Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR

 

o                    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-33274

 

TRAVELCENTERS OF AMERICA LLC

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-5701514

(State or Other Jurisdiction of Incorporation or

 

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

Organization)

 

 

 

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

(Address of Principal Executive Offices)

 

(440) 808-9100

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

 

Indicate by check mark whether the registrant 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 x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See 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 x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Number of Common Shares outstanding at August 2, 2012: 28,809,871 common shares.

 

 

 



Table of Contents

 

TRAVELCENTERS OF AMERICA LLC

 

FORM 10-Q

 

June 30, 2012

 

INDEX

 

 

 

Page

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2012 and December 31, 2011

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the three months ended June 30, 2012 and 2011

2

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the six months ended June 30, 2012 and 2011

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2012 and 2011

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

5

 

 

 

Item 2.

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

14

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 6.

Exhibits

28

 

 

 

 

Warning Concerning Forward Looking Statements

29

 

 

 

SIGNATURE

33

 

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

 



Table of Contents

 

Part I.  Financial Information

 

Item 1.  Financial Statements

 

TravelCenters of America LLC

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

129,386

 

$

118,255

 

Accounts receivable (less allowance for doubtful accounts of $1,514 as of June 30, 2012, and $1,679 as of December 31, 2011)

 

155,018

 

130,672

 

Inventories

 

165,290

 

168,267

 

Other current assets

 

62,579

 

67,056

 

Total current assets

 

512,273

 

484,250

 

 

 

 

 

 

 

Property and equipment, net

 

523,713

 

479,943

 

Intangible assets, net

 

20,185

 

21,957

 

Other noncurrent assets

 

29,440

 

30,381

 

Total assets

 

$

1,085,611

 

$

1,016,531

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

178,276

 

$

149,051

 

Current HPT Leases liabilities

 

26,027

 

25,073

 

Other current liabilities

 

140,528

 

113,624

 

Total current liabilities

 

344,831

 

287,748

 

 

 

 

 

 

 

Noncurrent HPT Leases liabilities

 

358,145

 

364,369

 

Other noncurrent liabilities

 

47,280

 

45,813

 

Total liabilities

 

750,256

 

697,930

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, no par value, 31,684 shares authorized at June 30, 2012, and December 31, 2011, and 28,810 and 28,776 shares issued and outstanding at June 30, 2012, and December 31, 2011, respectively

 

603,731

 

602,636

 

Accumulated other comprehensive income

 

1,126

 

1,134

 

Accumulated deficit

 

(269,502

)

(285,169

)

Total shareholders’ equity

 

335,355

 

318,601

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,085,611

 

$

1,016,531

 

 

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

 

1



Table of Contents

 

TravelCenters of America LLC

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Fuel

 

$

1,689,007

 

$

1,762,020

 

Nonfuel

 

348,743

 

329,508

 

Rent and royalties

 

3,757

 

3,429

 

Total revenues

 

2,041,507

 

2,094,957

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

Fuel

 

1,592,870

 

1,676,236

 

Nonfuel

 

154,414

 

142,345

 

Total cost of goods sold (excluding depreciation)

 

1,747,284

 

1,818,581

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Site level operating

 

176,088

 

171,183

 

Selling, general & administrative

 

24,366

 

22,206

 

Real estate rent

 

49,364

 

47,827

 

Depreciation and amortization

 

12,388

 

11,007

 

Total operating expenses

 

262,206

 

252,223

 

 

 

 

 

 

 

Income from operations

 

32,017

 

24,153

 

 

 

 

 

 

 

Income from equity investees

 

662

 

396

 

Acquisition costs

 

(316

)

(446

)

Interest income

 

360

 

172

 

Interest expense

 

(2,482

)

(2,216

)

Income before income taxes

 

30,241

 

22,059

 

Provision for income taxes

 

389

 

231

 

Net income

 

$

29,852

 

$

21,828

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustment, net of taxes of $(50) and $13, respectively

 

(127

)

35

 

Other

 

(3

)

39

 

Comprehensive income

 

$

29,722

 

$

21,902

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic and diluted

 

$

1.04

 

$

1.00

 

 

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

 

2



Table of Contents

 

TravelCenters of America LLC

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(in thousands, except per share data)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Fuel

 

$

3,372,200

 

$

3,255,306

 

Nonfuel

 

656,897

 

614,886

 

Rent and royalties

 

7,279

 

6,879

 

Total revenues

 

4,036,376

 

3,877,071

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

Fuel

 

3,207,617

 

3,108,644

 

Nonfuel

 

291,184

 

262,568

 

Total cost of goods sold (excluding depreciation)

 

3,498,801

 

3,371,212

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Site level operating

 

346,225

 

334,761

 

Selling, general & administrative

 

47,533

 

43,408

 

Real estate rent

 

98,879

 

95,137

 

Depreciation and amortization

 

24,230

 

22,629

 

Total operating expenses

 

516,867

 

495,935

 

 

 

 

 

 

 

Income from operations

 

20,708

 

9,924

 

 

 

 

 

 

 

Income from equity investees

 

462

 

217

 

Acquisition costs

 

(458

)

(446

)

Interest income

 

582

 

336

 

Interest expense

 

(4,994

)

(4,324

)

Income before income taxes

 

16,300

 

5,707

 

Provision for income taxes

 

633

 

451

 

Net income

 

$

15,667

 

$

5,256

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustment, net of taxes of $(3) and $77, respectively

 

(4

)

211

 

Other

 

(4

)

43

 

Comprehensive income

 

$

15,659

 

$

5,510

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic and diluted

 

$

0.54

 

$

0.26

 

 

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

 

3



Table of Contents

 

TravelCenters of America LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

15,667

 

$

5,256

 

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

 

 

 

 

 

Noncash rent expense adjustments

 

(4,772

)

(2,552

)

Share based compensation expense

 

1,095

 

1,152

 

Depreciation and amortization expense

 

24,230

 

22,629

 

Income from equity investees

 

(462

)

(217

)

Distribution from equity investee

 

2,000

 

 

Amortization of deferred financing costs

 

175

 

142

 

Deferred income tax provision

 

208

 

104

 

Provision for doubtful accounts

 

14

 

217

 

Changes in assets and liabilities, net of effects of acquired businesses:

 

 

 

 

 

Accounts receivable

 

(24,364

)

(83,084

)

Inventories

 

4,217

 

(7,336

)

Other current assets

 

4,160

 

(9,784

)

Accounts payable and other current liabilities

 

57,965

 

67,267

 

Other, net

 

167

 

(726

)

Net cash provided by (used in) operating activities

 

80,300

 

(6,932

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sales of improvements to HPT

 

18,065

 

35,863

 

Acquisitions of businesses, net of cash acquired

 

(17,830

)

(31,216

)

Capital expenditures

 

(68,392

)

(38,516

)

Proceeds from asset sales

 

111

 

80

 

Net cash used in investing activities

 

(68,046

)

(33,789

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common shares, net

 

 

53,135

 

Proceeds from borrowings on revolving credit facility

 

 

(1,000

)

Repayment of borrowings on revolving credit facility

 

 

1,000

 

Payment of deferred financing fees

 

(22

)

 

Sale/leaseback financing obligation payments

 

(1,098

)

(1,023

)

Net cash provided by (used in) financing activities

 

(1,120

)

52,112

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(3

)

24

 

 

 

 

 

 

 

Net increase in cash

 

11,131

 

11,415

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

118,255

 

125,396

 

Cash and cash equivalents at the end of the period

 

$

129,386

 

$

136,811

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Interest paid (including rent classified as interest)

 

$

4,781

 

$

4,727

 

Income taxes paid (net of refunds)

 

950

 

609

 

 

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

 

4



Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars and shares in thousands, except 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,” “Petro Stopping Centers” and “Petro” brands primarily along the U.S. interstate highway system.  Our customers include long haul trucking fleets and their drivers, independent truck drivers and motorists.

 

Our travel centers typically include over 20 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 and convenience stores and other driver amenities.  We also collect rents and franchise royalties from our franchisees.

 

At June 30, 2012, our business included 240 travel centers in 41 states and in Canada, 170 of which were operated under the “Travel Centers of America” or “TA” brand names and 70 of which were operated under the “Petro Stopping Centers” or “Petro” brand name.  Of these 240 travel centers, we operated 198, which we refer to as Company operated sites, and our franchisees operated 42. Of the 240 travel centers comprising our business at June 30, 2012, we owned 19 of the travel centers and we leased 145 of our TA branded sites and 40 of our Petro branded sites under leases with subsidiaries of Hospitality Properties Trust, or HPT, which we refer to as the TA Lease and Petro Lease, respectively, and which we refer to collectively as the HPT Leases.  We sublease to franchisees 10 of the travel centers we lease under the TA Lease.  In addition, we operate four other travel centers pursuant to lease or management agreements with parties other than HPT, including two sites owned by a joint venture in which we have a minority investment.  See Note 5 for a further description of the HPT Leases and our joint venture investment.

 

The financial information for the three and six months ended June 30, 2011, included in the accompanying financial statements and notes thereto were revised from the amounts previously reported for those periods.  Specifically, depreciation and amortization expense was decreased by $87 and $180, respectively, and interest expense was decreased by $74 and $148, respectively.  These revisions increased our net income for the three and six months ended June 30, 2011, by $161 and $328, or $0.01 and $0.02 per share, respectively.  We have determined that the effects of these revisions were not material.  For more information about these revisions, see the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011, or our Annual Report.

 

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

 

Recently Issued Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASC Topic No. 220, Comprehensive Income , which amended its guidance on the presentation of comprehensive income in financial statements with a stated intention of improving the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a single statement that presents net income and comprehensive income, or (2) a separate statement of comprehensive income immediately following the income statement. Companies are no longer allowed to present comprehensive income on the statement of changes in shareholders’ equity. In both options, companies must present the components of net income, total net income, the components of other comprehensive income, total other comprehensive income and total comprehensive income. In addition, in December 2011, the FASB issued an amendment to the standard that deferred the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The provisions of both pieces of new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and requires retrospective application for all periods presented. Our adoption of this new standard, which was effective January 1, 2012, affected our presentation of comprehensive income but did not otherwise affect our financial position or results of operations.

