right of first refusal, option to purchase or lease granted to a third person, except for any right of first refusal or option to purchase or lease properly recorded in the land records for the county where such Company Site is located or which an accurate and current title search of such Company Site would reveal, in each case as of October 1, 2013, or as otherwise set forth in Section 3.10(a)(i) of the Disclosure Schedules.
(e) Except as set forth in Section 3.10(e) of the Disclosure Schedule, not more than one (1) month’s rent has been prepaid under any lease of a Company Site where the Company is either the lessor or the lessee. The Company (either as lessor or lessee) has no present or future obligation to construct any tenant improvements, to pay any allowance to construct any tenant improvement or to pay any lease commissions under any lease affecting any Company Site.
(f) To Sellers’ Actual Knowledge, there are no intended public improvements which may involve any charge being levied or assessed, or which may result in the creation of any Encumbrance upon any Company Site.
(g) There are no outstanding mechanics’ liens, or rights to claim a mechanics’ lien in favor of any materialman, laborer or any other person in connection with labor or materials furnished to or performed on any portion of any Company Site that will not have been fully paid for on or prior to the Closing Date.
(h) To Sellers’ Knowledge, all appurtenances, utilities and material services needed for the current use and operation of all of the Company Sites (including, without limitation, gas, water, electricity and telephone) are available thereto. To Sellers’ Actual Knowledge, no fact, condition or proceeding exists which would result in the termination or impairment of the furnishing of such utilities to any of the Company Sites.
(i) Section 3.10(i) of the Disclosure Schedules lists the outstanding principal amount of Indebtedness as of September 30, 2013, and the lender thereto, with respect to each Company Site that is secured by a lien on such Company Site, which Indebtedness will be paid off or satisfied on or before Closing pursuant to Section 2.03(a) .
SECTION 3.11 Condition And Sufficiency of Assets.
(a) All machinery, equipment and other tangible assets that are material to the Company’s business and are used by the Company are owned or leased by the Company and are in good operating condition, maintenance and repair, ordinary wear and tear excepted, are usable in the ordinary course of business, and are reasonably adequate and suitable for the uses to which they are being put in the operation of the Company’s business as of the date hereof.
(b) To Sellers’ Knowledge, there are no patent or latent defects with respect to the buildings, structures and other improvements on each Company Site (ordinary wear and tear, casualty and condemnation excepted) that would materially interfere with the continued conduct of the Company’s business on each Company Site in substantially the manner conducted as of the date hereof.
SECTION 3.12 Intellectual Property.
(a) “ Intellectual Property ” means all United States, state and foreign intellectual property, including patents, inventions, discoveries, technology and know-how, copyrights and copyrightable works (including software and software code in any form, including source code and executable or object code), trademarks, service marks, trade names, brand names, corporate names, domain names, URLs, web sites, email addresses, logos trade dress and other source indicators, trade secrets and other related confidential information used in the conduct of the business of the Company and related proprietary rights, interests and protections, however arising. “ Company Intellectual Property ” means Intellectual Property that is owned by the Company and “ Licensed Intellectual Property ” means Intellectual Property licensed to the Company by a third party.
(b) Section 3.12(b) of the Disclosure Schedules lists all Company Intellectual Property that is subject to any issuance, registration, or application filed with, or issued by, any Governmental Authority or authorized private registrar in any jurisdiction (collectively, “ Intellectual Property Registrations ”), including registered trademarks, domain names and copyrights, issued and reissued patents and pending applications for any of the foregoing. All Intellectual Property Registrations are in full force and effect to the extent necessary for the conduct of the business of the Company other than U.S. Patent and Trademark Office actions issued in the ordinary course of prosecution of Intellectual Property Registrations.
(c) The Company owns, exclusively, all right, title and interest in and to the Company Intellectual Property material to and used in or necessary to the Company’s current business or operations, free and clear of Encumbrances (excluding non-exclusive licenses granted by Company to third parties in the ordinary course of business that do not limit the use of such Company Intellectual Property by the Company and none of which require any payment of license fees or royalties to the Company).
(d) Section 3.12(d) of the Disclosure Schedules lists all licenses, sublicenses and other Contracts whereby the Company is granted rights, interests and authority, whether on an exclusive or non-exclusive basis, with respect to any Licensed Intellectual Property that is used in or necessary for the Company’s current business or operations, but excluding (i) any off-the-shelf, clickwrap, browsewrap, terms of use or other shrinkwrap license; or (ii) any licenses with fees and other payments of less than $15,000 per year.
(e) To Sellers’ Knowledge, the Company Intellectual Property as currently owned and used by the Company, and the Company’s conduct of its business as currently conducted does not infringe, violate or misappropriate the Intellectual Property of any Person. The Company has not received any written communication, or to Sellers’ Knowledge, oral communication, alleging, and within the past three (3) years, no Action has been instituted, settled
or, to Sellers’ Actual Knowledge, threatened with respect to, any such infringement, violation or misappropriation. None of the Company Intellectual Property is subject to any outstanding Governmental Order.
(f) The Company has not granted rights or licenses to any Person with respect to any Company Intellectual Property or Licensed Intellectual Property, excluding any non-exclusive licenses granted by the Company of Company Intellectual Property to third parties in the ordinary course of business that do not limit the use of such Company Intellectual Property by the Company. To Sellers’ Knowledge, no Person has infringed, violated or misappropriated, or is infringing, violating or misappropriating, any Company Intellectual Property.
SECTION 3.13 Inventory. The inventory of the Company at each Company Site is of a quality usable and salable in the ordinary course of business consistent with past practice and adequate (but not excessive) for the operation of such Company Site in the ordinary course. Except as set forth in Section 3.13 of the Disclosure Schedules, all of the inventory of the Company is owned by the Company free and clear of all Encumbrances (other than Permitted Encumbrances), and no inventory is held on a consignment basis.
SECTION 3.14 Accounts Receivable. The accounts receivable reflected on the Interim Balance Sheet represent, and the accounts receivable taken into account in the Closing Working Capital will represent, valid, bona fide obligations arising from sales actually made in the ordinary course of business consistent with past practice.
SECTION 3.15 Suppliers. Section 3.15 of the Disclosure Schedules sets forth (i) each supplier to which the Company has paid consideration for goods or services rendered in an amount greater than or equal to $250,000 for the twelve months ended September 30, 2013 (collectively, the “ Material Suppliers ”); and (ii) the amount of purchases from each Material Supplier during such periods. The Company has not received any written notice (or to Sellers’ Knowledge, oral notice) that any of its Material Suppliers has ceased, or intends to cease, to supply goods or services to the Company or to otherwise terminate or materially reduce its relationship with the Company.
SECTION 3.16 Insurance . Section 3.16 of the Disclosure Schedules sets forth a complete and correct list of all current policies or binders of fire, liability, product liability, umbrella liability, real and personal property, workers’ compensation, vehicular, directors and officers’ liability, fiduciary liability and other casualty and property insurance maintained by the Company and relating to the assets, business, operations, managers and employees of the Company (collectively, the “ Insurance Policies ”) and complete and correct copies of such Insurance Policies have been made available to Buyer on the Datasite. Such Insurance Policies are, and as of the Closing Date will be (or comparable insurance policies will be) in full force and effect. The Company has not received any written notice as of the date hereof of cancellation of, premium increase with respect to, or alteration of coverage under, any of such Insurance Policies. All premiums due on such Insurance Policies have either been paid or, if due and payable prior to Closing, will be paid prior to Closing, in accordance with the payment terms of each Insurance Policy. Within the past five years of the date hereof, no such Insurance Policies have been subject to any lapse in coverage. There are no claims by the Company related to the business of the Company pending under any such Insurance Policies as to which coverage has been questioned,
denied or disputed in writing or in respect of which there is an outstanding reservation of rights. The Company is not in default under, nor has it otherwise failed to comply with, in any material respect, any provision contained in any such Insurance Policy.
SECTION 3.17 Legal Proceedings; Governmental Orders.
(a) Except as set forth in Section 3.17 of the Disclosure Schedules, there are no Actions (or to Sellers’ Actual Knowledge, any investigations) pending or, to Sellers’ Actual Knowledge, threatened (i) against or by the Company or affecting any of its material properties or assets, (ii) by or against any Seller or any Affiliate of any Seller and relating to the Company; or (iii) against or by the Company, any Seller or any Affiliate of any Seller that challenges or seeks to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement.
(b) There are no unsatisfied judgments, penalties or awards against or affecting the Company or any of its properties or assets.
SECTION 3.18 Compliance With Laws; Permits.
(a) Except as set forth in Section 3.18(a) of the Disclosure Schedules, the Company is currently and has complied during the five (5) years prior to the Closing Date, in all material respects, with all Laws and Governmental Orders applicable to it or its business, properties or assets.
(b) All material Permits required for the Company to conduct its business have been obtained by it and are valid and in full force and effect. Section 3.18(b) of the Disclosure Schedules lists all current material Permits issued to the Company, including the names of the Permits and their respective dates of issuance and expiration. To Sellers’ Knowledge, no event has occurred that, with or without notice or lapse of time or both, would reasonably be expected to result in the revocation, suspension, lapse or limitation of any Permit set forth in Section 3.18(b) of the Disclosure Schedules. For purposes of this Section 3.18(b) , “Permits” does not include Environmental Permits.
SECTION 3.19 Environmental Matters.
(a) Except as set forth in Section 3.19(a) of the Disclosure Schedules, the Company is currently and has been in compliance, in all material respects, with all Environmental Laws during the five (5) years prior to the Closing Date and has not received from any Person at any time: (i) any Environmental Notice or Environmental Claim; or (ii) any written request for information pursuant to Environmental Law, which, in each case, either remains pending or unresolved, or is the source of ongoing obligations or requirements as of the Closing Date.
(b) Except as set forth in Section 3.19(b) of the Disclosure Schedules, the Company has obtained and is in compliance, in all material respects, with all Environmental Permits (each of which is listed in Section 3.19(b) of the Disclosure Schedules) necessary for the ownership, lease, operation or use of the business or assets of the Company and all such Environmental Permits are in full force and effect and will be maintained in full force and effect through the Closing Date in accordance with Environmental Law and applications for renewal of such Environmental Permits have been or will be timely filed when due.
(c) Except as set forth in Section 3.19(c) of the Disclosure Schedules, no real property currently or formerly owned, operated or leased by the Company is listed on, or has been proposed for listing on, the National Priorities List (or CERCLIS) under CERCLA, or any similar state list.
(d) Except as set forth in Section 3.19(d) of the Disclosure Schedules, there has been no Release of Hazardous Materials in reportable quantities on, under or from any Former Company Site, any of the Transferred Properties or, to Sellers’ Knowledge, any Company Site, that has resulted in or would reasonably be expected to result in the creation of any material Liability to the Company under any Environmental Law. The Company has not received any Environmental Notice that any Company Site, any of the Transferred Properties or any Former Company Site (including soils, groundwater, surface water, buildings and other structures located on any such real property) has been contaminated with any Hazardous Material which would reasonably be expected to result in an Environmental Claim against, or a violation of Environmental Law or any Environmental Permit by, the Company. All Releases of Hazardous Materials on, under, at or from any Company Site which are known to the Company and are in reportable quantities, have been properly reported to the appropriate Governmental Authorities in accordance with Environmental Laws, and any Remediation required has been or is being undertaken by the Company in accordance with Environmental Laws. All sites at which the Company is conducting or responsible for Remediation (and the costs incurred to date) are listed in Section 3.19(d) of the Disclosure Schedules, and the costs of such Remediation are eligible for reimbursement under the appropriate state tank trust fund.
(e) Section 3.19(e) of the Disclosure Schedules contains a complete and correct list of all known active and abandoned aboveground and underground storage tanks owned or operated by the Company, or otherwise located, on the Company Sites and the quantity, capacity and location (above ground or underground) of the storage tanks. All known underground storage tanks located on the Company Sites are currently registered with the appropriate Governmental Authority as required by applicable Environmental Law, and all required registration fees and transfer charges and taxes or impositions therefor and voluntary fees for trust fund participation, if applicable, for such storage tanks have been paid in full. The Company has taken, and will take through Closing, all commercially reasonable actions necessary to establish and maintain eligibility for coverage of its storage tanks under the applicable state storage tank trust fund.
(f) Except as set forth in Section 3.19(f) of the Disclosure Schedules, no off-site Hazardous Materials treatment, storage, or disposal facilities or locations used by the Company and any predecessors as to which the Company may retain liability has been placed or proposed for placement on the National Priorities List (or CERCLIS) under CERCLA, or any similar state list. The Company has not received any Environmental Notice or request for information regarding potential liabilities with respect to such off-site Hazardous Materials treatment, storage, or disposal facilities or locations used by the Company.
(g) Except as set forth in Section 3.19(g) of the Disclosure Schedules, the Company has not retained or assumed, by contract or by operation of Law, any liabilities or obligations of third parties under Environmental Law.
(h) The Company has provided or otherwise made available to Buyer on the Datasite complete and correct copies of: (i) all material environmental reports, studies, audits, records, sampling data, site assessments, risk assessments, economic models and other similar documents with respect to the business or assets of the Company or any real property currently or formerly owned, operated or leased by the Company which are in the possession or control of any Seller or the Company related to compliance with Environmental Laws, Environmental Claims or Environmental Notices or the Release of Hazardous Materials; and (ii) all material documents concerning planned or anticipated capital expenditures required to reduce, offset, limit or otherwise control pollution and/or emissions, manage waste or otherwise ensure compliance with current or future Environmental Laws (including, costs of Remediation, pollution control equipment and operational changes).
(i) Except as set forth in Section 3.19(a) through (f) of the Disclosure Schedules, there is no condition or event concerning the Release or regulation of Hazardous Materials at any Former Company Site, any of the Transferred Properties, or to Seller’s Knowledge, any Company Site, that, after the Closing Date, is reasonably expected to prevent, materially impede or materially increase the costs associated with the ownership, lease, operation, performance or use of the business or assets of the Company as currently carried out.
SECTION 3.20 Employee Benefit Matters.
(a) Section 3.20(a) of the Disclosure Schedules contains a complete and correct list of each pension, benefit, retirement, welfare, equity, compensation, profit-sharing, deferred compensation, incentive, performance award, bonus, phantom equity, equity or equity-based, change in control, retention, severance, vacation, paid time off, fringe-benefit and other similar agreement, plan, policy, program or arrangement (and any amendments thereto), in each case whether or not reduced to writing and whether funded or unfunded, including each “employee benefit plan” within the meaning of Section 3(3) of ERISA, whether or not tax-qualified and whether or not subject to ERISA, which is or has been maintained, sponsored, contributed to, or required to be contributed to by the Company or any ERISA Affiliate for the benefit of any current or former employee, officer, director, retiree, independent contractor or consultant of the Company or any ERISA Affiliate or any spouse or dependent of such individual, or under which the Company or any ERISA Affiliate has or may have any Liability, or with respect to which Buyer or any of its Affiliates would reasonably be expected to have any Liability, contingent or otherwise after the Closing (as listed in Section 3.20(a) of the Disclosure Schedules, each, a “ Benefit Plan ”).
(b) With respect to each Benefit Plan, the Company has made available to Buyer on the Datasite current, complete and correct copies of each of the following: (i) where the Benefit Plan has been reduced to writing, the plan document together with all amendments; (ii) where the Benefit Plan has not been reduced to writing, a written summary of all material plan terms; (iii) where applicable, copies of any trust agreements or other funding arrangements, custodial agreements, insurance policies and contracts; (iv) copies of any summary plan descriptions, summaries of material modifications, and employee handbooks relating to any Benefit Plan; (v) in the case of any Benefit Plan for which a Form 5500 is required to be filed, a copy of the most recently filed Form 5500, with schedules attached; (vi) actuarial valuations and reports related to any Benefit Plans with respect to the two (2) most recently completed plan
years; and (vii) copies of material notices, letters or other correspondence from the Internal Revenue Service, Department of Labor or Pension Benefit Guaranty Corporation relating to the Benefit Plan received within the last five (5) years.
(c) Except as would not reasonably be expected to result in any material Liability to the Buyer, each Benefit Plan (other than any multi-employer plan within the meaning of Section 3(37) of ERISA (each a “ Multi-Employer Plan ”)) has been established, administered and maintained, in all material respects, in accordance with its terms and in compliance, in all material respects, with all applicable Laws (including ERISA and the Code) and all required returns (including, without limitation, information returns) have been prepared, in all material respects, and timely filed, in accordance with all applicable Laws with respect to each Benefit Plan. To the Sellers’ Knowledge, nothing has occurred with respect to any Benefit Plan that has subjected or would reasonably be expected to subject the Company or, with respect to any period on or after the Closing Date, Buyer or any of its Affiliates, to a penalty under Section 502 of ERISA or to an excise tax or penalty under Section 4975 of the Code. All benefits, contributions and premiums relating to each Benefit Plan have been timely paid in accordance with the terms of such Benefit Plan and all applicable Laws and accounting principles, and all benefits accrued under any unfunded Benefit Plan have been paid, accrued or otherwise adequately reserved to the extent required by, and in accordance with, GAAP.
(d) Neither the Company nor any of its ERISA Affiliates nor to Sellers’ Knowledge any of their respective directors, officers, employees or any other fiduciary with respect to a Benefit Plan has (i) incurred or reasonably expects to incur, either directly or indirectly, any material Liability under Title I or Title IV of ERISA or related provisions of the Code; (ii) failed to timely pay premiums to the Pension Benefit Guaranty Corporation; or (iii) engaged in any transaction which would be reasonably likely to give rise to liability under Section 4069 or Section 4212(c) of ERISA.
(e) Except as set forth in Section 3.20(e) of the Disclosure Schedules, with respect to each Benefit Plan (i) no such plan is a Multi-Employer Plan; (ii) no such plan is a “multiple employer plan” within the meaning of Section 413(c) of the Code or a “multiple employer welfare arrangement” (as defined in Section 3(40) of ERISA); (iii) no Action has been initiated by the Pension Benefit Guaranty Corporation to terminate any such plan or to appoint a trustee for any such plan; (iv) no such plan is subject to the minimum funding standards of Section 302 of ERISA or Section 412 of the Code; and (v) no “reportable event,” as defined in Section 4043 of ERISA, has occurred with respect to any such plan.
(f) Except as required by applicable Law, no provision of any Benefit Plan would reasonably be expected to result in any limitation on the Company, Buyer or any of their Affiliates from amending or terminating any Benefit Plan. Except as set forth in Section 3.20(f) of the Disclosure Schedules, none of the Company, any Seller or any of their Affiliates have made any binding commitment, obligation or representation to any manager, employee, independent contractor or consultant to adopt, amend or modify any Benefit Plan or any collective bargaining agreement, in connection with the consummation of the transactions contemplated by this Agreement or otherwise.
(g) Other than as required under Section 601 et. seq. of ERISA or other applicable Law, no Benefit Plan provides post-termination or retiree welfare benefits to any individual for any reason, and neither the Company nor any of its ERISA Affiliates has any Liability to provide post-termination or retiree welfare benefits to any individual or ever represented, promised or contracted to any individual that such individual would be provided with post-termination or retiree welfare benefits. The provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, or any equivalent state statute, and the Health Insurance Portability and Accountability Act of 1996, or any equivalent state statute, have been complied with in all material respects.
(h) There are no Actions (or to Sellers’ Actual Knowledge, investigations) pending or, to Sellers’ Actual Knowledge, threatened, relating to a Benefit Plan (other than routine claims for benefits), and no Benefit Plan has within the three (3) years prior to the date hereof been the subject of an examination or audit by a Governmental Authority or the subject of an application or filing under or is a participant in, an amnesty, voluntary compliance, or similar program sponsored by any Governmental Authority.
(i) Each Benefit Plan that is subject to Section 409A of the Code materially complies, and has materially complied, in form and operation, with such section and all applicable regulatory guidance (including notices, rulings and proposed and final regulations).
(j) Each individual who is classified by the Company as an independent contractor has been properly classified for purposes of participation and benefit accrual under each Benefit Plan.
(k) Except as otherwise set forth in or contemplated by this Agreement and except as set forth in Section 3.20(k) of the Disclosure Schedules, neither the execution of this Agreement nor any of the transactions contemplated by this Agreement will (either alone or upon the occurrence of any additional or subsequent events): (i) entitle any current or former manager, employee, independent contractor or consultant of the Company to severance pay or any other payment; (ii) accelerate the time of payment, funding or vesting, or increase the amount of compensation due to any such individual; (iii) increase the amount payable under or result in any other material obligation pursuant to any Benefit Plan; or (v) result in “excess parachute payments” within the meaning of Section 280G(b) of the Code.
(l) The representations and warranties contained in this Section 3.20 are the only representations and warranties being made with respect to compliance with, or liability under, Laws applicable to any of the Benefit Plans, including ERISA and the Code
SECTION 3.21 Employment Matters.
(a) Section 3.21(a) of the Disclosure Schedules contains a list of all Persons who are employees, independent contractors or consultants of the Company as of the date hereof, and sets forth for each such individual the following: (i) name; (ii) title or position (including whether full or part time); (iii) hire date; (iv) current annual base salary rate (or hourly rate, if applicable); (v) commission, bonus or other incentive-based compensation; and (vi) whether classified as exempt or non-exempt for wage, hours and benefit purposes. Except as set forth in
Section 3.09 and Section 3.20(a) of the Disclosure Schedules, there are no outstanding Contracts of the Company with respect to payment or maintenance of any compensation, commissions, bonuses or benefits to any employee, independent contractor or consultant.
(b) The Company is not, and has not been for the past three (3) years, a party to, bound by, or negotiating any collective bargaining agreement or other Contract with a union, works council or labor organization (collectively, “ Union ”), and there is not, and has not been for the past three (3) years, any Union representing or purporting to represent any employee of the Company, and, to Sellers’ Knowledge, no Union or group of employees is seeking or has sought to organize employees for the purpose of collective bargaining. There is no pending, nor to Sellers’ Actual Knowledge, any threatened strike, slowdown, work stoppage, lockout, concerted refusal to work overtime or other similar labor disruption or dispute affecting the Company or any of its employees.
(c) Except as set forth in Section 3.21(c) of the Disclosure Schedules, the Company is and has been during the five (5) years prior to the Closing Date in compliance, in all material respects, with all applicable Laws pertaining to employment and employment practices. All individuals characterized and treated by the Company as independent contractors or consultants are properly treated as independent contractors under all applicable Laws. All employees classified as exempt under the Fair Labor Standards Act and state and local wage and hour laws are properly classified in all material respects. To Sellers’ Knowledge, all employees are legally authorized to work in the United States.
(d) In the three (3) years preceding the date hereof, the Company has not taken any action which would constitute a “plant closing” or “mass layoff” within the meaning of the WARN Act or issued any notification of a plant closing or mass layoff required by the WARN Act.
(e) The Company is not subject to any affirmative action obligation under any Law, including Executive Order 11246 nor is the Company a government contractor or subcontractor for purposes of any Law with respect to the terms and conditions of employment, including prevailing wage Laws.
SECTION 3.22 Taxes.
(a) All Tax Returns required to be filed on or before the Closing Date by the Company have been, or will be, timely filed with the appropriate Governmental Authority (after giving effect to any valid extensions of time in which to make such filings) and are, or will be, complete and correct in all material respects and were completed in accordance with applicable Tax Laws. All Taxes due and owing by the Company on or before the Closing Date (whether or not shown on any Tax Return) have been, or will be, timely paid.
(b) The Company has (i) withheld all Taxes and other amounts required to have been withheld under applicable Law in connection with amounts paid or owing to any employee, independent contractor, creditor, customer, shareholder, member or other party; (ii) timely remitted or will timely remit, all such amounts to the appropriate Governmental Authority;
and (iii) properly completed and timely filed all required Tax Returns and other required forms and otherwise complied with all other withholding provisions of applicable Law.
(c) No written claim has been made by any taxing authority in any jurisdiction where the Company does not file Tax Returns that it is, or may be, subject to Tax by that jurisdiction.
(d) There are no outstanding agreements or waivers presently in effect extending the statutory period of limitations applicable to any claim for, or the period for the collection or assessment of, Taxes due from or with respect to the Company for any taxable period, and there are no outstanding requests from any Governmental Authority for any such waiver or extension. No power of attorney has been granted by or with respect to the Company in respect of any matter relating to Taxes which power of attorney is still in effect.
(e) The amount of the Company’s Liability for unpaid Taxes for all periods ending on or before September 30, 2013 does not, in the aggregate, exceed the reserve for Taxes (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) reflected on the Interim Financial Statements. The amount of the Company’s Liability for unpaid Taxes for all periods following the end of the recent period covered by the Interim Financial Statements shall not, in the aggregate, exceed the amount of accruals for Taxes (excluding reserves for deferred income Taxes) as adjusted for the passage of time in accordance with the past custom and practice of the Company (and which accruals shall not exceed comparable amounts incurred in similar periods in prior years).
(f) Section 3.22(f) of the Disclosure Schedules lists all federal, state and local income Tax Returns filed with respect to the Company for taxable periods ended on or after December 31, 2010, and indicates those Tax Returns that have been audited or are subject to similar examination by a taxing authority and those Tax Returns that currently are the subject of an audit or such examination. Complete and correct copies of all income Tax Returns, examination reports, requests for information from any taxing authority and statements of income tax deficiencies filed or received during each of the last three (3) taxable years filed by, assessed against, issued to or agreed to by the Company have been made available to Buyer in the Datasite. Complete and correct copies of all other Tax Returns filed by the Company during each of the last three (3) taxable years have been and will be made available by the Company upon request.
(g) The Company has not received any written notice of assessment or proposed or threatened assessment in connection with any Tax or any Tax Return, and no portion of any Tax Return of the Company is currently the subject of any audit or other Action by any taxing authority. There are no Actions (or to Sellers’ Actual Knowledge, any investigations) pending or, to Sellers’ Actual Knowledge, threatened, by any taxing authority in respect of Taxes of the Company.
(h) There are no Encumbrances for Taxes upon the assets of the Company other than Permitted Encumbrances described in Section 3.10(a)(ii) .
(i) No private letter rulings, technical advice memoranda or similar agreement or rulings related to Taxes have been requested, entered into or issued by any taxing authority with respect to the Company.
(j) The Company has not been a member of an affiliated, combined, consolidated or unitary Tax group for income Tax purposes. The Company has no Liability for Taxes of any Person (other than the Company) under Treasury Regulations Section 1.1502-6 (or any corresponding provision of state, local or foreign Law), as transferee or successor, by contract or otherwise.
(k) The Company is not a party to or member of any joint venture, partnership, limited liability company or other arrangement or contract with any third party which could be treated as a partnership for federal income Tax purposes. The Company is not a party to any Tax sharing or allocation agreement or similar arrangement (including, but not limited to, an indemnification agreement or arrangement), and the Company does not have any actual or potential Tax liability to any Person under any Law or as a result of, or pursuant to, any such agreement or arrangement.
(l) The Company will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending on or after the Closing Date, taking into account the transactions contemplated by this Agreement, as a result of any (i) adjustment pursuant to Sections 481 or 263A of the Code, the regulations thereunder or any similar provisions under state, local or foreign Law; (ii) “closing agreement” as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign Law) or offer in compromise executed on or prior to the Closing Date; (iii) installment sale or open transaction made or entered into on or prior to the Closing Date; (iv) prepaid amount received on or prior to the Closing Date; or (v) election under Section 108(i) of the Code.
(m) The Company is not a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any material amount for which a deduction would be disallowed or deferred under Section 162 or Section 404 of the Code, in each case whether before or after giving effect to the transactions contemplated by this Agreement.
(n) Effective as of the date of its conversion to a limited liability company, the Company elected on IRS Form 8832 to be classified for federal tax purposes as an association taxable as a corporation, has not filed any election to be taxable as other than a corporation, and has filed all Tax Returns consistent with such election. The Company received a letter from the Internal Revenue Service acknowledging acceptance of such election, a copy of which is attached to Section 3.22(n) of the Disclosure Schedules.
(o) No Seller is a “foreign person” as that term is used in Treasury Regulations Section 1.1445-2.
(p) The Company has not distributed stock of another entity and has not had its stock distributed by another entity, in a transaction that was purported or intended to be governed in whole or in part by Section 355 or Section 361 of the Code.
(q) The Company is not, and has not been, a party to, or a promoter of, a “reportable transaction” within the meaning of Section 6707A(c) of the Code and Treasury Regulations Section 1.6011-4(b) (or any comparable provisions of state, local or foreign Law).
(r) The amount of federal net operating loss carryover available to the Company for its 2013 taxable year is accurately stated on the Company’s federal income tax return on Form 1120 for its taxable year ended December 31, 2012. There is currently no limitation on the utilization of net operating losses, capital losses, built-in losses, tax credits or similar items of the Company under Sections 269, 382, 383, 384 or 1502 of the Code and the Treasury Regulations thereunder (and comparable provisions of state, local or foreign Law).
(s) The Company is in full compliance with all terms and conditions of any Tax exemption, Tax holiday or other Tax reduction agreement or order of a taxing authority, and the consummation of the transactions contemplated by this Agreement will not have any adverse effect on the continued validity and effectiveness of any such Tax exemption, Tax holiday or other Tax reduction agreement or order.
(t) The Company does not hold any assets, does not have any operations and does not have any liability for any Tax in any foreign jurisdiction.
(u) None of the assets of the Company is property that the Company is required to treat as being owned by any other person pursuant to the so-called “safe harbor lease” provisions of former Section 168(f)(8) of the Internal Revenue Code of 1954, as amended.
For purposes of this Section 3.22 , any reference to the Company shall be deemed to include the Company, any entity that is or was a subsidiary of the Company but only while it was a subsidiary and any entity that merged or was liquidated into the Company.
SECTION 3.23 Books and Records. All minute books of the Company have been made available to Buyer on the Datasite. At the Closing, all of the books and records of the Company will be in the possession of the Company.
SECTION 3.24 Bank Accounts. Section 3.24 of the Disclosure Schedules sets forth the names and locations of all banks and other financial institutions and depositories at which the Company maintains accounts of any type or safe deposit boxes, and also lists the account number of each of such account, the number of each such safe deposit box and the current authorized signatory or signatories on each such account or safe deposit box.
SECTION 3.25 Brokers. Except for the Broker, no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of any Seller or the Company.
SECTION 3.26 Full Disclosure . To Sellers’ Knowledge, no representation or warranty by Sellers in this Agreement and no statement contained in the Disclosure Schedules to this Agreement or any certificate or other document furnished or to be furnished to Buyer pursuant to this Agreement contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading.
SECTION 3.27 No Other Representations and Warranties. Except for the specific representations and warranties contained in this Article III and those specific representations and warranties contained in any document in connection with the contemplated transaction (in each case as modified by any disclosure schedules thereto): (a) neither any Seller nor any other Person makes any other express or implied representation or warranty and (b) Sellers disclaim any other express or implied representations or warranties made by Sellers or any other Person.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers that the statements contained in this Article IV are true and correct.
SECTION 4.01 Organization and Authority of Buyer . Buyer is a limited liability company duly organized, validly existing and in good standing under the Laws of the state of Delaware. Buyer has full limited liability company power and authority to enter into this Agreement to carry out its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery by Buyer of this Agreement, the performance by Buyer of its obligations hereunder and the consummation by Buyer of the transactions contemplated hereby have been duly authorized by all requisite limited liability company action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer, and (assuming due authorization, execution and delivery by Sellers) this Agreement constitutes a legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar Laws affecting creditors’ rights and remedies generally and to general principles of equity.
SECTION 4.02 No Conflicts; Consents. The execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby, do not and will not: (a) conflict with or result in a violation or breach of, or default under, any provision of the Organizational Documents of Buyer; (b) conflict with or result in a violation or breach of any provision of any Law or Governmental Order applicable to Buyer; or (c) require the consent, notice or other action by any Person under any Contract to which Buyer is a party. No consent, approval, Permit, Governmental Order, declaration or filing with, or notice to, any Governmental Authority is required by or with respect to Buyer in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby.
SECTION 4.03 Investment Purpose . Buyer is acquiring the Interests solely for its own account for investment purposes and not with a view to, or for offer or sale in connection with, any distribution thereof. Buyer acknowledges that the Interests are not registered under the Securities Act of 1933, as amended, or any state securities laws, and that the Interests may not be
transferred or sold except pursuant to the registration provisions of the Securities Act of 1933, as amended or pursuant to an applicable exemption therefrom and subject to state securities laws and regulations, as applicable.
SECTION 4.04 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Buyer.
SECTION 4.05 Sufficiency of Funds . Buyer has sufficient cash on hand or other sources of immediately available funds to enable it to make payment of the Purchase Price and consummate the transactions contemplated by this Agreement.
SECTION 4.06 Legal Proceedings. There are no Actions pending against or, to Buyer’s knowledge, threatened against Buyer that would reasonably be expected, individually or in the aggregate, to result in material Liability, to materially interfere with the conduct of Buyer’s business in substantially the manner currently conducted, or otherwise to interfere with, prevent or delay the ability of Buyer to enter into and perform its obligations under this Agreement or consummate the transactions contemplated hereby.
SECTION 4.07 No Other Representations and Warranties. Except for the specific representations and warranties contained in this Article IV and those specific representations and warranties contained in any document in connection with the contemplated transaction (in each case as modified by any disclosure schedules thereto): (a) neither Buyer nor any other Person makes any other express or implied representation or warranty and (b) Buyer disclaims any other express or implied representations or warranties made by Buyer or any other Person.