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars and shares in thousands, except per share amounts )

 

2.                                       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.   In May 2011, we issued 10,000 shares in a public offering.  The following table presents a reconciliation from net income to the net income available to common shareholders and the related earnings per share.

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

29,852

 

$

21,828

 

$

15,667

 

$

5,256

 

Less: net income attributable to participating securities

 

1,715

 

1,400

 

901

 

369

 

Net income available to common shareholders

 

$

28,137

 

$

20,428

 

$

14,766

 

$

4,887

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares (1)

 

27,141

 

20,480

 

27,130

 

18,557

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per share

 

$

1.04

 

$

1.00

 

$

0.54

 

$

0.26

 

 


(1)              Excludes the unvested shares granted under our share award plan.  The number of unvested participating shares as of the three and six months ended June 30, 2012 and 2011, was 1,655 and 1,403, respectively.

 

3.                                       Inventories

 

Inventories consisted of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Nonfuel merchandise

 

$

129,596

 

$

128,341

 

Petroleum products

 

35,694

 

39,926

 

Total inventories

 

$

165,290

 

$

168,267

 

 

4.                                    Acquisitions

 

In March 2012, we acquired a travel center in Georgia for $5,601 and we accounted for this transaction as a business combination.  We operate this travel center as a Petro Stopping Center.

 

In April 2012, we acquired a travel center in Pennsylvania for $7,541 and we accounted for this transaction as a business combination.  This travel center was formerly operated by a franchisee as a Petro Stopping Center and we now operate this travel center for our own account as a Petro Stopping Center.

 

In June 2012, we acquired two travel centers in Michigan.  We purchased these properties for an aggregate amount of $4,769 and we accounted for this transaction as a business combination.  We operate these travel centers as TravelCenters of America sites.

 

We have included the results of these acquired sites in our condensed consolidated financial statements from their respective dates of acquisition.  The pro forma impact of including the results of operations of the acquired business from the beginning of the period is not material to our condensed consolidated results of operations.  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.

 

6



Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars and shares in thousands, except per share amounts )

 

Cash

 

$

81

 

Inventories

 

1,241

 

Other current assets

 

19

 

Property and equipment

 

16,572

 

Other noncurrent assets

 

45

 

Other current liabilities

 

(47

)

Total purchase price

 

$

17,911

 

 

In July 2012, we acquired four travel centers in Indiana (three of which had been operated as Petro Stopping Centers by a franchisee) and a travel center in New Mexico for an aggregate amount of $22,133, net of cash acquired.  We expect to account for these transactions as business combinations.

 

During the three and six months ended June 30, 2012, we incurred and charged to expense $316 and $458, respectively, of acquisition costs related to our business combination transactions.  During the three and six months ended June 30, 2011, we incurred and charged to expense $446 of acquisition costs.

 

5.                                       Related Party Transactions

 

Relationship with HPT

 

HPT is our former parent company, our principal landlord and our largest shareholder.  We were created as a separate public company in 2007 as a result of our spin off from HPT.  As of June 30, 2012, HPT owned 2,540 of our common shares, representing approximately 8.8% 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 trustee of HPT, and his son-in-law 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.  In addition, one of our Independent Directors, Mr. Arthur Koumantzelis, was a trustee of HPT at the time we were created.  Mr. Koumantzelis resigned and ceased to be a trustee of HPT shortly before he joined our Board of Directors in 2007.

 

We have two leases with HPT, the TA Lease and the Petro Lease, pursuant to which we currently lease 185 travel centers from HPT.  Our TA Lease is for 145 travel centers that we operate under the “TravelCenters of America” or “TA” brand names.  Our Petro Lease is for 40 travel centers that we operate under the “Petro” brand name.  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.  The HPT Leases are “triple net” leases, which require us to pay all costs incurred in the operation of the leased travel centers, including personnel, utilities, acquiring inventories, services to customers, insurance, real estate and personal property taxes, environmental related expenses and ground lease payments, if any.  We also are required to generally indemnify HPT for certain environmental matters and for liabilities that arise from ownership or operation of the leased travel centers.

 

Effective February 1, 2012, the annual rent amount payable under the TA Lease increased by $5,000 pursuant to the final fixed rent increase included in the HPT Leases.  Effective January 2012, we began to accrue percentage rent payable to HPT under the TA Lease, which is based on the excess of our fuel and nonfuel revenues over the 2011 period.  The percentage rent is paid to HPT quarterly in arrears.  The total amount of this percentage rent recognized as expense during the three and six months ended June 30, 2012 was $326 and $1,055, respectively.

 

Under the HPT Leases, we may request that HPT purchase approved amounts for renovations, improvements and equipment at the leased travel centers, in return for annual rent increases according to the following formula: the 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 the six months ended June 30, 2012, pursuant to the terms of the HPT Leases, we sold to HPT $18,065 of improvements we previously made to properties leased from HPT, and as a result, our annual rent payable to HPT increased by approximately $1,535.  As of June 30, 2012, our property and equipment balance included $13,236 for similar improvements we have made to HPT owned sites that we expect to request that HPT purchase from us for an increase in future rent; however, HPT is not obligated to fund such amounts.

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars and shares in thousands, except per share amounts )

 

The following table summarizes the various amounts related to our HPT Leases that are reflected in our operating results and a reconciliation of those amounts to our consolidated financial statements:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Cash payments for rent for HPT Leases (1)

 

$

51,713

 

$

48,966

 

$

103,314

 

$

97,465

 

Accrued estimated percentage rent not yet paid

 

208

 

 

208

 

 

Required straight line rent adjustments

 

(1,013

)

421

 

(1,551

)

2,236

 

Less interest paid on deferred rent obligation

 

 

 

 

(1,450

)

Less sale/leaseback financing obligation amortization

 

(549

)

(438

)

(1,098

)

(1,023

)

Less portion of rent payments recognized as interest expense

 

(1,810

)

(1,921

)

(3,620

)

(3,694

)

Less deferred tenant improvements allowance amortization

 

(1,692

)

(1,692

)

(3,384

)

(3,384

)

Rent expense related to HPT Leases

 

46,857

 

45,336

 

93,869

 

90,150

 

Rent paid to others (2)

 

2,453

 

2,448

 

4,847

 

4,892

 

Straight line rent adjustments for other leases

 

54

 

43

 

163

 

95

 

Total real estate rent expense

 

$

49,364

 

$

47,827

 

$

98,879

 

$

95,137

 

 


(1)   Includes the final payment for interest on TA’s deferred rent obligation made in January 2011.

 

(2)   Includes rent paid directly to HPT’s landlords under leases for properties we sublease from HPT.

 

The following table summarizes the various amounts related to our HPT Leases that are included in our balance sheets.

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Current HPT Leases liabilities:

 

 

 

 

 

Accrued rent

 

$

16,984

 

$

16,109

 

Current portion of sale/leaseback financing obligation (1)

 

2,274

 

2,195

 

Total current HPT Leases obligations

 

19,258

 

18,304

 

Current portion of deferred tenant improvements allowance (2)

 

6,769

 

6,769

 

Total Current HPT Leases liabilities

 

$

26,027

 

$

25,073

 

 

 

 

 

 

 

Noncurrent HPT Leases liabilities:

 

 

 

 

 

Deferred rent obligation (3)

 

$

150,000

 

$

150,000

 

Sale/leaseback financing obligation (1)

 

96,588

 

97,765

 

Straight line rent accrual (4)

 

47,257

 

48,920

 

Total noncurrent HPT Lease obligations

 

293,845

 

296,685

 

Deferred tenant improvements allowance (2)

 

64,300

 

67,684

 

Total Noncurrent HPT Lease liabilities

 

$

358,145

 

$

364,369

 

 


(1)                                      Sale/leaseback Financing Obligation.   GAAP governing the transactions related to our entering the TA Lease required us to recognize in our consolidated balance sheet the leased assets at thirteen of the travel centers previously owned by our predecessor that we now lease from HPT because we sublease more than a minor portion of those travel centers to third parties, and one travel center did not qualify for operating lease treatment for other reasons.  Accordingly, we recorded the leased assets at these travel centers at an amount equal to HPT’s recorded initial carrying amounts, which were equal to their fair values, and recognized an equal amount of liability that is presented as sale/leaseback financing obligation in our consolidated balance sheet.  We recognize a portion of the total rent payments to HPT related to these assets as amortization of the sale/leaseback financing obligation and a portion as interest expense in our consolidated statements of operations.  We determined the allocation of these rent payments to the liability and to interest expense using the effective interest method. The amounts allocated to interest expense were $1,810 and $1,921, respectively, for the three months ended June 30, 2012 and 2011 and $3,620 and $3,694, respectively, during the six months ended June 30, 2012 and 2011.

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars and shares in thousands, except per share amounts )

 

(2)                                      Deferred Tenant Improvements Allowance.   Under the TA Lease, HPT provided us with a commitment to fund up to $125,000 of capital projects at the leased sites, without an increase in rent payable by us, which amount HPT had fully funded by September 30, 2010, net of discounting to reflect our accelerated receipt of those funds.  In connection with this commitment, we recognized a liability for the deferred rent related to this tenant improvements allowance.  This deferred tenant improvements allowance was initially recorded at an amount equal to the leasehold improvements receivable we recognized for the discounted value of the then expected future amounts to be received from HPT, based upon our then expected timing of receipt of those tenant improvements funding payments.  We amortize the deferred tenant improvements allowance on a straight line basis over the term of the TA Lease as a reduction of rent expense.

 

(3)                                      Deferred Rent Obligation.   Pursuant to our rent deferral agreement with HPT, through December 31, 2010, we deferred a total of $150,000 of rent payable to HPT.  The deferred rent obligation is payable in two installments, $107,085 in December 2022 and $42,915 in June 2024.  This obligation does not bear interest, unless certain events of default or other events occur, including a change of control of us.

 

(4)                                      Straight Line Rent Accrual.   The TA Lease included scheduled rent increases over the lease term, as do certain of the leases for properties we sublease from HPT but pay the rent directly to HPT’s landlords.  We recognize the effects of those scheduled rent increases in rent expense over the lease terms on a straight line basis, with offsetting entries to this accrual balance.

 

Relationship with RMR

 

Reit Management & Research LLC, or RMR, provides business management and shared services to us pursuant to a business management and shared services agreement, or our business management agreement.  RMR also provides building management services to us for our headquarters building pursuant to a property management agreement.  Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, including HPT.  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 director of RMR.  Our other Managing Director, Mr. Thomas O’Brien, who is also our President and Chief Executive Officer, is also an Executive Vice President of RMR.  Mr. Andrew Rebholz, our Executive Vice President, Chief Financial Officer and Treasurer, and Mr. Mark Young, our Executive Vice President and General Counsel, are each a Senior Vice President of RMR.  HPT’s executive officers are officers of RMR.  Our Independent Directors also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Mr. Barry Portnoy serves as a managing director or managing trustee of those companies and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies.

 

Pursuant to our business management agreement with RMR, we incurred expenses of $2,732 and $2,548 for the three months ended June 30, 2012 and 2011, respectively, and $5,054 and $4,682 for the six months ended June 30, 2012 and 2011, respectively.  In connection with our property management agreement with RMR, we incurred property management fees of $30 and $60 for the three and six months ended June 30, 2012, respectively.  These amounts are included in selling, general and administrative expenses in our condensed consolidated financial statements.

 

Relationship with AIC

 

We, RMR, HPT and five other companies to which RMR provides management services each currently own 12.5% of Affiliates Insurance Company, or AIC, an Indiana insurance company.  One of those five other companies became a shareholder of AIC during the quarter ended June 30, 2012.  All of our Directors and nearly all 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.  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 all of our Directors are also directors of AIC.  Our investment in AIC had a carrying value of $5,408 and $5,291 as of June 30, 2012, and December 31, 2011, respectively.   We recognized income of $76 and $48 for the three months ended June 30, 2012 and 2011, respectively, and $121 and $83 for the six months ended June 30, 2012 and 2011, respectively, related to this investment.  We and the other shareholders of AIC have purchased property insurance 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.  This program was modified and extended in June 2012 for a one year term and we paid a premium, including taxes and fees, of $3,183 in connection with that renewal, which amount may be adjusted from time to time in response to our acquisition and disposition of properties that are included in that program.  We are also currently investigating the possibilities to expand our insurance relationships with AIC to include other types of

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars and shares in thousands, except per share amounts )

 

insurance.  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 possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.

 

Relationship with PTP

 

We own a 40% interest in Petro Travel Plaza Holdings LLC, or PTP, and operate the two travel centers that PTP owns for which we receive management and accounting fees.  The carrying value of our investment in PTP as of June 30, 2012 and December 31, 2011, was $16,912 and $18,571, respectively.  During the three and six months ended June 30, 2012 and 2011, we recognized management and accounting fee income of $200 and $400, respectively.  At June 30, 2012 and December 31, 2011, we had a net payable to PTP of $1,115 and $559, respectively.  During the three and six months ended June 30, 2012 and 2011, we recognized income of $586 and $341, respectively, and $348 and $134, respectively, related to this investment.  In June 2012, we received a $2,000 distribution from PTP that represented a return on our investment.  Accordingly, this distribution is included in cash provided by operating activities in the accompanying statement of cash flows.

 

For further information about these and other such relationships and related person transactions, please see elsewhere in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Party Transactions” in Part I, Item 2 and “Warning Concerning Forward Looking Statements,” and our Annual Report, our Proxy Statement for our 2012 Annual Meeting of Shareholders dated March 16, 2012, or our Proxy Statement, and our other filings with the SEC, including Note 18 to our Consolidated Financial Statements included in our Annual Report, the sections captioned “Warning Concerning Forward Looking Statements,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Party Transactions” of our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Directors and executive officers in our Proxy Statement.  In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise from these transactions and relationships.  Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov.  In addition, copies of certain of our agreements with these related parties, including our leases, deferral agreement 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 also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

 

6.                                       Commitments and Contingencies

 

Commitments

 

As of June 30, 2012, we had entered agreements to acquire four travel centers for an aggregate amount of $14,100 (plus the cost of saleable inventories).  We completed the purchase of these travel centers during July 2012.

 

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 service 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 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 and waste at our travel centers.  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.  Under the terms of our leases, we generally have agreed to indemnify HPT for any environmental liabilities

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars and shares in thousands, except per share amounts )

 

related to travel centers that we lease from HPT and we are required to pay all environmental related expenses incurred in the operation of the travel centers.

 

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 travel centers.  Investigatory and remedial actions were, and regularly are, undertaken with respect to releases of hazardous substances at our travel centers.  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 travel centers 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 June 30, 2012, we had a gross accrued liability of $11,130 for environmental matters as well as a receivable for expected recoveries of certain of these estimated future expenditures of $3,844, resulting in an estimated net amount of $7,286 that we expect to need to fund from future cash flows.  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 do not 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 travel centers, individually or in the aggregate, would be material to our financial condition or results of operations.

 

We have insurance of up to $35,000 for certain environmental liabilities at certain of our travel centers that were known at the time the policies were issued, and up to $60,000 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.

 

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 problems, 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 may be adopted or administered and enforced differently in the future, which could 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, could negatively impact our business.  Further, legislation and regulations that limit carbon emissions also may cause our energy costs at our travel centers to increase.

 

Legal Proceedings

 

In July 2008, Riverside County in the State of California filed litigation against us in the Superior Court of California for Riverside County, seeking civil penalties and injunctive relief for alleged past violations of various state laws and regulations relating to management of underground storage tanks.  In April 2009, the California Attorney General intervened in that case.  In December 2010, the Attorney General and the Riverside County District Attorney filed a consolidated complaint in the Superior Court of California for Riverside County in which they combined the allegations of their previous separate complaints into a single complaint, seeking unspecified civil penalties and injunctive relief, and added as an additional defendant HPT TA Properties Trust, which is a subsidiary of HPT and a landlord under the TA Lease.  Under the TA Lease, we are liable to indemnify HPT TA Properties Trust for any liabilities, costs and expenses it incurs in connection with this litigation.  In October 2011, the parties reached an agreement to settle these claims for $1,200, with a credit to us in the amount of $250 for certain improvements that we have made to our Riverside County facility.  We paid the cash portion of the settlement of $950 in April 2012.  The terms of the settlement include injunctive relief provisions requiring that TA comply with certain California environmental laws applicable to underground storage tank systems and the management of hazardous substances.

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars and shares in thousands, except per share amounts )

 

In February 2012, Riverside County in the State of California performed its annual inspection of the underground storage tank systems at one of our sites and subsequently asserted that we were in violation of state laws and regulations governing the operation of those systems.  We are in the process of reviewing the merits of these new claims and we have demanded indemnification from third parties who we believe may be responsible for these alleged violations.

 

In May 2010, the California Attorney General filed a litigation on behalf of the California State Water Resources Control Board, or SWRCB, against various defendants, including us, HPT TA Properties Trust, PTP and Tejon Development Corporation, or 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.  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, seeking unspecified civil penalties and injunctive relief.  The parties are presently engaged in discovery and the court has not yet set a date for a trial.  We disagree with the Attorney General’s allegations, and we intend to defend this lawsuit if a settlement is not reached.  Under the TA Lease and our expired lease agreement with Tejon for a site that has since been closed, we are liable to indemnify HPT TA Properties Trust and Tejon for any liabilities, costs and expenses they incur in connection with this litigation.

 

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 allege that they are retail purchasers who purchased motor fuel at temperatures greater than 60 degrees Fahrenheit at the time of sale.  One theory alleges that the plaintiffs purchased smaller 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 alleges that fuel taxes are calculated in temperature adjusted 60 degree gallons and are collected by governmental agencies from 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.  We believe that there are substantial factual and legal defenses to the theories alleged in these so called “hot fuel” lawsuits.  The “temperature” cases seek nonmonetary relief in the form of an order requiring the defendants to install devices that display the temperature of the fuel and/or temperature correcting equipment on their retail fuel pumps and monetary relief in the form of damages, but the plaintiffs have not quantified the damages they seek.  The “tax” cases also seek monetary relief.  Plaintiffs have proposed a formula (which we dispute) to measure these damages as the difference between the amount of fuel excise taxes paid by defendants and the amount collected by defendants on motor fuel sales.  Plaintiffs have taken the position in filings with the Court that under this approach, our damages for an eight-year period for one state would be approximately $10,700.  We deny liability and disagree with the plaintiffs’ positions.  All of these cases have been 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.  Several defendants in the Kansas cases, including major petroleum refiners, have entered into multi-state settlements, which have not yet been approved by the Court.  A trial against the remaining defendants in the Kansas cases is scheduled for August 27, 2012.  The U.S. District Court for the District of Kansas has not issued a decision on class certification with respect to the remaining cases that have been consolidated in the multi-district litigation.  Because various motions are pending, we cannot estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.  However, the continued cost of litigating these cases could be significant.

 

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 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

 

12



Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars and shares in thousands, except per share amounts )

 

complaint on April 30, 2012.  A trial schedule for the matter has not otherwise been set.  We believe that there are substantial factual and legal defenses to the plaintiffs’ claims against us, but that the costs to defend this case could be significant.

 

In addition to the legal proceedings referenced above, we are involved from time to time 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.

 

7.                                       Income Taxes

 

Because we do not have sufficient history of generating taxable income we do not currently recognize in our income tax provision the future benefit of all of our deferred tax assets, including the tax benefit associated with our loss carry forwards from prior years.  We will continue to assess our ability to generate taxable income during future periods in which our deferred tax assets may be realized.  If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our consolidated statement of operations, which will affect our results of operations.  As a result of certain trading in our shares during 2007, our 2007 federal net operating loss of $50,346 and other tax credit carry forwards are generally not available to us for the purpose of offsetting future taxable income because of certain Internal Revenue Code provisions regarding changes in ownership of our common shares.  As of December 31, 2011, we had an unrestricted available federal net operating loss carry forward of approximately $146,268.  Our federal, and the majority of our state, net operating loss carry forwards will begin to expire in 2027.  Certain of our other state net operating loss carry forwards will begin to expire in 2012.  In addition, certain states have temporarily suspended the use of net operating loss carry forwards.

 

For the three months ended June 30, 2012 and 2011, we recognized tax expense of $389 and $231, respectively, which included tax expense of $232 and $179, respectively, for state taxes on operating income that are payable without regard to our tax loss carry forwards.  Tax expense also included $52 in each quarter related to a noncash deferred liability arising from the amortization of indefinite lived intangible assets for tax purposes but not for GAAP purposes.  For the three months ended June 30, 2012, tax expense also includes $105 related to a noncash deferred liability arising from foreign currency translation adjustments which are unavailable to offset our deferred tax assets.