ARTICLE V
COVENANTS AND AGREEMENTS
SECTION 5.01 Conduct of Business Prior to the Closing . From the date hereof until the Closing, except as set forth in Section 5.01 of the Disclosure Schedules or as otherwise required by applicable Law or as expressly permitted by this Agreement or consented to in writing by Buyer (which consent shall not be unreasonably withheld or delayed), the Company shall (x) conduct the business of the Company in the ordinary course of business consistent with past practice; and (y) use its commercially reasonable efforts to maintain and preserve intact the current organization, business and franchises of the Company and to preserve the rights, goodwill and relationships of its employees, customers, and suppliers, in each case on terms and conditions substantially comparable to those currently in effect. Without limiting the foregoing, from the date hereof until the Closing Date, unless otherwise required by applicable Law, consented to by Buyer or otherwise expressly permitted by this Agreement, (a) the Company shall use commercially reasonable efforts to:
(i) preserve and maintain in effect all of its Permits;
(ii) pay its debts, Taxes and other obligations when due;
(iii) maintain the properties and assets owned, leased, operated or used by the Company in materially the same condition as they were on the date of this Agreement, subject to reasonable wear and tear;
(iv) continue in full force and effect (or renew or replace with comparable coverages) all Insurance Policies, except as required by applicable Law;
(v) defend and protect its properties and assets from infringement or usurpation;
(vi) perform its material obligations under all Contracts relating to or affecting its properties, assets or business;
(vii) maintain its books and records in accordance with past practice;
(viii) comply in all material respects with all applicable Laws; and
(b) except as set forth in Section 5.01 of the Disclosure Schedules, the Company shall not:
(i) transfer, assign, sell or otherwise dispose of any assets material to the operation of the Company’s business (including any Company Site or portion thereof) except inventory in the ordinary course of business consistent with past practice;
(ii) make any capital investment in, or any loan to, any other Person (except for advancement of expenses in accordance with Company policy and past practice);
(iii) make any material capital expenditures except in the ordinary course of business consistent with past practice;
(iv) permit any Encumbrance to be imposed upon any of the Company properties or assets, tangible or intangible (other than Permitted Encumbrances);
(v) (i) grant any bonuses, whether monetary or otherwise, or increase any wages, salary, severance, pension or other compensation or benefits in respect of its employees, managers, officers, independent contractors or consultants, other than as provided for in Contracts disclosed in Section 3.09 of the Disclosure Schedules or required by applicable Law, (ii) change the terms of employment for any employee or terminate any employees other than “for cause”, or (iii) take any action to accelerate the vesting or payment of any compensation or benefit for any employee, officer, director, independent contractor or consultant;
(vi) enter into or adopt, modify or terminate any: (i) employment, severance, retention or other agreement with any current or former employee, officer, director, independent contractor or consultant, (ii) Benefit Plan (except as required by such Benefit Plan) or (iii) collective bargaining or other agreement with a Union, in each case whether written or oral;
(vii) amend, modify (in any material respect) or terminate any Material Contract or enter into any Contract which would have been a Material Contract if such Contract had been in effect as of the date hereof;
(viii) settle or compromise any Action (whether or not commenced prior to the date of this Agreement) other than settlements or compromises solely for monetary damages where the amount paid in settlement or compromise of such Action does not exceed One Hundred Thousand Dollars ($100,000); and
(ix) take or permit any action that would cause any of the changes, events or conditions described in Section 3.08 to occur.
SECTION 5.02 Access to Information. From the date hereof until the Closing, the Company shall (i) afford Buyer and its Representatives reasonable access during normal business hours, upon reasonable prior notice to the Company, to and the right to inspect all of the Real Property, properties, assets, premises, books and records, Contracts and other documents and data related to the Company; (ii) furnish Buyer and its Representatives with such financial, operating and other data and information (as readily available and prepared in the ordinary course of business) related to the Company as Buyer or any of its Representatives may reasonably request; and (iii) instruct the Representatives of Sellers and the Company to use commercially reasonable efforts to cooperate with Buyer in its investigation of the Company. Any investigation pursuant to this Section 5.02 shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the Company. No investigation by Buyer or other information received by Buyer shall operate as a waiver or otherwise affect any representation, warranty or agreement given or made by Sellers in this Agreement. Notwithstanding the foregoing, (i) Buyer’s access to personnel records of the Company employees may be restricted to the extent disclosure is not permitted by applicable Law and (ii) the Company may withhold (after consultation with their outside counsel) any document or information the disclosure of which could reasonably be expected to violate any Contract or any Law or that would result in the waiver of any legal privilege or work-product privilege; provided that in either case above, the Company shall so notify Buyer that the Company is withholding such document or information and, to the extent practicable, make reasonable and appropriate substitute disclosure arrangements under the circumstances. Sellers shall have the right to have a Representative present at all times during any such inspections, interviews and examinations. Buyer shall hold in confidence all such information on the terms and subject to the conditions contained in the Confidentiality Agreement. Notwithstanding anything to the contrary contained herein, prior to the Closing, without the prior consent of the manager of the Company, which shall not be unreasonably withheld, conditioned or delayed, Buyer shall not contact any vendors to, or customers of, the Company about the respective business or operations of the Company, this Agreement or the transactions contemplated hereby; provided that nothing in this Agreement shall prohibit Buyer from continuing to contact, in accordance with its past practice, those vendors and/or customers who are also vendors and/or customers of Buyer and its Affiliates with regard to matters other than this Agreement and the transactions contemplated hereby.
SECTION 5.03 No Solicitation of Other Bids. Sellers shall not, and shall not authorize or permit any of their respective Affiliates (including the Company) or any of their Representatives to, directly or indirectly, (i) encourage, solicit, initiate, facilitate or continue
inquiries regarding an Acquisition Proposal; (ii) enter into discussions or negotiations with, or provide any information to, any Person concerning a possible Acquisition Proposal; or (iii) enter into any agreements or other instruments (whether or not binding) regarding an Acquisition Proposal. Sellers shall immediately cease and cause to be terminated, and shall cause their Affiliates (including the Company) and all of their Representatives to immediately cease and cause to be terminated, all existing discussions or negotiations with any Persons conducted heretofore with respect to, or that could lead to, an Acquisition Proposal. For purposes hereof, “ Acquisition Proposal ” shall mean any inquiry, proposal or offer from any Person (other than Buyer or any of its Affiliates) concerning (i) a merger, consolidation, liquidation, recapitalization, share exchange or other business combination transaction involving the Company; (ii) the issuance or acquisition of membership interests or other equity securities of the Company; or (iii) the sale, lease, exchange or other disposition of any significant portion of the Company’s properties or assets, other than the Transferred Properties and the assets identified in items 7, 8 and 9 of Section 5.01 of the Disclosure Schedules.
(a) In addition to the other obligations under this Section 5.03 , Sellers’ Representative shall promptly (and in any event within three (3) Business Days after receipt thereof by any Seller or its Representatives) advise Buyer orally and in writing of any Acquisition Proposal, any request for information with respect to any Acquisition Proposal, or any inquiry with respect to or which could reasonably be expected to result in an Acquisition Proposal, the material terms and conditions of such request, Acquisition Proposal or inquiry, and the identity of the Person making the same.
(b) Sellers agree that the rights and remedies for noncompliance with this Section 5.03 shall include having such provision specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach shall cause irreparable injury to Buyer and that money damages would not provide an adequate remedy to Buyer.
SECTION 5.04 Notice of Certain Events.
From the date hereof until the Closing, Sellers’ Representative shall promptly notify Buyer in writing of:
(i) any fact, circumstance, event or action the existence, occurrence or taking of which (A) has had, or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, (B) has resulted in, or would reasonably be expected to result in, any representation or warranty made by Sellers not being true and correct or a breach of any of their or the Company’s covenants contained herein or (C) has resulted in, or would reasonably be expected to result in, the failure of any of the conditions set forth in Section 7.02 to be satisfied;
(ii) any notice from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement;
(iii) any notice from any Governmental Authority in connection with the transactions contemplated by this Agreement; and
(iv) any Actions commenced or, to Sellers’ Actual Knowledge, threatened, that, if pending on the date of this Agreement, would have been required to have been disclosed in the Disclosure Schedules as an exception to Section 3.17 or that otherwise relate to the consummation of the transactions contemplated by this Agreement.
(b) Buyer’s receipt of information pursuant to Section 5.04(a) shall not operate as a waiver or otherwise affect any representation, warranty or agreement given or made by Sellers in this Agreement and shall not be deemed to amend or supplement the Disclosure Schedules.
(c) From the date hereof until the Closing, Buyer shall promptly notify Sellers in writing of:
(i) any notice from any Governmental Authority in connection with the transactions contemplated by this Agreement; and
(ii) any fact, circumstance, event or action the existence, occurrence or taking of which (A) has resulted in, or would reasonably be expected to result in, any representation or warranty made by Buyer not being true and correct or a breach of any of its covenants contained herein or (C) has resulted in, or would reasonably be expected to result in, the failure of any of the conditions set forth in Section 7.03 to be satisfied.
(d) Sellers’ receipt of information pursuant to Section 5.04(c) shall not operate as a waiver or otherwise affect any representation, warranty or agreement given or made by Buyer in this Agreement.
SECTION 5.05 Resignations. Company shall use commercially reasonable efforts to deliver to Buyer written resignations, effective as of the Closing Date, of the individuals listed in Section 5.05 of the Disclosure Schedules.
SECTION 5.06 Confidentiality. The parties shall continue to comply with the terms and conditions of the Confidentiality Agreement. Additionally, from the Closing Date until the fifth anniversary of the Closing Date, each Seller shall, and shall cause his/her/its Affiliates to, hold, and shall use commercially reasonable efforts to cause his/hers/its or their respective Representatives to hold, in confidence any and all confidential information, whether written or oral, concerning the Company, except to the extent that a Seller can show that such confidential information (a) is generally available to and known by the public through no fault of any Seller, any of his/her/its Affiliates or their respective Representatives; or (b) was lawfully acquired by such Seller, any of his/her/its Affiliates or their respective Representatives after the Closing Date from sources which are not prohibited from disclosing such confidential information by a legal, contractual or fiduciary obligation. Additionally, from the Closing Date until the fifth anniversary of the Closing Date, if any Seller or any of his/her/its Affiliates or their respective Representatives are compelled to disclose any such confidential information by judicial or administrative process or by other requirements of Law, such Seller shall promptly notify Buyer in writing and shall disclose only that portion of such confidential information which such Seller is advised by his/her/its counsel in writing is required to be disclosed, provided that such Seller shall use commercially reasonable efforts to obtain an appropriate protective order or other reasonable
assurance that confidential treatment will be accorded such confidential information. Notwithstanding the foregoing, this Section 5.06 shall not apply to the Minority Sellers.
SECTION 5.07 Governmental Approvals and Consents.
(a) Each party hereto shall, as promptly as possible, (i) make, or cause to be made, all filings and submissions required under any Law applicable to such party or any of its Affiliates; and (ii) use commercially reasonable efforts to obtain, or cause to be obtained, all consents, authorizations, orders and approvals from all Governmental Authorities that may be or become necessary for its execution and delivery of this Agreement and the performance of its obligations pursuant to this Agreement. Each party shall cooperate fully with the other parties and their respective Affiliates in promptly seeking to obtain all such consents, authorizations, orders and approvals. The parties hereto shall not willfully take any action that will have the effect of delaying, impairing or impeding the receipt of any required consents, authorizations, orders and approvals.
(b) The Company shall use commercially reasonable efforts to give all notices to, and obtain all consents from, all third parties that are described in Section 3.05 of the Disclosure Schedules.
SECTION 5.08 Books and Records. In order to facilitate the resolution of any claims made against or incurred by Sellers prior to the Closing, or for any other reasonable purpose, for a period of five (5) years after the Closing, Buyer shall:
(i) retain the books and records (including personnel files) of the Company relating to periods prior to the Closing in a manner reasonably consistent with the prior practices of the Company; and
(ii) upon reasonable notice, afford Sellers’ Representative reasonable access (including the right to make, at Sellers’ expense, photocopies), during normal business hours, to such books and records; provided , however , that any books and records related to Tax matters shall be retained pursuant to the periods set forth in Article VI .
(b) Buyer shall not be obligated to provide Sellers’ Representative with access to any books or records (including personnel files) pursuant to this Section 5.08 where such access would violate any Law.
SECTION 5.09 Closing Conditions. From the date hereof until the Closing, each party shall use commercially reasonable efforts to take such actions as are necessary to expeditiously satisfy the closing conditions set forth in Article VII hereof and Sellers shall take all action necessary to cause the Company to comply with its obligations under this Agreement.
SECTION 5.10 Public Announcements. Neither Buyer nor the Company, any Seller or Sellers’ Representative will disseminate any press releases, announcements or other public disclosures relating to the transactions contemplated hereby without the written consent of the other party, not to be unreasonably withheld or delayed; provided , that this subsection shall not preclude Buyer from making any disclosure as to the transactions contemplated hereby (i) to the extent Buyer determines, based on the advice of legal counsel, such disclosure is required by
applicable Law or in connection with any filing by Buyer with the U.S. Securities and Exchange Commission (“ SEC ”) or any stock exchange rules applicable to Buyer; or (ii) to the extent Buyer determines, based on the advice of legal counsel, such disclosure is required in any prospectus, report or other filing made by Buyer with the SEC or any stock exchange, or (iii) such disclosure is consistent with Buyer’s practices relating to earnings releases and investor relations. Without limiting the foregoing, Sellers acknowledge that consistent with Buyer’s practices relating to investor relations, Buyer anticipates filing a press release in connection with the transaction contemplated hereby and may file a copy of this Agreement with the SEC. Buyer agrees to provide Sellers’ Representative a draft of such press release and use commercially reasonable efforts to provide Sellers’ Representative the opportunity to comment, prior to its release. Notwithstanding the foregoing, each party is expressly permitted, from and after the date of this Agreement, to make disclosures of the transactions contemplated hereby in connection with (i) applying for and obtaining the Permits, certificates, licenses and approvals necessary to carry on the business of the Company as is now conducted, including, without limitation, the Permits, certificates, licenses and approvals needed for liquor sales, video gaming, gasoline sales and tobacco sales, and (ii) obtaining the consents necessary from third parties to the transactions contemplated by this Agreement and Buyer is expressly permitted, from and after the date of this Agreement, to make disclosures of the transactions contemplated hereby to prospective underwriters and placement agents. As used in this Section 5.10 the terms “Buyer” and “Sellers” includes their respective Affiliates.
SECTION 5.11 Release.
(a) For and in consideration of the payment of the Purchase Price, and the additional covenants and promises set forth in this Agreement, from and after the Closing, each Seller, on behalf of himself/herself/itself and his/her/its assigns, beneficiaries, Representatives and Affiliates (the “ Seller Releasing Parties ”), hereby fully, finally and irrevocably releases, acquits and forever discharges Buyer, and the members, stockholders, Representatives, Affiliates, parents, subsidiaries, joint ventures, predecessors, successors, assigns, beneficiaries, heirs, executors, personal or legal Representatives, insurers and attorneys of any of them (collectively, the “ Buyer Released Parties ”) from any and all commitments, actions, debts, claims, counterclaims, suits, causes of action, damages, demands, liabilities, obligations, costs, expenses, and compensation of every kind and nature whatsoever, past, present, or future, at law or in equity, whether known or unknown, contingent or otherwise, which such Seller Releasing Parties, or any of them had, has, or may have had at any time in the past until and including the date of this Agreement against the Buyer Released Parties, or any of them, which relate to or arise out of Seller Releasing Party’s relationship with Buyer or the business of the Company (collectively, for the purposes of this Section 5.11 , “ Seller Causes of Action ”); provided , that nothing set forth in this Section 5.11 shall relieve any Buyer Released Party from (i) Seller Causes of Action arising from or in connection with this Agreement, any other agreement entered into by any Buyer Released Party or Seller Releasing Party in connection with this Agreement and the transactions contemplated hereby and thereby, or (ii) Seller Causes of Action for reimbursement under or accrued benefits pursuant to any Benefit Plan as in effect as of the date hereof or permitted by Section 5.01(a)(vi) . Nothing herein shall be deemed to release any rights any Seller Releasing Party may have to make any claims under any insurance policy or policies maintained for such Seller Releasing Party’s benefit by the Company at any time on or prior to the Closing Date, including, without limitation, general liability, directors and officers, errors and omissions, and malpractice insurance.
(b) Each Seller hereby represents to the Buyer Released Parties that (i) it has not and, to the knowledge of such Seller, no other Seller Releasing Party has, assigned, or will assign, any Seller Causes of Action or possible Actions against any Buyer Released Party, (ii) each fully intends to release all Seller Causes of Action released by Section 5.11(a) against the Buyer Released Parties including unknown and contingent Seller Causes of Action, and (iii) each has been advised to consult with counsel with respect to the execution and delivery of this general release and the consequences hereof. Furthermore, each Seller further agrees not to institute, or permit any of its Seller Releasing Parties to institute, any litigation, lawsuit, claim or action against any Buyer Released Party with respect to the released Seller Causes of Action.
(c) For and in consideration of the covenants and promises set forth in this Agreement, from and after the Closing Date, Buyer, on behalf of itself and its assigns, Representatives, agents and Affiliates (the “ Buyer Releasing Parties ”), hereby fully, finally and irrevocably releases, acquits and forever discharges each Seller and the Representatives, Affiliates, predecessors, successors, assigns, beneficiaries, heirs, executors, personal or legal Representatives, insurers and attorneys of any of them (collectively, the “ Seller Released Parties ”) from any and all commitments, actions, debts, claims, counterclaims, suits, causes of action, damages, demands, liabilities, obligations, costs, expenses, and compensation of every kind and nature whatsoever, past, present, or future, at law or in equity, whether known or unknown, contingent or otherwise, which such Buyer Releasing Parties, or any of them had, has, or may have had at any time in the past until and including the date of this Agreement against the Seller Released Parties, or any of them, which relate to or arise out of such Buyer Releasing Party’s relationship with Sellers or the business of the Company (collectively, for the purposes of this Section 5.11 , “ Buyer Causes of Action ”); provided , that nothing set forth in this Section 5.11 shall relieve any Seller Released Party for Buyer Causes of Action arising from or in connection with this Agreement, any other agreement entered into by any Seller Released Party or Buyer Releasing Party in connection with this Agreement and the transactions contemplated hereby and thereby.
(d) Buyer hereby represents to the Seller Released Parties that (i) neither Buyer, nor to Buyer’s knowledge, any other Buyer Releasing Party has assigned, or will assign, any Buyer Causes of Action or possible Buyer Causes of Action against any Seller Released Party, (ii) each fully intends to release all Buyer Causes of Action against the Seller Released Parties including unknown and contingent Buyer Causes of Action, and (iii) each has consulted with counsel with respect to the execution and delivery of this general release and has been fully apprised of the consequences hereof. Furthermore, Buyer further agrees not to institute, or permit any other Buyer Releasing Party to institute, any litigation, lawsuit, claim or action against any Seller Released Party with respect to the released Buyer Causes of Action.
SECTION 5.12 Financials. At Buyer’s request, the Company shall request its independent accountants, within thirty (30) days of Buyer’s request, to prepare audited financial statements for the Company in accordance with the requirements of Regulation S-X, Rule 3-01 of the SEC with respect to the past three (3) full calendar years and any applicable stub period thereafter, for inclusion in any public filing of Buyer or any Affiliate of Buyer with the SEC. Such financial statements shall be prepared at Buyer’s sole cost and expense. The Company shall provide its accountants with such certifications and representations as its accountants shall reasonably require in preparing such audited financial statements. Buyer shall be responsible for
all out-of-pocket costs or expenses of the Company in connection with the preparation of such certifications and representations. The Company shall use commercially reasonable efforts to cause its accountants to provide written consent to the use of such financial statements in any such public filing. Buyer shall indemnify and hold harmless the Company and its respective officers, employees, representatives and advisors, including legal and accounting, from and against any and all losses, damages, claims, costs or expenses suffered or incurred by any of them in connection with compliance with this Section 5.12 and any information utilized in connection therewith; provided , however , the foregoing shall not be deemed to limit any rights to indemnification any of the parties hereto may have pursuant to Article 8.
SECTION 5.13 Employees and Benefit Plans.
(a) Buyer will recognize all accrued but unused vacation and sick days of employees of the Company as of the Closing Date and pay employees the bonuses which have been accrued as of the Closing Date under any bonus programs for employees existing as of the date hereof and disclosed in Section 3.09 or Section 3.20 of the Disclosure Schedules in accordance with the terms thereof, in each case to the extent accrued as a Current Liability in Closing Working Capital as finally determined.
(b) Buyer shall credit each employee of the Company with his or her years of service with the Company under Buyer’s benefit plans, programs and arrangements to the same extent as such employee was entitled, before the Closing Date, under any similar Benefit Plan (but excluding benefit accrual under any defined benefit pension plan) for purposes of eligibility for participation and vesting, except to the extent such credit would result in a duplication of benefits. Any preexisting condition clause in any welfare plan (including medical, dental and disability coverage) included in Buyer’s benefit programs shall be waived for the Company’s employees. Buyer shall use commercially reasonable efforts to credit the Company’s employees with any amounts paid under the Company’s welfare plans prior to the Closing Date for the Plan year in which the Closing occurs toward satisfaction of applicable deductibles or out-of-pocket maximums applicable to such employees and their covered dependents under the corresponding welfare plans of Buyer.
(c) On the next regularly scheduled payroll date following the fortieth (40 th ) day following the Closing Date (the “ Transition Period End Date ”), Buyer shall cause the Company to pay to each individual listed in Section 5.13(c) of the Disclosure Schedules the amount set forth opposite such individual’s name in Section 5.13(c) of the Disclosure Schedules (less required applicable withholdings for federal, state, local or employment taxes); provided, however, that no such amount shall be paid to an individual who voluntarily terminates his or her respective employment with the Company on or before the Transition Period End Date unless Sellers’ Representative shall have waived this proviso in his sole discretion. Any amounts set forth in Section 5.13(c) of the Disclosure Schedules that are not paid to the individuals listed therein shall be paid over to the Sellers’ Representative for the benefit of the Sellers no later than the third (3 rd ) Business Day following the end of the Transition Period End Date by wire transfer of immediately available funds to such account as is directed by Sellers’ Representative. Any payments made to the Sellers’ Representative pursuant to this Section 5.13(c) shall be treated as an adjustment to the Purchase Price by the parties for Tax purposes, unless otherwise required by applicable Law.
(d) The parties acknowledge and agree that the provisions in this Section 5.13 are included for the sole benefit of the parties and shall not create any right in any employee of the Company or any other Person. No provision in this Agreement shall create any right to employment or to continued employment or to a particular term or condition of employment with the Company or Buyer or any of their respective Affiliates. Nothing in this Section 5.13 or any other provision of this Agreement shall be construed to establish, amend, or modify any benefit plan, program or arrangement, or limit the ability the Company, Buyer or any of their Affiliates to amend, modify or terminate any benefit plan, program or arrangement.
SECTION 5.14 Remediation and Other Obligations.
(a) If the Closing occurs, Sellers acknowledge that Falcon shall assume the obligations to perform, or cause to be performed, at its sole cost and expense and in accordance with and to the extent required by all applicable Laws, the ongoing Remediation at the sites set forth in Section 5.14(a) of the Disclosure Schedules.
(b) Sellers agree to promptly furnish to Falcon and the Company copies of correspondence or other documents regarding Remediation at the sites set forth in Section 5.14(a) of the Disclosure Schedules that they receive from or provide to Governmental Authorities or third parties.
(c) Following the date of this Agreement, Sellers shall cause the Company to:
(i) prior to the Closing, , to the extent required by Environmental Law, prepare the following documents and file them with the applicable Governmental Authorities: (i) Spill Prevention Control and Countermeasure Plans for Company Sites 68, 91, 102, 138, 166, and 167; (ii) Groundwater Protection Plans for all of the Company Sites located in Kentucky; (iii) Gasoline Dispensing Facility Registration Forms (Kentucky DEP Form 7105) for all of the Company Sites located in Kentucky; and (iv) Initial Notification/Compliance Certification forms (Kentucky DEP Form 7122) for Company Sites 165, 166, and 167; and
(ii) correct the non-compliance with applicable Law, if any, related to Store #54 disclosed in Section 3.17(a) of the Disclosure Schedules.
SECTION 5.15 Further Assurances. Following the Closing, each of the parties shall, and shall cause their respective Affiliates to, execute and deliver such additional documents, instruments, conveyances and assurances and take such further actions as may be commercially reasonably required to carry out the provisions hereof and give effect to the transactions contemplated by this Agreement.
ARTICLE VI
TAX MATTERS
SECTION 6.01 Tax Covenants.
(a) Without the prior written consent of Buyer, which shall not be unreasonably withheld, conditioned or delayed, the Company shall not, except as required by applicable Tax Law (in which case Sellers’ Representative shall provide prior written notice to
Buyer), (i) make, change or rescind any material Tax election or amend any Tax Return or (ii) take any position on any Tax Return, take any action, omit to take any action or enter into any other transaction that would have the effect of materially increasing the Tax liability or materially reducing any Tax asset of Buyer or the Company in respect of any Post-Closing Tax Period.
(b) All transfer, documentary, sales, use, stamp, registration, value added and other such Taxes and fees (including any penalties and interest) (“ Transfer Taxes ”) incurred in connection with the transactions to be effected at the Closing described in Sections 2.03(c) and 2.03(e) , regardless of the party that is obligated by Law to pay such Transfer Taxes, shall be borne one-half by Buyer and one-half by Sellers. Buyer shall, at its own expense, file all necessary Tax Returns and other documentation with respect to all such Transfer Taxes, and if required by applicable law, Sellers will join in the execution of any such Tax Returns and other documentation. All Transfer Taxes in connection with the transfer or sale of the Transferred Properties to Falcon and the assets identified in items 7, 8 and 9 of Section 5.01 of the Disclosure Schedules and the conveyance of the properties described on Schedule 2.03(f) shall be borne by Sellers.
(c) Preparation of Tax Returns.
(i) Sellers’ Representative shall prepare or cause to be prepared accurately in a lawful manner consistent with past practice (except as required by a change in applicable Tax law) all income Tax Returns of the Company for all taxable periods ending on or prior to the Closing Date which are required to be filed after the Closing Date, and the Tax liability, if any, and the preparation expense thereof shall be paid by Sellers’ Representative (on behalf of Sellers). Sellers’ Representative shall provide Buyer with a copy of each such Tax Return as soon as practicable but in no event later than thirty (30) days prior to the deadline for filing such Tax Return for its review and comment. If Buyer provides any comments, Sellers’ Representative and Buyer shall use their respective and mutual good faith efforts to resolve any dispute relating to any such Tax Return sufficiently in advance of the applicable filing deadline to permit the timely filing of such Tax Return. Buyer shall file or cause to be filed each Tax Return that is filed after the Closing Date that Sellers’ Representative is required to prepare.
(ii) Buyer shall prepare, or cause to be prepared, and file all other Tax Returns required to be filed by the Company with respect to any Pre-Closing Tax Period that are due after the Closing Date. Buyer shall provide Sellers’ Representative with a copy of each such Tax Return that is an income Tax Return or any other Tax Return filed on an annual or quarterly basis that includes a material Tax liability as soon as practicable but in no event later than thirty (30) days prior to the deadline for filing such Tax Return for its review and comment. If Sellers’ Representative provides any comments, Sellers’ Representative and Buyer shall use their respective and mutual good faith efforts to resolve any dispute relating to any such Tax Return sufficiently in advance of the applicable filing deadline to permit the timely filing of such Tax Return.
(iii) Any dispute pertaining to a Tax Return addressed in this paragraph (c) that the parties cannot in good faith resolve shall be resolved by the Independent Accountants; Buyer, on the one hand, and Sellers on the other hand, shall share the costs of such Independent Accountants equally.
(d) Neither Buyer, the Company nor their Affiliates shall take any action on the Closing Date that is outside the ordinary course of business if such action could have the effect of increasing the Company’s Pre-Closing Taxes.
(e) Each of Buyer and the Company covenants that it shall not make any election under Code Section 338 with respect to the transactions contemplated pursuant to this Agreement. Without the prior written consent of Sellers’ Representative, which shall not be unreasonably withheld or delayed, or unless required by applicable Tax law, each of Buyer and the Company agrees not to cause or permit the Company or any Affiliate to make or change any Tax election or Tax accounting method of the Company or amend any Tax Return of the Company, in each case for a Pre-Closing Tax Period, if such election, change, amendment or position is reasonably expected to increase the indemnification obligations of Sellers for Taxes under Section 6.03.
(f) After the Closing Date, Buyer, the Company and their Affiliates shall not, without the prior written consent of the Sellers’ Representative, agree to the waiver or any extension of the statute of limitations relating to any income Taxes of the Company for any Pre-Closing Tax Period.
(g) Any refund of Pre-Closing Taxes of the Company received by Buyer, the Company or their Affiliates, net of Buyer’s actual costs incurred to obtain such refund, shall be for the account of Sellers, except to the extent such refund is treated as an asset in the calculation of Closing Working Capital as finally determined. Buyer shall pay any such amount to Sellers’ Representative within fifteen (15) days after receipt thereof.
SECTION 6.02 Termination of Existing Tax Sharing Agreements. Any and all existing Tax sharing agreements (whether written or not) binding upon the Company shall be terminated as of the Closing Date. After such date the Company shall not have any further rights or liabilities thereunder.
SECTION 6.03 Tax Indemnification.
(a) Except (i) to the extent treated as a liability in the calculation of Closing Working Capital as finally determined and (ii) for Transfer Taxes that are the responsibility of Buyer pursuant to Section 6.01(b) , and subject in all respects to the limitations set forth in Section 8.04(e) Sellers shall indemnify the Company, Buyer, and each Buyer Indemnitee and hold them harmless from and against, without duplication, (A) except as provided in Section 6.03(b) , any Loss attributable to any breach of or inaccuracy in any representation or warranty made in Section 3.22 ; (B) any Loss attributable to any breach or violation of, or failure to fully perform, any covenant, agreement, undertaking or obligation in this Article VI ; (C) all Pre-Closing Taxes; (D) all Taxes of any member of an affiliated, consolidated, combined or unitary group of which the Company (or any predecessor of the Company) is or was a member on or prior to the Closing Date by reason of a liability under Treasury Regulation Section 1.1502-6 or any comparable provisions of foreign, state or local Law; and (E) any and all Taxes of any person imposed on the Company arising as a result of (1) any tax sharing or tax allocation agreement, arrangement or understanding entered into prior to the Closing Date or (2) transferee or successor
liability relating to an event or transaction occurring before the Closing Date whether by operation of law, by contract or otherwise.
(b) Sellers’ indemnification obligations under clause (A) of Section 6.03(a) shall not include any Losses for Taxes attributable to a Post-Closing Tax Period in respect of any breach of the representations and warranties set forth in Section 3.22(a), (c), (d), (e), (f), (g), (h), (t) and (u).
(c) For purposes of this Agreement, “ Pre-Closing Taxes ” means all Taxes of the Company attributable to or payable with respect to a Pre-Closing Tax Period. In the case of any taxable period that includes (but does not end on) the Closing Date, Pre-Closing Taxes shall include (A) the amount of any income or other Taxes of the Company that are measured on the basis of actual economic activity (such as sales Taxes) that are attributable or payable with respect to such period determined on a closing of the books as of the close of business on the Closing Date, and (B) the amount of any other Taxes of the Company (if not described in clause (A), such as ad valorem Taxes) that are attributable or payable with respect to the period determined on a pro rata basis with reference to the number of days in such period prior to and including the Closing Date relative to the number of days in such period. For the avoidance of doubt, any interest and penalties arising in connection with a liability for any Tax shall be treated as attributable to the taxable period with respect to which the underlying Tax is attributable and not to the period or periods in which such interest or penalties accrue or are assessed. Taxes of the Company attributable to a Post-Closing Tax Period that includes the Closing Date shall be determined using a comparable methodology.
(d) In each of the above cases, Sellers shall pay or reimburse Buyer for any such Losses and Taxes within fifteen (15) Business Days after request therefor by Buyer.
SECTION 6.04 Contests.
(a) Notwithstanding anything to the contrary in this Agreement, after the Closing Date, Buyer agrees to give prompt written notice (but in any event not later than thirty (30) days after receipt of such notice of such Tax Claim) to Sellers’ Representative of the receipt of any written notice by the Company, Buyer or any of Buyer’s Affiliates which involves the assertion of any claim, or the commencement of any Action, involving Taxes of the Company in respect of which indemnification may be sought by Buyer pursuant to this Article VI (a “ Tax Claim ”); provided , that failure to comply with this provision shall not relieve the Sellers of their indemnification obligations hereunder except and only to the extent that such failure shall have actually prejudiced Sellers.
(b) In the case of a Tax Claim relating to income Taxes (other than a claim made by a taxing authority in a jurisdiction where the Company does not file Tax Returns that the Company is, or may be, subject to Tax by that jurisdiction) in any Tax period that ends on or prior to the Closing Date, the Sellers’ Representative may, on behalf of the Sellers, participate in and, upon written notice to Buyer, assume control of the defense of any such Tax Claim; provided, however, that if the Sellers’ Representative so assumes control, Buyer may participate in the conduct of such Tax Claim and the Sellers’ Representative shall not settle or compromise any
such Tax Claim without the consent of Buyer, which consent shall not be unreasonably withheld, conditioned or delayed.
(c) In the case of any other Tax Claim, Buyer shall have the right to control the defense of such Tax Claim; provided, however, that if such Tax Claim would be reasonably expected to result in an increase in Tax liability for which the Sellers would be liable under this Agreement, the Sellers’ Representative may, on behalf of the Sellers, participate in the defense of such Tax Claim and Buyer shall not settle or compromise any such Tax Claim without the consent of the Sellers’ Representative, which consent shall not be unreasonably withheld, conditioned or delayed.