 

For the six months ended June 30, 2012 and 2011, we recognized tax expense of $633 and $451, respectively, which included tax expense of $424 and $347, respectively, for state taxes on operating income that are payable without regard to our tax loss carry forwards.  Tax expense also included $104 during each of the six month periods related to a noncash deferred liability arising from the amortization of indefinite lived intangible assets for tax purposes but not for GAAP purposes.  For the six months ended June 30, 2012, tax expense also includes $105 related to a noncash deferred liability arising from foreign currency translation adjustments which are unavailable to offset our deferred tax assets.

 

8.                                          Other Information

 

Interest expense consisted of the following:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

HPT rent classified as interest

 

$

1,810

 

$

1,921

 

$

3,620

 

$

3,694

 

Amortization of deferred financing costs

 

88

 

71

 

175

 

142

 

Other

 

584

 

224

 

1,199

 

488

 

Interest expense

 

$

2,482

 

$

2,216

 

$

4,994

 

$

4,324

 

 

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Table of Contents

 

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

 

Overview (dollars in thousands)

 

The following discussion should be read in conjunction with the financial statements included elsewhere in this Quarterly Report on Form 10-Q, or this Quarterly Report, and in our Annual Report.

 

Our revenues and income are subject to potentially material changes as a result of the market prices of fuel, as well as the availability of these products.  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.  During 2011, fuel prices generally rose during the first quarter of 2011 due in part to the political unrest in Northern Africa and the Middle East.  Fuel prices began to decline during the second quarter of 2011, and during the second half of 2011 fuel prices generally continued to decline due to, among other reasons, concerns the U.S. and global economies were sliding into a recession.  During the first half of 2012, prices have generally continued to decrease due to continued global economic concerns, including economic conditions in Europe, and at June 30, 2012, fuel prices were below the price level of June 30, 2011.  We expect that significant 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, fuel gross margins per gallon tend to be lower during periods of rising fuel commodity prices and higher during periods of falling fuel commodity prices.  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.

 

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.  The slow improvement of the U.S. economy generally, and the improving financial condition and increased activity of the trucking industry in the U.S. specifically, impacted our financial results during the first half of 2012.  However, the improved fuel efficiency of heavy truck engines and other fuel conservation practices of trucking companies have somewhat reduced the demand for diesel fuel that might otherwise exist for a given level of U.S. economic activity.  Reflecting these and other factors, our nonfuel revenues in the first half of 2012 increased on a same site basis over the prior year, but our 2012 fuel sales volumes on a same site basis were largely unchanged compared to the prior year and the level of fuel sales volume continues to be well below that experienced before the U.S. economic recession which began in late 2007 or 2008.  While the U.S. economy has been slowly growing over the past several quarters and trucking activity measures reflect continued growth in that industry, the strength and sustainability of any economic recovery remains uncertain.  If the U.S. economy worsens, our financial results may not improve and may decline, resulting in losses from operations.

 

There can be no assurance that industry conditions will not deteriorate or that any one or more of the risks identified under the section “Risk Factors,” “Warning Concerning Forward Looking Statements” or elsewhere in our Annual Report, under “Warning Concerning Forward Looking Statements” or elsewhere in this Quarterly 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.

 

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Table of Contents

 

Number of Travel Center Sites

 

The following table summarizes the changes in the number of travel center sites (company operated and franchisee operated) from December 31, 2010 through June 30, 2012:

 

 

 

 

 

 

 

Franchisee

 

 

 

 

 

 

 

 

 

Owned

 

 

 

 

 

Company

 

Franchisee

 

and

 

 

 

 

 

Operated

 

Operated

 

Operated

 

Total

 

Number of travel centers at December 31, 2010

 

188

 

10

 

30

 

228

 

 

 

 

 

 

 

 

 

 

 

January - June 2011 Activity:

 

 

 

 

 

 

 

 

 

Acquired travel centers

 

6

 

 

(1

)

5

 

Opened franchised travel center

 

 

 

1

 

1

 

Number of travel centers at June 30, 2011

 

194

 

10

 

30

 

234

 

 

 

 

 

 

 

 

 

 

 

July - December 2011 Activity:

 

 

 

 

 

 

 

 

 

New franchised travel centers

 

 

 

3

 

3

 

Number of travel centers at December 31, 2011

 

194

 

10

 

33

 

237

 

 

 

 

 

 

 

 

 

 

 

January — June 2012 Activity:

 

 

 

 

 

 

 

 

 

Acquired travel centers

 

4

 

 

(1

)

3

 

Number of travel centers at June 30, 2012

 

198

 

10

 

32

 

240

 

 

During July 2012 we acquired five travel centers that we now operate, three of which had been owned and operated by a franchisee under the Petro brand as of June 30, 2012.

 

Relevance of Fuel Revenues

 

Due to volatile pricing of fuel products and our pricing to fuel customers, we believe that fuel revenue is not a reliable basis 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 materially impact our working capital requirements; see “Liquidity and Capital Resources” below.

 

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Table of Contents

 

Results of Operations (dollars in thousands)

 

Three months ended June 30, 2012 compared to June 30, 2011

 

The following table presents changes in our operating results for the three months ended June 30, 2012, as compared with the three months ended June 30, 2011.

 

 

 

Three Months Ended
June 30,

 

$

 

%

 

(dollars in thousands)

 

2012

 

2011

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Fuel

 

$

1,689,007

 

$

1,762,020

 

$

(73,013

)

-4.1

%

Nonfuel

 

348,743

 

329,508

 

19,235

 

5.8

%

Rent and royalties

 

3,757

 

3,429

 

328

 

9.6

%

Total revenues

 

2,041,507

 

2,094,957

 

(53,450

)

-2.6

%

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

 

 

 

 

Fuel

 

1,592,870

 

1,676,236

 

(83,366

)

-5.0

%

Nonfuel

 

154,414

 

142,345

 

12,069

 

8.5

%

Total cost of goods sold (excluding depreciation)

 

1,747,284

 

1,818,581

 

(71,297

)

-3.9

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Site level operating expenses

 

176,088

 

171,183

 

4,905

 

2.9

%

Selling, general & administrative expense

 

24,366

 

22,206

 

2,160

 

9.7

%

Real estate rent

 

49,364

 

47,827

 

1,537

 

3.2

%

Depreciation and amortization expense

 

12,388

 

11,007

 

1,381

 

12.5

%

Total operating expenses

 

262,206

 

252,223

 

9,983

 

4.0

%

 

 

 

 

 

 

 

 

 

 

Income from operations

 

32,017

 

24,153

 

7,864

 

32.6

%

 

 

 

 

 

 

 

 

 

 

Income from equity investees

 

662

 

396

 

266

 

67.2

%

Acquisition costs

 

(316

)

(446

)

130

 

-29.1

%

Interest income

 

360

 

172

 

188

 

109.3

%

Interest expense

 

(2,482

)

(2,216

)

(266

)

12.0

%

Income before income taxes

 

30,241

 

22,059

 

8,182

 

37.1

%

Provision for income taxes

 

389

 

231

 

158

 

68.4

%

Net income

 

$

29,852

 

$

21,828

 

$

8,024

 

36.8

%

 

16



Table of Contents

 

Same Site Comparisons . As part of the discussion and analysis of our operating results we refer to increases and decreases in results on a same site basis.  For purposes of these comparisons, we include a travel center in the following same site comparisons only if we or a franchisee continuously operated it from April 1, 2011, through June 30, 2012.  We do not exclude travel centers from the same site comparisons as a result of expansions in their size or changes in the services offered.  The table below excludes the data of two travel centers TA operates that are owned by a joint venture.

 

(gallons and dollars in thousands,

 

Three Months Ended June 30,

 

$

 

%

 

except per gallon amounts)

 

2012

 

2011

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Number of company operated travel centers

 

186

 

186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel: (1)

 

 

 

 

 

 

 

 

 

Sales volume (gallons)

 

487,609

 

498,770

 

(11,161

)

-2.2

%

Revenues

 

$

1,561,111

 

$

1,663,110

 

$

(101,999

)

-6.1

%

Gross margin

 

$

93,349

 

$

83,921

 

$

9,428

 

11.2

%

Gross margin per gallon

 

$

0.191

 

$

0.168

 

$

0.023

 

13.7

%

 

 

 

 

 

 

 

 

 

 

Nonfuel: (1)

 

 

 

 

 

 

 

 

 

Revenues

 

$

339,981

 

$

326,832

 

$

13,149

 

4.0

%

Gross margin

 

$

189,783

 

$

185,725

 

$

4,058

 

2.2

%

Gross margin percentage

 

55.8

%

56.8

%

 

 

-100

b.p.

 

 

 

 

 

 

 

 

 

 

Total gross margin (1)  

 

$

283,132

 

$

269,646

 

$

13,486

 

5.0

%

 

 

 

 

 

 

 

 

 

 

Site level operating expenses (1)  

 

$

168,751

 

$

168,139

 

$

612

 

0.4

%

 

 

 

 

 

 

 

 

 

 

Net site level operating expenses as a percentage of nonfuel revenues

 

49.6

%

51.4

%

 

 

-180

b.p.

Net site level gross margin in excess of site level operating expenses (1)  

 

$

114,381

 

$

101,507

 

$

12,874

 

12.7

%

 

 

 

 

 

 

 

 

 

 

Number of franchisee operated travel centers

 

39

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent and royalty revenues

 

$

3,415

 

$

3,281

 

$

134

 

4.1

%

 


(1)                              Includes fuel volume, gross margin, revenues and site level operating expenses for only those travel centers that were company operated during the entirety of both of the periods presented.

 

Revenues.   Revenues for the three month period ended June 30, 2012, were $2,041,507, which represented a decrease from the quarter ended June 30, 2011, of $53,450, or 2.6%, primarily related to a decrease in fuel revenue.

 

Fuel revenues were 82.7% of total revenues for the quarter ended June 30, 2012, compared to 84.1% for the same period in 2011.  Fuel revenues for the quarter ended June 30, 2012, were $1,689,007, a decrease of $73,013, or 4.1%, compared to the same period in 2011.  This decrease was principally the result of decreases in fuel prices and also resulted from decreased fuel sales  volume, which decreases were partially offset by fuel sales at travel centers we acquired or opened since April 1, 2011.  The table below shows the changes in fuel revenues between periods that resulted from price and volume changes:

 

17



Table of Contents

 

 

 

Gallons

 

Fuel

 

(gallons and dollars in thousands)

 

Sold

 

Revenues

 

 

 

 

 

 

 

Results for three months ended June 30, 2011

 

529,570

 

$

1,762,020

 

 

 

 

 

 

 

Decrease due to petroleum products price changes

 

 

(70,910

)

Decrease due to same site volume changes

 

(11,161

)

(35,679

)

Increase due to travel centers acquired or opened

 

10,882

 

34,753

 

Other changes, net

 

(368

)

(1,177

)

Net change from prior year period

 

(647

)

(73,013

)

 

 

 

 

 

 

Results for three months ended June 30, 2012

 

528,923

 

$

1,689,007

 

 

On a same site basis, fuel sales volume for our company operated travel centers decreased by 11,161 gallons, or 2.2%, during the three months ended June 30, 2012, compared to the same period in 2011.  We believe this decrease was largely the result of capital projects during 2012 to replace fuel dispensers and install diesel exhaust fluid dispensers that required us to take certain diesel dispensers out of service during the period as well as our decisions to avoid certain lower margin sales.

 

Nonfuel revenues were 17.1% of total revenues for the quarter ended June 30, 2012, compared to 15.7% for the same period in 2011.  Nonfuel revenues for the three months ended June 30, 2012, were $348,743, an increase of $19,235, or 5.8%, compared to the same period in 2011.  The majority of the change between years related to those sites we operated continuously during both periods.  On a same site basis for our company operated sites, nonfuel revenues increased by $13,149, or 4.0%, during the three months ended June 30, 2012, compared to the same period in 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 marketing initiatives.  The increase in nonfuel revenues was also the result of sales at the travel centers we acquired or opened since the first quarter of 2011.

 

Rent and royalty revenues for the three months ended June 30, 2012, were $3,757, an increase of $328, or 9.6%, compared to the same period in 2011.  Rent and royalties increased as a result of increased nonfuel revenues at our franchisee locations and the addition of three franchisee locations since the first quarter of 2011. These increases were partially offset by our acquisition of two franchise travel centers that we now operate; these travel centers were acquired in May 2011 and April 2012, respectively.

 

Cost of goods sold (excluding depreciation). Cost of goods sold for the three months ended June 30, 2012, was $1,747,284, a decrease of $71,297, or 3.9%, compared to the same period in 2011.  Fuel cost of goods sold for the quarter ended June 30, 2012, of $1,592,870 decreased by $83,366, or 5.0%, compared to the same period in 2011.  This decrease in fuel cost of goods sold primarily resulted from the decrease in fuel prices and also from the slight decline in fuel sales volume.  The fuel gross margin per gallon of $0.191 on a same site basis for the three months ended June 30, 2012, was $0.023 per gallon higher than for the same period of 2011, primarily as a result of variations in market prices for fuel and our decisions regarding pricing.

 

Nonfuel cost of goods sold for the three months ended June 30, 2012, was $154,414, an increase of $12,069, or 8.5%, compared to the same period in 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 the three months ended June 30, 2012, was $194,329, compared to $187,163 during the same period of 2011.  Nonfuel gross margin was 55.7% and 56.8% of nonfuel revenues during the second quarters of 2012 and 2011, respectively.  The nonfuel gross margin percentage primarily decreased as a result of a change in the mix of truck service products and services sold and a delay in reflecting certain product cost increases in our retail prices.

 

Site level operating expenses.  Site level operating expenses for the three months ended June 30, 2012, were $176,088, an increase of $4,905, or 2.9%, compared to the same period in 2011.  The increase in site level operating expenses primarily was due to increased labor costs, which principally increased to support the increases in our nonfuel sales levels, including those at the travel centers we opened since the first quarter of 2011, and as a result of adjustments to reserves for certain litigation matters.

 

On a same site basis for our company operated sites, site level operating expenses increased by $612, or 0.4%, for the three months ended June 30, 2012, compared to the same period in 2011.  Site level operating expenses as a percentage of nonfuel revenues for the quarter ended June 30, 2012, were 49.6%, compared to 51.4% for the same period in 2011.  The decrease in operating expenses as a percentage of nonfuel revenues primarily was because certain of our expenses are fixed in nature, 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.

 

Selling, general and administrative expenses.   Selling, general and administrative expenses for the three months ended

 

18



Table of Contents

 

June 30, 2012, were $24,366, an increase of $2,160, or 9.7%, compared to the same period in 2011.  This increase primarily resulted from increases in legal expenses and personnel costs.

 

Real estate rent expense.   Rent expense for the three months ended June 30, 2012, was $49,364, an increase of $1,537, or 3.2%, compared to the same period in 2011.  This increase resulted from the rent related to improvements sold to HPT during 2011 and 2012 and estimated 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 the three months ended June 30, 2012, was $12,388, an increase of $1,381, or 12.5%, compared to the same period in 2011, that primarily resulted from an increase in depreciable assets due in part to the acquisitions we completed since April 1, 2012.

 

Interest expense.  Interest expense consisted of the following:

 

 

 

Three Months Ended June 30,

 

$

 

(dollars in thousands)

 

2012

 

2011

 

Change

 

 

 

 

 

 

 

 

 

HPT rent classified as interest

 

$

1,810

 

$

1,921

 

$

(111

)

Amortization of deferred financing costs

 

88

 

71

 

17

 

Other

 

584

 

224

 

360

 

Total interest expense

 

$

2,482

 

$

2,216

 

$

266

 

 

Income tax provision .  Our provision for income taxes was $389 and $231 for the three month periods ended June 30, 2012 and 2011, respectively.  We do not currently recognize the benefit of all of our deferred tax assets, including the tax benefit associated with our tax loss carry forwards from prior years but our federal tax loss carry forwards do offset any federal tax associated with our current taxable income.  Our income tax provision represents certain minimum income based state taxes payable without regard to our applicable state tax loss carry forwards as well as the recognition of deferred tax liabilities related to the tax amortization of indefinite lived intangible assets that cannot be used to reduce existing deferred tax assets.

 

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Table of Contents

 

Six months ended June 30, 2012 compared to June 30, 2011

 

The following table presents changes in our operating results for the six months ended June 30, 2012, as compared with the six months ended June 30, 2011.

 

 

 

Six Months Ended
June 30,

 

$

 

%

 

(dollars in thousands)

 

2012

 

2011

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Fuel

 

$

3,372,200

 

$

3,255,306

 

$

116,894

 

3.6

%

Nonfuel

 

656,897

 

614,886

 

42,011

 

6.8

%

Rent and royalties

 

7,279

 

6,879

 

400

 

5.8

%

Total revenues

 

4,036,376

 

3,877,071

 

159,305

 

4.1

%

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

 

 

 

 

Fuel

 

3,207,617

 

3,108,644

 

98,973

 

3.2

%

Nonfuel

 

291,184

 

262,568

 

28,616

 

10.9

%

Total cost of goods sold (excluding depreciation)

 

3,498,801

 

3,371,212

 

127,589

 

3.8

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Site level operating expenses

 

346,225

 

334,761

 

11,464

 

3.4

%

Selling, general & administrative expense

 

47,533

 

43,408

 

4,125

 

9.5

%

Real estate rent

 

98,879

 

95,137

 

3,742

 

3.9

%

Depreciation and amortization expense

 

24,230

 

22,629

 

1,601

 

7.1

%

Total operating expenses

 

516,867

 

495,935

 

20,932

 

4.2

%

 

 

 

 

 

 

 

 

 

 

Income from operations

 

20,708

 

9,924

 

10,784

 

108.7

%

 

 

 

 

 

 

 

 

 

 

Income from equity investees

 

462

 

217

 

245

 

112.9

%

Acquisition costs

 

(458

)

(446

)

(12

)

2.7

%

Interest income

 

582

 

336

 

246

 

73.2

%

Interest expense

 

(4,994

)

(4,324

)

(670

)

15.5

%

Income before income taxes

 

16,300

 

5,707

 

10,593

 

185.6

%

Provision for income taxes

 

633

 

451

 

182

 

40.4

%

Net income

 

$

15,667

 

$

5,256

 

$

10,411

 

198.1

%

 

20



Table of Contents

 

Same Site Comparisons .  As part of the discussion and analysis of our operating results we refer to increases and decreases in results on a same site basis.  For purposes of these comparisons, we include a travel center in the following same site comparisons only if we or a franchisee continuously operated it from January 1, 2011, through June 30, 2012.  We do not exclude travel centers from the same site comparisons as a result of expansions in their size or changes in the services offered.  The table below excludes the data of two travel centers TA operates that are owned by a joint venture and one company operated site that was temporarily closed during part of the six month period ending June 30, 2011.

 

(gallons and dollars in thousands,

 

Six Months Ended June 30,

 

$

 

%

 

except per gallon amounts)

 

2012

 

2011

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Number of company operated travel centers

 

184

 

184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel: (1)

 

 

 

 

 

 

 

 

 

Sales volume (gallons)

 

956,863

 

970,123

 

(13,260

)

-1.4

%

Revenues

 

$

3,104,148

 

$

3,069,526

 

$

34,622

 

1.1

%

Gross margin

 

$

158,725

 

$

143,885

 

$

14,840

 

10.3

%

Gross margin per gallon

 

$

0.166

 

$

0.148

 

$

0.018

 

12.2

%

 

 

 

 

 

 

 

 

 

 

Nonfuel: (1)

 

 

 

 

 

 

 

 

 

Revenues

 

$

638,215

 

$

608,454

 

$

29,761

 

4.9

%

Gross margin

 

$

356,046

 

$

348,766

 

$

7,280

 

2.1

%

Gross margin percentage

 

55.8

%

57.3

%

 

 

-150

b.p.

 

 

 

 

 

 

 

 

 

 

Total gross margin (1)  

 

$

514,771

 

$

492,651

 

$

22,120

 

4.5

%

 

 

 

 

 

 

 

 

 

 

Site level operating expenses (1)  

 

$

329,945

 

$

329,156

 

$

789

 

0.2

%

Net site level operating expenses as a percentage of nonfuel revenues

 

51.7

%

54.1

%

 

 

-240

b.p.