SECTION 6.05 Cooperation and Exchange of Information. Sellers’ Representative and Buyer shall provide each other with such cooperation and information as either of them reasonably may request of the other in filing any Tax Return pursuant to this Article VI or in connection with any audit or other proceeding in respect of Taxes of the Company. Such cooperation and information shall include providing copies of relevant Tax Returns or portions thereof, together with accompanying schedules, related work papers and documents relating to rulings or other determinations by tax authorities. Each of Sellers’ Representative and Buyer shall retain all Tax Returns, schedules and work papers, records and other documents in its possession relating to Tax matters of the Company for any taxable period beginning before the Closing Date until the expiration of the statute of limitations of the taxable periods to which such Tax Returns and other documents relate, without regard to extensions except to the extent notified by the other party in writing of such extensions for the respective Tax periods. Prior to transferring, destroying or discarding any Tax Returns, schedules and work papers, records and other documents in its possession relating to Tax matters of the Company for any taxable period beginning before the Closing Date, Sellers’ Representative or Buyer (as the case may be) shall provide the other party with reasonable written notice and offer the other party the opportunity to take custody of such materials.
SECTION 6.06 Survival. Notwithstanding anything in this Agreement to the contrary, the provisions of Section 3.22 shall survive for the full period of all applicable statutes of limitations (giving effect to any waiver, mitigation or extension thereof) plus sixty (60) days and this Article VI shall survive the Closing indefinitely.
SECTION 6.07 Overlap. To the extent that any obligation or responsibility pursuant to Article VIII may overlap with an obligation or responsibility pursuant to this Article VI , the provisions of this Article VI shall govern.
ARTICLE VII
CONDITIONS TO CLOSING
SECTION 7.01 Conditions to Obligations of All Parties . The obligations of each party to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of the following condition:
(a) No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Law or Governmental Order which is in effect and has the effect of
making the transactions contemplated by this Agreement illegal, otherwise restraining or prohibiting consummation of such transactions or which could cause any of the transactions contemplated hereunder to be rescinded following completion thereof, provided , however , no party hereto may invoke this condition unless and until such party has complied with its obligations under Section 5.07 .
SECTION 7.02 Conditions to Obligations of Buyer. The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or Buyer’s waiver, at or prior to the Closing, of each of the following conditions:
(a) Other than the representations and warranties of Sellers contained in Section 3.01 and Section 3.03 , the representations and warranties of Sellers contained in this Agreement shall be true and correct in all respects (in the case of any representation or warranty qualified by materiality or Material Adverse Effect) or in all material respects (in the case of any representation or warranty not qualified by materiality or Material Adverse Effect) on and as of the Closing Date with the same effect as though made at and as of the Closing Date (except those representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that specified date in all respects). The representations and warranties of Sellers contained in Section 3.01 and Section 3.03 shall be true and correct in all respects on and as of the Closing Date with the same effect as though made at and as of such date.
(b) Sellers and the Company shall have duly performed and complied, in all material respects, with all agreements, covenants and conditions required by this Agreement to be performed or complied with by them prior to or on the Closing Date; provided , that , with respect to agreements, covenants and conditions that are qualified by materiality, Sellers or the Company, as applicable, shall have performed such agreements, covenants and conditions, as so qualified, in all respects.
(c) Sellers shall have paid, or made arrangements reasonably satisfactory to Buyer for the payment of, all brokerage, finder’s or other fee or commissions due in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or any Seller.
(d) All rights of first refusal in the agreements disclosed in Section 3.03(c) of the Disclosure Schedules and any competitive restrictions with respect to Buyer’s operations in the agreements listed in Section 3.09(a)(i) of the Disclosure Schedules shall have been terminated on terms and conditions acceptable to Buyer.
(e) Buyer shall have received the third party consents, approvals or waivers, and the consents of the applicable Governmental Authority required to maintain in effect the Permits set forth in Section 7.02(e) of the Disclosure Schedules, in form and substance reasonably satisfactory to Buyer and no such consent, approval or waiver shall impose any condition, term or obligation less favorable to the Company or Buyer than those applicable to the Company as of the date hereof.
(f) From the date of this Agreement, there shall not have occurred any Material Adverse Effect.
(g) The Assumption Agreement, Guaranty and Indemnity Escrow Agreement shall have been executed and delivered by the parties thereto (other than Buyer) and complete and correct copies thereof shall have been delivered to Sellers.
(h) Each Seller shall have executed and delivered to Buyer an Assignment and Withdrawal Agreement;
(i) Buyer shall have received evidence reasonably satisfactory to Buyer that all Indebtedness of the Company has been, or will be as of the Closing, paid and all Encumbrances securing such Indebtedness released (which shall include, but not be limited to, the Encumbrances set forth in Section 7.02(i) of the Disclosure Schedules);
(j) Buyer shall have received a certificate, dated the Closing Date and signed by Sellers’ Representative, that each of the conditions set forth in Section 7.02(a) , Section 7.02(b) , and Section 7.02(f) have been satisfied.
(k) The Title Company shall be irrevocably committed to issue its ALTA-2006 owner’s policy of title insurance for each Company Site, insuring that the Company has good, record, marketable and indefeasible fee simple title to the Owned Real Property and good, record and marketable leasehold title to the Leased Real Property, in each case free and clear of all Encumbrances other than the Permitted Encumbrances (except to the extent the Title Company has agreed to delete or insure over such matters), and subject to any other exception that are customary in the jurisdiction of the applicable Company Site. Such title insurance policies shall be in form and substance reasonably satisfactory to Buyer. The Company and Frederick M. Higgins shall have executed reasonable and customary affidavits in the form set forth in Section 7.02(k) of the Disclosure Schedules.
(l) Buyer shall have received resignations of the manager and all officers of the Company pursuant to Section 5.05 .
(m) Sellers shall have delivered to Buyer a good standing certificate (or its equivalent) for the Company from the secretary of state or similar Governmental Authority of the jurisdiction under the Laws in which the Company is organized, dated within thirty (30) days of Closing.
(n) Each Seller shall have delivered to Buyer a certificate in the form of Exhibit E pursuant to Treasury Regulations Section 1.1445-2(b) that such Seller is not a foreign person within the meaning of Section 1445 of the Code.
(o) Buyer shall have received an executed estoppel certificate from the landlord under each lease pursuant to which the Company leases a Leased Real Property, which estoppel certificate shall certify to the lease documents, the name of the landlord and tenant, the current monthly rent due under such lease, the date through which all rent has been paid, the security deposit, if any, being held by the landlord under such lease, and whether or not the tenant is in default under any terms or conditions of such lease (and whether or not such facts or circumstances exist which, with notice and/or passage of time, would result in such a default), and if such default or potential default exists, specifying the nature of such default.
(p) Sellers shall have delivered fully executed and recorded Notices of Lease, which provide proper record notice of the existence and term of each lease pursuant to which the Company leases a Leased Real Property.
(q) Sellers shall have delivered to Buyer such other documents or instruments as are necessary to consummate the transactions contemplated by this Agreement.
SECTION 7.03 Conditions to Obligations of Sellers. The obligations of Sellers to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or Sellers’ Representatives’ waiver, at or prior to the Closing, of each of the following conditions:
(a) Other than the representations and warranties of Buyer contained in Section 4.01 , the representations and warranties of Buyer contained in this Agreement shall be true and correct in all respects (in the case of any representation or warranty qualified by materiality or Material Adverse Effect) or in all material respects (in the case of any representation or warranty not qualified by materiality or Material Adverse Effect) on and as of the Closing Date with the same effect as though made at and as of such date (except those representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that specified date in all respects). The representations and warranties of Buyer contained in Section 4.01 shall be true and correct in all respects on and as of the Closing Date with the same effect as though made at and as of such date.
(b) Buyer shall have duly performed and complied, in all material respects, with all agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date; provided , that , with respect to agreements, covenants and conditions that are qualified by materiality, Buyer shall have performed such agreements, covenants and conditions, as so qualified, in all respects.
(c) Buyer shall have paid, or made arrangements reasonably satisfactory to Sellers for the payment of, all brokerage, finder’s or other fee or commissions due in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Buyer.
(d) Sellers’ Representative shall have received a certificate, dated the Closing Date and signed by a duly authorized officer of Buyer, that each of the conditions set forth in Section 7.03(a) and Section 7.03(b) have been satisfied.
(e) Buyer shall have delivered (i) to Sellers an amount equal to the Purchase Price, less the Indemnity Amount and the Sellers’ Representative Fund Amount, (ii) to Escrow Agent an amount equal to the Indemnity Escrow Amount, and (iii) to Sellers’ Representative an amount equal to the Sellers’ Representative Fund Amount, in each case, by wire transfer in immediately available funds in accordance with Section 2.03(c)(i), (ii) and (iii) .
(f) The Assumption Agreement, Indemnity Escrow Agreement and each Seller’s Assignment and Withdrawal Agreement shall have been executed and delivered by the parties thereto (other than any Seller, Seller Representative or Falcon) and complete and correct copies thereof shall have been delivered to Sellers’ Representative.
(g) Frederick M. Higgins, Kathy Higgins, Glenn Howard, and Cathy Howard shall have been removed and released from all personal guarantees set forth on Section 7.03(g) of the Disclosure Schedules.
(h) Buyer shall have delivered to Sellers’ Representative such other documents or instruments as are necessary to consummate the transactions contemplated by this Agreement.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.01 Survival . Subject to the limitations and other provisions of this Agreement, the representations and warranties contained herein shall survive the Closing and shall remain in full force and effect until the date that is one (1) year from the Closing Date; provided, that (i) the representations and warranties in Section 3.01 , Section 3.03 , Section 3.25 , Section 4.01 and Section 4.04 shall survive indefinitely, (ii) the representations and warranties in Section 3.22 shall survive for the full period of all applicable statutes of limitations (giving effect to any waiver, mitigation or extension thereof) plus sixty (60) days, (iii) the representations and warranties in 3.20 shall remain in full force and effect until the date that is two (2) years from the Closing Date, and (iv) the representations and warranties in Section 3.19 shall remain in full force and effect until the date that is four (4) years from the Closing Date. All covenants and agreements of the parties contained herein shall survive the Closing indefinitely or for the period explicitly specified therein. Notwithstanding the foregoing, any claims asserted in good faith with reasonable specificity (to the extent known at such time) and in writing by notice from the non-breaching party to the breaching party prior to the expiration date of the applicable survival period shall not thereafter be barred by the expiration of the relevant representation or warranty and such claims shall survive until finally resolved.
SECTION 8.02 Indemnification By Sellers . Subject to the other terms and conditions of this Article VIII , Sellers shall, jointly and severally, (subject to the limitations set forth in Section 8.04(e) ) from and after the Closing Date, indemnify and defend each of Buyer and its Affiliates (including the Company) (collectively, the “ Buyer Indemnitees ”) against, and shall hold each of them harmless from and against, and shall pay and reimburse each of them for, any and all Losses incurred or sustained by, or imposed upon, the Buyer Indemnitees arising out of or relating to:
(a) any inaccuracy in or breach of any of the representations or warranties of Sellers contained in this Agreement or in any certificate or instrument delivered by or on behalf of any Seller, the Company, Sellers’ Representative pursuant to this Agreement (other than in respect of Section 3.22 , it being understood that the sole remedy for any such inaccuracy in or breach thereof shall be pursuant to Article VI ), as of the date such representation or warranty was made or as if such representation or warranty was made on and as of the Closing Date (except for representations and warranties that expressly relate to a specified date, the inaccuracy in or breach of which will be determined with reference to such specified date); or
(b) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by Sellers, the Company, Sellers’ Representative pursuant to this Agreement or any instrument or agreement delivered by or on behalf of any Seller pursuant to this Agreement (other
than any breach or violation of, or failure to fully perform, any covenant, agreement, undertaking or obligation in Article VI , it being understood that the sole remedy for any such breach, violation or failure shall be pursuant to Article VI ); or
(c) the non-compliance with applicable Law related to Store #54 disclosed in Section 3.17(a) of the Disclosure Schedules.
SECTION 8.03 Indemnification By Buyer. Subject to the other terms and conditions of this Article VIII , Buyer shall indemnify and defend each Seller and his/her/its respective Affiliates (collectively, the “ Seller Indemnitees ”) against, and shall hold each of them harmless from and against, and shall pay and reimburse each of them for, any and all Losses incurred or sustained by, or imposed upon, the Seller Indemnitees arising out of or relating to:
(a) any inaccuracy in or breach of any of the representations or warranties of Buyer contained in this Agreement or in any certificate or instrument delivered by or on behalf of Buyer pursuant to this Agreement, as of the date such representation or warranty was made or as if such representation or warranty was made on and as of the Closing Date (except for representations and warranties that expressly relate to a specified date, the inaccuracy in or breach of which will be determined with reference to such specified date); or
(b) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by Buyer pursuant to this Agreement (other than Article VI , it being understood that the sole remedy for any such breach thereof shall be pursuant to Article VI ).
SECTION 8.04 Certain Limitations. The indemnification provided for in Section 8.02 and Section 8.03 shall be subject to the following limitations:
(a) Sellers shall not be liable to the Buyer Indemnitees for indemnification under Section 8.02(a) (i) until the aggregate amount of all Losses in respect of claims for indemnification under Section 8.02(a) exceeds $670,000 (the “ Basket ”), in which event Sellers shall be required to pay or be liable for all such Losses attributable to a single course of conduct or related set of facts, events or circumstances that exceed $15,000 (the “ Mini-Basket ”), and (ii) for an aggregate amount in excess of $4,690,000 (the “ Cap ”); provided, however , that the Mini-Basket, Basket and Cap shall not apply to claims for indemnification based upon a breach of a representation or warranty in Section 3.03 , Section 3.22 , or Section 3.25 ; provided further , Sellers’ liability for claims of indemnification based upon a breach of a representation or warranty in Section 3.03 , Section 3.22 , or Section 3.25 shall not exceed the Purchase Price.
(b) Buyer shall not be liable to the Seller Indemnitees for indemnification under Section 8.03(a) (i) until the aggregate amount of all Losses in respect of claims for indemnification under Section 8.03(a) exceeds $670,000, in which event Buyer shall be required to pay or be liable for all such Losses attributable to a single course of conduct or related set of facts, events or circumstances that exceed $15,000 and (ii) for an aggregate amount in excess of $4,690,000; provided, however , the limitations in this Section 8.04(b) do not apply to claims for indemnification based upon a breach of a representation or warranty in Section 4.01 or Section 4.04.
(c) For purposes of this Article VIII , any inaccuracy in or breach of any representation or warranty (except for the representations and warranties contained in Section 3.06 and the representation and warranty set forth in the final sentence of Section 3.02 ) shall be determined without regard to any materiality, Material Adverse Effect or other similar qualification contained in or otherwise applicable to such representation or warranty.
(d) With respect to Company Sites, except where a condition or circumstance existing prior to Closing prevents Buyer from having coverage for Losses that would otherwise be eligible under the applicable state storage tank trust fund, Sellers shall not be liable for any such Losses to the extent such Losses are incurred because of Buyer’s failure to operate storage tank systems in accordance with all applicable requirements to establish and maintain eligibility for coverage of storage tanks under the applicable state storage tank trust fund, or to conduct any required reporting or remediation related to storage tanks in accordance with all applicable requirements of such state storage tank trust fund; provided the foregoing is not intended to limit Sellers’ liability for Losses which exceed any state storage tank trust fund coverage limit or which are within any deductible.
(e) The Minority Sellers shall be severally, and not jointly and severally, liable to Buyer Indemnitees for indemnification under Section 6.03 and Section 8.02. The liability of each Minority Seller for a Loss shall be limited to the portion of such Loss determined by multiplying the amount of such Loss by a fraction, the numerator of which is the number of units which represented such Seller’s Interest and the denominator of which is the total number of units which represented all Interests in each case, as set forth in Section 3.03(a) of the Disclosure Schedules. All other Sellers shall be jointly and severally liable to Buyer Indemnitees for indemnification under Section 6.03 and Section 8.02 , but no such other Seller shall be liable for the portion of any Loss for which the Minority Sellers are liable. Notwithstanding the foregoing, the Indemnity Escrow Amount shall be available to satisfy any and all Losses of Buyer Indemnitee Parties without regard to any limitation on the liability of any Seller for Losses set forth in this Section 8.04(e) .
SECTION 8.05 Indemnification Procedures. The party making a claim under this Article VIII is referred to as the “ Indemnified Party ”, and the party against whom such claims are asserted under this Article VIII is referred to as the “ Indemnifying Party ”.
(a) Third Party Claims . If any Indemnified Party receives notice of the assertion or commencement of any Action other than a Tax Claim made or brought by any Person who is not a party to this Agreement or an Affiliate of a party to this Agreement or a Representative of the foregoing (a “ Third Party Claim ”) against such Indemnified Party with respect to which the Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnified Party shall give the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) days after receipt of such notice of such Third Party Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that such failure shall have actually prejudiced the Indemnifying Party. Such notice by the Indemnified Party shall describe the Third Party Claim in reasonable detail, shall include copies of all material written evidence thereof in the Indemnified Party’s possession or control and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the
Indemnified Party. The Indemnifying Party shall have the right to participate in, or by giving written notice within fifteen (15) days of receipt of notice from Indemnified Party of such Third Party Claim to the Indemnified Party, to assume the defense of, any Third Party Claim at the Indemnifying Party’s expense and by the Indemnifying Party’s own counsel, and the Indemnified Party shall cooperate in good faith in such defense; provided , that if the Indemnifying Party is a Seller, such Indemnifying Party shall not have the right to defend or direct the defense of any such Third Party Claim (i) brought by a Governmental Authority or (ii) that seeks an injunction or other equitable relief against the Indemnified Party. In the event that the Indemnifying Party assumes the defense of any Third Party Claim, subject to Section 8.05(b) , it shall have the right to take such action as it deems necessary to avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third Party Claim in the name and on behalf of the Indemnified Party. The Indemnified Party shall have the right to participate in the defense of any Third Party Claim with counsel selected by it subject to the Indemnifying Party’s right to control the defense thereof. The fees and disbursements of such counsel shall be at the expense of the Indemnified Party, provided, that if in the reasonable opinion of counsel to the Indemnified Party, (A) there are legal defenses available to an Indemnified Party that are different from or additional to those available to the Indemnifying Party; or (B) there exists a conflict of interest between the Indemnifying Party and the Indemnified Party that cannot be waived, the Indemnifying Party shall be liable for the reasonable fees and expenses of one lead counsel to the Indemnified Parties and the reasonable fees and expenses of any local counsel necessary for such lead counsel to secure admission to appear before the relevant adjudicative forum. If the Indemnifying Party elects not to compromise or defend such Third Party Claim, fails to notify the Indemnified Party in writing within fifteen (15) days of receipt of notice from the Indemnified Party of such Third party Claim of its election to defend as provided in this Agreement, or fails to diligently prosecute the defense of such Third Party Claim, the Indemnified Party may, subject to Section 8.05(b) , pay, compromise, defend such Third Party Claim and seek indemnification for any and all Losses based upon, arising from or relating to such Third Party Claim. Sellers and Buyer shall cooperate with each other in all reasonable respects in connection with the defense of any Third Party Claim, including making available (subject to the provisions of Section 5.06 ) records relating to such Third Party Claim and furnishing, without expense (other than reimbursement of actual out-of-pocket expenses) to the defending party, management employees of the non-defending party as may be reasonably necessary for the preparation of the defense of such Third Party Claim.
(b) Settlement of Third Party Claims . Notwithstanding any other provision of this Agreement, the Indemnifying Party shall not enter into settlement of any Third Party Claim without the prior written consent of the Indemnified Party, except as provided in this Section 8.05(b) . If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnified Party and provides, in customary form, for the unconditional release of each Indemnified Party from all liabilities and obligations in connection with such Third Party Claim and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to that effect to the Indemnified Party. If the Indemnified Party fails to consent to such firm offer within ten (10) days after its receipt of such notice, the Indemnified Party may continue to contest or defend such Third Party Claim and in such event, the maximum liability of the Indemnifying Party as to such Third Party Claim shall not exceed the amount of such settlement offer. If the Indemnified Party fails to consent to such firm offer and also fails to assume defense of such Third Party Claim, the Indemnifying Party may settle the Third Party Claim upon the terms set forth in such firm offer to
settle such Third Party Claim. If the Indemnified Party has assumed the defense pursuant to Section 8.05(a) , it shall not agree to any settlement without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed).
(c) Direct Claims . Any Action by an Indemnified Party on account of a Loss which does not result from a Third Party Claim (a “ Direct Claim ”) shall be asserted by the Indemnified Party giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) days after the Indemnified Party becomes aware of such Direct Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that such failure shall have actually prejudiced the Indemnifying Party. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof in the Indemnified Party’s possession or control and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have thirty (30) days after its receipt of such notice to respond in writing to such Direct Claim. The Indemnified Party shall allow the Indemnifying Party and its professional advisors to investigate the matter or circumstance alleged to give rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct Claim. If the Indemnifying Party does not so respond within such thirty (30) day period, the Indemnifying Party shall be deemed to have rejected such claim, in which case the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement.
(d) Cooperation . Each Indemnified Party seeking indemnification hereunder in respect of any Direct Claim, hereby agrees to consult with the Indemnifying Party and use commercially reasonable efforts to take actions reasonably requested by the Indemnifying Party in order to attempt to reduce the amount of Losses in respect of such Direct Claim. Any costs or expenses associated with taking such actions shall be included as Losses hereunder.
(e) Tax Claims . Notwithstanding any other provision of this Agreement, the control of any claim, assertion, event or proceeding in respect of Taxes of the Company (including, but not limited to, any such claim in respect of a breach of the representations and warranties in Section 3.22 hereof or any breach or violation of or failure to fully perform any covenant, agreement, undertaking or obligation in Article VI ) shall be governed exclusively by Article VI hereof.
SECTION 8.06 Payments. Once the amount of a Loss payable is agreed to by the Indemnified Party and Indemnifying Party or finally adjudicated to be payable pursuant to this Article VIII , the Indemnifying Party shall satisfy its obligations within fifteen (15) Business Days of such final, non-appealable adjudication by wire transfer of immediately available funds; provided, however , if the Indemnifying Party is a Seller, the amount of such Loss shall be first satisfied from the Indemnity Escrow Amount to the extent of funds available therefor pursuant to the Indemnity Escrow Agreement and then by payment of cash or other immediately available funds from Sellers. The parties hereto agree that should an Indemnifying Party not make full payment of any such obligations within such fifteen (15) Business Day period, any amount payable shall accrue interest from and including the date of agreement of the Indemnifying Party or final, non-appealable adjudication to but excluding the date such payment has been made at an
annual rate equal to one percent (1%). Such interest shall be calculated daily on the basis of a 365 day year and the actual number of days elapsed, without compounding.
SECTION 8.07 Tax Treatment of Indemnification Payments. All indemnification payments made under this Agreement shall be treated by the parties as an adjustment to the Purchase Price for Tax purposes, unless otherwise required by Law.
SECTION 8.08 Effect of Investigation. The representations, warranties and covenants of the Indemnifying Party, and the Indemnified Party’s right to indemnification with respect thereto, shall not be affected or deemed waived by reason of any investigation made by or on behalf of the Indemnified Party (including by any of its Representatives) or by reason of the fact that the Indemnified Party or any of its Representatives knew or should have known that any such representation or warranty is, was or might be inaccurate or by reason of the Indemnified Party’s waiver of any condition set forth in Section 7.02 or Section 7.03 , as the case may be.
SECTION 8.09 Calculation of Losses. Notwithstanding anything to the contrary in this Agreement:
(a) No Buyer Indemnitee shall be entitled to indemnification under Article VI or this Article VIII to the extent a Liability or reserve relating to the matter giving rise to such Losses has been included in the calculation of Closing Working Capital as finally determined.
(b) The amount of any Loss for which an Indemnified Party claims indemnification under this Agreement (i) shall be reduced (but not below zero) by the amount, if any, of any actual Tax benefit with respect to such Loss, (ii) shall be reduced by the amount of any payment actually received by such Indemnified Party with respect to such Loss from a third-party insurer or other third party (net of costs or expenses of recovery and applicable premiums and self-insured retentions); provided that receipt of such proceeds, benefits or recoveries shall not be a predicate to indemnification for such Loss or require the Indemnified Party to use anything other than commercially reasonable efforts to collect any amounts available under such insurance coverage or from such other third parties. For purposes of the preceding sentence, an actual Tax benefit is a Tax benefit to the extent that it results in, or with commercially reasonable steps capable of being taken by the Indemnified Party would result in, a refund of or actual reduction in Tax with respect to the taxable period in which payment of the Loss is made. In addition, if, at any time following the payment of an indemnification obligation to an Indemnified Party with respect to a Loss under this Agreement, the Indemnified Party actually realizes any net reduction in Taxes or receives any payment by an insurance carrier or other third party with respect to such Loss not previously effected as a reduction payment to clauses (i) or (ii) of this Section 8.09(b) , then the value of any such amount recovered by the Indemnified Party up to the amount of such indemnification payment hereunder, but net of any reasonable costs or expenses of recovery, shall promptly be repaid by such Indemnified Party to the Indemnifying Party. An Indemnified Party shall use commercially reasonable efforts to pursue all legal rights and remedies available in order to mitigate Losses for which indemnification is provided to it under this Agreement. Without limiting the foregoing, each Indemnified Party shall use commercially reasonable efforts to pursue, and to cause its Affiliates to pursue, all reductions in Taxes and insurance or other third-party recoveries to which it may be entitled in connection with any Loss it
incurs, and the parties shall cooperate with each other in pursuing the insurance and other third-party claims with respect to any such Losses.
(c) In the event an Indemnified Party shall recover Losses in respect of a claim of indemnification under Article VI or this Article VIII , no other Indemnified Party shall be entitled to recover the same Losses in respect of a claim for indemnification
SECTION 8.10 Exclusive Remedies. Subject to Section 5.03 and Section 11.11 , the parties acknowledge and agree that following the Closing their sole and exclusive remedy with respect to any and all claims (other than claims arising from fraud on the part of a party hereto in connection with the transactions contemplated by this Agreement) for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant to the indemnification provisions set forth in Article VI and this Article VIII . In furtherance of the foregoing, each party hereby waives from and after the Closing, to the fullest extent permitted under Law, any and all rights, claims and causes of action for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement it may have against the other parties hereto and their Affiliates and each of their respective Representatives arising under or based upon any Law, except pursuant to the indemnification provisions set forth in Article VI and this Article VIII . Nothing in this Section 8.10 shall limit any Person’s right to seek and obtain any equitable relief to which any Person shall be entitled or to seek any remedy on account of any party’s fraudulent conduct.
ARTICLE IX
TERMINATION; CASUALTY AND CONDEMNATION
SECTION 9.01 Termination .
(a) This Agreement may be terminated at any time prior to the Closing:
(i) By the mutual written consent of Sellers’ Representative and Buyer. If this Agreement is terminated under this Section 9.01(a)(i) , the Earnest Money shall be returned to Buyer.
(ii) By Buyer by written notice to Sellers’ Representative if there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by Sellers pursuant to this Agreement that would give rise to the failure of any of the conditions specified in Section 7.02 and such breach, inaccuracy or failure has not been cured by Sellers within sixty (60) days of Sellers’ Representative’s receipt of written notice of such breach from Buyer; provided, however , Buyer shall not have the right to terminate under this Section 9.01(a)(ii) if there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by Buyer pursuant to this Agreement that would give rise to the failure of any of the conditions specified in Section 7.03 . If this Agreement is terminated under this Section 9.01(a)(ii) , the Earnest Money shall be returned to Buyer.
(iii) By Sellers’ Representative by written notice to Buyer if there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by Buyer pursuant to this Agreement that would give rise to the failure of any of
the conditions specified in Section 7.03 and such breach, inaccuracy or failure has not been cured by Buyer within sixty (60) days of Buyer’s receipt of written notice of such breach from Sellers’ Representative; provided, however , Sellers’ Representative shall not have the right to terminate under this Section 9.01(a)(iii) if there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by Sellers or the Company pursuant to this Agreement that would give rise to the failure of any of the conditions specified in Section 7.02 . If this Agreement is terminated under this Section 9.01(a)(iii) , the Earnest Money shall be paid to the Company.
(iv) By Sellers’ Representative or Buyer if any of the conditions set forth in Section 7.02 or Section 7.03 shall not have been fulfilled by January 15, 2014; provided, however , (A) Sellers’ Representative shall not have the right to terminate under this Section 9.01(a)(iv) if there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by Sellers or the Company pursuant to this Agreement that gave rise to the failure of the conditions set forth in Section 7.02 or Section 7.03 and (B) Buyer shall not have the right to terminate under this Section 9.01(a)(iv) if there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by Buyer pursuant to this Agreement that gave rise to the failure of the conditions set forth in Section 7.02 or Section 7.03 . If this Agreement is terminated under this Section 9.01(a)(iv) , the Earnest Money shall be returned to Buyer, unless such termination is by Sellers’ Representative at a time when Buyer did not have the right to terminate under this Section 9.01(a)(iv) , in which case the Earnest Money shall be paid to the Company; and
(v) By Buyer or Sellers’ Representative in the event that (A) there shall be any Law that makes consummation of the transactions contemplated by this Agreement illegal or otherwise prohibited or (B) any Governmental Authority shall have issued a Governmental Order restraining or enjoining the transactions contemplated by this Agreement, and such Governmental Order shall have become final and non-appealable. If this Agreement is terminated under this Section 9.01(a)(v) , the Earnest Money shall be returned to Buyer.
The party seeking to terminate this Agreement pursuant to this Section 9.01(a) (other than pursuant to Section 9.01(a)(i) ) shall give prompt written notice of such termination to the other party, which notice shall specify the subsection of this Section 9.01(a) under which the party is terminating this Agreement.
(b) If this Agreement is terminated in accordance with Section 9.01(a), this Agreement shall forthwith become void and there shall be no Liability on the part of any party to any other party or any of their respective stockholders, members, equity holders, Affiliates, directors, managers or officers under this Agreement except for the obligations of the parties pursuant to this Section 9.01, Section 5.10 , Article X and Article XI ; provided, however, except as provided in Section 9.01(c) , nothing herein shall relieve any party from liability for its fraud or any willful breach of this Agreement occurring prior to the date of such termination.
(c) Subject to Sellers’ rights under Section 11.11 , Sellers’ right to receive the Earnest Money as provided in this Section 9.01 shall be Sellers’ sole and exclusive remedy against Buyer for any breach by Buyer of its obligations under this Agreement or for any failure
of the Closing to occur; provided, however, nothing in this Section 9.01(c) shall relieve Buyer from liability for its fraud.
SECTION 9.02 Casualty and Condemnation.
(a) If, prior to the Closing Date, all or any portion of a Company Site is damaged or destroyed by fire or other casualty, Sellers’ Representative shall promptly deliver written notice thereof to Buyer. If any such casualty shall result in any material damage to the affected Company Site, then Buyer shall have the right to terminate this Agreement with respect to the affected Company Site by giving written notice thereof to Sellers’ Representative not later than five (5) Business Days after the date on which Buyer receives Sellers’ Representative’s notice thereof (and, if necessary, the day for the Closing shall be extended until the date which is three (3) Business Days after the expiration of such period in order to permit Buyer to determine whether or not to exercise such termination right). If Buyer elects to terminate this Agreement with respect to the affected Company Site, then (i) the affected Company Site shall become a Transferred Property and the Purchase Price payable by Buyer shall be reduced by the amount allocated to the affected Company Site in Section 9.02(a) of the Disclosure Schedules, (ii) all Contracts relating solely to the affected Company Site shall be assigned to Falcon, and (iii) the Company shall assign and pay over to Falcon any insurance proceeds paid or payable to the Company for such damage and the Company shall cooperate with Falcon in pursuing such proceeds, provided that any reasonable out-of-pocket costs incurred by Buyer or the Company in connection with such cooperation shall be reimbursed to Buyer or the Company from the insurance proceeds. If any such casualty does not result in material damage to the affected Company Site or if Buyer shall not elect to terminate this Agreement with respect to the affected Company Site, then there shall be no adjustment of the Purchase Price. For purposes of this Section 9.02(a), a casualty shall be deemed to have resulted in material damage with respect to a Company Site if Buyer reasonably estimates that the costs to repair the resulting damage at such Company Site will exceed ten percent (10%) of the amount allocated to such Company Site and/or, with respect to a Company Site which is a Leased Real Property, the casualty permits the landlord to terminate the lease with respect to such Leased Real Property and Sellers’ Representative has not received a written waiver of termination from such landlord by the fifth (5th) Business Day following the date on which Buyer receives Sellers’ Representative’s notice of such casualty event.
(b) If, prior to the Closing Date, all or any part of a Company Site is taken by eminent domain (or becomes the subject of a pending or threatened taking which has not yet been consummated), Sellers’ Representative shall promptly deliver written notice thereof to Buyer and, if the taking involves a material part of the affected Company Site, Buyer shall have the right to terminate this Agreement with respect to the affected Company Site by giving written notice thereof to Sellers’ Representative not later than five (5) Business Days after the date on which Buyer receives Sellers’ Representative’s notice thereof (and, if necessary, the Closing Date shall be extended until the date which is three (3) Business Days after the expiration of such period in order to permit Buyer to determine whether or not to exercise such termination right). If Buyer elects to terminate this Agreement with respect to the affected Company Site, then (i) the affected Company Site shall become a Transferred Property and the Purchase Price payable by Buyer hereunder shall be reduced by the amount allocated to the affected Company Site in accordance with Section 9.02(a) of the Disclosure Schedules, (ii) all Contracts relating solely to the affected
Company Site shall be assigned to Falcon, and (iii) Buyer and the Company shall assign and pay over to Falcon any condemnation award paid or payable to Buyer or the Company for such taking and Buyer and the Company shall cooperate with Falcon in pursuing such award, provided that any reasonable out-of-pocket costs incurred by Buyer or the Company in connection with such cooperation shall be reimbursed to Buyer or the Company from the condemnation award. If Buyer shall not elect to terminate this Agreement with respect to an affected Company Site, there shall be no adjustment to the Purchase Price. For purposes of this Section 9.02(b), a material part of a Company Site shall be deemed taken if: (x) Buyer reasonably estimates that the payments in connection with such taking will exceed ten percent (10%) of the amount allocated to such Company Site in Section 9.02(a) of the Disclosure Schedule, (y) the taking will materially and adversely affect the access or parking at the Company Site, and/or (z) with respect to a Company Site which is a Leased Real Property, the taking will permit the landlord to terminate the lease with respect to such Leased Real Property and Sellers’ Representative has not received a written waiver of termination from such landlord by the fifth (5th) Business Day following the date on which Buyer receives Sellers’ Representative’s notice of such eminent domain proceeding.