Net site level gross margin in excess of site level operating expenses (1)  

 

$

184,826

 

$

163,495

 

$

21,331

 

13.0

%

 

 

 

 

 

 

 

 

 

 

Number of franchisee operated travel centers

 

38

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent and royalty revenues

 

$

6,631

 

$

6,387

 

$

244

 

3.8

%

 


(1)                                Includes fuel volume, gross margin, revenues and site level operating expenses for only those travel centers that were company operated during the entirety of both of the periods presented.

 

Revenues.   Revenues for the six month period ended June 30, 2012, were $4,036,376, which represented an increase from the six month period ended June 30, 2011, of $159,305, or 4.1%, primarily related to an increase in fuel revenue.

 

Fuel revenues were 83.5% of total revenues for the six months ended June 30, 2012, compared to 84.0% for the same period in 2011.  Fuel revenues for the six months ended June 30, 2012, were $3,372,200, an increase of $116,894, or 3.6%, compared to the same period in 2011.  This increase was principally the result of increases in fuel prices and also resulted from increased fuel sales volume resulting from travel centers that we acquired or opened since January 1, 2011.  The table below shows the changes in fuel revenues between periods that resulted from price and volume changes:

 

21



Table of Contents

 

 

 

Gallons

 

Fuel

 

(gallons and dollars in thousands)

 

Sold

 

Revenues

 

 

 

 

 

 

 

Results for six months ended June 30, 2011

 

1,030,435

 

$

3,255,306

 

 

 

 

 

 

 

Increase due to petroleum products price changes

 

 

81,116

 

Decrease due to same site volume changes

 

(13,260

)

(43,329

)

Increase due to travel centers acquired or opened

 

24,552

 

79,501

 

Other changes, net

 

(103

)

(394

)

Net change from prior year period

 

11,189

 

116,894

 

 

 

 

 

 

 

Results for six months ended June 30, 2012

 

1,041,624

 

$

3,372,200

 

 

On a same site basis, fuel sales volume for our company operated travel centers decreased by 13,260 gallons, or 1.4%, during the six months ended June 30, 2012, compared to the same period in 2011.  We believe this decrease was largely the result of capital projects during the first half of 2012 to replace fuel dispensers and install diesel exhaust fluid dispensers that required us to take certain diesel dispensers out of service during the period as well as our decisions to avoid certain lower margin sales.

 

Nonfuel revenues were 16.3% of total revenues for the six months ended June 30, 2012, compared to 15.9% for the same period in 2011.  Nonfuel revenues for the six months ended June 30, 2012, were $656,897, an increase of $42,011, or 6.8%, compared to the same period in 2011.  The majority of the change between years related to those sites we operated continuously during both periods.  On a same site basis for our company operated sites, nonfuel revenues increased by $29,761, or 4.9%, during the six months ended June 30, 2012, compared to the same period in 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 marketing initiatives.   The increase in nonfuel revenues was also the result of sales at the travel centers we acquired or opened since the beginning of 2011.

 

Rent and royalty revenues for the six months ended June 30, 2012, were $7,279, an increase of $400, or 5.8%, compared to the same period in 2011.  Rent and royalties increased as a result of increased nonfuel revenues at our franchisee locations and the addition of three franchisee locations since the beginning of 2011. These increases were partially offset by our acquisitions in May 2011 and April 2012 of franchise travel centers that we now operate.

 

Cost of goods sold (excluding depreciation). Cost of goods sold for the six months ended June 30, 2012, was $3,498,801, an increase of $127,589, or 3.8%, compared to the same period in 2011.  Fuel cost of goods sold for the six months ended June 30, 2012, of $3,207,617 increased by $98,973, or 3.2%, compared to the same period in 2011.  This increase in fuel cost of goods sold primarily resulted from the increase in fuel prices and the increase in fuel sales volumes.  The fuel gross margin per gallon of $0.166 on a same site basis for the six months ended June 30, 2012, was $0.018 per gallon higher than for the same period of 2011, primarily as a result of variations in market prices for fuel and our decisions regarding pricing.

 

Nonfuel cost of goods sold for the six months ended June 30, 2012, was $291,184, an increase of $28,616, or 10.9%, compared to the same period in 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 the six months ended June 30, 2012, was $365,713, compared to $352,318 during the same period of 2011.  Nonfuel gross margin was 55.7% and 57.3% of nonfuel revenues during the second quarters of 2012 and 2011, respectively.  The nonfuel gross margin percentage decreased as a result of a decision to lower our retail prices for certain products in order to encourage higher sales volumes of store products as well as a change in the mix of truck service products and services sold and delays in reflecting product cost increases in our retail pricing.

 

Site level operating expenses.  Site level operating expenses for the six months ended June 30, 2012, were $346,225, an increase of $11,464, or 3.4%, compared to the same period in 2011.  The increase in site level operating expenses was due to increased labor costs, which principally increased to support the increases in our nonfuel sales levels, including those at the travel centers we acquired or opened since the first quarter of 2011, and as a result of adjustments to reserves for certain environmental and litigation matters.

 

On a same site basis for our company operated sites, site level operating expenses increased by $789, or 0.2%, for the six months ended June 30, 2012, compared to the same period in 2011.  Site level operating expenses as a percentage of nonfuel revenues for the six months ended June 30, 2012, were 51.7%, compared to 54.1% for the same period in 2011.  The decrease in operating expenses as a percentage of nonfuel revenues primarily was because certain of our expenses are fixed in nature, or otherwise do not

 

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vary directly with sales, so that increases in our revenues did not result in corresponding increases in those site level operating expenses.

 

Selling, general and administrative expenses.   Selling, general and administrative expenses for the six months ended June 30, 2012, were $47,533, an increase of $4,125, or 9.5%, compared to the same period in 2011.  This increase primarily resulted from increases in legal expenses and personnel costs.

 

Real estate rent expense.   Rent expense for the six months ended June 30, 2012, was $98,879, an increase of $3,742, or 3.9%, compared to the same period in 2011 that resulted from the rent related to improvements sold to HPT during 2011 and 2012 and estimated 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 the six months ended June 30, 2012, was $24,230, an increase of $1,601, or 7.1%, compared to the same period in 2011, that primarily resulted from an increase in depreciable assets due in part to the acquisitions we completed since April 1, 2011.

 

Interest expense.  Interest expense consisted of the following:

 

 

 

Six Months Ended June 30,

 

$

 

(dollars in thousands)

 

2012

 

2011

 

Change

 

 

 

 

 

 

 

 

 

HPT rent classified as interest

 

$

3,620

 

$

3,694

 

$

(74

)

Amortization of deferred financing costs

 

175

 

142

 

33

 

Other

 

1,199

 

488

 

711

 

Total interest expense

 

$

4,994

 

$

4,324

 

$

670

 

 

Income tax provision .  Our provision for income taxes was $633 and $451 for the six months ended June 30, 2012 and 2011, respectively.  We do not currently recognize the benefit of all of our deferred tax assets, including the tax benefit associated with our tax loss carry forwards from prior years but our tax loss carry forwards do offset any federal tax associated with our current taxable income.  Our income tax provision represents certain minimum income based state taxes payable without regard to our tax loss carry forwards as well as the recognition of deferred tax liabilities related to the tax amortization of indefinite lived intangible assets that cannot be used to reduce existing deferred tax assets.

 

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.  Assuming little variation in fuel prices, our revenues in the fourth quarter of a year are often somewhat lower than those of the second and third quarters because, while 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.

 

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 have in the past caused some of our customers to reduce their purchases of our goods and services.  Further, our fuel gross margins per gallon tend to be lower during periods of rising fuel commodity prices.  Because significant components of our expenses are fixed, we may not be able to realize expense reductions that match declines in general price levels, or deflation.

 

Liquidity and Capital Resources (dollars in thousands)

 

Our principal liquidity requirements are to meet our operating expenses, including rent, and to fund our capital expenditures and working capital requirements.  Our principal sources of liquidity to meet these requirements are:

 

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·                   our cash balance;

·                   our operating cash flow;

·                   our credit facility;

·                   our ability to offer to sell to HPT, for an increase in our rent, tenant improvements we make to the sites we lease from HPT, as further described in Note 5 to the Notes to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report; and

·                   our ability to issue new debt and equity securities. We have an effective shelf registration statement that allows us to issue public securities, but it does not assure that there will be buyers for such securities.

 

Additionally, the unencumbered operating real estate and developable land that we own may be financed or sold as a source of additional liquidity over time.

 

The primary risks we face with respect to our operating cash flow are:

 

·                   the current depressed demand for our products and services as compared to the time prior to when the U.S. economy began to enter into recession in 2007;

·                   decreased demand for our products and services we may experience as a result of competition, particularly competition from the recently combined Pilot Flying J;

·                   the negative impacts of the volatility and high level of prices for petroleum products on our gross margins and working capital requirements;

·                   the potential negative impacts of inflation on our nonfuel cost of goods sold, on our nonfuel gross margins and working capital requirements; and

·                   the present difficult economic conditions in the U.S. and the trucking industry and risk of a renewed economic slowdown or recession.

 

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.  Additional increases in the prices we must pay to obtain fuel, a decrease 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 requirements materially.  In addition, because of the recent and current economic, industry and global credit market conditions and our historical operating losses, credit may be expensive and difficult for us to obtain.

 

Assets and Liabilities

 

At June 30, 2012, and December 31, 2011, we had cash and cash equivalents of $129,386 and $118,255, respectively.  Our total current assets at June 30, 2012, were $512,273, compared to $484,250 at December 31, 2011.  Our total current liabilities were $344,831 at June 30, 2012, compared to $287,748 at December 31, 2011.  During the first half of 2012, the increase in our cash balance was primarily attributable to the cash generated from our operating activities, including working capital changes, and from our sales of improvements to HPT.  These cash sources were partially offset by $86,222 we invested in capital expenditures and the acquisitions of four travel centers we completed.  During the 2012 second quarter we received a $2,000 distribution from PTP.  Accounts receivable and accounts payable primarily increased as a result of increased sales levels in June as compared to December.

 

Revolving Credit Facility

 

We have a revolving credit agreement, or credit facility, with a group of commercial banks.  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 spread (which spread is subject to adjustment based upon facility availability, utilization and other matters).  The annual interest rate for our revolving credit facility was 2.5% as of June 30, 2012.  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.  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 for our borrowings under that facility.  Changes in LIBOR do not affect the charges for letters of credit outstanding under our credit facility.

 

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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 RMR.

 

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 cash, accounts receivable and inventory.  At June 30, 2012, this borrowing base calculation provided a total of $153,181 available for loans and letters of credit under the credit facility.  At June 30, 2012, there were no loans outstanding under the credit facility but we had outstanding $67,522 of letters of credit issued under that facility, securing certain purchases, insurance, fuel taxes and other trade obligations.

 

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 existing sites to maintain their competitive attractiveness to our customers.  During the six months ended June 30, 2012, we made capital investments of $65,116 for improvements to existing travel centers and $3,276 to improve eight travel centers we acquired during 2011.  During the six months ended June 30, 2012, we purchased four travel centers for a total of $17,830.

 

During July 2012, we completed the acquisition of five travel centers for an aggregate amount of $22,133.  We currently intend to continue to selectively and strategically pursue acquisitions of additional travel centers.

 

During the first half of 2012, we received $18,065 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 $1,535, pursuant to the terms of the HPT Leases.  At June 30, 2012, we had assets of $13,236 included in our property and equipment balance that we expect to request that HPT purchase for a future increase in rent; however, HPT is not obligated to purchase those assets.

 

Off Balance Sheet Arrangements (dollars in thousands)

 

As of June 30, 2012, we had no off balance sheet arrangements that we believe have had or would be 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 owed by an entity in which we own a minority interest.  We own a 40% interest in a joint venture, PTP, that owns two travel centers that we operate.  These travel centers are encumbered by debt of approximately $18,419 as of June 30, 2012, 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 ($16,912 at June 30, 2012) could be adversely affected if PTP defaulted on this debt and PTP’s property was used to satisfy this debt.  In connection with the loan agreement entered by PTP, we and Tejon, the owner of the majority interest in PTP, each agreed to indemnify the lender against liability from environmental matters related to PTP’s sites.

 

Related Party Transactions (dollars in thousands, except share amounts)

 

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 or related to them.  For example: HPT is our former parent company, our principal landlord and our largest shareholder and RMR provides management services to both us and HPT; we own 12.5% of AIC, as do RMR, HPT and five other companies to which RMR provides management services, and we and the other shareholders of AIC have property insurance in place 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; RMR, a company that employs our President and Chief Executive Officer; our Executive Vice President, Chief Financial Officer and Treasurer; our Executive Vice President and General Counsel; and both of our Managing Directors and which is partially owned by one of our Managing Directors, assists us with various aspects of our business pursuant to a business management agreement and provides building management services related to our headquarters office building pursuant to a property management agreement.  For further information about these and other such relationships and related person transactions, please see Note 5 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.  In addition, for more information about these transactions and relationships, please see elsewhere in this Quarterly Report, including “Warning Concerning

 

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Forward Looking Statements,” and our Annual Report, our Proxy Statement and our other filings with the SEC, including Note 18 to our Consolidated Financial Statements included in our Annual Report, the sections captioned “Warning Concerning Forward Looking Statements,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Party Transactions” of our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Directors and executive officers in our Proxy Statement.  In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise from these transactions and relationships.  Our filings with the SEC, including our Annual Report and Proxy Statement, are available at the SEC’s website at www.sec.gov.  In addition, copies of certain of our agreements with these related parties, including our leases, rent deferral agreement 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 also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

 

We believe that our agreements with HPT, RMR and AIC are on commercially reasonable terms.  We also believe that our relationships with HPT, RMR, 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 that PTP owns.  Additional information regarding our relationship and transactions with PTP can be found above in “Off Balance Sheet Arrangements” and in Note 5 to our Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report, both of which are incorporated herein by reference.

 

Environmental and Climate Change Matters (dollars in thousands)

 

At June 30, 2012, we had an accrued liability of $11,130 for environmental matters as well as a receivable for expected recoveries of certain of these estimated future expenditures of $3,844, resulting in an estimated net amount of $7,286 that we expect to need to fund from future cash flows.  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 do not 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 travel centers, individually or in the aggregate, would be material to our financial condition or results of operations.

 

We have insurance of up to $35,000 for certain environmental liabilities at certain of our travel centers that were known at the time the policies were issued, and up to $60,000 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 problems, 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 may be adopted or administered and enforced differently in the future, which could 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, could negatively impact our business.  Further, legislation and regulations that limit carbon emissions may cause our energy costs at our travel centers to increase.

 

For further information about these and other environmental and climate change matters, see the disclosure under the heading “Environmental Matters” in Note 6 to the Notes to Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report, which disclosure is incorporated herein by reference.

 

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

For quantitative and qualitative disclosures about market risk affecting us, see Item 7A. — “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report, filed with the SEC on March 16, 2012.  Our exposure to market risks has not changed materially from that set forth in our Annual Report.

 

Item 4.   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, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective at June 30, 2012, because we had not completed remediation of the material weakness in our internal control over financial reporting relating to our controls over determining whether impairment indicators for our property and equipment exist and subsequently measuring any resulting impairment charges, as described in Item 9A of our Annual Report.

 

Changes in Internal Control over Financial Reporting

 

Except as described in this Item 4, there have been no changes in our internal control over financial reporting during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Remediation of Material Weakness in Internal Control over Financial Reporting

 

With respect to our controls over the assignment and review of useful lives for property and equipment that had been found to be ineffective as of December 31, 2011, as described in Item 9A of our Annual Report, during 2012 we have designed new procedures for assigning depreciable lives to our property and equipment assets based on their specific circumstances.  During the second quarter of 2012, we implemented new processes for the supervisory review of the depreciable life assignment process and we implemented regular periodic review by supervisory personnel of routinely generated data reports regarding the assigned depreciable lives of assets.  We have completed our documentation and testing of the changes we implemented during the second quarter of 2012 and have concluded that the material weakness related to the assignment of depreciable lives to assets that existed as of December 31, 2011, has been remediated.

 

We continue to design and implement improved internal controls to remediate the material weakness that existed as of December 31, 2011 , with respect to our controls over impairment indicators and charges.  We have adopted new procedures for performing our annual impairment analysis and for performing our identification of potential indicators of impairment during the year, including more frequent quantitative and qualitative assessments throughout the year and analysis of the financial results of our travel centers after taking into account the allocation of rent expense incurred under the HPT Leases.  We also have designed new processes for the supervisory review of the assumptions, calculations and results of such analyses, and we intend to arrange additional formal training of our accounting staff and management personnel regarding generally accepted accounting principles with respect to impairment analysis and fair value calculations.  These changes were in process as of June 30, 2012, but had not yet been completed, documented and tested.  We expect that this remediation will be completed during 2012.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

The disclosure under the heading “Legal Proceedings” in Note 6 to the Notes to Condensed Consolidated Financial Statements in this Quarterly Report is incorporated herein by reference.

 

Item 1A.   Risk Factors

 

There have been no material changes during the period covered by this Quarterly Report to the risk factors previously disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report.

 

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Item 6. Exhibits

 

Exhibit 3.1

 

Certificate of Formation of TravelCenters of America LLC (Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 filed on December 12, 2006, File No. 333-139272)

 

 

 

Exhibit 3.2

 

Amended and Restated Limited Liability Company Agreement of TravelCenters of America LLC (Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on May 19, 2010)

 

 

 

Exhibit 3.3

 

Amended and Restated Bylaws of TravelCenters of America LLC, as amended and restated on January 25, 2010 ( Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on January 28, 2010)

 

 

 

Exhibit 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 )

 

 

 

Exhibit 10.1

 

Current Compensation Plan for Directors (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 11, 2012)

 

 

 

Exhibit 10.2

 

Amended and Restated Shareholders Agreement, dated May 21, 2012, by and among Affiliates Insurance Company, Five Star Quality Care, Inc., Hospitality Properties Trust, CommonWealth REIT, Senior Housing Properties Trust, TravelCenters of America LLC, Reit Management & Research LLC, Government Properties Income Trust and Select Income REIT (filed herewith)

 

 

 

Exhibit 12.1

 

Statement of Computation of Ratio of Earnings to Fixed Charges (filed herewith)

 

 

 

Exhibit 31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith)

 

 

 

Exhibit 31.2

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith)

 

 

 

Exhibit 32.1

 

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (furnished herewith)

 

 

 

Exhibit 99.1

 

Amended and Restated Reimbursement Agreement, dated May 1, 2012, by and among Reit Management & Research LLC, TravelCenters of America LLC and Five Star Quality Care, Inc. (filed herewith)

 

 

 

Exhibit 101.1

 

The following materials from TravelCenters of America LLC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text (furnished herewith)

 

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WARNING CONCERNING FORWARD LOOKING STATEMENTS

 

THIS QUARTERLY REPORT 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 QUARTERLY REPORT THAT MAY NOT OCCUR INCLUDE:

 

·                   THIS QUARTERLY REPORT INCLUDES STATEMENTS THAT OUR NET INCOME, FUEL AND NONFUEL SALES AND FUEL GROSS MARGIN LEVELS INCREASED.  AN IMPLICATION OF THESE STATEMENTS MAY BE THAT WE WILL BE ABLE TO OPERATE PROFITABLY IN THE FUTURE. IN FACT, THERE ARE MANY FACTORS WHICH WILL IMPACT OUR FUTURE OPERATIONS THAT MAY CAUSE US TO OPERATE UNPROFITABLY IN ANNUAL AND/OR QUARTERLY PERIODS IN ADDITION TO THOSE STATED ITEMS, INCLUDING SOME FACTORS WHICH ARE BEYOND OUR CONTROL SUCH AS SEASONALITY, THE CONDITION OF THE U.S. ECONOMY GENERALLY, THE FUTURE DEMAND FOR OUR GOODS AND SERVICES AND COMPETITION IN OUR BUSINESS;

 

·                   OUR ENVIRONMENTAL LIABILITY MAY BE GREATER THAN WE CURRENTLY ANTICIPATE AND 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 REQUIRE US TO EXPEND SIGNIFICANT AMOUNTS AND OUR BUSINESS TO DECLINE MATERIALLY;

 