ARTICLE X
SELLERS’ REPRESENTATIVE
SECTION 10.01 Appointment of Sellers’ Representative . Each Seller hereby irrevocably and unconditionally appoints Sellers’ Representative as his/her/its true and lawful attorney-in-fact, to act as such Seller’s representative in connection with the execution, delivery and performance of this Agreement and any documents, certificates, instrument or other agreements to be executed or performed pursuant to this Agreement (collectively, the “ Transaction Documents ”) and the transactions contemplated thereby and, as such, to act as such Seller’s agent (with full power of substitution).
SECTION 10.02 Authority. Each Seller hereby grants Sellers’ Representative with power and authority in connection with the Transaction Documents: (a) to execute and deliver, on behalf of such Seller, and to accept delivery of, on behalf of such Seller, the Transaction Documents other than this Agreement on behalf of Sellers, or any of them, as Sellers’ Representative determines, in its sole discretion, to be necessary or appropriate; (b) to do each and every act, implement any decision and exercise any and all rights that Sellers, or any of them, are permitted or required to do or exercise under the Transaction Documents; (c) to (i) negotiate and compromise, on behalf of and in consultation with Sellers, or any of them, any dispute that may arise under, and to exercise or refrain from exercising any remedies available under, the Transaction Documents and (ii) execute on behalf of Sellers, or any of them, any settlement agreement, release or other document with respect to such dispute or remedy; (d) to enforce, on behalf of Sellers, or any of them, any claim against Buyer arising under the Transaction Documents; (e) to engage attorneys, accountants and agents at the expense of Sellers in connection with Sellers’ Representative’s discharge of its obligations under and in connection with the Transaction Documents; (f) to give such instructions and to take such action or refrain from taking such action, on behalf of Sellers, or any of them, as Sellers’ Representative deems, in his or her sole discretion, necessary or appropriate; (g) to communicate to, and receive all communications and notices from Buyer and its Affiliates and Representatives; (h) to execute and deliver on behalf of Sellers, or any of them, any amendment or waiver to any Transaction Document; (i) to authorize delivery or payment to the Buyer Indemnitees or to object to such
deliveries or payments; and (j) to make, execute, acknowledge and deliver all such other agreements, orders, receipts, endorsements, notices, requests, instructions, certificates, stock powers, letters and other writing, and in general, to do any and all things and to take any and all actions that Sellers’ Representative, in its sole discretion, may consider necessary or proper or convenient in connection with or to carry out the transactions contemplated by the Transaction Documents.
SECTION 10.03 Liability . Sellers’ Representative shall not be liable to any Seller for any action taken by it in good faith pursuant to this Agreement, and Sellers shall severally indemnify Sellers’ Representative from any Losses incurred by Sellers’ Representative arising out of its service hereunder. Sellers’ Representative is serving in that capacity solely for purposes of administrative convenience, and shall not be personally liable in such capacity for any of the obligations of Sellers hereunder, and Buyer agrees that neither it nor its successors, assigns, delegates or Affiliates shall look to the personal assets of Sellers’ Representative, acting in such capacity, for the satisfaction of any obligations to be performed by Sellers hereunder. Sellers’ Representative shall be entitled to conclusively rely upon any statements furnished to it by any Seller or Buyer, and Sellers’ Representative shall be entitled to act on the advice of counsel selected by it.
SECTION 10.04 Sellers’ Representative Fund. The Sellers’ Representative Fund shall be used by Sellers’ Representative to pay (i) any costs or expenses Sellers’ Representative may incur from time to time in performing his duties hereunder (including, without limitation, pursuant to Section 2.04 and Article VI ) or under the Indemnity Escrow Agreement, or (ii) any costs or expenses incurred by Sellers pursuant to any indemnity or similar obligation given by Sellers under this Agreement or any other agreement or document executed pursuant thereto or otherwise in fulfillment of Sellers’, or any of their, obligations under any Transaction Document.
SECTION 10.05 Replacement of Sellers’ Representative. Upon the resignation, death, disability, or incapacity of Sellers’ Representative, Sellers who held a majority of the Interests immediately prior to Closing shall appoint a replacement reasonably believed to be capable of carrying out the duties and performing the obligations of Sellers’ Representative hereunder (which such replacement shall be subject to the prior written consent of the Buyer, such consent not to be unreasonably withheld).
ARTICLE XI
MISCELLANEOUS
SECTION 11.01 Expenses . Except as otherwise expressly provided herein, all costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred; provided , however , if the Closing occurs the Sellers shall be responsible for one-half of the title insurance premiums, fees and charges charged by the Title Company and the Escrow Agent (including escrow fees), and Buyer shall be responsible for one-half of the title insurance premiums, fees and charges charged by the Title Company and the Escrow Agent (including escrow fees).
SECTION 11.02 Notices. All notices, requests, consents, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been given (a) when delivered by hand (with written confirmation of receipt); (b) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); or (c) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the next Business Day if sent after normal business hours of the recipient. Such communications must be sent to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 11.02 ):
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If to Sellers: |
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c/o Sellers’ Representative |
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Frederick M. Higgins |
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2017 Nashville Road |
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Bowling Green, KY 42101 |
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Email: fhiggins@ivcvoip.com |
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With a copy to: |
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Bass, Berry & Sims PLC |
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150 Third Avenue South, Suite 2800 |
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Nashville, TN 37201 |
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Facsimile: 615-742-2709 |
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615-742-0427 |
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E-mail: hlamar@bassberry.com
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Attention: Howard H. Lamar III
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If to the Company: |
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Girkin Development, LLC dba Minit Mart |
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P.O. Box 90011 |
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Bowling Green, Kentucky 42102 |
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Facsimile: 270-781-3388 |
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E-mail: fhiggins@minitmart.com |
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Attention: Frederick M. Higgins |
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With a copy to: |
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Bass, Berry & Sims PLC |
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150 Third Avenue South, Suite 2800 |
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Nashville, TN 37201 |
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Facsimile: 615-742-2709 |
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615-742-0427 |
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E-mail: hlamar@bassberry.com
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Attention: Howard H. Lamar III
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If to Buyer: |
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TravelCenters of America LLC |
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Two Newton Place |
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255 Washington Street |
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Newton, MA 02458 |
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Facsimile: 617 969 4697 |
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E-mail: myoung@ta-petro.com |
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Attention: Mark R. Young, Executive Vice President
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with a copy to: |
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Sullivan & Worcester LLP |
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One Post Office Square |
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Boston, MA 02109 |
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Facsimile: 617-338-2880 |
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E-mail: rteller@sandw.com |
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nrives@sandw.com |
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Attention: Richard Teller
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SECTION 11.03 Interpretation. For purposes of this Agreement, (a) the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation”; (b) the word “or” is not exclusive; (c) the words “herein,” “hereof,” “hereby,” “hereto” and “hereunder” refer to this Agreement as a whole and (d) the singular and plural use of a defined term have the correlative meaning. Unless the context otherwise requires, references herein: (x) to Articles, Sections, Disclosure Schedules and Exhibits mean the Articles and Sections of, and Disclosure Schedules and Exhibits attached to, this Agreement; (y) to an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and (z) to a statute means such statute as amended from time to time and includes any successor legislation thereto and any regulations promulgated thereunder. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting an instrument or causing any instrument to be drafted. The Disclosure Schedules and Exhibits referred to herein shall be construed with, and as an integral part of, this Agreement to the same extent as if they were set forth verbatim herein.
SECTION 11.04 Headings. The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.
SECTION 11.05 Severability. If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.
SECTION 11.06 Entire Agreement. This Agreement constitutes the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein and supersedes all prior and contemporaneous understandings and agreements, both written and oral,
with respect to such subject matter. In the event of any inconsistency between the statements in the body of this Agreement, the Exhibits and Disclosure Schedules (other than an exception expressly set forth as such in the Disclosure Schedules), the statements in the body of this Agreement will control.
SECTION 11.07 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. No party may assign its rights or obligations hereunder without the prior written consent of the other parties which consent shall not be unreasonably withheld or delayed; provided, however , that prior to the Closing Date, Buyer may, without the prior written consent of Sellers’ Representative, assign all or any portion of its rights under this Agreement to one or more of its direct or indirect wholly-owned subsidiaries. No assignment shall relieve the assigning party of any of its obligations hereunder. Any such assignor shall remain jointly and severally liable for its obligations and the obligations of its permitted assignee. Upon such permitted assignment, the references in this Agreement to Buyer shall also apply to any such assignee unless the context requires otherwise.
SECTION 11.08 No Third-party Beneficiaries. Except as provided in Article VIII , this Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 11.09 Amendment and Modification; Waiver. This Agreement may only be amended, modified or supplemented by an agreement in writing signed by each of Buyer and Sellers’ Representative. No waiver by Buyer or Sellers’ Representative of any of the provisions hereof shall be effective unless explicitly set forth in writing and signed by the party so waiving. No waiver by any party shall operate or be construed as a waiver in respect of any failure, breach or default not expressly identified by such written waiver, whether of a similar or different character, and whether occurring before or after that waiver. No failure to exercise, or delay in exercising, any right, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.
SECTION 11.10 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of Laws of any jurisdiction other than those of the State of Delaware.
(a) ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY MAY BE INSTITUTED IN THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA OR THE COURTS OF THE STATE OF OHIO IN EACH CASE LOCATED IN THE CITY OF CINCINNATI AND COUNTY OF HAMILTON, AND EACH PARTY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS IN
ANY SUCH SUIT, ACTION OR PROCEEDING. SERVICE OF PROCESS, SUMMONS, NOTICE OR OTHER DOCUMENT BY MAIL TO SUCH PARTY’S ADDRESS SET FORTH HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT, AND EACH SELLER HEREBY APPOINTS SELLERS’ REPRESENTATIVE AS ITS AGENT TO RECEIVE SUCH SERVICE OF PROCESS AND SELLERS’ REPRESENTATIVE HEREBY ACCEPTS SUCH APPOINTMENT. THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR ANY PROCEEDING IN SUCH COURTS AND IRREVOCABLY WAIVE AND AGREE NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT SEEK TO ENFORCE THE FOREGOING WAIVER IN THE EVENT OF A LEGAL ACTION, (B) SUCH PARTY HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (D) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.10(c) .
SECTION 11.11 Specific Performance. The parties agree that irreparable damage would occur in the event that any provision of this Agreement were not performed in accordance with its specific terms or were otherwise breached, and that money damages or other remedies at law would not be an adequate remedy for any such damages. Accordingly, the parties acknowledge and hereby agree that in the event of any breach or threatened breach by any party of any of its covenants or obligations set forth in this Agreement, the non-breaching party shall be entitled to an injunction or injunctions to prevent breaches or threatened breaches of, or to enforce compliance with, the covenants and obligations under this Agreement, in addition to any other remedy that may be available at law or in equity. The parties agree not to raise any objections to the availability of the equitable remedy of specific performance to prevent or restrain breaches or threatened breaches of this Agreement, and to specifically enforce the terms and provisions of this Agreement to prevent breaches or threatened breaches of, or to enforce compliance with, the covenants and obligations of the parties under this Agreement.
SECTION 11.12 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.
SECTION 11.13 Disclosure Schedule. The parties acknowledge and agree that (a) the inclusion of any items or information in the Disclosure Schedules that is not required by this Agreement to be so included is solely for the convenience of Buyer; (b) the disclosure by Sellers of any matter in the Disclosure Schedules shall not be deemed to constitute an acknowledgement by Sellers that the matter is required to be disclosed by the terms of this Agreement, is material, has resulted in a Material Adverse Effect or is outside the ordinary course of business; (c) if any section of the Disclosure Schedules lists an item or information in such a way as to make its relevance to the disclosure required by or provided in another section of the Disclosure Schedules readily apparent on the face of such item or information, the matter shall be deemed to have been disclosed in or with respect to such other section of the Disclosure Schedules, notwithstanding the omission of an appropriate cross-reference to such other section or the omission of a reference in the particular representation and warranty to such section of the Disclosure Schedule or Article III hereof; (d) except as provided in clause (c) above, headings have been inserted in the Disclosure Schedules for convenience and reference only; and (e) the Disclosure Schedules and the information and statements contained therein are not intended to constitute, and shall not be construed as constituting, representations or warranties of Sellers except as and to the extent provided in this Agreement.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.
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[SELLERS] |
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Frederick M. Higgins |
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Heather Higgins |
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Leslie Higgins Embry |
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Cathy Howard |
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Glenn Howard |
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Stacy Howard Jones |
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Wesley Howard |
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Jamie Gaddie Higgins Family Trust |
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By: |
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Name: |
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Jamie Gaddie Higgins Marital Trust |
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By: |
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Rita Barks |
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Danny Evans |
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Jerry Goff |
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Helen Jernigan |
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Martha Miller Webb |
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Donna Carlyle |
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Betsy Monroe |
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Owen Monroe Trust Under Will |
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Carrie Leigh Porcel |
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Frederick M. Higgins Charitable Remainder Unitrust |
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By: |
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COMPANY: |
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GIRKIN DEVELOPMENT, LLC |
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SELLERS’ REPRESENTATIVE: |
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Frederick M. Higgins |
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BUYER: |
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TRAVELCENTERS OF AMERICA LLC |
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Exhibit 10.13
AMENDMENT TO LEASE AGREEMENT
THIS AMENDMENT TO LEASE AGREEMENT (this “ Amendment ”) is entered into as of December 23, 2013 (the “ Amendment Date ”), by and among HPT PSC PROPERTIES TRUST , a Maryland real estate investment trust, and HPT PSC PROPERTIES LLC , a Maryland limited liability company, as landlord (collectively, “ Landlord ”), and TA OPERATING LLC , a Delaware limited liability company, as tenant (“ Tenant ”).
W I T N E S S E T H :
WHEREAS , pursuant to the terms of that certain Lease Agreement, dated as of May 30, 2007, as modified by that certain First Amendment to Lease Agreement, dated as of March 17, 2008, by and among Landlord and Tenant (as successor by merger with Petro Stopping Centers, L.P.), that certain Deferral Agreement, dated as of August 11, 2008, by and among Landlord, Tenant, Hospitality Properties Trust (“ HPT ”), HPT TA Properties Trust, HPT TA Properties LLC (together with HPT TA Properties Trust, collectively, “ HPT TA ”), TravelCenters of America LLC (“ TCA ”) and TA Leasing LLC (“ TA Leasing ”), that certain Amendment Agreement, dated as of January 31, 2011, by and among Landlord, Tenant, HPT, HPT TA, TCA and TA Leasing, and that certain Amendment Agreement, dated as of April 15, 2013, by and among Landlord, Tenant, HPT TA and TA Leasing (as so modified, the “ Lease ”), Landlord leases to Tenant and Tenant leases from Landlord certain premises at various locations, as more particularly described in the Lease; and
WHEREAS , HPT PSC Properties LLC has acquired the fee interest in the real property and certain related property comprising a gas station having an address at 3195 Donald Lee Hollowell Parkway, Atlanta, Georgia (the “ Gas Station ”), which Gas Station is adjacent to the portion of the Leased Property located at 3181 Donald Lee Hollowell Parkway, as more particularly described on Exhibit A-8 to the Lease; and
WHEREAS , Landlord and Tenant desire to amend the Lease to include the Gas Station, subject to the terms and conditions of this Amendment;
NOW, THEREFORE , in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:
1. Capitalized Terms . Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Lease.
2. Minimum Rent . With respect to the period commencing on the Amendment Date and continuing through June 30, 2024, Minimum Rent shall be $59,941,643.66 per annum, subject to adjustment as provided in Section 3.1.1(b) of the Lease.
3. Exhibit A-8 . Effective as of the Amendment Date, Exhibit A-8 to the Lease is hereby deleted in its entirety and Exhibit A-8 attached hereto is hereby inserted in its place.
5. Statement of Limited Liability . THE DECLARATION OF TRUST ESTABLISHING HPT PSC PROPERTIES TRUST, DATED MAY 23, 2007, AS AMENDED
AND SUPPLEMENTED, AS FILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HPT PSC PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HPT PSC PROPERTIES TRUST. ALL PERSONS DEALING WITH HPT PSC PROPERTIES TRUST IN ANY WAY SHALL LOOK ONLY TO THE ASSETS OF HPT PSC PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
6. Ratification . As amended hereby, the Lease is hereby ratified and confirmed and all other terms remain in full force and effect.
[Signature Pages Follow]
IN WITNESS WHEREOF , Landlord and Tenant have caused this Amendment to be duly executed, as a sealed instrument, as of the date first set forth above.
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LANDLORD: |
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HPT PSC PROPERTIES TRUST |
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By: |
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John G. Murray |
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President |
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HPT PSC PROPERTIES LLC |
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By: |
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John G. Murray |
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President |
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TENANT: |
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TA OPERATING LLC |
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By: |
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Mark R. Young |
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Executive Vice President and General Counsel |
EXHIBIT A-8
EXHIBIT A-8 HAS BEEN OMITTED AND WILL BE SUPPLEMENTALLY FURNISHED TO
THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST.
Exhibit 10.20
TRAVELCENTERS OF AMERICA LLC
RESTRICTED SHARE AGREEMENT
This Restricted Share Agreement (this “Agreement”) is made as of , , between (the “Recipient”) and TravelCenters of America LLC (the “Company”).
In consideration of the mutual promises and covenants contained in this Agreement, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Grant of Shares . Subject to the terms and conditions hereinafter set forth and the terms and conditions of the Amended and Restated TravelCenters of America LLC 2007 Equity Compensation Plan, as it may be amended from time to time (the “Plan”), the Company hereby grants to the Recipient, effective as of the date of this Agreement, of its limited liability company interests represented by common shares, no par value per share. The shares so granted are hereinafter referred to as the “Shares,” which term shall also include any shares of the Company issued to the Recipient by virtue of his or her ownership of the Shares, by share dividend, share split, recapitalization or otherwise.
2. Vesting; Forfeiture of Shares .
(a) Subject to Sections 2(b) and 2(c) hereof, the Shares shall vest one-fifth of the total number of Shares as of the date hereof and as to a further one-fifth of such total number of Shares on each anniversary of the date hereof for the next four calendar years. Any Shares not vested as of any date are herein referred to as “Unvested Shares.”
(b) Subject to Section 2(c) hereof, at the option of the Company and in the event the Recipient ceases to render significant services, whether as an employee or otherwise, to (i) the Company, (ii) the entity which is the manager or shared services provider to the Company or an entity controlled by, under common control with or controlling such entity (collectively, the “Manager”), or (iii) an affiliate of the Company (which shall be deemed for such purpose to include any other entity to which the Manager is the manager or shared services provider), all or any portion of the Unvested Shares shall be forfeited by the Recipient as of the date the Recipient ceases to render such services. The Company may exercise such option by delivering or mailing to the Recipient (or his or her estate), at any time after the Recipient has ceased to render such services, a written notice of exercise of such option. Such notice shall specify the number of Unvested Shares to be forfeited.
(c) Notwithstanding anything in this Agreement to the contrary, immediately upon the occurrence of an Acceleration Event (as defined below), all of the Unvested Shares shall vest and any forfeiture or other rights of the Company described in Section 2(b) shall lapse in their entirety, and such vesting and lapse of forfeiture or other
Company rights shall also immediately apply to each other common share, no par value per share, of the Company previously granted to the Recipient which then remains subject to comparable restrictions and rights. For purposes of this Section 2(c), an Acceleration Event shall be deemed to occur immediately upon the occurrence of any of the following events: a Change in Control, a Termination Event (as each such term is defined in Exhibit A hereto) or the death of the Recipient.
3. Legends . Share certificates, if any, evidencing the Shares shall prominently bear a legend in substantially the following terms:
“THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED PURSUANT TO AN EQUITY COMPENSATION PLAN MAINTAINED BY THE COMPANY. THESE SHARES MAY BE SUBJECT TO TRANSFER AND/OR VESTING RESTRICTIONS, AND UNVESTED SHARES ARE SUBJECT TO REPURCHASE RIGHTS AND FORFEITURE CONDITIONS CONTAINED IN THE PLAN, THE RELATED GRANT OF SHARES OR AN AGREEMENT BETWEEN THE COMPANY AND THE INITIAL HOLDER OF THESE SHARES. A COPY OF APPLICABLE RESTRICTIONS, REPURCHASE RIGHTS AND FORFEITURE CONDITIONS WILL BE FURNISHED TO THE HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON REQUEST TO THE SECRETARY OF THE COMPANY.”
In the event that the Shares are not evidenced by share certificates, the share books and records of the Company shall contain a notation in substantially the following terms:
“THE SHARES COVERED BY THIS STATEMENT WERE ISSUED PURSUANT TO AN EQUITY COMPENSATION PLAN MAINTAINED BY THE COMPANY. THESE SHARES MAY BE SUBJECT TO TRANSFER AND/OR VESTING RESTRICTIONS, AND UNVESTED SHARES ARE SUBJECT TO REPURCHASE RIGHTS AND FORFEITURE CONDITIONS CONTAINED IN THE PLAN, THE RELATED GRANT OF SHARES OR AN AGREEMENT BETWEEN THE COMPANY AND THE INITIAL HOLDER OF THESE SHARES. A COPY OF APPLICABLE RESTRICTIONS, REPURCHASE RIGHTS AND FORFEITURE CONDITIONS WILL BE FURNISHED TO THE HOLDER OF THE SHARES COVERED BY THIS STATEMENT WITHOUT CHARGE UPON REQUEST TO THE SECRETARY OF THE COMPANY.”
Certificates evidencing Shares and Shares not evidenced by certificates shall also bear or contain, as applicable, legends and notations as may be required by the Plan or the Company’s Limited Liability Company Agreement or Bylaws, each as in effect from time to time, or as the Company may otherwise determine appropriate.
Promptly following the request of the Recipient with respect to any Shares (or any other common share, no par value per share, of the Company previously granted to the Recipient) which have become vested, the Company shall take, at its sole cost and expense, all such actions
as may be required to permit the Recipient to resell such shares including, without limitation, providing to the Company’s transfer agent certificates of officers of the Company, and opinions of counsel and/or filing an appropriate registration statement, and taking all such other actions as may be required to remove the legends set forth above with respect to transfer and vesting restrictions from the certificates evidencing such shares and, if applicable, from the share books and records of the Company. The Company shall reimburse the Recipient, promptly upon the receipt of a request for payment, for all expenses (including legal expenses) reasonably incurred by the Recipient in connection with the enforcement of the Recipient’s rights under this paragraph.
4. Tax Withholding. To the extent required by law, the Company shall withhold or cause to be withheld income and other taxes incurred by the Recipient by reason of a grant of Shares, and the Recipient agrees that he or she shall upon request of the Company pay to the Company an amount sufficient to satisfy its tax withholding obligations from time to time (including as Shares become vested) as the Company may request.
5. Miscellaneous .
(a) Amendments . Neither this Agreement nor any provision hereof may be changed or modified except by an agreement in writing executed by the Recipient and the Company; provided, however, that any change or modification that does not adversely affect the rights hereunder of the Recipient, as they may exist immediately prior to the effective date of such change or modification, may be adopted by the Company without an agreement in writing executed by the Recipient, and the Company shall give the Recipient written notice of such change or modification reasonably promptly following the adoption of such change or modification.
(b) Binding Effect of the Agreement . This Agreement shall inure to the benefit of, and be binding upon, the Company, the Recipient and their respective estates, heirs, executors, transferees, successors, assigns and legal representatives.
(c) Provisions Separable . In the event that any of the terms of this Agreement shall be or become or is declared to be illegal or unenforceable by any court or other authority of competent jurisdiction, such terms shall be null and void and shall be deemed deleted from this Agreement, and all the remaining terms of this Agreement shall remain in full force and effect.
(d) Notices . Any notice in connection with this Agreement shall be deemed to have been properly delivered if it is in writing and is delivered by hand or by facsimile transmission or sent by registered certified mail, postage prepaid, to the party addressed as follows, unless another address has been substituted by notice so given:
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To the Recipient: |
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To the Recipient’s address as set forth on the signature page hereof. |
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To the Company: |
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TravelCenters of America LLC |
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Two Newton Place |
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255 Washington Street, Suite 300 |
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Newton, MA 02458 |
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Attn: Secretary |
(e) Construction . The headings and subheadings of this Agreement have been inserted for convenience only, and shall not affect the construction of the provisions hereof. All references to sections of this Agreement shall be deemed to refer as well to all subsections which form a part of such section.
(f) Employment Agreement . This Agreement shall not be construed as an agreement by the Company, the Manager or any affiliate of the Company or the Manager to employ the Recipient, nor is the Company, the Manager or any affiliate of the Company or the Manager obligated to continue employing the Recipient by reason of this Agreement or the grant of Shares to the Recipient hereunder.
(g) Applicable Law . This Agreement shall be construed and enforced in accordance with the laws of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or caused this Agreement to be executed, under seal, as of the date first above written.
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TRAVELCENTERS OF AMERICA LLC |
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By: |
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Name: |
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Title: |
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RECIPIENT: |
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[Name] |
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[Address] |
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Exhibit A
A “Change in Control” shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall have occurred:
(a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 50% or more of either the then outstanding common shares of the Company or the combined voting power of the Company’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in paragraph (c)(i) below;
(b) the following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on the date of the Agreement, constitute the Board and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of Directors) whose appointment or election by the Board or nomination for election by the Company’s shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the Directors then in office who either were Directors on the date of the Agreement or whose appointment, election or nomination for election was previously so approved or recommended;
(c) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other entity, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 50% or more of the combined voting power of the Company’s then outstanding securities; or
(d) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.
A “Termination Event” shall occur if Reit Management & Research LLC (or any entity controlled by, under common control with or controlling Reit Management & Research LLC) ceases to be the manager or shared services provider to the Company.
For purposes of the definitions set forth on this Exhibit A, the following definitions shall apply, with capitalized terms used but not defined in this Exhibit A having the meaning set forth in the Plan:
“Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.
“Agreement” shall mean the Restricted Share Agreement to which this Exhibit A is attached.
“Beneficial Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act.
“Director” is a member of the Board of Directors of the Company.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities and (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of shares of the Company.
Exhibit 10.23
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
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MARCHBANKS TRUCK SERVICE, INC., et al. , on behalf of itself and all others similarly situated,
Plaintiffs, v.
COMDATA NETWORK, INC., d/b/a COMDATA CORPORATION, et al. ,
Defendants. |
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Civil Action No. 07-1078-JKG
Consolidated Case |
DEFINITIVE MASTER CLASS SETTLEMENT AGREEMENT
TABLE OF CONTENTS
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I. |
DEFINITIONS |
7 |
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II. |
SETTLEMENT CLASS |
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III. |
CLASS SETTLEMENT ESCROW ACCOUNT |
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IV. |
PAYMENTS TO THE CLASS SETTLEMENT ESCROW ACCOUNT |
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V. |
CONSIDERATION PROVIDED TO SETTLEMENT CLASS MEMBERS |
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VI. |
RELEASE, WAIVER AND COVENANT NOT TO SUE |
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VII. |
PRELIMINARY APPROVAL |
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VIII. |
CLASS NOTICE AND ADMINISTRATION |
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IX. |
REQUESTS FOR EXCLUSION FROM THE SETTLEMENT CLASS |
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X. |
OBJECTIONS TO THE SETTLEMENT |
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XI. |
ATTORNEYS’ FEE AWARDS, REIMBURSEMENT FOR COSTS AND EXPENSES AND PLAINTIFFS’ SERVICE AWARDS |
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XII. |
FINAL APPROVAL |
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XIII. |
MODIFICATION OR TERMINATION OF THIS SETTLEMENT AGREEMENT |
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XIV. |
CONTINUING JURISDICTION |
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XV. |
GENERAL MATTERS AND RESERVATIONS |
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TABLE OF EXHIBITS
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Exhibit |
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Sample Claim Form |
A |
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Proposed Final Judgment |
B |
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Proposed Final Approval Order |
C |
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Long Form Notice |
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Plan of Administration and Distribution |
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Proposed Preliminary Approval Order |
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Publication Notice |
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Escrow Agreement |
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Sample Merchant Services Agreement |
I |
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Declaration of Settlement Administrator |
J |
WHEREAS, in or around March 2007, several independent Truck Stops filed lawsuits on behalf of a proposed class of independent Truck Stops and retail fueling merchants against Comdata and/or Ceridian in the U.S. District Court for the Eastern District of Pennsylvania and, in or around June 2007, filed similar lawsuits against Comdata, Ceridian and/or the Major Chains in the U.S. District Court for the Middle District of Tennessee (the “Actions” as defined below) alleging, among other things, that certain provisions in Comdata’s Merchant Services Agreements with members of the proposed class, as well as certain supposed agreements with the Major Chains, violated Section 1 and/or Section 2 of the Sherman Act;
WHEREAS, the actions filed in the U.S. District Court for the Eastern District of Pennsylvania were consolidated by the Honorable James Knoll Gardner under Civil Action No. 07-CV-1078-JKG and certain Plaintiffs’ Class Counsel were appointed interim Co-Lead Counsel and Liaison Counsel for the Plaintiffs and the proposed class;
WHEREAS, on May 1, 2007, Plaintiffs filed on behalf of themselves and the proposed class a Consolidated Amended Complaint against Comdata and Ceridian in the U.S. District Court for the Eastern District of Pennsylvania alleging violations of Sections 1 and 2 of the Sherman Act;
WHEREAS, on June 22, 2007, Comdata filed an answer with affirmative defenses to Plaintiffs’ Consolidated Amended Complaint and Ceridian moved to dismiss Plaintiffs’ Consolidated Amended Complaint for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure;
WHEREAS, the cases filed in the U.S. District Court for the Middle District of Tennessee were dismissed voluntarily in or around July 2007;
WHEREAS, on September 18, 2007, after Ceridian’s Motion to Dismiss the Consolidated Amended Complaint was fully briefed, and after Plaintiffs and Ceridian had entered into a tolling agreement providing for, inter alia , Ceridian’s cooperation with Plaintiffs in discovery, Plaintiffs dismissed their claims without prejudice as to Ceridian only and Ceridian’s Motion to Dismiss was denied as moot on December 19, 2007;
WHEREAS, Plaintiffs and Comdata subsequently engaged in extensive document and deposition discovery, including the production of millions of pages of documents by Comdata, Plaintiffs, and third-parties, collectively;
WHEREAS, on April 6, 2009, Plaintiffs filed a Motion for Leave to File a Second Consolidated Amended Complaint, seeking, among other things, to rejoin Ceridian as a party to the case and to assert claims under Sections 1 and 2 of the Sherman Act against each of the Major Chains;
WHEREAS, with its Motion for Leave to File a Second Consolidated Amended Complaint pending before the Court, in order to preserve the statute of limitations, Plaintiffs on behalf of themselves and a proposed class of independent Truck Stops and other retail fueling merchants filed on May 21, 2009 a separate case in the U.S. District Court for the Eastern District of Pennsylvania against Ceridian and the Major Chains only;
WHEREAS, on July 17, 2009, Plaintiffs filed their Motion for Class Certification in the original case pending against Comdata and Plaintiffs and Comdata thereafter engaged in expert discovery, including depositions, with respect to one another’s class certification experts;
WHEREAS, before Comdata’s opposition to Plaintiffs’ Motion for Class Certification was due, on November 10, 2009, the Court dismissed Plaintiffs’ Motion for Class Certification as moot, and on March 25, 2010, Plaintiffs’ separate lawsuit against Ceridian and the Major
Chains was consolidated into Plaintiffs’ lawsuit against Comdata and Plaintiffs were granted leave to file a Second Consolidated Amended Complaint;
WHEREAS, on March 31, 2010, Plaintiffs filed a Second Consolidated Amended Complaint naming Comdata, Ceridian and the Major Chains as Defendants;
WHEREAS, all Defendants moved to dismiss the Second Consolidated Amended Complaint, and on March 24, 2011, the Court denied such motions as to all Defendants except for the TA Defendants and ordered Plaintiffs to file a Third Consolidated Amended Complaint ( Marchbanks Truck Service Inc. v. Comdata Network, Inc. , No. 07-1078, 2011 U.S. Dist. LEXIS 158011, 2011 WL 11559549 (E.D. Pa. Mar. 24, 2011));
WHEREAS, on April 21, 2011, Plaintiffs filed their Third Consolidated Amended Complaint against all Defendants;
WHEREAS, on May 6, 2011, all Defendants, with the exception of Comdata, moved to dismiss the Third Consolidated Amended Complaint and, on May 19, 2011, Comdata filed an Answer with Affirmative Defenses to Plaintiffs’ Third Consolidated Amended Complaint;
WHEREAS, on March 29, 2012, the Court denied Defendants’ motions to dismiss the Third Consolidated Amended Complaint and the remaining Defendants filed answers on April 30, 2012;
WHEREAS, during the pendency of the various motions to dismiss, Plaintiffs and Defendants engaged in additional and substantial document and deposition discovery;
WHEREAS, during this time period, all Plaintiffs and Defendants participated in a settlement conference with Magistrate Judge Perkin on or about May 9, 2011, and Plaintiffs, on the one hand, and Comdata and Ceridian, on the other, participated in a separate private
mediation on July 12, 2012, with retired District Court Judge Layn R. Phillips of Irell & Manella LLP, but were unable to reach any settlements;
WHEREAS, on June 7, 2013, Plaintiffs filed their second Motion for Class Certification under Rule 23(b)(3) of the Federal Rules of Civil Procedure, seeking certification of a litigation class, defined in material part to include “truck stops and other retail merchants with one or more physical locations in the United States that paid transaction fees on Over-the-Road (“OTR”) Fleet Card transactions, which fees were computed based on a percentage of the purchase amount, directly to Comdata at any time from March 1, 2003 through June 30, 2010 [with the exception of] the Major Chains [and] Wilco Hess….”
WHEREAS, Plaintiffs’ June 7, 2013 Motion for Class Certification was accompanied by the opinions of three economic experts for class and merits purposes (all of whom were deposed), to which Comdata and the other Defendants responded on September 27, 2013, proffering the opinions of a total of three economic experts, two of which related both to class and the merits (all of whom were deposed);
WHEREAS, on August 30, 2013, Plaintiffs moved to disqualify certain of Defendants’ experts and Defendants moved to disqualify Plaintiffs’ proffered experts, responses to such motions were filed on September 20, 2013, and a hearing was held on those motions on October 28 and 29, 2013;
WHEREAS, Ceridian filed a motion for summary judgment on Plaintiffs’ claims against it only on September 11, 2013, Plaintiffs responded on November 26, 2013, and Ceridian filed a reply on December 20, 2013;
WHEREAS, a trial was scheduled in this matter to begin on August 18, 2014;
WHEREAS, while Ceridian’s motion for summary judgment, the various motions to disqualify experts, and Plaintiffs’ class certification motion were pending, the Parties all participated in a private mediation before Professor Eric D. Green of Resolutions LLC on December 9, 2013;
WHEREAS, after extensive subsequent arm’s length negotiations took place between Class Counsel and Comdata’s Counsel and Ceridian’s Counsel under the supervision of Professor Green during December 2013, Plaintiffs, on the one hand, and Comdata and Ceridian, on the other hand, reached a settlement, which was documented in a detailed memorandum of understanding that was signed on behalf of those parties on December 31, 2013;
WHEREAS, after further arm’s length negotiations took place between Class Counsel and Counsel for Love’s, Plaintiffs, on the one hand, and Love’s, on the other hand, reached a settlement, which was documented in a separate memorandum of understanding that was signed on behalf of those parties on January 3, 2014;
WHEREAS, on or about January 9, 2013, the Court held a settlement conference with Class Counsel and TA Defendants’ Counsel and Pilot Defendants’ Counsel, and after additional separate arm’s length negotiations between Class Counsel and counsel for the TA Defendants and the Pilot Defendants under the supervision of the Court, those parties reached separate settlements, which were documented in a joint memorandum of understanding that was signed on behalf of those parties on January 21, 2014;
WHEREAS, the Parties’ obligations with respect to each of the memoranda of understanding are separate, distinct, and not contingent upon one another, but the Parties have agreed that, for the convenience of the Court and for purposes of streamlining the settlement
process for the benefit of the Settlement Class, those settlements shall be memorialized in a single master Settlement Agreement;
WHEREAS, Plaintiffs and Plaintiffs’ Class Counsel, having conducted substantial discovery, investigated the facts and underlying events relating to the subject matter of their claims, and carefully analyzed the applicable legal principles, believe based upon their investigation, and taking into account the risks, uncertainties, burdens, and costs of further prosecution of their claims, and taking into account the substantial benefits to be received, that the resolutions and compromises reached between Plaintiffs, on the one hand, and Defendants, on the other, which were initially described in the Parties’ various memoranda of understanding, and which are set forth in greater detail herein, are fair, reasonable and adequate and that settlement under the terms set forth herein is in the best interests of the proposed Settlement Class;
WHEREAS, Defendants, for the purpose of avoiding the burden, expense, risk, and uncertainty of continuing to litigate the Plaintiffs’ claims, and for the purpose of putting to rest all controversies with Plaintiffs and the Settlement Class that were or could have been alleged, and without any admission of liability or wrongdoing whatsoever, desire to enter into this settlement, which was initially described in the Parties’ various memoranda of understanding, and which is set forth in greater detail herein;
WHEREAS, it is agreed between Plaintiffs, on the one hand, and Defendants, on the other, that this Settlement Agreement shall not be deemed or construed to be an admission, concession, or evidence of any violation of any federal, state, or local statute, regulation, rule, or other law, or principle of common law or equity, or of any liability or wrongdoing whatsoever,
by any Defendant, or of the truth of any of the claims that the Plaintiffs have asserted against any Defendant;
NOW, THEREFORE, without any admission or concession by Plaintiffs of any lack of merit to their allegations and claims, and without any admission or concession by Defendants of any liability or wrongdoing or lack of merit in their defenses, in consideration of the mutual covenants and terms contained herein, and subject to the final approval of the Court, the Parties agree as follows:
I. DEFINITIONS
1. For purposes of this Settlement Agreement, the following words and terms shall be defined to have the meanings set forth below, and all undefined words and phrases shall have their usual and customary meaning.
a. “Action” or “Actions” means all pending or prior actions that were consolidated in the United States District Court for the Eastern District of Pennsylvania under the caption Marchbanks Truck Service, Inc. d/b/a/ Bear Mountain Truck Stop, et al. v. Comdata Network, Inc. d/b/a Comdata Corporation , No. 07-0178-JKG (E.D. Pa.), as well as any other related cases, including, but not limited to, the following:
1. Universal Delaware, Inc. d/b/a Gap Truck Stop v. Comdata Network, Inc., et al. , No. 07-1078 (E.D. Pa.);
2. Marchbanks Truck Service, Inc. d/b/Bear Mountain Travel Stop v. Comdata Network, Inc. et al. , No. 07-1128 (E.D. Pa.);
3. Mahwah Fuel Stop v. Comdata Network, Inc. et al. , No. 07-1323 (E.D. Pa.);
4. Gerald Krachey d/b/a Krachey’s BP South v. Comdata Network, Inc. , No. 07-1732 (E.D. Pa.);
5. Walt Whitman Truck Stop v. Comdata Network, Inc. et al. , No. 07-2829 (E.D. Pa.);
6. Nu-Way Cooperative v. Comdata Network, Inc. et al. , No. 07-1734 (E.D. Pa.);
7. Universal Delaware, Inc. d/b/a Gap Truck Stop v. Ceridian Corporation et al. , No. 09-2327 (E.D. Pa.);
8. Riverbend Truck Stop & Palace Casinos, Inc. v. Ceridian Corporation, et al. , No. 07-647 (M.D. Tenn.);
9. Minnows LLC v. Ceridian Corporation, et al. , No. 07-658 (M.D. Tenn.);
10. Dickerson Petroleum, Inc. v. Ceridian Corporation, et al. , No. 07-659 (M.D. Tenn.); and
11. VGD Services v. Ceridian Corporation, et al. , No. 07-660 (M.D. Tenn.).
b. “Aggregate Settlement Fund” means the settlement fund created within five (5) business days following the Final Effective Date by transferring the Comdata/Ceridian Settlement Fund, the Love’s Settlement Fund, the Pilot Settlement Fund, and the TA Settlement Fund into a single sub-account within the Escrow Account.
c. “Attorneys’ Fee Award” means any and all attorneys’ fees that are awarded by the Court for the work performed for the benefit of the members of the Settlement Class by Plaintiffs’ Class Counsel or other counsel for Plaintiffs or the proposed class in the Actions, as further described in Section XI of this Settlement Agreement.
d. “Buying Groups” means and is limited to North American Truck Stop Network (“NATSN”), Professional Transportation Partners, LLC (“PTP”), AMBEST, and Roady’s.
e. “Ceridian” means Defendant Ceridian Corporation n/k/a Ceridian LLC.
f. “Ceridian’s Counsel” means Carolyn P. Short and Shannon E. McClure of Reed Smith LLP.
g. “Ceridian Releasees” means Ceridian, together with its affiliates, subsidiaries, shareholders, officers, directors, managers, and representatives and their predecessors, assignees and successors in interest and its or their respective past, present or future officers, directors, managers, stockholders, agents, employees, partners, trustees, parents, subsidiaries, divisions, affiliates, heirs, administrators, purchasers, assigns and other legal representatives, including, but not limited to, Fidelity National Financial, Inc., Thomas H. Lee Partners, L.P., Ceridian Holding LLC, Foundation Holding LLC, Ceridian LLC, Ceridian Co-Issuer Inc., and Ceridian HCM Holding Inc. and their direct and indirect subsidiaries, and their predecessors, including but not limited Ceridian Holding Corp., Ceridian Intermediate Corp., Foundation Holdings, Inc. and Ceridian Corporation.
h. “Claim” means the claim of a Settlement Class Member or his or her or its representative submitted on a Claim Form as provided in this Settlement Agreement.
i. “Claimant” means a Settlement Class Member who has submitted a Claim.
j. “Claim Bar Date” means the deadline by which Settlement Class Members must submit a timely, valid, and complete Claim Form.
k. “Claim Forms” mean the documents, in substantially the same form as Exhibit “A” to this Settlement Agreement.
l. “Claim Period” means the time period in which Settlement Class Members may submit a Claim Form for review to the Settlement Administrator. The Claim Period shall run for approximately 8 weeks from the Notice Date. The expiration of the Claim Period shall be specified in the Publication Notice, the Long Form Notice, and the Settlement Website.
m. “Class Notice” means the notice program described in Section VIII.
n. “Class Objection Period” means the period in which a Settlement Class Member must file any objections to this Settlement Agreement.
o. “Comdata” means Defendant Comdata Network, Inc., n/k/a Comdata Inc. and its successors or assigns.
p. “Comdata Proprietary Transactions” means transactions in which the method of payment used is: (i) the Comdata OTR Fleet Card; or (ii) the Comdata MasterCard where such MasterCard transactions are processed by Comdata rather than by the MasterCard because of the existence of an agreement between Comdata and the merchant.
q. “Court” means the United States District Court for the Eastern District of Pennsylvania.
r. “Comdata’s Counsel” means J. Gordon Cooney, Jr., Steven A. Reed, and R. Brendan Fee of Morgan, Lewis & Bockius LLP and Kevin J. Arquit, Matthew J. Reilly, and Abram J. Ellis of Simpson Thacher & Bartlett LLP.
s. “Comdata/Ceridian Settlement Fund” means the settlement monies deposited into the Escrow Account by Comdata/Ceridian as described in Paragraph 7 of this Settlement Agreement.
t. “Comdata Releasees” means Comdata, together with its affiliates, subsidiaries, assignees, shareholders, officers, directors, managers, and representatives and their predecessors and successors in interest and its or their respective past, present or future officers, directors, managers, stockholders, agents, employees, partners, trustees, parents, subsidiaries, divisions, affiliates, heirs, administrators, purchasers, assigns and other legal representatives, including, but not limited to, Comdata Inc. and its direct and indirect subsidiaries, and its predecessors, Comdata Network, Inc. and Ceridian Stored Value Solutions, Inc.
u. “Custom-Fee Arrangement” means an agreement between Comdata, on the one hand, and a merchant on the other, under which Comdata will charge the merchant a Merchant Transaction Fee that is lower than its Effective Comdata Proprietary Merchant Transaction Fee on transactions by a particular fleet at the particular merchant’s location.
v. “Defendants” means Comdata, Ceridian, Love’s, the TA Defendants and the Pilot Defendants collectively.
w. “Defense Counsel” means Comdata’s Counsel, Ceridian’s Counsel, Love’s Counsel, the TA Defendants’ Counsel and the Pilot Defendants’ Counsel collectively.
x. “Effective Comdata Proprietary Merchant Transaction Rate” means the Merchant Transaction Fee rate that Comdata charges a merchant on transactions in which no Custom-Fee Arrangement or other special exception applies.
y. “Escrow Agent” means the agreed-upon entity to address and hold for distribution the funds identified in this Settlement Agreement pursuant to the terms of an Escrow Agreement.
z. “Escrow Account” means the custodial or investment account administered by the Settlement Administrator in which the funds to be deposited will be held, invested, administered, and disbursed pursuant to this Settlement Agreement and the Escrow Agreement.
aa. “Escrow Agreement” means the agreement by and among Plaintiffs’ Class Counsel, Defense Counsel, and the Escrow Agent with respect to the escrow of the funds to be deposited into the Escrow Account pursuant to this Settlement Agreement.
bb. “Fairness Hearing” means the hearing that is to take place as provided for in the Preliminary Approval Order for purposes of, among other things: (a) entering the Final Order and Final Judgment and dismissing the Actions with prejudice; (b) determining whether the
settlement should be approved as fair, reasonable, adequate and in the best interests of the Settlement Class Members; and (c) ruling upon an application by Plaintiffs’ Class Counsel for an Attorneys’ Fee Award, Reimbursement for Costs and Expenses and for Plaintiffs’ Service Awards.
cc. “Final Approval Date” means the date on which the Court enters the Final Order and Final Judgment, or the latter of the two in the event the Final Order and Final Judgment are not entered on the same date.
dd. “Final Effective Date” means the latest date on which the Final Order and Final Judgment approving this Settlement Agreement become final. For purposes of this Settlement Agreement: (1) if no appeal has been taken from the Final Order and Final Judgment, “Final Effective Date” means the date on which the time to appeal therefrom has expired; or (2) if any appeal has been taken from the Final Order and Final Judgment, “Final Effective Date” means the date on which all appeals therefrom, including petitions for rehearing or reargument, petitions for rehearing en banc and petitions for certiorari or any other form of review, have been finally disposed of in a manner that affirms the Final Order and Final Judgment; or (3) if Plaintiffs’ Class Counsel and Defense Counsel agree in writing, the “Final Effective Date” can occur on any other agreed-upon date.
ee. “Final Judgment” means the Court’s final judgment as described in Section XII of this Settlement Agreement, which is to be substantially in the form attached hereto as Exhibit “B”.
ff. “Final Order” means the Court’s final order approving the settlement and this Settlement Agreement, as described in Section XII of this Settlement Agreement, which is to be substantially in the form attached hereto as Exhibit “C”.
gg. “Long Form Notice” means the Long Form Notice substantially in the form attached hereto as Exhibit “D”.
hh. “Love’s” means Defendant Love’s Travel Stops & Country Stores, Inc.
ii. “Love’s Counsel” means Mack J. Morgan, III of Crowe & Dunlevy P.C.
jj. “Love’s Releasees” means Love’s, together with its affiliates, shareholders, officers, directors, managers, members, and representatives and their predecessors and successors in interest and its or their respective past, present or future officers, directors, managers, members, stockholders, agents, employees, partners, trustees, parents, subsidiaries, divisions, affiliates, heirs, administrators, purchasers, assigns and other legal representatives.
kk. “Love’s Settlement Fund” means the settlement monies deposited into the Escrow Account by Love’s as described in Paragraph 8 of this Settlement Agreement.
ll. “Lowest Posted Cash Price” shall mean the lowest price posted on signage at a physical location by a merchant for the purchase of fuel. This price is typically referred to as the “cash price” and is the base price from which discounts or rebates offered to fleets or truckers are often calculated.
mm. “Major Chains” means the Pilot Defendants, the TA Defendants, and Love’s collectively.
nn. “Merchant Services Agreement” means the agreement setting forth the commercial terms under which a merchant accepts an OTR Fleet Card.
oo. “Merchant Transaction Fee” is the fee per transaction paid to an OTR Fleet Card issuer by a Truck Stop or other merchant in connection with a transaction in which a purchaser presents that OTR Fleet Card for payment at the merchant’s location.
pp. “Mobile Fueler” means an entity whose primary business is delivering fuel to a customer’s terminal or job site.
qq. “Net Aggregate Settlement Fund” means the Aggregate Settlement Fund less (1) the Taxes and administrative costs related to the accounts, and (2) any payments approved by the Court, including, but not limited to, any Attorneys’ Fee Award, any Reimbursement for Costs and Expenses, any Plaintiffs’ Service Awards, any Settlement Administration Costs, and any other such expenses and payments as the Court deems appropriate.
rr. “Notice Date” means the last date on which dissemination of the Long Form Notice can begin as set forth in the Preliminary Approval Order.
ss. “Objector” means any Settlement Class Member who or which timely and properly submits an objection to this settlement that fully complies in all respects with the criteria set forth in Paragraphs 62 and 63 below.
tt. “Operative Class Complaint” means the Third Consolidated Amended Complaint filed in the Action.
uu. “Opt-Out” means any member of the Settlement Class who or which timely and properly excludes itself (or himself or herself) from the Settlement Class that fully complies in all respects with the criteria set forth in Paragraphs 57 and 58 and those exclusion procedures approved by the Court.
vv. “OTR Fleet Card” means a payment card or card number used by fleets and over-the-road truck drivers to purchase diesel fuel and other items at Truck Stops and other Retail Fueling Faclities and that provides (1) enhanced data capture functionality and (2) purchase controls.
ww. “Paragraph” or “Paragraphs” means one or more paragraphs of this Settlement Agreement.
xx. “Pilot Defendants” means Defendants Pilot Travel Centers LLC and Pilot Corporation collectively.
yy. “Pilot Defendants’ Counsel” means John H. Bogart of Telos VG PLLC.
zz. “Pilot Releasees” means Pilot Travel Centers LLC and Pilot Corporation, together with their affiliates, shareholders, officers, directors, members, managers, and representatives and their predecessors and successors in interest and their respective past, present or future officers, directors, stockholders, members, agents, employees, partners, trustees, parents, subsidiaries, divisions, heirs, administrators, purchasers, assigns and other legal representatives.
aaa. “Pilot Settlement Fund” means the settlement monies deposited into the Escrow Account by the Pilot Defendants as described in Paragraph 9 of this Settlement Agreement.
bbb. “Plan of Administration and Distribution” means the plan pursuant to which the Net Settlement Fund will be distributed to Claimants, which such plan is attached hereto as Exhibit “E”.
ccc. “Principal OTR Fleet Card Competitor” means the principal OTR Fleet Cards with which the OTR Fleet Card issued by Comdata competes, which, for purposes of this Settlement Agreement, consists of TCH, EFS, T-Chek and WEX/FleetOne, together with their respective successors and assigns.
ddd. “Parties” means Plaintiffs and Defendants collectively, as each of those terms is defined in this Settlement Agreement.
eee. “Plaintiffs” means Marchbanks Truck Service, Inc. d/b/a Bear Mountain Travel Stop, Mahwah Fuel Stop, Gerald F. Krachey d/b/a/ Krachey’s BP South, and Walt Whitman Truck Stop, Inc. Mahwah Fuel Stop includes Royal Gas and Diesel Stations, LLC.
fff. “Plaintiffs’ Service Award” means any incentive or service payments that the Court orders to be paid to any Plaintiff, but not including any Attorneys’ Fee Award, Reimbursement for Costs and Expenses, the amount any Plaintiff receives under the Plan of Administration and Distribution, or any Settlement Administration Costs.
ggg. “Plaintiffs’ Class Counsel” or “Class Counsel” means Eric L. Cramer and Andrew C. Curley of Berger & Montague, P.C., Eric B. Fastiff and Dean Harvey of Lieff Cabraser Heimann & Bernstein, LLP, and Stephen R. Neuwirth and Dale H. Oliver of Quinn Emanuel Urquhart & Sullivan, LLP.
hhh. “Preliminary Approval Date” means the date on which the Court enters the Preliminary Approval Order.
iii. “Preliminary Approval Order” means the order to be entered by the Court preliminarily approving the settlement as outlined in Section VII of this Settlement Agreement and to be substantially in the form attached hereto as Exhibit “F”.
jjj. “Publication Notice” means the Publication Notice substantially in the form attached hereto as Exhibit “G”.
kkk. “Reimbursement for Costs and Expenses” means Plaintiffs’ request for recovery out of the Aggregate Settlement Fund of costs and expenses reasonably incurred by Plaintiffs’ Class Counsel and/or the Plaintiffs in investigating, prosecuting, and settling this matter for the benefit of Plaintiffs and members of the Settlement Class, including, e.g ., fees and costs
for experts and consultants, but not including any Plaintiffs’ Service Awards or Settlement Administration Costs, as further described in Section XI of this Settlement Agreement.
lll. “Release” means the release, waiver and covenant not to sue set forth in Section VI of this Settlement Agreement and in the Final Order and Final Judgment.
mmm. “Released Claims” means any claim covered by the Release.
nnn. “Releasees” means the Comdata Releasees, the Ceridian Releasees, the Love’s Releasees, the Pilot Releasees, and the TA Releasees collectively.
ooo. “Retail Fueling Facilities” means merchants that sell fuel, including diesel fuel, at retail to the public generally and to truckers and fleets.
ppp. “Settlement Administrator” means Rust Consulting, Inc., which shall effectuate and administer the Class Notice, the exclusion process for Opt-Outs, the Claims process, and distribution(s) to eligible Claimants under the supervision of Plaintiffs’ Class Counsel and the Court, and which firm is unrelated to and independent of the Plaintiffs, Plaintiffs’ Class Counsel, and Defense Counsel, within the meaning of Treasury Regulations § 1.468B-1(d) and § 1.468B-3(c)(2)(A).
qqq. “Settlement Administration Costs” means the expenses incurred in the administration of this Settlement Agreement, including all amounts awarded by the Court for costs associated with providing Class Notice, locating members of the Settlement Class and determining their eligibility to submit a Claim, administering, calculating, and distributing the Net Aggregate Settlement Fund to eligible Claimants, other costs of claims administration, payment of Taxes or administration costs with respect to the Escrow Account(s), and other reasonable third-party fees and expenses incurred by the Settlement Administrator or other consultants retained by agreement of the Parties or by authority of the Court to assist with claims administration in
connection with prosecuting, handling, and settling the Actions, and administering the terms of this Settlement Agreement, that are not categorized as an Attorneys’ Fee Award, Reimbursement for Costs and Expenses, or a Plaintiffs’ Service Award.
rrr. “Settlement Agreement” means this Definitive Master Settlement Agreement and the exhibits attached hereto or incorporated herein, including any subsequent amendments and any exhibits to such amendments.
sss. “Settlement Class” means the class defined for settlement purposes only in Section II of this Settlement Agreement.
ttt. “Settlement Class Exclusion Period” means the period in which a member of the Settlement Class may timely and properly become an Opt-Out, which period is specified in Paragraph 58 below.
uuu. “Settlement Class Members” or “Settlement Class Member” means a member of the Settlement Class who or which does not submit a timely and valid request for exclusion from the settlement.
vvv. “Settlement Class Period” means the time period between March 1, 2003 and the Preliminary Approval Date.
www. “Settlement Website” means the dedicated website to be established for purposes of this Settlement Agreement, which is described in Paragraph 49 below.
xxx. “TA Defendants” means Defendants TravelCenters of America LLC, TravelCenters of America Holding Company LLC, TA Operating LLC, and Petro Stopping Centers collectively.
yyy. “TA Defendants’ Counsel” means Jane E. Willis and Matthew L. McGinnis of Ropes & Gray LLP.
zzz. “TA Releasees” means the TA Defendants, together with their affiliates, shareholders, officers, directors, members, managers, and representatives and their predecessors and successors in interest and each entities’ respective past, present or future officers, directors, managers, stockholders, agents, employees, partners, trustees, parents, direct and indirect subsidiaries, divisions, affiliates, heirs, administrators, purchasers, assigns and other legal representatives.
aaaa. “TA Settlement Fund” means the settlement monies deposited into the Escrow Account by the TA Defendants as described in Paragraph 10 of this Settlement Agreement.
bbbb. “Taxes” means (1) any and all applicable taxes, duties, and similar charges imposed by a government authority (including any estimated taxes, interest, or penalties) arising in any jurisdiction, if any, (A) with respect to the income or gains earned by or in respect of the Escrow Account including, without limitation, any taxes that may be imposed upon Plaintiffs or Defendants with respect to any income or gains earned by or in respect of an Escrow Account for any period while it is held by the Escrow Agent during which the Escrow Account does not qualify as a Qualified Settlement Fund for federal or state income tax purposes, or (B) with respect to the income or gains earned by or in respect of any of the Escrow Account, or by way of withholding as required by applicable law on any distribution by the Escrow Agent of any portion of the Escrow Account to the Settlement Administrator, Settlement Class Members, or other persons entitled to such distributions pursuant to this Settlement Agreement, and (2) any and all expenses, liabilities, and costs incurred in connection with the taxation of the Escrow Account (including without limitation expenses of tax attorneys and accountants, if any).
cccc. “Truck Stops” means merchants that, among other things, sell diesel fuel at retail and provide other services and amenities to over-the road fleets and truckers, such as overnight parking, showers, a convenience store, a truck service center, and/or a restaurant.
dddd. The terms “he or she” and “his or her” include “it” or “its” where applicable, and vice versa.
eeee. Other capitalized terms used in this Settlement Agreement but not defined in this Section I shall have the meanings ascribed to them elsewhere in this Settlement Agreement.
II. SETTLEMENT CLASS
2. Pursuant to the procedure described in Paragraphs 42, 44 and 73 below, Plaintiffs will seek, and Defendants will not oppose, the Court’s certification of a class for settlement purposes only consisting of: All owners and operators of Truck Stops or other Retail Fueling Facilities with at least one physical location in the United States that paid Merchant Transaction Fees directly to Comdata on Comdata Proprietary Transactions and that were calculated based on a percentage of the face amount of the transaction during the Settlement Class Period with the exception of Mobile Fuelers, Wilco-Hess locations, the Pilot Defendants, the TA Defendants, and Love’s and any of the parents, subsidiaries, affiliates, franchisees or employees of any of the Defendants.
III. CLASS SETTLEMENT ESCROW ACCOUNT
3. The Parties and the Escrow Agent will establish the Escrow Account as being at all times a Qualified Settlement Fund pursuant to Internal Revenue Code § 468B and the Regulations issued thereto. All payments to be made by Defendants pursuant to Section IV below shall be made by wire transfer into separate sub-accounts within an Escrow Account at
Huntington National Bank pursuant to an Escrow Agreement attached as Exhibit “H” hereto. All (i) Taxes on the income of the Escrow Account and (ii) expenses and costs incurred with taxes paid from the Escrow Account (including, without limitation, expenses of tax attorneys and accountants) shall be timely paid out of the Escrow Account without prior Order of the Court.
4. The Escrow Agent shall invest the funds paid into the Escrow Account by Defendants pursuant to this Settlement Agreement exclusively in instruments backed by the full faith and credit of the U.S. Government or fully insured by the U.S. Government or an agency thereof, including, e.g ., U.S. Treasury Bills, U.S. Treasury Money Market Funds, or a bank account insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the guaranteed FDIC limit. Defendants shall not bear any responsibility or liability related to the investment of the funds paid into the Escrow Account by the Escrow Agent.
5. The Parties agree that the Settlement Administrator shall be responsible for filing tax returns for the Qualified Settlement Fund and paying from the Escrow Account any Taxes owed with respect to the Qualified Settlement Fund. The Parties hereto agree that the Escrow Account shall be treated as a Qualified Settlement Fund from the earliest date possible, and agree to any relation-back election required to treat the Escrow Account as a Qualified Settlement Fund from the earliest date possible.
6. In no event shall any of the Releasees have any obligation, responsibility, or liability arising from or relating to the administration, maintenance, preservation, investment, use, allocation, adjustment, distribution, disbursement, or disposition of any funds in the Escrow Account.
IV. PAYMENTS TO THE CLASS SETTLEMENT ESCROW ACCOUNT
7. Within five (5) business days after the Preliminary Approval Date, Comdata and Ceridian shall cause a total cash payment in the amount of one hundred million dollars ($100,000,000.00) to be paid by wire transfer into a dedicated sub-account within the Escrow Account, which Comdata and Ceridian shall be under no obligation to restore, supplement, or replenish. Although Comdata and Ceridian are jointly responsible for the entire amount of this payment, neither Plaintiffs nor Plaintiffs’ Class Counsel shall have a role in determining the allocation of Comdata’s and Ceridian’s respective contributions to the Comdata/Ceridian Settlement Fund.
8. Within five (5) business days after the Preliminary Approval Date, Love’s shall cause a total cash payment in the amount of ten million dollars ($10,000,000.00) to be paid by wire transfer into a dedicated sub-account within the Escrow Account, which Love’s shall be under no obligation to restore, supplement, or replenish.
9. Within five (5) business days after the Preliminary Approval Date, the Pilot Defendants shall cause a total cash payment in the amount of ten million dollars ($10,000,000.00) to be paid by wire transfer into a dedicated sub-account within the Escrow Account, which the Pilot Defendants shall be under no obligation to restore, supplement, or replenish. Although each of the Pilot Defendants is jointly responsible for the entire amount of this payment, neither Plaintiffs nor Plaintiffs’ Class Counsel shall have a role in determining the allocation of each Pilot Defendants’ respective contribution to the Pilot Settlement Fund.
10. Within five (5) business days after the Preliminary Approval Date, the TA Defendants shall cause a total cash payment in the amount of ten million dollars ($10,000,000.00) to be paid by wire transfer into a dedicated sub-account within the Escrow
Account, which the TA Defendants shall be under no obligation to restore, supplement, or replenish. Although each of the TA Defendants is jointly responsible for the entire amount of this payment, neither Plaintiffs nor Plaintiffs’ Class Counsel shall have a role in determining the allocation of the TA Defendants’ respective contributions to the TA Settlement Fund.
11. None of the payments into the Escrow Account described in Paragraphs 7 through 10 above is contingent or dependent on another such payment, each Defendant is responsible for making its own payment into the Escrow Account, and no Defendant shall have any responsibility whatsoever for making a payment into the Escrow Account for any other Defendant (except as specified with regard to the respective amounts separately identified in Paragraphs 7 through 10 above).
12. The Comdata/Ceridian Settlement Fund, the Love’s Settlement Fund, the Pilot Settlement Fund, and the TA Settlement Fund shall be segregated by the Escrow Agent in separate sub-accounts within the Escrow Account, each of which shall unto itself constitute a Qualified Settlement Fund under Internal Revenue Code § 468B and the Regulations issued thereto, until five (5) days after the Final Effective Date at which time the fund remaining in each separate sub-account shall be combined into the Aggregate Settlement Fund to facilitate the payment of any Attorneys’ Fee Award, any Reimbursement for Costs and Expenses, any Plaintiffs’ Service Awards, and any remaining Settlement Administration Costs and any other such costs and expenses as directed by the Court, as well as the distribution of the Net Aggregate Settlement Fund to Claimants pursuant to the Plan of Administration and Distribution attached as Exhibit “E” to this Settlement Agreement. No Defendant shall have any reversionary interest in any of the separate Settlement Funds or in any portion of the Aggregate Settlement Fund, regardless of the number of Claimants, except and only to the
extent that any termination rights under this Settlement Agreement are triggered and specifically invoked.
13. The payments described in Paragraphs 7 through 10 above shall exhaust and fully satisfy any and all payment obligations under this Settlement Agreement of Defendants and any Releasees, and shall extinguish entirely any further obligation, responsibility, or liability to pay any notice expenses, reasonable attorneys’ fees, litigation costs, costs of administration, Taxes, settlement sums, or sums of any kind to the Escrow Account, or to the Plaintiffs or other Settlement Class Members, or to any of their respective counsel, experts, advisors, agents, and representatives, all of whom shall look solely to the Escrow Account for settlement and satisfaction of all claims released in this Settlement Agreement.
V. CONSIDERATION PROVIDED TO SETTLEMENT CLASS MEMBERS
14. The consideration provided to Settlement Class Members consists of (a) a right to make a claim for a monetary payment from the Net Aggregate Settlement Fund, (b) the payment of Plaintiffs’ Class Counsel’s attorneys’ fees and costs as well as the costs of Settlement Administration out of the Aggregate Settlement Fund, (c) an agreement by Comdata not to enforce or not to use certain provisions in Major Chain Merchant Services Agreements, (d) an agreement by Comdata not to enforce or to modify certain provisions in Settlement Class Member Merchant Services Agreements, and (e) an agreement by Comdata to engage in good faith negotiations with Buying Groups. The consideration identified in (c)-(e) of the preceding sentence and described more fully in Section V.B-V.D of this Settlement Agreement are the sole and exclusive obligation of Comdata and no other Defendant.
A. Monetary Payment from the Net Aggregate Settlement Fund
15. Settlement Class Members may receive money payments from the Net Aggregate Settlement Fund by submitting a Claim Form pursuant to the claims process specified in the Plan of Administration and Distribution attached as Exhibit “E” hereto, which Plaintiffs will propose to the Court in moving for preliminary approval of this Settlement Agreement, and as later or otherwise modified and ordered by the Court.
16. No person shall have any claim against the Defendants, Defense Counsel, Plaintiffs, Plaintiffs’ Class Counsel, Releasees and/or the Settlement Administrator based on any determinations, distributions, or awards made in good faith with respect to any Claim Form. This provision does not affect or limit in any way the right of review by the Court of any disputed Claim Forms as provided in this Settlement Agreement.
B. Non-Enforcement/Non-Use of Certain Provisions in Major Chain Merchant Services Agreements
17. For a period of five (5) years from the Preliminary Approval Date, Comdata will not enforce Section 3(b) in its Merchant Services Agreement with the TA Defendants or any one of them (or a similar provision in any subsequent agreement), which provides that the TA Defendants or any one of them must:
“refrain from any active sales effort to convert customers of Comdata to any other third party billing, debit or credit program, or any active effort to convert such customers to an in-house open account or billing program/system; provided, however, that it is understood that this Section 3(b) does not restrict or prohibit Merchant from maintaining its own billing, debit or credit programs/systems and, provided, further, that Merchant may participate in the billing, debit or credit programs of other third party billing service companies. Additionally, this Section 3(b) shall not be construed to restrict or prohibit Merchant from identifying and engaging trucking companies using criteria other than being a Comdata customer for the marketing, promotion and sales by Merchant of Merchant’s various billing, debit or credit programs/systems or acceptance of other billing, debit or credit systems at Merchant, and in any case, the foregoing does not prohibit Merchant from accepting the request of a Comdata customer to
use or convert to a Merchant billing, debit or credit program/system or other service or system or acceptance of another third party billing, debit or credit system on that customer’s behalf.”
and for a period of five (5) years from the Preliminary Approval Date, Comdata will not enforce or include any similar provision preventing the TA Defendants or any one of them from active sales efforts to convert fleet customers of Comdata to any other billing program, including in-house open accounts.
18. For a period of five (5) years from the Preliminary Approval Date, Comdata will not enforce Section 3(b) in its Merchant Services Agreement with Love’s (or a similar provision in any subsequent agreement), which provides that Love’s must:
“refrain from any active, targeted sales effort to convert customers of [Comdata] from [Comdata] payment methods to any third party fuel card or billing program; provided, however, that it is understood that this Section 3(b) does not restrict or prohibit Merchant from maintaining its own billing, debit or credit programs/systems and, provided, however, that it is understood that this Section 3(b) does not restrict or prohibit Service Center from maintaining its own fuel card or billing program or participating in the fuel cards or billing programs of third parties. Additionally, this Section 3(b) does not (and shall not be construed to) restrict or prohibit Service Center from identifying customers using criteria other than being a Comdata customer for the marketing, promotion and sales by Service Center of Service Center’s fuel card or billing program, or acceptance of other fuel cards or billing programs at Service Center, and in any case, the foregoing does not prohibit Service Center from: (1) accepting the request of a Comdata customer to use or convert to a Service Center fuel card or billing program or another third party fuel card or billing program; or (2) participating in any conversion (or proposed conversion) of a Comdata customer to a third party fuel card or billing program if either: (a) Service Center has the ability to grow the amount of fuel volumes purchased by any Comdata customer from Service Center, or (b) the amount of fuel volumes committed to Service Center by any Comdata customer are at risk of reduction”
and for a period of five (5) years from the Preliminary Approval Date, Comdata will not enforce or include any similar provision preventing Love’s from active sales efforts to convert fleet customers of Comdata to any other billing program, including in-house open accounts.
19. For a period of five (5) years from the Preliminary Approval Date, Comdata will not enforce or insert in Merchant Services Agreements with any Major Chain, any provision that requires that Major Chain to refrain from active sales efforts to convert fleet customers of Comdata to any other billing program, including in-house open accounts, including any provision similar to the provisions described above in Paragraphs 17 and 18.
20. Comdata agrees that for a period of five (5) years from the Preliminary Approval Date, it will not include or enforce in any Merchant Services Agreement with any Major Chain a provision that would require that Major Chain to pay to Comdata a Merchant Transaction Fee that is equal to or greater than the highest Merchant Transaction Fee paid by that Major Chain to any other competing OTR Fleet Card supplier.
C. Non-Enforcement/Modification of Certain Provisions in Settlement Class Member Merchant Services Agreements
21. For a period of five (5) years from the Preliminary Approval Date, Comdata will not enforce in existing Settlement Class Member Merchant Services Agreements and will not insert in new agreements with Settlement Class Members any provision that requires such merchants to refrain from active sales efforts to convert fleet customers of Comdata to any other billing program, including in-house open accounts. For the sake of clarity, an example of the contractual provision referenced herein can be found in Section 3(b) of the sample Comdata Merchant Services Agreement attached as Exhibit “I”.
22. For a period of five (5) years from the Preliminary Approval Date, Comdata will not enforce in existing Settlement Class Member Merchant Services Agreements and will not insert in new agreements with Settlement Class Members any provision that requires such merchants to pay to Comdata and/or its cardholders an amount equal to the amount of any rebates or discounts per gallon of fuel purchased which the merchant pays to any other
competing OTR Fleet Card issuer and/or its cardholders. For avoidance of doubt, this means that Comdata shall not bar any merchant accepting any payment card offered by Comdata from offering a more favorable discount to a trucker or fleet using a rival OTR Fleet Card than that merchant offers to fleets or truckers using Comdata. For the sake of clarity, an example of the contractual provision referenced herein can be found in Section 3(g) of the sample Comdata Merchant Services Agreement attached as Exhibit “I”.
23. Comdata agrees that any provision in existing Settlement Class Member Merchant Services Agreements or in new Merchant Services Agreements with Settlement Class Members that obligates the merchant to charge Comdata cardholders its “lowest cash price” shall only obligate such merchants to charge Comdata cardholders the Lowest Posted Cash Price, and not the credit price, if such merchant charges a higher credit price. Nothing in any such provision shall preclude any Settlement Class Member from offering additional discounts or rebates from the Lowest Posted Cash Price to a trucker or fleet using a rival OTR Fleet Card and Comdata further states that the offering of any such discount or rebate by such merchant shall not trigger any of the obligations with regard to surcharging set forth in Paragraph 25 below. For the sake of clarity, an example of the contractual provision referenced herein can be found in Section 3(c) of the sample Comdata Merchant Services Agreement attached as Exhibit “I”.
24. For a period of five (5) years from the Preliminary Approval Date, Comdata will not seek to include in any Merchant Services Agreement with any Settlement Class Member a most favored nations clause or other similar contractual provision that would require such merchant to pay to Comdata a Merchant Transaction Fee that is equal to or greater than the highest Merchant Transaction Fee paid by that merchant to any other OTR Fleet Card issuer.
25. For a period of five (5) years from the date ninety (90) days after mailing of the Long Form Notice, Comdata will not enforce in existing Settlement Class Member Merchant Services Agreements and will not insert in new agreements with Settlement Class Members any provision that completely prohibits such merchants from surcharging Comdata Proprietary Transactions. For the sake of clarity, an example of the contractual provision referenced herein can be found in Section 3(d) of the sample Comdata Merchant Services Agreement attached as Exhibit “I”. During this five-year period, Comdata shall not prohibit Settlement Class Members from surcharging that portion of Comdata Proprietary Transactions on which a percentage fee is charged (the “Qualifying Portion”) subject to the following conditions:
a. A Settlement Class Member may impose a surcharge on the Qualifying Portion of any Comdata Proprietary Transaction provided that the surcharge does not exceed the difference between the merchant’s Effective Comdata Proprietary Merchant Transaction Rate and the lower of (i) the next highest rate (after Comdata) charged to the merchant by Comdata’s Principal OTR Fleet Card Competitors, or (ii) a set amount of 1.5 percent.
b. If a Settlement Class Member elects to impose a surcharge on the Qualifying Portion of any Comdata Proprietary Transactions, it must do so for all Comdata Proprietary Transactions performed by fleets at its locations and shall not be permitted to grant exemptions for particular fleet customers, provided, however, that the merchant is not required to surcharge fleets or truckers that are covered by a Custom-Fee Arrangement at that particular location.
c. The ability to surcharge the Qualifying Portion of Comdata Proprietary Transactions pursuant to sub-paragraph (a) above shall not apply if any of the merchant’s then-existing Merchant Services Agreement with any of Comdata’s Principal OTR Fleet Card
Competitors prohibits that merchant from levying a surcharge on transactions in which that Principal OTR Fleet Card Competitor’s OTR Fleet Card is presented for payment.
d. A Settlement Class Member wishing to impose a surcharge on the Qualifying Portion of any Comdata Proprietary Transactions subject to the terms and conditions set forth herein shall notify Comdata thirty (30) days before implementing the surcharge by completing and submitting a form to be made available by Comdata to all Settlement Class Members upon email request to surcharge@comdata.com and provided with any new Merchant Services Agreement presented to a Settlement Class Member, which shall require the merchant to specifically identify the next highest rate (after Comdata) charged to the merchant by the applicable Principal OTR Fleet Card Competitor, and to attach the portion of the pertinent contract reflecting the rate and duration of the agreement unless prohibited by a confidentiality provision, in which case, the merchant will provide to Comdata a statement under oath (a template for which will be made available by Comdata upon request) setting forth (i) the rate of the next highest Principal OTR Fleet Card Competitor, (ii) the identity of that Principal OTR Fleet Card Competitor (unless prohibited by a confidentiality provision in the pertinent contract), and (iii) the start and end dates of the pertinent agreement with that OTR Fleet Card Competitor. Nothing in this Paragraph shall preclude a Settlement Class Member from surcharging the difference between the merchant’s Effective Comdata Proprietary Merchant Transaction Rate and 1.5% in the event the next-highest rate charged by a Principal OTR Fleet Card Competitor is less than 1.5%. If Comdata agrees to match the next-highest rate charged by the OTR Fleet Card Competitor within the thirty-day period, the Settlement Class Member shall not be permitted to impose a surcharge on Comdata Proprietary Transactions.
e. A Settlement Class Member electing to impose a surcharge on any Comdata Proprietary Transaction shall prominently disclose through signage at the diesel fuel pump (i) that the merchant (as opposed to Comdata) is imposing a surcharge, (ii) the amount of the surcharge being imposed, and (iii) the fact that the surcharge being imposed does not exceed the difference between the merchant’s Effective Comdata Proprietary Merchant Transaction Rate and the lower of (a) the next highest rate (after Comdata) charged to the merchant by a Principal OTR Fleet Card Competitor, or (b) a set amount of 1.5 percent.
f. The required disclosure described in sub-paragraph (e) above shall not include language that could be deemed to disparage Comdata or its products and such disclosure shall otherwise comply with all applicable state and federal laws regarding misleading or deceptive disclosures. A factual statement that the surcharge was implemented because of the cost of Comdata’s Merchant Transaction Fee to the Settlement Class Member shall not violate this provision.
g. Nothing in this Settlement Agreement shall preclude Comdata from truthfully advising its fleet customers that a Settlement Class Member imposes a surcharge on the Qualifying Portion of its Comdata Proprietary Transactions as long as in doing so, Comdata acknowledges in its first communication that the merchant’s ability to choose to impose a surcharge was obtained through a lawsuit settlement agreement executed by Comdata and that the surcharge does not exceed the difference between the merchant’s Effective Comdata Proprietary Merchant Transaction Rate and the lower of (i) the next highest rate (other than Comdata) charged to the merchant by a Principal OTR Fleet Card Competitor, or (ii) a set amount of 1.5 percent. In any such communications with fleet customers, Comdata may not include language that could be deemed to disparage any Settlement Class Member or its products
or services and such disclosure shall otherwise comply with all applicable state and federal laws regarding misleading or deceptive disclosures.
h. A Settlement Class Member electing to impose a surcharge on the Qualifying Portion of any Comdata Proprietary Transaction shall be required before implementing the surcharge to have installed on an eligible point-of-sale device an update that will facilitate the processing of a transaction on which a surcharge is imposed. This update will be distributed by Comdata to the supplier of Settlement Class Member’s eligible point-of-sale device within sixty (60) days of the mailing of Long Form Notice. Any costs or expenses associated with the development and distribution of the update described in this Paragraph, as well as costs associated with correcting any system-wide defect in this update that would materially impair a Settlement Class Member with an eligible point-of-sale device from exercising its rights under this Paragraph shall be borne by Comdata. Upon installation of the update, the eligible point-of-sale device shall generate a receipt that displays the surcharge as a separate line item, which shall be supplied to the driver by the merchant at the point-of-sale. If a Settlement Class Member wishing to impose a surcharge pursuant to this Paragraph does not have an eligible point-of-sale device on which the update described herein can be installed, it may still impose a surcharge on the Qualifying Portion of its Comdata Proprietary Transactions, provided that it produces and furnishes to the driver at the point-of-sale documentation setting forth, at a minimum, the products purchased, the prices of those products, and the amount of the surcharge imposed.
i. Any Settlement Class Member electing to impose a surcharge pursuant to this Paragraph shall bear sole responsibility for complying with any applicable state laws that prohibit, limit or otherwise govern surcharging.
D. Good Faith Negotiations with Buying Groups
26. Within six months after the Final Effective Date, each of the Buying Groups, in its discretion, may engage in and complete at least one bi-lateral negotiation with Comdata in which both parties (Comdata, on the one hand, and the Buying Group, on the other) will attempt in good faith to reach a commercially reasonable agreement regarding, inter alia , the rates and commercial terms for Comdata Proprietary Transactions between Comdata and merchant members of those Buying Groups that are members as of July 1, 2014. It shall be incumbent on any of the Buying Groups in such negotiations to demonstrate in any negotiation pursuant to this Paragraph an ability to bring tangible economic value to Comdata in addition to existing transaction volume. Comdata shall exercise its discretion and business judgment in good faith: (a) in determining whether a proposal sets forth tangible economic value to Comdata in addition to existing transaction volume; (b) in negotiations related to such proposals; and (c) in making its determination whether to accept or reject a proposal. Notwithstanding the foregoing, the exercise of good faith by Comdata shall not impose an obligation on Comdata to provide a discounted Merchant Transaction Fee rate to some or all of the Buying Groups or their members, but if a discounted Merchant Transaction Fee rate is provided by Comdata to the membership of any Buying Group, such discounted Merchant Transaction Fee rate and any other accompanying commercial terms shall be memorialized in a separate agreement with the Buying Group.
27. Any claim by any Buying Group that Comdata has failed to discharge its obligations under Paragraph 26 above to negotiate in good faith shall be initiated within twelve (12) months of the Final Effective Date and shall be resolved in mandatory arbitration before Professor Eric D. Green (the “Arbitrator”) in which both Comdata and the Buying Group must be represented by counsel. In any such arbitration proceeding, the Buying Group will be
required to establish any failure by Comdata to exercise good faith in negotiations by clear and convincing evidence, and, in all events, if bad faith by Comdata is established, the remedy available to the Buying Group will be limited to declaratory relief, and no other relief. At the conclusion of any such arbitration proceeding, the Arbitrator shall have the discretion to award attorneys’ fees and costs to the prevailing party in any arbitration between a Buying Group and Comdata pursuant to this Paragraph should he conclude that the losing party brought the matter to arbitration or defended the arbitration in bad faith or generally brought claims or made arguments that did not have a reasonable possibility of succeeding. In the event that Professor Green is unable to serve as the Arbitrator, Plaintiffs’ Class Counsel and Comdata’s Counsel will meet and confer with regard to a mutually agreeable alternative who shall conduct the arbitration consistent with the terms of this Paragraph. Arbitration shall be the exclusive means of challenging Comdata’s obligations under Paragraph 26 of this Settlement Agreement.
28. No Opt-Out shall have any rights under any contract that may be reached between a Buying Group and Comdata pursuant to negotiations authorized by Paragraphs 26. Nothing in this Paragraph shall be construed as limiting discussions, negotiations or contractual relationships not covered by the terms of this Settlement Agreement.
29. Nothing in Paragraphs 26 of this Settlement Agreement shall limit the ability of Comdata to, in its own sole discretion, set Merchant Transaction Fee rates, whether default rates or rates applicable to individual Settlement Class Members, groups of Settlement Class Members, or Buying Groups. Nor shall anything in Paragraphs 26 of this Settlement Agreement impose any limitation upon any other conduct of any Releasee not expressly addressed by the terms hereof.
VI. RELEASE, WAIVER AND COVENANT NOT TO SUE
30. The Parties agree to the following Release, waiver and covenant not to sue, which shall take effect on the Final Approval Date.
31. In consideration for the relief described above, Plaintiffs and each Settlement Class Member, as well as their respective past, present or future officers, directors, stockholders, members, agents, employees, partners, trustees, parents, subsidiaries, divisions, affiliates, heirs, administrators, purchasers, predecessors, successors, assigns and any other legal representatives, agree to dismiss with prejudice all claims against the Releasees, and grant to each Releasee the broadest general release and covenant not to sue allowed by law, which shall unconditionally and forever bar Plaintiffs and Settlement Class Members from bringing, prosecuting, or participating in any and all claims, known or unknown, that Plaintiffs or Settlement Class Members brought or could have brought against the Defendants as of the Final Approval Date that arise out of, in whole or in part, or relate in any way to the subject matter of, or conduct alleged in, the Operative Class Complaint in the Actions, as well as any prior complaints filed in the Actions. This Release does not release any claims relating to conduct occurring or actions taken by any of the Defendants or Releasees after the Final Approval Date except to the extent that such claims (a) pertain to the terms of Comdata’s Merchant Services Agreements, either with Settlement Class Members or the Major Chains, as modified by the prospective relief described above, or (b) are based upon conduct or activity that is expressly required by or consistent with the terms of this Settlement Agreement, in which case such claims (except to the extent they relate to any breach of this Settlement Agreement) are expressly released herein. Nor does this Settlement Agreement release any claims (a) arising out of contractual terms imposed or offered by any OTR Fleet Card issued by any entity other than Comdata, but only where such OTR Fleet Card is generally made
available for acceptance by Truck Stops and Retail Fueling Facilities and is not exclusive to any particular Major Chain; or (b) involving standard commercial disputes arising in the ordinary course of business, such as disputes regarding lines of credit or other related credit relations, individual chargeback disputes, misappropriation of cardholder data or invasion of privacy, and compliance with technical specifications for acceptance of any Comdata product or other product sold by Defendants. Further, nothing in this Release shall preclude any action to enforce the terms of the Settlement Agreement.
32. Without limiting the foregoing, and although the operative pleadings, filings and transcripts speak for themselves, and shall govern the scope of the claims released and forever barred under this Settlement Agreement and that are subject to any covenant not to sue set forth in this Settlement Agreement, and subject to the limitations and exclusions set out in Paragraph 31 above, claims based on the following are specifically released, barred, and subject to the covenant not to sue set forth herein:
a. Comdata’s and Ceridian’s alleged monopoly or market power in supposed markets for OTR Fleet Cards or point-of-sale devices that route OTR Fleet Cards, or any other similar markets;
b. the alleged inflation of the Comdata Merchant Transaction Fee paid by merchants as a result of alleged anticompetitive conduct of Comdata or any other Defendant;
c. the so-called fee restructuring under which Comdata and Ceridian in or around 2000 and 2001 changed its Merchant Transaction Fee structure for non-Major Chain merchants and required those merchants to pay Comdata Merchant Transaction Fees based on a percentage of the face amount of the transaction while retaining a flat Merchant Transaction Fee structure for the Major Chains;
d. any alleged conspiracy between and among Comdata, Ceridian and/or any of the Major Chains with regard to any payment instrument, payment method, or point-of-sale device provided by Comdata;
e. the non-issuance of an OTR Fleet Card by each of the Major Chains, and in particular, the claim that such decision was the result of an agreement, including without limitation any oral agreement, written contract or letter of intent, between or among the Major Chains, and Comdata and/or Ceridian;
f. the non-acceptance of the TCH Card by each of the Major Chains, and in particular the claim that such decision was the result of an agreement between or among the Major Chains, and Comdata and/or Ceridian;
g. the provisions in Comdata’s past and/or present Merchant Services Agreements and any other oral or written agreements or understandings between Comdata and/or Ceridian and the Major Chains, including without limitation, the provisions that Plaintiffs have described as the transaction fee MFN, the fuel discount MFN, the active sales ban, the no-surcharge rule, the honor-all-cards rule, and the lowest cash price provision, and any other similar so-called anti-steering provision in Comdata’s Merchant Services Agreements with any one of the Major Chains;
h. the provisions in Comdata’s past and/or present Merchant Services Agreements with non-Major Chain merchants, including without limitation the provisions that Plaintiffs have described as the fuel discount MFN, the active sales ban, the no-surcharge rule, the honor-all-cards rule, and the lowest cash price provision, and any other similar so-called anti-steering provision in Comdata’s Merchant Services Agreements with any non-Major Chain merchant;
i. any actions by Comdata and Ceridian to discourage merchants or fleets from accepting or carrying an OTR Fleet Card that competes with Comdata;
j. any loyalty provisions in Comdata’s cardholder agreements with fleets, including without limitation any minimum volume commitment provision;
k. any alleged use by Comdata and Ceridian of its point-of-sale device that reads and routes OTR Fleet Cards to impair competition among OTR Fleet Cards, including without limitations any claim that Comdata programmed its point-of-sale device not to process or accept competing OTR Fleet Cards;
l. Ceridian’s conduct in engaging in acquisitions which Plaintiffs claim had the purpose and effect of enabling Comdata to monopolize the purported relevant markets, including but not limited to Ceridian’s alleged acquisitions of Comdata, NTS, Inc., TIC, Archco, EDS, Fleet Services, Saunders, Inc., IAES, CCIS, and TCC, and Trendar;
m. Ceridian’s alleged alter ego liability arising out of its actions in allegedly overseeing, supervising, actively managing, extending credit to, setting rates and policy for, directing, instructing, and/or being extensively involved with Comdata, including but not limited to in Comdata’s negotiations with Major Chains, fleets and other customers; and
n. Ceridian’s alleged direct liability arising out of its actions in allegedly conspiring with, threatening, negotiating with, and/or forming agreements with the Major Chains.
33. Plaintiffs and the Settlement Class Members expressly agree that this Release, the Final Order, and the Final Judgment are, will be, and may be raised as a complete defense to, and will preclude any action or proceeding encompassed by, this Release.
34. Plaintiffs and the Settlement Class Members shall not now or hereafter institute, maintain, prosecute, assert, and/or cooperate in the institution, commencement, filing, or
prosecution of any suit, action, and/or proceeding, against the Releasees, either directly or indirectly, on their own behalf, on behalf of a class, or on behalf of any other person or entity with respect to the claims, causes of action and/or any other matters released through this Settlement Agreement.
35. Plaintiffs and the Settlement Class Members acknowledge that they may hereafter discover claims presently unknown or unsuspected, or facts in addition to or different from those that they now know or believe to be true concerning the subject matter of the Action and/or the Release herein. Nevertheless, it is the intention of Plaintiffs’ Class Counsel, Plaintiffs, and the Settlement Class Members in executing this Settlement Agreement to fully, finally and forever settle, release, discharge, and hold harmless all such matters, and all claims relating thereto which exist, hereafter may exist, or might have existed (whether or not previously or currently asserted in any action or proceeding) with respect to the Action, except as otherwise stated in this Settlement Agreement.
36. Plaintiffs expressly understand and acknowledge, and all Plaintiffs and Settlement Class Members will be deemed by Final Order and the Final Judgment to acknowledge and waive Section 1542 of the Civil Code of the State of California, which provides that: “A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.” Plaintiffs and the Settlement Class Members expressly waive and relinquish any and all rights and benefits that they may have under, or that may be conferred upon them by, the provisions of Section 1542 of the California Civil Code, or any other law of any state or territory
that is similar, comparable or equivalent to Section 1542, to the fullest extent they may lawfully waive such rights.
37. Plaintiffs represent and warrant that they are the sole and exclusive owners of all claims that they personally are releasing under this Settlement Agreement. Plaintiffs further acknowledge that they have not assigned, pledged, or in any manner whatsoever, sold, transferred, assigned or encumbered any right, title, interest or claim arising out of or in any way whatsoever pertaining to the Actions, including without limitation, any claim for benefits, proceeds, or value under the Actions, and that Plaintiffs are not aware of anyone other than themselves claiming any interest, in whole or in part, in the Actions or in any benefits, proceeds, or values under the Actions.
38. Settlement Class Members submitting a Claim Form shall represent and warrant therein that they are the sole and exclusive owner of all claims that they personally are releasing under the Settlement Agreement and that they have not assigned, pledged, or in any manner whatsoever, sold, transferred, assigned or encumbered any right, title, interest or claim arising out of or in any way whatsoever pertaining to the Actions, including without limitation, any claim for benefits, proceeds, or value under the Actions, and that such Settlement Class Member(s) are not aware of anyone other than themselves claiming any interest, in whole or in part, in the Actions or in any benefits, proceeds, or values under the Actions.
39.
Without in any way limiting its scope, and, except to the extent otherwise
specified in the Settlement Agreement, this Release covers by example and without limitation, any and all claims for reasonable attorneys’ fees, costs, expert fees, consultant fees, interest, litigation fees, costs, or any other fees, costs, and/or disbursements incurred by any attorneys,
Plaintiffs’ Class Counsel, Plaintiffs, or Settlement Class Members who claim to have assisted in conferring the benefits under this Settlement upon the Settlement Class.
40. In consideration for the Settlement, the Releasees shall be deemed to have, and by operation of the Final Order and Final Judgment shall have, released Plaintiffs’ Class Counsel and each current and former Plaintiff from any and all causes of action that were or could have been asserted pertaining solely to the conduct in filing and prosecuting the litigation or in settling the Action.
41. Plaintiffs and Plaintiffs’ Class Counsel hereby agree and acknowledge that the provisions of this Release together constitute an essential and material term of the Settlement Agreement and shall be included in any Final Order and Final Judgment entered by the Court.
VII. PRELIMINARY APPROVAL
42. As soon as is practicable following the signing of this Settlement Agreement by all Parties, but not later than March 4, 2014, and separately from any motions for an Attorneys’ Fee Award, Reimbursement for Costs and Expenses, or for Plaintiffs’ Service Awards, Plaintiffs and Plaintiffs’ Class Counsel will request, and Defendants will not oppose, the entry by the Court of a Preliminary Approval Order (substantially in the form attached at Exhibit “F”):
a. Finding that the requirements for provisional certification of the Settlement Class have been satisfied, appointing Plaintiffs as the representatives of the Settlement Class, and Plaintiffs’ Class Counsel as counsel for the Settlement Class, and preliminarily approving the settlement as being within the range of reasonableness such that the Class Notice should be sent to the members of the Settlement Class;
b. Approving the Class Notice and directing that it shall be given as set forth in Section VIII of this Settlement Agreement;
c. Scheduling the Fairness Hearing not earlier than seventy-five (75) days following the Notice Date;
d. Appointing the Settlement Administrator;
e. Authorizing the payment of Settlement Administration Costs reasonably incurred by the Settlement Administrator and those entities or consultant, such as Econ One, Inc. (“Econ One”), working with the Settlement Administrator;
f. Finding that the Escrow Account is to be a “Qualified Settlement Fund” as defined in Section 1.468B-1(c) of the Treasury Regulations;
g. Providing that members of the Settlement Class will have until the Claim Bar Date to submit Claim Forms;
h. Providing that any objections by any Settlement Class Member shall be heard and any papers submitted in support of said objections shall be considered by the Court at the Fairness Hearing only if, on or before the date(s) specified in the Class Notice and Preliminary Approval Order, such Settlement Class Member follows the procedures set forth in this Settlement Agreement and approved by the Court;
i. Establishing dates by which the Parties shall file and serve all papers in support of the application for final approval of the settlement and/or in response to any valid and timely objections;
j. Providing that all Settlement Class Members will be bound by the Final Order and Final Judgment dismissing the Actions with prejudice unless such member of the Settlement Class timely submits to the Settlement Administrator a valid written request for exclusion in accordance with this Settlement Agreement and the Class Notice;
k. Providing that, pending the Fairness Hearing, Plaintiffs, or any of them, are enjoined from commencing or prosecuting, either directly or indirectly, any action asserting any of the Released Claims against any of the Releasees; and
l. Issuing other related orders to effectuate the preliminary approval of the Settlement Agreement.
43. Following the entry of the Preliminary Approval Order, the Class Notice shall be given and published in the manner directed and approved by the Court. The Parties agree that the methods of Class Notice contemplated by this Settlement Agreement are valid and effective, that they provide reasonable notice to the Settlement Class, and that they represent the best practicable notice under the circumstances.
44. Upon entry of the Preliminary Approval Order, Plaintiffs, Plaintiffs’ Class Counsel, Defendants, Releasees, and Defense Counsel agree to use reasonable and good faith efforts to effectuate the Court’s final approval of this Settlement Agreement, including filing the necessary motion papers and scheduling any necessary hearings for a date and time that are convenient for the Court.
VIII. CLASS NOTICE AND ADMINISTRATION
45. Class Notice will be accomplished through a combination of Publication Notice, notice through the Settlement Website, and Long Form Notice, each of which is described below, as specified in the Preliminary Approval Order, the Declaration of the Settlement Administrator (attached hereto as Exhibit “J”), and this Settlement Agreement and in order to comply with all applicable laws, including but not limited to, Fed. R. Civ. P. 23, the Due Process Clause of the United States Constitution, and any other applicable statute, law or rule.
46. Beginning not later than twenty-eight (28) days following the Court’s entry of the Preliminary Approval Order (the Notice Date), the Settlement Administrator shall send the Long Form Notice substantially in the form attached hereto as Exhibit “D”, by U.S. first class mail, proper postage prepaid, to the last known address of those members of the Settlement Class that can reasonably be identified (by merchant name and address) in Comdata’s FMLog transaction database.
47. To aid with effectuating dissemination of the Long Form Notice, within seven (7) business days after the Court enters the Preliminary Approval Order, Comdata shall, at its own expense, provide Plaintiffs with Comdata’s FMLog transaction data in the same form that Comdata produced it to Plaintiffs during discovery in the Actions for the entire Settlement Class Period to the extent such data has not already been produced to Plaintiffs’ Class Counsel.
48. Beginning not later than twenty-eight (28) days following the Court’s entry of the Preliminary Approval Order, the Settlement Administrator shall cause the publication of the Publication Notice, substantially in the form attached hereto as Exhibit “G”, in such appropriate trade publications as may be agreed upon by the Parties and as may be necessary to ensure the best notice that is practicable under the circumstances, including, for example, NACS (National Association for Convenience and Fuel Retailing) Magazine and/or NATSO’s weekly e-newsletter.
49. As soon as practicable following the Court’s entry of the Preliminary Approval Order, but before dissemination of the Long Form Notice and the Publication Notice, the Settlement Administrator shall establish the dedicated Settlement Website, Post Office Box, and toll-free telephone line for providing notice and information to the members of the Settlement Class. The website shall include, at least, the Long Form Notice, a sample Claim Form, and such
other materials, in .pdf format, as would be necessary or appropriate to reasonably inform Settlement Class members regarding the settlement.
50. In addition to its availability on the Settlement Website, the Settlement Administrator shall send via first-class mail, the Long Form Notice to those persons who request it in writing or through the toll-free telephone number.
51. Without limiting the foregoing provisions, the Settlement Administrator shall be responsible for, without limitation: (a) printing, mailing, or arranging for the mailing of the Long Form Notices; (b) handling returned mail not delivered to members of the Settlement Class; (c) arranging for the publication of the Publication Notice; (d) attempting to obtain updated address information for any Long Form Notices returned without a forwarding address; (f) responding to requests for Long Form Notice; (g) receiving and maintaining on behalf of the Court any correspondence regarding requests for exclusion and/or objections to the settlement; (h) forwarding written inquiries to Plaintiffs’ Class Counsel or their designee for a response, if warranted; (i) establishing a post-office box for the receipt of any correspondence; (j) responding to requests from Plaintiffs’ Class Counsel; (k) establishing a website to which members of the Settlement Class may refer for information about the Actions and the settlement; (l) fulfilling any escheatment obligations that may arise; and (m) otherwise implementing and/or assisting with the dissemination of the Class Notice. The Settlement Administrator shall also be responsible for, without limitation, implementing the terms of the Claim Process and related administrative activities.
52. Not later than ten (10) days before the date of the Fairness Hearing, Plaintiffs’ Class Counsel shall file with the Court a Declaration from the Settlement Administrator (a)
containing a list of Opt-Outs, if any, that have excluded themselves from the settlement; and (b) outlining the scope, method and results of the Notice Program.
53. Not later than ten (10) days after the Settlement Agreement is filed with the Court, the Settlement Administrator on behalf of each Defendant shall send to each appropriate State and Federal official the materials specified in 28 U.S.C. § 1715 and otherwise comply with its terms. The identities of such officials and the content of the materials shall be mutually agreeable to the Parties. The Parties and their counsel agree to cooperate fully with the Settlement Administrator in order to ensure timely notice is provided by the Settlement Administrator to each appropriate State and Federal official and to use their best efforts to ensure that the Settlement Administrator timely issues such notice.
54. Settlement Administration Costs, including, but not limited to, costs and expenses for the Class Notice and the Settlement Administrator, including those of any third-party vendors used to perform tasks necessary for the implementation or effectuation of the Class Notice, shall be allocated by and among the Comdata/Ceridian Settlement Fund, the Love’s Settlement Fund, the Pilot Settlement Fund, and the TA Settlement Fund on a pro rata basis until such time that such accounts are combined into the Aggregate Settlement Fund following the Final Effective Date. After the creation of the Aggregate Settlement Fund, any further payments or distributions for Settlement Administration Costs and any other costs and expenses ordered by the Court shall be paid from the Aggregate Settlement Fund. For avoidance of doubt, in no event shall any Releasee have any obligation, responsibility, or liability with respect to the Settlement Administrator, the Class Notice, or the exclusion procedures, including with respect to the costs, administration expenses, or any other charges for any notice and exclusion procedures.
55. The Releasees are not and will not be obligated to compute, estimate, or pay any Taxes on behalf of any Plaintiff, any Settlement Class Member, Plaintiffs’ Class Counsel and/or the Settlement Administrator.
56. If the Settlement Administrator makes a material or fraudulent misrepresentation to, or conceals requested material information from, Plaintiffs’ Class Counsel, any Defendant, or any Defense Counsel, then the Party to whom the misrepresentation is made shall, in addition to any other appropriate relief, have the right to demand that the Settlement Administrator immediately be replaced. If the Settlement Administrator fails to perform adequately, the Parties may unanimously agree to remove the Settlement Administrator. Under such circumstances, the other Party (or Parties) shall not unreasonably withhold consent to remove the Settlement Administrator, but removal of the Settlement Administrator shall occur only after Defense Counsel and Plaintiffs’ Class Counsel have attempted to resolve any disputes regarding the retention or dismissal of the Settlement Administrator in good faith, and, if they are unable to do so, after the matter has been referred to the Court for resolution.
IX. REQUESTS FOR EXCLUSION FROM THE SETTLEMENT CLASS
57. Persons or entities in the Settlement Class may elect to opt out of the settlement, relinquishing their rights to benefits hereunder; provided, however, that any such person or entity who or which owns or operates multiple Truck Stop or Retail Fueling Facility locations may not opt out only some but not all such locations from the Settlement Class. For avoidance of doubt, that means that any such persons or entities who or which operate multiple Truck Stop or Retail Fueling Facility locations must remain fully in the Settlement Class, or fully exclude itself and all of its locations from the settlement.
58. Opt-Outs will not release their claims pursuant to this Settlement Agreement. Any member of the Settlement Class wishing to opt out of the settlement must send to the Settlement Administrator a letter including its name, address, and telephone number and providing a clear statement communicating that it elects to be excluded from the Settlement Class, does not wish to be a Settlement Class Member, and elects to be excluded from any judgment entered pursuant to the Settlement. Any request for exclusion or opt out must be postmarked on or before the opt-out deadline provided in the Court’s Preliminary Approval Order. The date of the postmark on the return mailing envelope shall be the exclusive means used to determine whether a request for exclusion has been timely submitted.
59. Any Opt-Out may not file an objection to the settlement and shall be deemed to have waived any rights or benefits under this settlement.
60. Not later than five (5) business days after the deadline for submission of requests for exclusion or opt out, the Settlement Administrator shall provide to Plaintiffs’ Class Counsel a complete list of Opt-Outs together with copies of the opt-out requests and any other related information. Plaintiffs’ Class Counsel shall provide the complete list of Opt-Outs with copies of the opt-out requests and any other information relating to Opt-Outs furnished to Plaintiffs’ Class Counsel by the Settlement Administrator within two (2) business days of receiving them to Defense Counsel.
61. Any member of the Settlement Class who does not file a valid and timely written request for exclusion as provided in this Section shall be bound by all subsequent proceedings, orders and judgments in the Actions, including, but not limited to, the Release, the Final Order, and the Final Judgment, even if such Settlement Class Member has litigation pending or
subsequently initiates litigation against any Releasee relating to the claims and transactions released in the Actions.
X. OBJECTIONS TO THE SETTLEMENT
62. Any Settlement Class Member who wishes to object to the fairness, reasonableness, or adequacy of any aspect of the settlement, must deliver to the Settlement Administrator and file with the Court, so that it is received on or before the date ordered by the Court, a written statement setting forth that Settlement Class Member’s objection and any supporting brief it wishes to file. Any such objection shall include a statement of whether the Objector intends to appear and argue at the Fairness Hearing. Objectors may prepare, file, and serve the written objection and any supporting brief on their own or through an attorney retained at their own expense. The objection must include proof that the Objector falls within the definition of the Settlement Class.
63. Any Objector who files and serves a written objection may appear at the Fairness Hearing, either in person at their own expense or through personal counsel hired at the Objector’s expense, to object to the fairness, reasonableness, or adequacy of any aspect of the settlement. Objectors or their attorneys who intend to make an appearance at the Fairness Hearing must deliver a notice of intention to appear to the Settlement Administrator and file such notice of intention to appear with the Court, so that it is filed and received by both on or before the date ordered by the Court.
64. Objectors shall be entitled to all of the benefits of the settlement if this Settlement Agreement and the terms contained herein are approved, as long as the Objector complies with all requirements of this Settlement Agreement applicable to Settlement Class Members, including the timely and complete submission of Claim Forms and other requirements herein.
XI. ATTORNEYS’ FEE AWARDS, REIMBURSEMENT FOR COSTS AND EXPENSES AND PLAINTIFFS’ SERVICE AWARDS
65. After agreeing to the principal terms set forth in this Settlement Agreement and the amount of compensation to the Settlement Class, Plaintiffs’ Class Counsel and Defense Counsel discussed the amount of any Attorneys’ Fee Award, any Reimbursement for Costs and Expenses, and any Plaintiffs’ Service Award that Plaintiffs’ Class Counsel and Plaintiffs would seek, subject to the approval of the Court.
66. The Parties agreed that any and all such Attorneys’ Fee Awards, Reimbursement for Costs and Expenses, and Plaintiffs’ Service Awards shall be paid from the Aggregate Settlement Fund and the Releasees shall have no obligation to pay any additional amounts above and beyond the amount paid by each Defendant into the Escrow Account and used to create the Comdata/Ceridian Settlement Fund, the Love’s Settlement Fund, the Pilot Settlement Fund, and the TA Settlement Fund.
67. Although the reimbursement of litigation costs and the attorneys’ fee amount to which Plaintiffs’ Class Counsel may be entitled shall be determined by the Court, Defendants agree that they will not oppose any application for (a) an award of attorneys’ fees by Plaintiffs’ Class Counsel up to the amount of one-third of the $130 million Aggregate Settlement Fund or $43,333,333.33; and (b) reimbursement of reasonably incurred out of pocket costs and expenses, as documented on the books and records of Plaintiffs’ Class Counsel, Plaintiffs, and the other firms, persons, and consulting companies providing services to Plaintiffs and the Settlement Class in these Actions, of an amount not to exceed $7.5 million.
68. Plaintiffs’ Class Counsel shall have the discretion to allocate any Attorneys’ Fee Award and Reimbursement for Costs and Expenses among themselves and any other law firms who represented Plaintiffs in the Actions in a manner that Plaintiffs’ Class Counsel in good faith
believes reflects the contributions of each to the prosecution and settlement of the claims against Defendants in the Actions.
69. Plaintiffs’ Class Counsel may also petition the Court for a Plaintiffs’ Service Award in the following amounts, reflecting each Plaintiff’s contributions in terms of time, effort, and risk incurred in connection with the Actions and for each Plaintiff’s efforts undertaken on behalf of the Settlement Class in the following amounts: $150,000 for Marchbanks Truck Service, Inc. d/b/a Bear Mountain Travel Stop; $75,000 for Gerald F. Krachey d/b/a/ Krachey’s BP South, $75,000 for Walt Whitman Truck Stop, Inc.; and $15,000 for Mahwah Fuel Stop. These amounts are separate and apart from any amount these Plaintiffs may recover by submitting a Claim as provided herein.
70. The proceedings for the Court to determine the amount of any Attorneys’ Fee Award, any Reimbursement for Costs and Expenses, and any Plaintiffs’ Service Award, and the Court’s award of such attorneys’ fees, expenses, or service payments, are to be considered by the Court separately from the Court’s consideration of the fairness, reasonableness, and adequacy of the settlement. Any Attorneys’ Fee Award, Reimbursement for Costs and Expenses, or Plaintiffs’ Service Award shall be set forth in a fee and expense award order separate from the Final Order and Final Judgment so that any appeal of one shall not constitute an appeal of the other. Any order or proceedings relating to the application for an Attorneys’ Fee Award, Reimbursement for Costs and Expenses, or for any Plaintiffs’ Service Award, or any appeal from any order related thereto, or reversal or modification thereof, will not operate to terminate or cancel this Settlement Agreement, or affect or delay the Final Effective Date.
71. For avoidance of doubt, no Defendant shall be liable for, or obligated to pay, any fees, expenses, costs, or disbursements to any person or entity, either directly or indirectly, in
connection with the Actions or the Settlement Agreement beyond the amount paid by each Defendant into the Escrow Account and used to create the Comdata/Ceridian Settlement Fund, the Love’s Settlement Fund, the Pilot Settlement Fund, and the TA Settlement Fund. Nor will any Defendant be obligated to pay any Attorneys’ Fee Award, Reimbursement for Costs and Expenses or Plaintiffs’ Service Award if the Final Effective Date does not occur.
72. Any Attorneys’ Fee Award, Reimbursement for Costs and Expenses, or Plaintiffs’ Service Award awarded by the Court shall be paid not earlier than thirty (30) days after the later of the Final Effective Date or the expiration of any appeal period for any order making an Attorneys’ Fee Award, Reimbursement for Costs and Expenses or Plaintiffs’ Service Award or, in the event of an appeal, the date on which all appeals therefrom, including petitions for rehearing or reargument, petitions for rehearing en banc and petitions for certiorari or any other form of review, have been finally disposed of, concluded, or resolved.
XII. FINAL APPROVAL
73. Separately from any motions for an Attorneys’ Fee Award, any Reimbursement for Costs and Expenses, or any Plaintiffs’ Service Awards, Plaintiffs and Plaintiffs’ Class Counsel agree to file with the Court, and Defendants will not oppose, a motion and supporting papers seeking final approval of this Settlement Agreement and for the entry of a Final Order and Final Judgment substantially in the forms attached hereto as Exhibits “B” and “C”:
a. Determining that the Court has personal jurisdiction over all Plaintiffs and Settlement Class Members, that the Court has subject matter jurisdiction over the claims asserted in the Action, and that venue is proper;
b. Finally approving the Settlement Agreement and settlement as fair, reasonable, and adequate, pursuant to Fed. R. Civ. P. 23;
c. Finally approving and certifying the Settlement Class for settlement purposes only;
d. Finding that the Class Notice and dissemination methodology complied with all laws, including, but not limited to, the Due Process Clause of the United States Constitution, and was fair, adequate, and sufficient, as the best practicable notice under the circumstances, and as reasonably calculated to apprise members of the Settlement Class of the Action, the Settlement Agreement, their objection rights, and their exclusion rights;
e. Dismissing the Action with prejudice and without costs (except as provided for herein as to costs);
f. Incorporating the Release set forth in the Settlement Agreement and making the Release effective as of the Final Approval Date;
g. Listing all Opt-Outs;
h. Certifying that the notification requirements of the Class Action Fairness Act, 28 U.S.C. § 1715, have been met;
i. Approving the Plan of Administration and Distribution;
j. Authorizing the Parties to implement the terms of the Settlement Agreement;
k. Permanently enjoining Plaintiffs and all other Settlement Class Members and those subject to their control, from commencing, maintaining, or participating in, or permitting another to commence, maintain, or participate in on its behalf, any Released Claims against the Releasees;
l. Retaining jurisdiction relating to the administration, consummation, enforcement, and interpretation of the Settlement Agreement and the Final Order and Final Judgment, and for any other necessary purpose; and
m. Issuing related Orders to effectuate the final approval of the Settlement Agreement and its implementation.
XIII. MODIFICATION OR TERMINATION OF THIS SETTLEMENT AGREEMENT
74. The terms and provisions of this Settlement Agreement may be amended, modified, or expanded by written agreement of the Parties and approval of the Court; provided, however, that after entry of the Final Order and Final Judgment, the Parties may by written agreement effect such amendments, modifications, or expansions of this Settlement Agreement and its implementing documents (including all exhibits hereto) without further notice to the Settlement Class or approval by the Court if such changes are consistent with the Court’s Final Order and Final Judgment and do not limit the rights of Settlement Class Members under this Settlement Agreement.
75. If the Court declines to finally approve the settlement, or if such approval is reversed, vacated, or otherwise materially modified on appeal, or if the Court materially modifies the terms of the proposed Final Order or Final Judgment as provided for in Section XII hereto, or if the Court enters the Final Order and Final Judgment and appellate review is sought, and on such review, either the Final Order or Final Judgment is reversed, vacated or materially modified, then any party to this Settlement Agreement may terminate its participation in this Settlement Agreement; provided, however, that any reversal, vacating or modification on appeal of any amount of Plaintiffs’ Class Counsel’s Attorneys’ Fees Award or Reimbursement for Costs and Expenses by the Court, or any amount of Plaintiffs’ Service Awards to any Plaintiff, or any
determination by the Court to award less than the amount requested in attorneys’ fees or costs to Plaintiffs’ Class Counsel or incentive payments to Plaintiffs, shall not give rise to any right of termination or otherwise serve as a basis for termination of this Settlement Agreement. The terminating party must exercise the option to withdraw from and terminate its participation in this Settlement Agreement, as provided in this Section, by a signed writing served on all of the other Parties no later than five (5) days after receiving notice of the event prompting the termination. Upon such termination, the terminating parties (party) will be returned to their position status quo ante in relation to their (its) adversary or adversaries, meaning, inter alia , that some or all of the motions, documents, and other filings relating to the terminating parties deemed withdrawn pursuant to the various stipulations between and among the Parties that were approved as Orders by the Court at Docket Nos. 689, 690 and 696 shall be deemed filed or served as of their original filed and service date and the orders docketed at Nos. 689, 690, 696 and 697 shall be deemed null and void.
76. The procedure for and the allowance or disallowance by the Court of any application for attorneys’ fees, costs, expenses, or reimbursement to be paid to Plaintiffs’ Class Counsel or for any Plaintiffs’ Service Awards are not part of the settlement of the Released Claims as set forth in this Settlement Agreement. Neither Plaintiffs nor Plaintiffs’ Class Counsel, nor any other attorney who claims a right to receive attorneys’ fees and costs from this settlement, shall have the right to terminate the Settlement Agreement or otherwise affect or delay the finality of the Final Order and Final Judgment based on any finding, ruling, holding, or proceeding relating to any Attorneys’ Fee Award, Reimbursement for Costs and Expenses, or Plaintiffs’ Service Awards, or any separate appeal from any separate order, finding, ruling, holding, or proceeding relating to any of them or reversal or modification of any of them.
77. Each Defendant will have the right (but not the obligation) to terminate its respective portion of the settlement if the total number of percentage-based Comdata Proprietary Transactions during the Settlement Class Period at members of the Settlement Class who choose to opt out of the settlement exceeds 11.5 percent of the total number of Settlement Class Members’ percentage-based Comdata Proprietary Transactions during the Settlement Class Period.
78. If an option to withdraw from and terminate this Settlement Agreement arises under the preceding Paragraph, any Defendant wishing to exercise such option must inform Plaintiffs’ Class Counsel in writing within five (5) business days of receiving the Opt-Out information from Class Counsel. Failure to exercise such option within that time period will constitute a termination of the option. Defendants are not required for any reason or under any circumstance to exercise that option and any exercise of that option shall be in good faith.
79. If, but only if, this Settlement Agreement is terminated pursuant to Paragraphs 75 or 77 above, then this Settlement Agreement shall be null and void as between the terminating Defendant and Plaintiffs and shall have no force or effect as between them and neither the terminating Defendant nor Plaintiffs shall be bound as between one another to the terms of this Settlement Agreement, except as follows:
a. The terminating Defendant and Plaintiffs will be required to petition the Court to have any stay or similar orders entered as a result of the settlement, including pursuant to this Settlement Agreement lifted as to them;
b. All of its provisions, and all negotiations, statements, and proceedings relating to it shall be without prejudice to the rights of the terminating Defendant, Plaintiffs, or any member of the Settlement Class, all of whom shall be restored to their respective positions
existing immediately before the execution of any memoranda of understanding contemplating this Settlement Agreement, except that the terminating Defendant and Plaintiffs shall cooperate in requesting that the Court set a new scheduling order such that their substantive and procedural rights are not prejudiced by the settlement negotiations and proceedings;
c. The terminating Defendant would expressly and affirmatively reserve all defenses, arguments, and motions as to all claims that have been or might later be asserted in the Actions, including, without limitation, the argument that the Actions may not be litigated as a class action;
d. Plaintiffs and all other members of the Settlement Class, on behalf of themselves and their heirs, assigns, executors, administrators, predecessors, and successors, would expressly and affirmatively reserve and would not waive all motions as to, and arguments in support of, all claims, causes of actions or remedies that have been or might later be asserted in the Actions including, without limitation, any argument concerning class certification;
e. The terminating Defendant would expressly and affirmatively reserve and would not waive any motions and positions as to, and arguments in support of, all defenses to the causes of action or remedies that have been sought or might be later asserted in the Actions, including, without limitation, any argument or position opposing class certification, liability or damages;
f. Neither this Settlement Agreement, the fact of its having been made, nor the negotiations leading to it, nor any discovery or action taken by a Party or member of the Settlement Class pursuant to this Settlement Agreement shall be admissible or entered into evidence for any purpose whatsoever;
g. Any settlement-related order(s) or judgment(s) entered in this Action after the date of execution of this Settlement Agreement shall be deemed vacated and shall be without any force or effect as to the terminating Defendant and Plaintiffs, and the Release with respect each terminating Defendant’s Releasees shall be null and void;
h. All Settlement Administration Costs incurred in connection with the settlement and the Settlement Administrator, including, but not limited to, notice, publication, and customer communications, will be paid from the Comdata/Ceridian Settlement Fund, the Love’s Settlement Fund, the Pilot Settlement Fund, and the TA Settlement Fund and, after its creation following the Final Effective Date, the Aggregate Settlement Fund. Neither Plaintiffs nor Plaintiffs’ Class Counsel shall be responsible for any of these costs or other settlement-related costs;
i. The amount of any Attorneys’ Fees Award previously sought by Plaintiffs’ Class Counsel or Plaintiffs at the time of termination, if any, shall be reduced on a pro rata basis to reflect the termination of this Settlement Agreement by the terminating Defendant; and
j. The entire remainder of the terminating Defendants’ Settlement Fund, less the Settlement Administration Costs incurred as of the date of termination shall be returned to the respective terminating Defendant.
XIV. CONTINUING JURISDICTION
80. The Court will retain continuing jurisdiction over Plaintiffs, the Settlement Class Members, Plaintiffs’ Class Counsel, and Defendants to implement, administer, consummate, and enforce this Settlement Agreement and the Final Order and Final Judgment, except that the exclusive jurisdiction for adjudicating any disputes pursuant to Paragraphs 26 through 29 shall be
by arbitration as provided in those paragraphs and nothing in this Section or this Settlement Agreement shall be construed to limit the operation of those Paragraphs.
81. All proceedings with respect to the administration, processing and determination of Claim Forms or with respect to any Attorneys’ Fee Award, any Reimbursement for Costs and Expenses, or any Plaintiffs’ Service Award described in this Settlement Agreement and the determination of all controversies relating thereto, shall be subject to the continuing jurisdiction of the Court.
82. Except for the resolution of any claims under Paragraphs 26 through 29 above, which will be resolved by the Arbitrator, Defendants, Plaintiffs’ Class Counsel, and Plaintiffs agree, and Settlement Class Members will be deemed to have agreed, to submit irrevocably to the exclusive jurisdiction of the Court for the resolution of any matter covered by this Settlement Agreement, the Release, the Final Order, the Final Judgment, or the applicability of this Settlement Agreement, the Release, the Final Order, or the Final Judgment.
83. All applications to the Court with respect to any aspect of this Settlement Agreement, the Release, the Final Order, or the Final Judgment shall be presented to and be determined by United States District Court Judge James Knoll Gardner for resolution, or, if he is not available, any other District Court Judge designated by the Court.
XV. GENERAL MATTERS AND RESERVATIONS
84. Defendants have denied and continue to deny each and all of the claims and contentions alleged in the Actions, and have denied and continue to deny that they have committed any violation of law or engaged in any wrongful act that was alleged, or that could have been alleged, in the Actions. Defendants believe that they have valid and complete defenses to the claims asserted against them in the Actions and deny that they committed any violations of
law, engaged in any unlawful act or conduct, or that there is any basis for liability for any of the claims that have been, are, or might have been alleged in the Actions. Nonetheless, Defendants have concluded that it is desirable that the Actions be fully and finally settled in the matter and upon the terms and conditions set forth in this Settlement Agreement.
85. The obligation of the Parties to conclude the proposed settlement is and shall be contingent upon each of the following:
a. Entry by the Court of the Final Order and Final Judgment approving the settlement, from which the time to appeal has expired or which have remained unmodified after any appeal(s); and
b. Any other conditions stated in this Settlement Agreement.
86. Except as otherwise previously agreed, the Parties and their counsel agree to keep the contents of this Settlement Agreement confidential until the date on which the motion for preliminary approval is filed; provided, however, that this Paragraph shall not prevent Defendants from disclosing such information, prior to the date on which the motion for preliminary approval is filed, to state and federal agencies, independent accountants, actuaries, advisors, financial analysts, insurers or attorneys, or as otherwise required by law or regulation, nor shall it prevent Defendants from disclosing such information based on the substance of this Settlement Agreement. Nor shall it prevent the Parties and their counsel from disclosing such information to persons or entities (such as experts, courts, co-counsel, escrow agents, banks, and/or administrators) to whom the Parties agree disclosure must be made in order to effectuate the terms and conditions of this Settlement Agreement.
87. Information provided by any Defendant or its counsel to Plaintiffs, Plaintiffs’ Class Counsel, any individual member of the Settlement Class, counsel for any individual
member of the Settlement Class, administrators and/or consultants from Econ One, pursuant to the negotiation and implementation of this Settlement Agreement, includes trade secrets and highly confidential and proprietary business information and shall be deemed “Highly Confidential” pursuant to the Second Amended Protective Order in the Action, and shall be subject to all of the provisions thereof. Any materials inadvertently produced shall, upon the producing Defendant’s request, be promptly returned to that Defendant through its counsel, and there shall be no implied or express waiver of any privileges, rights and defenses. Nothing in this Paragraph shall be deemed to preclude Plaintiffs’ Class Counsel from furnishing Comdata’s FMLog transaction data to the Settlement Administrator and Econ One for purposes of providing Class Notice and executing the claims administration process, so long as the Settlement Administrator and Econ One each agrees in writing to be bound by the terms of the governing protective order in the Actions, nor shall this Paragraph be construed as precluding the Settlement Administrator or Econ One from making use of such data for purposes of providing Class Notice or executing the claims administration process.
88. Six months after the distribution of the settlement funds to Settlement Class Members who submitted timely and valid Claim Forms, the Settlement Administrator shall either destroy or return all documents and materials to the Defendants and/or their counsel and/or Plaintiffs’ Class Counsel that produced the documents and materials, except that it shall not destroy any and all Claim Forms, including any and all information and/or documentation submitted by Settlement Class Members. Nothing in this Settlement Agreement shall affect any confidentiality order or protective order entered by the Court in the Actions.
89. The Parties agree that within ten (10) days after the opt-out deadline provided in the Court’s Preliminary Approval Order, they may, in their own discretion, lift or release any and
all applicable litigation holds or document preservation notices requiring their employees or agents to preserve documents and electronic data as a result of the Actions on a going forward basis, and may return to their ordinary document retention policies, if any, provided that the Parties must continue to retain through the Final Effective Date previously collected documents, and in the case of Comdata, FMLog transaction data. The Parties agree that such release of any such litigation holds or document preservation notices pursuant to this Paragraph shall not under any circumstances provide a basis for any claim of spoliation of evidence in the Actions or any subsequent proceeding involving the Parties.
90. With respect to documents produced by the Parties in the Actions, the Final Effective Date shall constitute the “termination of the Litigation” for purposes of Paragraph 19 of the Second Amended Protective Order such that within sixty (60) days of the Final Effective Date the Parties shall return or destroy Confidential Material and/or Highly Confidential Material in compliance with the terms of that Paragraph of the Second Amended Protective Order.
91. Defendants’ execution of this Settlement Agreement shall not be construed to release—and Defendants expressly do not intend to release—any claim Defendants may have or make against any insurer for any cost or expense incurred in connection with this settlement, including, without limitation, for attorneys’ fees and costs.
92. Plaintiffs’ Class Counsel represent that: (1) they are authorized by Plaintiffs to enter into this Settlement Agreement with respect to the claims in the Actions; and (2) they are seeking to protect the interests of the Settlement Class.
93. Plaintiffs and Plaintiffs’ Class Counsel further represent that Plaintiffs: (1) have agreed to serve as representatives of the Settlement Class proposed to be certified herein; (2) are willing, able, and ready to perform all of the duties and obligations of representatives of the
Settlement Class, including, but not limited to, being involved in discovery and fact finding; (3) have read the pleadings in the Actions, or have had the contents of such pleadings described to them; (4) are familiar with the results of the fact-finding undertaken by Plaintiffs’ Class Counsel to the extent possible given the Protective Order in this case; (5) have been kept apprised of settlement negotiations among the Parties (except that plaintiff Mahwah Fuel Stop was not involved in the preliminary negotiations of the memoranda of understanding entered in to in advance of this Settlement Agreement), and have either read this Settlement Agreement, including the exhibits annexed hereto, or have received a detailed description of it from Plaintiffs’ Class Counsel and they have agreed to its terms; (6) have consulted with Plaintiffs’ Class Counsel about the Actions and this Settlement Agreement and the obligations imposed on representatives of the Settlement Class; (7) have authorized the execution of this Settlement Agreement; (8) shall remain and serve as representatives of the Settlement Class until the terms of this Settlement Agreement are effectuated, this Settlement Agreement is terminated in accordance with its terms, or the Court at any time determines that said Plaintiffs cannot represent the Settlement Class, and (9) believe the settlement to be in the best interests of the Settlement Class.
94. Plaintiffs further represent and warrant that the individuals executing this Settlement Agreement are authorized to enter into this Settlement Agreement on behalf of each respective Plaintiff.
95. Defendants represent and warrant that the individuals executing this Settlement Agreement are authorized to enter into this Settlement Agreement on behalf of each respective Defendant.
96. This Settlement Agreement, complete with its exhibits, sets forth the sole and entire agreement among the Parties with respect to its subject matter, and it may not be altered,
amended, or modified except by written instrument executed by Plaintiffs’ Class Counsel and each Defendant and its counsel. The Parties expressly acknowledge that no other agreements, arrangements, or understandings not expressed in this Settlement Agreement exist among or between them, and that in deciding to enter into this Settlement Agreement, they rely solely upon their judgment and knowledge. This Settlement Agreement supersedes any prior agreements, understandings, or undertakings (written or oral) by and between the Parties regarding the subject matter of this Settlement Agreement.
97. The Parties further acknowledge that they are executing this Settlement Agreement after independent investigation and without fraud, duress or undue influence.
98. The Parties acknowledge and agree that no opinion concerning the tax consequences of the proposed settlement to Settlement Class Members is given or will be given by the Parties, nor are any representations or warranties in this regard made by virtue of this Settlement Agreement. Each Settlement Class Member’s tax obligations, and the determination thereof, are the sole responsibility of the Settlement Class Member, and it is understood that the tax consequences may vary depending on the particular circumstances of each individual Settlement Class Member.
99. This Settlement Agreement and any amendments thereto shall be governed by and interpreted according to the law of the Commonwealth of Pennsylvania notwithstanding its conflict of law provisions.
100. Except as set forth in Paragraphs 26 through 29, any disagreement and/or action to enforce this Settlement Agreement shall be commenced and maintained only in the Court.
101. Whenever this Settlement Agreement requires or contemplates that one of the Parties shall or may give notice to the other, notice shall be provided by e-mail and/or next-day (excluding Saturdays, Sundays and Federal Holidays) express delivery service as follows:
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If to Comdata, then to: |
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J. Gordon Cooney, Jr. |
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Steven A. Reed |
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R. Brendan Fee |
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MORGAN LEWIS & BOCKIUS LLP |
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1701 Market Street |
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Philadelphia, PA 19103 |
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E-mail: jgcooney@morganlewis.com |
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sreed@morganlewis.com |
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bfee@morganlewis.com |
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If to Ceridian, then to: |
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Carolyn P. Short |
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Shannon E. McClure |
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REED SMITH LLP |
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2500 One Liberty Place |
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1650 Market Street |
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Philadelphia, PA 19103 |
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E-mail: cshort@reedsmith.com |
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smcclure@reedsmith.com |
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If to Love’s, then to: |
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Mack J. Morgan, III |
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CROWE & DUNLEVY, P.C. |
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20 North Broadway, Suite 1800 |
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Oklahoma City, OK 73102 |
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E-mail: mack.morgan@crowedunlevy.com |
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If to Pilot, then to: |
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John H. Bogart |
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TELOS VG, PLLC |
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299 South Main, Suite 1300 |
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Salt Lake City, UT 84111 |
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E-mail: Jbogart@telosvg.com |
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If to the TA Defendants, then to: |
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Jane E. Willis |
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Matthew L. McGinnis |
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ROPES & GRAY LLP |
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Prudential Tower |
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800 Boylston Street |
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Boston, MA 02199 |
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E-mail: jane.willis@ropesgray.com |
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matthew.mcginnis@ropesgray.com |
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If to Plaintiffs, then to : |
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Eric L. Cramer |
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Andrew C. Curley |
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BERGER & MONTAGUE, P.C. |
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1622 Locust Street |
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Philadelphia, PA 19103 |
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E-mail: ecramer@bm.net |
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acurley@bm.net |
102. All time periods set forth herein shall be computed in calendar days unless otherwise expressly provided. In computing any period of time prescribed or allowed by this Settlement Agreement or by order of the Court, the day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is a Saturday, a Sunday, or a Federal Holiday, or, when the act to be done is the filing of a paper in court, a day on which weather or other conditions have made the office of the clerk of the court inaccessible, in which event the period shall run until the end of the next day that is not one of the aforementioned days. As used in this Section, “Federal Holiday” includes New Year’s Day, Birthday of Martin Luther King, Jr., Presidents’ Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Patriot’s Day, Thanksgiving Day, Christmas Day, and any other day appointed as a holiday by the President, the Congress of the United States, or the Clerk of the United States District Court for the Eastern District of Pennsylvania.
103. The Parties reserve the right, subject to the Court’s approval, to agree to any reasonable extensions of time that might be necessary to carry out any of the provisions of this Settlement Agreement.
104. Neither the Settlement Class, Plaintiffs, Plaintiffs’ Class Counsel, Defendants, nor their counsel shall be deemed to be the drafter of this Settlement Agreement or of any particular provision, nor shall they argue that any particular provision should be construed against its drafter. All Parties agree that this Settlement Agreement was drafted by counsel for the Parties during extensive arm’s length negotiations. No parol or other evidence may be offered to explain, construe, contradict, or clarify its terms, the intent of the Parties or their counsel, or the circumstances under which this Settlement Agreement was made or executed.
105. The Parties expressly acknowledge and agree that this Settlement Agreement and its exhibits, along with all related drafts, motions, pleadings, conversations, negotiations, and correspondence, constitute an offer of compromise and a compromise within the meaning of Federal Rule of Evidence 408 and any equivalent rule of evidence in any state. In no event shall this Settlement Agreement, any of its provisions or any negotiations, statements or court proceedings relating to its provisions in any way be construed as, offered as, received as, used as, or deemed to be evidence of any kind in the Action, any other action, or in any judicial, administrative, regulatory or other proceeding, except in a proceeding to enforce this Settlement Agreement or the rights of the Parties, their counsel, or the Releasees. Without limiting the foregoing, neither this Settlement Agreement nor any related negotiations, statements, or court proceedings shall be construed as, offered as, received as, used as or deemed to be evidence or an admission or concession of any liability or wrongdoing whatsoever on the part of any person or entity, including, but not limited to, the Releasees, Plaintiffs, or the Settlement Class or as a
waiver by the Releasees, Plaintiffs, or the Settlement Class of any applicable privileges, claims or defenses.
106. Plaintiffs expressly affirm that the allegations contained in the Actions were made in good faith, but consider it desirable for the Action to be settled and dismissed because of the substantial benefits that the proposed settlement will provide to Settlement Class Members.
107. The Parties, their successors and assigns, and their counsel undertake to implement the terms of this Settlement Agreement in good faith, and to use good faith in resolving any disputes that may arise in the implementation of the terms of this Settlement Agreement.
108. The waiver by one Party of any breach of this Settlement Agreement by another Party shall not be deemed a waiver of any prior or subsequent breach of this Settlement Agreement.
109. If one Party to this Settlement Agreement considers another Party to be in breach of its obligations under this Settlement Agreement, that Party must provide the breaching Party with written notice of the alleged breach and provide a reasonable opportunity to cure the breach before taking any action to enforce any rights under this Settlement Agreement.
110. The Parties, their successors and assigns, and their counsel agree to cooperate fully with one another in seeking Court approval of this Settlement Agreement and to use their best efforts to effect the prompt consummation of this Settlement Agreement and the proposed settlement.
111. This Settlement Agreement may be signed with a facsimile signature and in counterparts, each of which shall constitute a duplicate original.
112. In the event any one or more of the provisions contained in this Settlement Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any other provision if Defendants and Plaintiffs’ Class Counsel, on behalf of Plaintiffs and the Settlement Class, mutually agree in writing to proceed as if such invalid, illegal, or unenforceable provision had never been included in this Settlement Agreement. Any such agreement shall be reviewed and approved by the Court before it becomes effective.
113. All headings used in this Settlement Agreement are for reference and convenience only and shall not affect the meaning or interpretation of this Settlement Agreement.
IN WITNESS WHEREOF, the signatories below have read and understood this Settlement Agreement, have executed it, represent that the undersigned are authorized to execute this Settlement Agreement on behalf of their respectively represented parties, have agreed to be bound by its terms, and have duly executed this Settlement Agreement.
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BY |
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DATE: , 2014 |
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NAME: |
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POSITION: |
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MARCHBANKS TRUCK SERVICE, INC. D/B/A BEAR MOUNTAIN TRAVEL STOP |
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PLAINTIFF |
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BY |
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DATE: , 2014 |
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NAME: |
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POSITION: |
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GERALD F. KRACHEY D/B/A/ KRACHEY’S BP SOUTH |
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PLAINTIFF |
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BY |
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DATE: , 2014 |
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NAME: |
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POSITION: |
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WALT WHITMAN TRUCK STOP |
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PLAINTIFF |
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BY |
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DATE: , 2014 |
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NAME: |
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POSITION: |
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MAHWAH FUEL STOP |
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PLAINTIFF |
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BY |
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DATE: , 2014 |
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ERIC L. CRAMER |
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BERGER & MONTAGUE, P.C. |
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PLAINTIFFS’ CLASS COUNSEL |
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BY |
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DATE: , 2014 |
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ERIC FASTIFF |
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LIEFF CABRASER HEIMANN & BERNSTEIN, LLP |
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PLAINTIFFS’ CLASS COUNSEL |
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BY |
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DATE: , 2014 |
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STEPHEN NEUWIRTH |
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QUINN EMANUEL URQUHART & SULLIVAN, LLP |
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PLAINTIFFS’ CLASS COUNSEL |
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BY |
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DATE: , 2014 |
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NAME: |
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POSITION: |
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COMDATA NETWORK, INC. N/K/A COMDATA INC. |
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BY |
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DATE: , 2014 |
|
J. GORDON COONEY, JR. |
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MORGAN, LEWIS & BOCKIUS LLP |
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COUNSEL FOR COMDATA NETWORK, INC. N/K/A COMDATA INC. |
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BY |
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DATE: , 2014 |
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NAME: |
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POSITION: |
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CERIDIAN CORPORATION N/K/A CERIDIAN LLC |
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|
BY |
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|
DATE: , 2014 |
|
CAROLYN P. SHORT |
|
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|
REED SMITH LLP |
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COUNSEL FOR CERIDIAN CORPORATION N/K/A CERIDIAN LLC |
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|
BY |
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DATE: , 2014 |
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NAME: |
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POSITION: |
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PILOT TRAVEL CENTERS LLC AND PILOT CORPORATION |
|
||
|
BY |
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DATE: , 2014 |
|
JOHN H. BOGART |
|
||
|
TELOS VG PLLC |
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COUNSEL FOR PILOT TRAVEL CENTERS LLC AND PILOT CORPORATION |
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BY |
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DATE: , 2014 |
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NAME: |
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POSITION: |
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TRAVELCENTERS OF AMERICA LLC, TRAVELCENTERS OF AMERICA HOLDING COMPANY LLC, TA OPERATING LLC, AND PETRO STOPPING CENTERS, L.P. |
|||
|
BY |
|
|
DATE: , 2014 |
|
JANE E. WILLIS |
|
||
|
ROPES & GRAY LLP |
|
||
|
COUNSEL FOR TRAVELCENTERS OF AMERICA LLC, TRAVELCENTERS OF AMERICA HOLDING COMPANY LLC, TA OPERATING LLC, AND PETRO STOPPING CENTERS, L.P. |
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|
BY |
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|
DATE: , 2014 |
|
NAME: |
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POSITION: |
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LOVE’S TRAVEL STOPS & COUNTRY STORES, INC. |
|
||
|
BY |
|
|
DATE: , 2014 |
|
MACK J. MORGAN, III |
|
||
|
CROWE & DUNLEVY, P.C. |
|
||
|
COUNSEL FOR LOVE’S TRAVEL STOPS & COUNTRY STORES, INC. |
|||
Statement of Computation of Ratio of Earnings to Fixed Charges
|
|
Years Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
|
|
(in thousands, except ratio amounts)
|
|||||||||||||||
|
Income before income taxes and income from equity investees |
$ | 2,331 | $ | 31,812 | $ | 23,784 | $ | (66,560 | ) | $ | (94,363 | ) | ||||
|
Distributions received from equity investees |
— | 4,800 | — | 960 | — | |||||||||||
|
Fixed charges |
90,880 | 79,161 | 75,471 | 106,603 | 96,350 | |||||||||||
|
Amortization of capitalized interest |
31 | — | — | — | — | |||||||||||
|
Capitalized interest |
(1,033 | ) | — | — | — | — | ||||||||||
| | | | | | | | | | | | | | | | | |
|
Total earnings |
$ | 92,209 | $ | 115,773 | $ | 99,255 | $ | 41,003 | $ | 1,987 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
Interest expense (1) |
$ | 17,650 | $ | 10,358 | $ | 9,005 | $ | 25,653 | $ | 15,440 | ||||||
|
Estimated interest within rent expense (2) |
72,197 | 68,803 | 66,466 | 80,950 | 80,910 | |||||||||||
|
Capitalized interest |
1,033 | — | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
|
Total fixed charges |
$ | 90,880 | $ | 79,161 | $ | 75,471 | $ | 106,603 | $ | 96,350 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
Ratio of earnings to fixed charges |
1.01 | 1.46 | 1.32 | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
Deficiency of earnings available to cover fixed charges |
$ | N/A | $ | N/A | $ | N/A | $ | (65,600 | ) | $ | (94,363 | ) | ||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
EXHIBIT 21.1
TravelCenters of America LLC
Consolidated Subsidiaries
As of December 31, 2013
|
Name of Subsidiary |
|
Jurisdiction of Organization |
|
|
|
|
|
TravelCenters of America Holding Company LLC |
|
Delaware |
|
TA Leasing LLC |
|
Delaware |
|
TA Operating LLC (doing business as TravelCenters of America and as Petro Stopping Centers) |
|
Delaware |
|
TA Franchise Systems LLC |
|
Delaware |
|
Petro Franchise Systems LLC |
|
Delaware |
|
TA Operating Texas LLC |
|
Texas |
|
TA Operating Nevada LLC |
|
Nevada |
|
TA Operating Montana LLC |
|
Montana |
|
3073000 Nova Scotia Company |
|
Nova Scotia, Canada |
|
TravelCentres Canada, Inc. |
|
Ontario, Canada |
|
TravelCentres Canada Limited Partnership |
|
Ontario, Canada |
|
Girkin Development, LLC (1) |
|
Kentucky |
(1) Effective May 1, 2014, Girkin Development, LLC was merged into TA Operating LLC.
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
of our reports dated June 6, 2014, with respect to the consolidated financial statements of TravelCenters of America LLC and the effectiveness of internal control over financial reporting of TravelCenters of America LLC included in this Annual Report (Form 10-K) of TravelCenters of America LLC for the year ended December 31, 2013.
/s/ Ernst & Young LLP
Boston,
Massachusetts
June 6, 2014
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
of our report dated March 31, 2014, with respect to the consolidated financial statements of Petro Travel Plaza Holdings, LLC included in this Annual Report (Form 10-K) of TravelCenters of America LLC for the year ended December 31, 2013.
| /s/ Ernst & Young LLP | ||
|
Boston, Massachusetts June 6, 2014 |
|
|
CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)
I, Thomas M. O'Brien, certify that:
| Date: June 6, 2014 |
/s/ THOMAS M. O'BRIEN
Thomas M. O'Brien President and Chief Executive Officer |
CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)
I, Andrew J. Rebholz, certify that:
| Date: June 6, 2014 |
/s/ ANDREW J. REBHOLZ
Andrew J. Rebholz |
|
| Executive Vice President, Chief Financial Officer and Treasurer |
Certification Pursuant to 18 U.S.C. Sec. 1350
(Section 906 of the Sarbanes—Oxley Act of 2002)
In connection with the filing by TravelCenters of America LLC (the "Company") of the Annual Report on Form 10-K for the period ending December 31, 2013 (the "Report"), each of the undersigned hereby certifies, to the best of his knowledge:
| Date: June 6, 2014 |
/s/ THOMAS M. O'BRIEN
Thomas M. O'Brien President and Chief Executive Officer |
|
|
|
|
/s/ ANDREW J. REBHOLZ Andrew J. Rebholz Executive Vice President, Chief Financial Officer and Treasurer |
Exhibit 99.3
Petro Travel Plaza Holdings LLC
Consolidated Financial Statements
For the Years Ended
December 31, 2013, 2012 and 2011
Report of Independent Registered Public Accounting Firm
The Members
Petro Travel Plaza Holdings LLC
We have audited the accompanying consolidated balance sheets of Petro Travel Plaza Holdings LLC (“the Company”) as of December 31, 2013 and 2012, and the related consolidated comprehensive income statements, and statements of cash flows and changes in members’ capital for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Petro Travel Plaza Holdings LLC at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
|
|
/s/ Ernst & Young LLP |
|
|
|
|
|
|
|
Boston, Massachusetts |
|
|
March 31, 2014 |
|
PETRO TRAVEL PLAZA HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
December 31, |
|
||||
|
|
|
2013 |
|
2012 |
|
||
|
Assets |
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
11,178 |
|
$ |
6,416 |
|
|
Inventories |
|
2,360 |
|
2,325 |
|
||
|
Due from affiliate |
|
1,143 |
|
571 |
|
||
|
Other current assets |
|
151 |
|
266 |
|
||
|
Total current assets |
|
14,832 |
|
9,578 |
|
||
|
|
|
|
|
|
|
||
|
Property and equipment, net |
|
43,950 |
|
44,196 |
|
||
|
Other noncurrent assets, net |
|
208 |
|
246 |
|
||
|
|
|
|
|
|
|
||
|
Total assets |
|
$ |
58,990 |
|
$ |
54,020 |
|
|
|
|
|
|
|
|
||
|
Liabilities and Members’ Capital |
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Current portion of long-term debt |
|
$ |
755 |
|
$ |
719 |
|
|
Accrued expenses and other current liabilities |
|
1,628 |
|
2,104 |
|
||
|
Total current liabilities |
|
2,383 |
|
2,823 |
|
||
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
||
|
Long-term debt, excluding current portion |
|
16,602 |
|
17,358 |
|
||
|
Other noncurrent liabilities |
|
153 |
|
141 |
|
||
|
|
|
|
|
|
|
||
|
Total liabilities |
|
19,138 |
|
20,322 |
|
||
|
|
|
|
|
|
|
||
|
Members’ capital |
|
39,852 |
|
33,698 |
|
||
|
|
|
|
|
|
|
||
|
Total liabilities and members’ capital |
|
$ |
58,990 |
|
$ |
54,020 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PETRO TRAVEL PLAZA HOLDINGS LLC
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(in thousands)
|
|
|
Years Ended December 31, |
|
|||||||
|
|
|
2013 |
|
2012 |
|
2011 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Revenues: |
|
|
|
|
|
|
|
|||
|
Fuel |
|
$ |
102,209 |
|
$ |
111,342 |
|
$ |
107,459 |
|
|
Nonfuel |
|
23,595 |
|
22,620 |
|
20,885 |
|
|||
|
Total revenues |
|
125,804 |
|
133,962 |
|
128,344 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Costs and expenses: |
|
|
|
|
|
|
|
|||
|
Cost of sales: |
|
|
|
|
|
|
|
|||
|
Fuel |
|
92,705 |
|
102,206 |
|
99,400 |
|
|||
|
Nonfuel |
|
10,061 |
|
9,688 |
|
8,878 |
|
|||
|
Total cost of sales (excluding depreciation) |
|
102,766 |
|
111,894 |
|
108,278 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Operating expenses |
|
14,767 |
|
14,539 |
|
14,766 |
|
|||
|
Depreciation and amortization expense |
|
1,564 |
|
1,482 |
|
1,392 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Total costs and expenses |
|
119,097 |
|
127,915 |
|
124,436 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Operating income |
|
6,707 |
|
6,047 |
|
3,908 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Interest income |
|
2 |
|
7 |
|
8 |
|
|||
|
Interest expense |
|
(555 |
) |
(810 |
) |
(1,227 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
6,154 |
|
$ |
5,244 |
|
$ |
2,689 |
|
|
|
|
|
|
|
|
|
|
|||
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|||
|
Change in accumulated unrealized loss on cash flow hedging derivative |
|
— |
|
254 |
|
364 |
|
|||
|
Other comprehensive income (loss) |
|
— |
|
254 |
|
364 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Comprehensive income |
|
$ |
6,154 |
|
$ |
5,498 |
|
$ |
3,053 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PETRO TRAVEL PLAZA HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
Years Ended December 31, |
|
|||||||
|
|
|
2013 |
|
2012 |
|
2011 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
6,154 |
|
$ |
5,244 |
|
$ |
2,689 |
|
|
Adjustments to reconcile net income to net cash provided by |
|
|
|
|
|
|
|
|||
|
operating activities: |
|
|
|
|
|
|
|
|||
|
Depreciation and amortization |
|
1,564 |
|
1,482 |
|
1,392 |
|
|||
|
Amortization of debt issuance costs |
|
30 |
|
30 |
|
84 |
|
|||
|
Increase (decrease) from changes in: |
|
|
|
|
|
|
|
|||
|
Inventories |
|
(35 |
) |
(167 |
) |
(240 |
) |
|||
|
Other current assets |
|
115 |
|
(7 |
) |
(16 |
) |
|||
|
Due to/from affiliates |
|
(572 |
) |
(16 |
) |
35 |
|
|||
|
Accrued expenses and other current liabilities |
|
(476 |
) |
97 |
|
652 |
|
|||
|
Other, net |
|
8 |
|
2 |
|
(24 |
) |
|||
|
Net cash provided by operating activities |
|
6,788 |
|
6,665 |
|
4,572 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|||
|
Purchases of property and equipment |
|
(1,306 |
) |
(1,577 |
) |
(832 |
) |
|||
|
Net cash used in investing activities |
|
(1,306 |
) |
(1,577 |
) |
(832 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|||
|
Repayments of long-term debt |
|
(720 |
) |
(640 |
) |
(571 |
) |
|||
|
Payments of debt issuance costs |
|
— |
|
— |
|
(166 |
) |
|||
|
Distributions to members |
|
— |
|
(12,000 |
) |
— |
|
|||
|
Net cash used in financing activities |
|
(720 |
) |
(12,640 |
) |
(737 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Net increase (decrease) in cash and cash equivalents |
|
4,762 |
|
(7,552 |
) |
3,003 |
|
|||
|
Cash and cash equivalents, beginning of period |
|
6,416 |
|
13,968 |
|
10,965 |
|
|||
|
Cash and cash equivalents, end of period |
|
$ |
11,178 |
|
$ |
6,416 |
|
$ |
13,968 |
|
|
|
|
|
|
|
|
|
|
|||
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|||
|
Interest paid during the period |
|
$ |
557 |
|
$ |
817 |
|
$ |
1,252 |
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|||
|
Net change in accumulated unrealized loss on cash flow hedging derivative |
|
$ |
— |
|
$ |
254 |
|
$ |
364 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PETRO TRAVEL PLAZA HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
(in thousands)
|
|
|
|
|
Accumulated |
|
|
|
|||
|
|
|
|
|
Other |
|
Total |
|
|||
|
|
|
Members’ |
|
Comprehensive |
|
Members’ |
|
|||
|
|
|
Capital |
|
Income (Loss) |
|
Capital |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Balances, December 31, 2010 |
|
$ |
37,765 |
|
$ |
(618 |
) |
$ |
37,147 |
|
|
Net income |
|
2,689 |
|
— |
|
2,689 |
|
|||
|
Other comprehensive loss |
|
— |
|
364 |
|
364 |
|
|||
|
Balances, December 31, 2011 |
|
40,454 |
|
(254 |
) |
40,200 |
|
|||
|
Distributions to members |
|
(12,000 |
) |
— |
|
(12,000 |
) |
|||
|
Net income |
|
5,244 |
|
— |
|
5,244 |
|
|||
|
Other comprehensive income |
|
— |
|
254 |
|
254 |
|
|||
|
Balances, December 31, 2012 |
|
33,698 |
|
— |
|
33,698 |
|
|||
|
Net income |
|
6,154 |
|
— |
|
6,154 |
|
|||
|
Balances, December 31, 2013 |
|
$ |
39,852 |
|
$ |
— |
|
$ |
39,852 |
|
The accompanying notes are an integral part of these consolidated financial statements.
PETRO TRAVEL PLAZA HOLDINGS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 and 2011
(in thousands)
(1) Company Formation and Description of Business
Company Formation
Petro Travel Plaza Holdings LLC (the “Company”), a Delaware limited liability company, was formed on October 8, 2008 by Tejon Development Corporation, a California corporation (“Tejon”) and TA Operating LLC, a Delaware limited liability company (“TA”) to develop and operate two travel centers and two convenience stores in Southern California. The Company has two wholly owned subsidiaries: Petro Travel Plaza LLC (“PTP”) and East Travel Plaza LLC (“ETP”), each of which is a California limited liability company. ETP was formed on October 8, 2008, to develop a travel center, and had no operations until December 2009, when construction of that travel center was complete and it began operations. The Company’s LLC agreement limits each members’ liability to the fullest extent permitted by law.
PTP was formed on December 5, 1997, by Tejon and Petro Stopping Centers, L.P., a Delaware limited partnership (“Petro”) to develop and operate a travel center in Southern California that began operations in 1999. Petro was acquired by TA’s parent company in 2007 and was merged into TA in 2008. As a result, TA became the owner of Petro’s interest in PTP. Hereinafter both TA and Petro are referred to as TA. Tejon and TA both contributed their ownership interest in PTP to the Company, and the results of PTP are included for all periods presented. The formation of the Company during 2008 was a change in legal entity structure, and did not represent a business combination.
Pursuant to the terms of the Company’s Operating Agreement, TA manages the travel centers and convenience stores and is responsible for the administrative, accounting, and tax functions of the Company.
These consolidated financial statements include results for the Company and its subsidiaries for all periods presented.
Description of Business
The Company has two travel centers and two convenience stores with retail gasoline stations. One travel center and two convenience stores, owned by PTP, operate under the Petro brand and the other travel center, owned by ETP, operates under the TravelCenters of America brand. The travel centers offer a broad range of products, services and amenities, including diesel fuel, gasoline, full service and branded quick service restaurants, truck maintenance and repair facilities, travel stores and truck driver services such as showers, weigh scales, a truck wash and laundry facilities.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, PTP and ETP, after eliminating intercompany transactions, profits and balances.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The carrying amount of cash equivalents is equal to their fair value.
PETRO TRAVEL PLAZA HOLDINGS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 and 2011
(in thousands)
Due from Affiliate
Pursuant to the terms of the Company’s Limited Liability Company Operating Agreements (the “Operating Agreement”), as amended, TA provides cash management services to PTP, including the collection of accounts receivable. Accounts receivable are periodically transferred to TA for collection and any amounts for which PTP has not received payment from TA are reflected as due from affiliates in the accompanying balance sheets.
Inventories
Inventories are stated at the lower of cost or market value. The Company determines cost principally on the weighted average cost method.
Property and Equipment
Property and equipment are recorded at historical cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the respective assets. Repairs and maintenance are charged to expense as incurred, and amounted to $738, $711 and $706 for the years ended December 31, 2013, 2012 and 2011, respectively. Renewals and betterments are capitalized. The cost and related accumulated depreciation of property and equipment sold, replaced or otherwise disposed is removed from the related accounts. Gains or losses on disposal of property and equipment are credited or charged to depreciation and amortization in the accompanying consolidated comprehensive income statements.
Debt Issuance Costs
Costs incurred in obtaining long-term financing are capitalized and amortized over the life of the related debt using the effective interest method as a component of interest expense. The Company capitalized $142 of costs related to the Amended Credit Agreement it entered in December 2011. Debt issuance costs included in other assets on the balance sheets for both of the years ended December 31, 2013 and 2012, were $214, and accumulated amortization of debt issuance costs were $64 and $34, respectively.
Impairment of Long-Lived Assets
The Company recognizes impairment charges when (a) the carrying value of a long lived or indefinite lived asset group to be held and used in the business is not recoverable and exceeds its fair value and (b) when the carrying value of a long lived asset to be disposed of exceeds the estimated fair value of the asset less the estimated cost to sell the asset. The Company’s estimates of fair value are based on its estimates of likely market participant assumptions including with respect to projected operating results and the discount rate used to measure the present value of projected future cash flows. If the business climate deteriorates the Company’s actual results may not be consistent with these assumptions and estimates. The Company recognizes such impairment charges in the period during which the circumstances surrounding an asset to be held and used have changed such that the carrying value is no longer recoverable, or during which a commitment to a plan to dispose of the asset is made. The lowest level of asset groupings for which the cash flows are largely independent of the cash flows of other assets and liabilities is the individual location and, accordingly, it is at the individual location level that the Company performs its impairment analysis for substantially all of the Company’s property and equipment. The Company includes impairment charges, when required, in depreciation and amortization expense in the accompanying consolidated comprehensive income statements.
Environmental Liabilities and Expenditures
The Company records the expense of remediation costs and penalties when the obligation to remediate is probable and the amount of associated costs is reasonably determinable. The Company includes remediation expenses within operating expenses in the accompanying consolidated comprehensive income statements. Generally, the timing of remediation accruals coincides with the completion of a feasibility study or the commitment to a formal plan of action. Accrued liabilities related to environmental matters are recorded on an undiscounted basis because of the uncertainty associated with the timing of the related future payments.
PETRO TRAVEL PLAZA HOLDINGS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 and 2011
(in thousands)
Asset Retirement Obligations
Asset retirement costs are capitalized as part of the cost of the related long-lived asset and such costs are allocated to expense using a systematic and rational method. To date these costs relate to the Company’s obligation to remove underground storage tanks used to store fuel and motor oil. The Company records a liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long lived asset at the time an underground storage tank is installed. The Company amortizes the amount added to property and equipment and recognizes accretion expense in connection with the discounted liability over the remaining life of the respective underground storage tank. The Company bases the estimated liability on its historical experiences in removing these assets, estimated useful lives, external estimates as to the cost to remove the assets in the future and regulatory or contractual requirements. Revisions to the liability could occur due to changes in estimated removal costs, or asset useful lives or if new regulations regarding the removal of such tanks are enacted. An asset retirement obligation of $153 and $141 has been recorded as a noncurrent liability as of December 31, 2013 and 2012, respectively. The $12 increase between years is the result of accretion of the liability.
Derivative Instruments and Hedging Activities
The Company records derivative instruments on the balance sheet as either an asset or liability measured at its fair value. Changes in the fair value of derivative instruments are recorded in other comprehensive income to the extent that hedge accounting criteria are met and that the hedge is effective. Special accounting for qualifying hedges allows a derivative’s gain or loss to offset related results on the hedged item in the comprehensive income statements at the time those gains or losses are realized and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. If the terms of the Company’s derivative instrument do not match the terms of the hedged item, a portion of the derivative instrument would be ineffective and the Company would recognize gains or losses attributable to the ineffective portion in the comprehensive income statements immediately.
Revenue Recognition
The Company recognizes revenue from the sale of fuel and nonfuel products and services at the time delivery has occurred and services have been performed. The estimated cost to the Company of the redemption by customers of loyalty program points is recorded as a discount against gross sales in determining net sales presented in the consolidated comprehensive income statements.
Motor Fuel Taxes
The Company collects the cost of certain motor fuel taxes from consumers and remits those amounts to the supplier or the appropriate governmental agency. Such taxes were $11,686, $12,298 and $12,351, for the years ended December 31, 2013, 2012 and 2011, respectively, and are included in net revenues and cost of sales in the accompanying comprehensive income statements.
Advertising and Promotion
Costs incurred in connection with advertising and promotions are expensed as incurred. Advertising and promotion expenses, which are included in operating expenses in the accompanying comprehensive income statements, were $345, $315 and $279 for the years ended December 31, 2013, 2012 and 2011, respectively.
Income Taxes
The Company is not subject to federal or state income taxes. Results of operations are allocated to the members in accordance with the provisions of the Company’s Operating Agreement and reported by each member on its federal and state income tax returns. The taxable income or loss allocated to the members in any one year generally varies substantially from income or loss for financial reporting purposes due to differences between the periods in which such items are reported for financial reporting and income tax purposes.
Recently Issued Accounting Pronouncements
In January 2013, the Company adopted FASB Accounting Standards Update, or ASU, No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires companies to report, in one place, information about reclassifications out of accumulated other comprehensive
PETRO TRAVEL PLAZA HOLDINGS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 and 2011
(in thousands)
income. Companies are also required to present details of reclassifications in the disclosure of changes in accumulated other comprehensive income balances. The update is effective for interim and annual reporting periods beginning after December 15, 2012. The implementation of this update caused no changes to the Company’s consolidated financial statements.
Subsequent Events
The Company has evaluated subsequent events through March 31, 2014, which date represents the date the financial statements were available to be issued.
(3) Inventories
Inventories at December 31, 2013 and 2012, consisted of the following:
|
|
|
2013 |
|
2012 |
|
||
|
|
|
|
|
|
|
||
|
Nonfuel products |
|
$ |
1,777 |
|
$ |
1,762 |
|
|
Fuel products |
|
583 |
|
563 |
|
||
|
Inventories |
|
$ |
2,360 |
|
$ |
2,325 |
|
(4) Property and Equipment
Property and equipment, net, as of December 31, 2013 and 2012, consisted of the following:
|
|
|
Estimated |
|
|
|
|
|
||
|
|
|
Useful |
|
|
|
|
|
||
|
|
|
Lives |
|
2013 |
|
2012 |
|
||
|
|
|
(years) |
|
|
|
|
|
||
|
Land |
|
|
|
$ |
17,717 |
|
$ |
17,717 |
|
|
Building and improvements |
|
10-40 |
|
34,794 |
|
34,526 |
|
||
|
Furniture and equipment |
|
3-10 |
|
8,665 |
|
8,017 |
|
||
|
Construction in progress |
|
|
|
390 |
|
— |
|
||
|
|
|
|
|
61,566 |
|
60,260 |
|
||
|
Less: accumulated depreciation |
|
|
|
17,616 |
|
16,064 |
|
||
|
Property and equipment, net |
|
|
|
$ |
43,950 |
|
$ |
44,196 |
|
Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $1,552, $1,473 and $1,383, respectively. The Company did not capitalize interest during any period presented.
(5) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities as of December 31, 2013 and 2012, consisted of the following:
|
|
|
2013 |
|
2012 |
|
||
|
Taxes payable, other than income taxes |
|
$ |
264 |
|
$ |
608 |
|
|
Environmental reserve |
|
599 |
|
750 |
|
||
|
Accrued wages and benefits |
|
371 |
|
382 |
|
||
|
Other |
|
394 |
|
364 |
|
||
|
Total other current liabilities |
|
$ |
1,628 |
|
$ |
2,104 |
|
PETRO TRAVEL PLAZA HOLDINGS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 and 2011
(in thousands)
(6) Long-Term Debt
Long-term debt consisted of the following at December 31, 2013 and 2012:
|
|
|
2013 |
|
2012 |
|
||
|
|
|
|
|
|
|
||
|
Note payable to a bank |
|
$ |
17,357 |
|
$ |
18,077 |
|
|
|
|
|
|
|
|
||
|
Less current portion |
|
755 |
|
719 |
|
||
|
Long-term debt, excluding current portion |
|
$ |
16,602 |
|
$ |
17,358 |
|
The Company has a credit agreement with a bank that matures in December 2018. This debt carries certain financial covenants, with which the Company was in compliance at December 31, 2013. Scheduled principal payments are $61.6 per month until July 2014, $64.8 per month from August 2014 through July 2015, $68.1 from August 2015 through July 2016, $71.6 from August 2016 through July 2017, $75.3 from August 2017 through July 2018 and $79.1 from August 2018 through December 2018, with the final installment of $13,253 due at maturity. Until August 2012, the Company had an interest rate swap on this debt that is more fully described below. The interest rate on the debt is LIBOR plus 2.5%, payable monthly, or 2.67% at December 31, 2013. The debt is collateralized by the Company’s real property.
The Company’s weighted average interest rates were 2.69%, 4.18% and 5.93% during 2013, 2012 and 2011, respectively.
At December 31, 2013 and 2012, the Company had no involvement with derivative financial instruments. The Company has at times used derivatives to manage well-defined interest rate risks and during 2011 and part of 2012 the Company was party to an interest rate swap agreement to hedge the interest rate risk associated with the note payable. The swap expired during August 2012 and was not replaced. The swap that had been in place was not an exchange traded instrument. The Company does not use derivative financial instruments for trading or speculative purposes. The Company accounted for the swap as a cash flow hedge and, accordingly, changes in the fair value of the swap were recorded in other comprehensive income (loss) to the extent the hedge was effective. The Company’s interest rate swap was measured at fair value on a recurring basis during 2012 and 2011.
Future minimum principal payments due on the note payable during the next five years as of December 31, 2013, were as follows:
|
Year ending December 31, |
|
Total |
|
|
|
2014 |
|
$ |
755 |
|
|
2015 |
|
$ |
795 |
|
|
2016 |
|
$ |
835 |
|
|
2017 |
|
$ |
878 |
|
|
2018 |
|
$ |
14,094 |
|
(7) Related-Party Transactions
Amounts due from affiliates as of December 31, 2013 and 2012, were $1,143 and $571, respectively. Pursuant to the terms of the Company’s Operating Agreement, TA manages the travel centers and is responsible for the administrative, accounting, and tax functions of the Company. TA receives a management fee for providing these services. The Company paid management fees to TA in the amount of $800 for each of the years ended December 31, 2013, 2012 and 2011, which fees are included in operating expenses in the accompanying consolidated comprehensive income statements.
PETRO TRAVEL PLAZA HOLDINGS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 and 2011
(in thousands)
The employees operating the Company’s travel centers are TA employees. In addition to the management fees described above, the Company reimbursed TA for wages and benefits related to these employees that aggregated $7,232, $7,135, and $7,005 in 2013, 2012 and 2011, respectively. These reimbursements were recorded in operating expenses in the accompanying consolidated comprehensive income statements.
In addition to management services and staffing provided by TA, the Company’s Operating Agreement grants the Company the right to use all of TA’s names, trade names, trademarks and logos to the extent required in the operation of the Company’s travel centers and convenience stores.
(8) Members’ Capital
Ownership
Tejon and TA are the Members of the Company. The members and their interests in the Company are as follows:
|
Members |
|
|
|
|
Tejon Development Corporation |
|
60 |
% |
|
TA Operating LLC |
|
40 |
% |
Allocations of Income
In any fiscal year, the Company’s profits or losses shall be allocated 60.0% to Tejon and 40.0% to TA pursuant to the terms of the Operating Agreement.
Allocations of Distributions
At any such time that there is a distribution from the Company, that distribution shall be allocated 60.0% to Tejon and 40.0% to TA pursuant to the terms of the Operating Agreement. Distributions totaling $5,000 and $7,000 were made in June 2012 and September 2012, respectively.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) related to the accumulated unrealized gain or loss on cash flow hedging derivatives, and the balances at December 31, 2012 and 2011, consisted of the following:
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
(618 |
) |
|
Change in accumulated unrealized loss on cash flow hedging derivative |
|
364 |
|
|
|
Balance at December 31, 2011 |
|
(254 |
) |
|
|
|
|
|
|
|
|
Change in accumulated unrealized loss on cash flow hedging derivative |
|
254 |
|
|
|
Balance at December 31, 2012 |
|
$ |
— |
|
There was no activity in accumulated other comprehensive income during 2013.
PETRO TRAVEL PLAZA HOLDINGS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 and 2011
(in thousands)
(9) Commitments and Contingencies
The Company’s operations and properties are subject to extensive federal and state legislation, regulations, and requirements relating to environmental matters. The Company uses underground storage tanks (“UST”) to store petroleum products and motor oil. Statutory and regulatory requirements for UST systems include requirements for tank construction, integrity testing, leak detection and monitoring, overfill and spill control, and mandate corrective action in case of a release from a UST into the environment. The Company is also subject to regulation relating to vapor recovery and discharges into the water. Management believes that the Company’s USTs are currently in compliance in all material respects with applicable environmental legislation, regulations, and requirements.
Accruals for environmental matters are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. From time to time the Company has received, and in the future likely will receive, notices of alleged violations of environmental laws or otherwise has become or will become aware of the need to undertake corrective actions to comply with environmental laws at its properties. Investigatory and remedial actions were, and regularly are, undertaken with respect to releases of hazardous substances. The Company had a reserve for environmental matters of $599 and $750, at December 31, 2013 and 2012, respectively. Accruals are periodically evaluated and updated as information regarding the nature of the clean up work is obtained. In light of the Company’s business and the quantity of petroleum products that it handles, there can be no assurance that currently unidentified hazardous substance contamination does not exist or that liability will not be imposed in the future in materially different amounts than those the Company has recorded. See Note (2) for a discussion of its accounting policies relating to environmental matters.
In May 2010, the California Attorney General commenced litigation on behalf of the California State Water Resources Control Board, or the State Water Board, against various defendants, including the Company, TA and Tejon in the Superior Court of California for Alameda County seeking unspecified civil penalties and injunctive relief for alleged violations of underground storage tank laws and regulations at various facilities in Kern and Merced Counties, which alleged violations do not include release of contamination into the environment. On July 26, 2010, the California Attorney General voluntarily dismissed this litigation against the Company and the other named defendants, and on September 2, 2010, refiled its complaint against the same defendants in the Superior Court of California for Merced County, or the Superior Court, seeking unspecified civil penalties and injunctive relief. The defendants denied the material allegations in the complaint and asserted various affirmative defenses. In February 2014, the parties reached an agreement to settle these claims for a cash payment of $1,800, suspended penalties of $1,000 that may become payable by the defendants in the future if, prior to March 2019, they fail to comply with specified underground storage tank laws and regulations; and the defendants’ agreement to invest prior to March 2018, up to $2,000 of verified costs that are directly related to the development and implementation of a comprehensive California Enhanced Environmental Compliance Program for the underground storage tank systems at all of the defendants’ California facilities which is above and beyond minimum requirements of California law and regulations related to underground storage tank systems. PTP is responsible for its pro rata share of the expenses incurred related to this settlement agreement, and as of December 31, 2013, had a liability of $599 related to this matter. To the extent that the defendants do not incur the full $2,000 of eligible environmental compliance costs by March 2018, the difference between the amount incurred and $2,000 will be payable to the State Water Board. The parties submitted to the Superior Court for approval a form of Proposed Final Consent Judgment and Permanent Injunction, which also included injunctive relief provisions requiring compliance with certain California environmental laws and regulations applicable to underground storage tank systems and the Superior Court approved the related Proposed Final Consent Judgment and Permanent Injunction on February 20, 2014. The expense related to this matter was recognized in prior years. The Company believes that the probability of triggering any portion of the $1,000 of suspended penalties is remote and have not recognized a loss or a liability for that amount, but it is possible that such events will occur and some portion or all of the $1,000 my become payable and would be charged to expense at the time of that future event.
In addition to the legal proceeding referenced above, the Company is involved from time to time in various other legal and administrative proceedings, including tax audits, and threatened legal and administrative proceedings incidental to the ordinary course of business, none of which is expected, individually or in the aggregate, to have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.