·                   THIS QUARTERLY REPORT STATES THAT WE HAVE ACQUIRED TRAVEL CENTER LOCATIONS DURING 2011, REFERENCES SEVERAL PURCHASES THAT WE HAVE COMPLETED DURING 2012 AND STATES THAT WE CURRENTLY INTEND TO CONTINUE OUR EFFORTS TO SELECTIVELY AND STRATEGICALLY ACQUIRE OTHER PROPERTIES.  THE IMPLICATIONS OF THESE STATEMENTS MAY BE THAT WE WILL BE ABLE TO COMPLETE ALL OF THESE PURCHASES AND WILL BE ABLE TO OPERATE OUR NEW LOCATIONS PROFITABLY.  MANY OF THE TRAVEL CENTERS WE HAVE ACQUIRED PRODUCED OPERATING RESULTS WHICH MAY HAVE CAUSED THE PRIOR OWNERS TO EXIT THESE BUSINESSES AND OUR ABILITY TO OPERATE LOCATIONS PROFITABLY DEPENDS UPON MANY FACTORS, INCLUDING OUR ABILITY TO INTEGRATE NEW OPERATIONS INTO OUR EXISTING OPERATIONS AND SOME FACTORS WHICH ARE BEYOND OUR CONTROL SUCH AS THE LEVEL OF DEMAND FOR OUR GOODS AND SERVICES ARISING FROM THE U.S. ECONOMY GENERALLY.  WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE TRAVEL CENTER OPERATIONS OR OPERATE THESE LOCATIONS, OR ANY OF THEM, PROFITABLY IN THE FUTURE.  ALSO, WE MAY NOT SUCCEED IN IDENTIFYING AND/OR ACQUIRING OTHER PROPERTIES;

 

·                   THIS QUARTERLY REPORT STATES THAT AT JUNE 30, 2012, WE HAD $129.4 MILLION OF CASH AND CASH EQUIVALENTS, THAT THERE WERE NO AMOUNTS OUTSTANDING UNDER OUR BANK CREDIT FACILITY ON JUNE 30, 2012, THAT DURING THE SIX MONTHS ENDED JUNE 30, 2012, WE RECEIVED $18.1 MILLION FROM HPT FOR SALES TO HPT OF QUALIFYING IMPROVEMENTS, THAT WE EXPECT TO SELL TO HPT IMPROVEMENTS WE HAVE MADE OR IN THE FUTURE MAKE TO THE PROPERTIES WE LEASE FROM HPT AND THAT WE OWN UNENCUMBERED REAL ESTATE THAT MAY BE ADDITIONAL SOURCES OF LIQUIDITY OVER TIME.  THESE STATEMENTS MAY IMPLY THAT WE HAVE ABUNDANT WORKING CAPITAL LIQUIDITY.  IN FACT, OUR REGULAR OPERATIONS REQUIRE LARGE AMOUNTS OF WORKING CASH.  AS OF JUNE 30, 2012, $67.5 MILLION OF OUR BANK CREDIT FACILITY WAS USED TO PROVIDE LETTERS OF CREDIT TO OUR SUPPLIERS, INSURERS AND TAXING AUTHORITIES AND WE HAVE COLLATERALIZED OUR BANK FACILITY WITH SUBSTANTIALLY ALL OF OUR CASH, ACCOUNTS RECEIVABLE, INVENTORIES, EQUIPMENT AND INTANGIBLE ASSETS.  IN ADDITION, OUR BUSINESS REQUIRES US TO MAKE SIGNIFICANT CAPITAL EXPENDITURES TO MAINTAIN OUR COMPETITIVENESS, HPT IS NOT OBLIGATED TO PURCHASE THE IMPROVEMENTS WE MAY REQUEST AND WE DO NOT KNOW THE EXTENT TO WHICH WE COULD MONETIZE OUR EXISTING

 

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UNENCUMBERED REAL ESTATE.  ACCORDINGLY, WE MAY NOT HAVE SUFFICIENT WORKING CAPITAL OR CASH LIQUIDITY;

 

·                   THIS QUARTERLY REPORT STATES THAT OUR BUSINESS REQUIRES REGULAR CAPITAL EXPENDITURES.  THE AMOUNT AND TIMING OF CAPITAL EXPENDITURES ARE OFTEN DIFFICULT TO PREDICT.  SOME CAPITAL PROJECTS COST MORE THAN ANTICIPATED.  CURRENTLY UNANTICIPATED PROJECTS THAT WE MAY BE REQUIRED TO COMPLETE IN THE FUTURE, AS A RESULT OF GOVERNMENT PROGRAMS OR REGULATION, ADVANCES OR CHANGES MADE BY OUR COMPETITION, DEMANDS OF OUR CUSTOMERS, ACQUISITIONS OR OTHER MATTERS, MAY ARISE AND CAUSE US TO SPEND MORE THAN CURRENTLY ANTICIPATED.  SOME CAPITAL PROJECTS TAKE MORE TIME THAN ANTICIPATED.  AS A RESULT OF MARKET CONDITIONS OR CAPITAL CONSTRAINTS, WE MAY DEFER CERTAIN CAPITAL PROJECTS AND SUCH DEFERRAL MAY HARM OUR BUSINESS OR REQUIRE US TO MAKE LARGER CAPITAL EXPENDITURES IN THE FUTURE;

 

·                 THIS QUARTERLY REPORT STATES OUR CURRENT OBSERVATIONS AS TO ECONOMIC AND INDUSTRY CONDITIONS.  HOWEVER, IMPROVEMENTS, IF ANY, IN THE U.S. ECONOMY OR IN THE TRUCKING OR TRAVEL CENTER INDUSTRIES MAY NOT CONTINUE, AND OUR FUEL AND NONFUEL SALES VOLUMES MAY NOT INCREASE OR OUR SALES VOLUMES MAY DECLINE;

 

·                  THIS QUARTERLY REPORT STATES SOME OF OUR BELIEFS WITH RESPECT TO VARIOUS PENDING LITIGATION, AND THESE STATEMENTS MAY IMPLY THAT WE WILL PREVAIL IN OUR LITIGATION.  IN FACT, WE MAY BE UNABLE TO PREVAIL IN OUR PENDING LITIGATION AND ANY SETTLEMENT OR ADVERSE RULING MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.  ALSO, THE LEGAL AND OTHER EXPENSES WE MAY INCUR IN CONNECTION WITH LITIGATION WILL DEPEND, IN PART, UPON ACTIONS TAKEN BY OTHER PARTIES, WHICH ACTIONS ARE NOT WITHIN OUR CONTROL, AND THESE LITIGATION COSTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS;

 

·                   THIS QUARTERLY REPORT STATES THAT WE HAVE A CREDIT FACILITY WITH A CURRENT MAXIMUM AVAILABILITY OF $200 MILLION.  HOWEVER, OUR BORROWING AND LETTER OF CREDIT AVAILABILITY UNDER THIS FACILITY IS SUBJECT TO OUR HAVING QUALIFIED COLLATERAL, INCLUDING ELIGIBLE CASH, ACCOUNTS RECEIVABLE AND INVENTORIES THAT VARY IN AMOUNT FROM TIME TO TIME.  ACCORDINGLY, OUR BORROWING AND LETTER OF CREDIT AVAILABILITY AT ANY TIME MAY BE LESS THAN $200 MILLION; WE HAD $153.2 MILLION OF BORROWING AND LETTER OF CREDIT AVAILABLILITY UNDER OUR CREDIT FACILITY AS OF JUNE 30, 2012, OF WHICH $67.5 MILLION WAS UTILIZED FOR OUTSTANDING LETTERS OF CREDIT.  ALSO, THIS QUARTERLY REPORT STATES THAT THE MAXIMUM AMOUNT AVAILABLE UNDER THE CREDIT FACILITY MAY BE INCREASED TO $300 MILLION, SUBJECT TO AVAILABLE COLLATERAL AND LENDER PARTICIPATION.  NONETHELESS, 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 WHEN WE MAY NEED OR WANT TO DO SO;

 

·                  WE MAY NOT REALIZE OUR EXPECTATION THAT WE WILL BENEFIT FINANCIALLY BY PARTICIPATING IN AIC;

 

·                   THIS QUARTERLY REPORT STATES THAT WE BELIEVE THAT OUR CONTINUING RELATIONSHIPS WITH HPT, RMR, AIC AND THEIR AFFILIATED AND RELATED PERSONS AND ENTITIES MAY BENEFIT US AND PROVIDE US WITH ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS.  IN FACT, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE; AND

 

·                   THIS QUARTERLY REPORT STATES THAT WE HAVE REMEDIATED ONE OF THE TWO MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING THAT WE IDENTIFIED AND DISCLOSED IN ITEM 9A OF OUR ANNUAL REPORT AND FURTHER STATES THAT WE EXPECT TO REMEDIATE THE SECOND MATERIAL WEAKNESS DURING 2012.  IN FACT, WE MAY SUFFER A RELAPSE WITH RESPECT TO THE CONTROLS WE REMEDIATED, WE MAY NOT COMPLETE THE REMEDIATION OF CONTROLS WITHIN 2012 AS EXPECTED AND WE MAY IDENTIFY OTHER MATERIAL WEAKNESSES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING.

 

THESE AND OTHER UNEXPECTED RESULTS MAY BE CAUSED BY VARIOUS FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL, INCLUDING:

 

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·                 THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR CUSTOMERS AND FRANCHISEES;

 

·                  COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX RATES AND SIMILAR MATTERS;

 

·                  COMPETITION WITHIN THE TRAVEL CENTER INDUSTRY;

 

·                   FUTURE FUEL PRICE INCREASES, FUEL PRICE VOLATILITY OR OTHER FACTORS MAY CAUSE US TO NEED MORE WORKING CAPITAL TO MAINTAIN OUR INVENTORIES AND CARRY OUR ACCOUNTS RECEIVABLE THAN WE NOW EXPECT;

 

·                   THE ACQUISITION OF TRAVEL CENTERS MAY SUBJECT US TO ADDITIONAL OR GREATER RISKS THAN OUR CONTINUING OPERATIONS, INCLUDING THE ASSUMPTION OF UNKNOWN LIABILITIES;

 

·                   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.  FUEL CARD COMPANIES FACILITATE PAYMENTS TO US, AND CHARGE US FEES FOR THESE SERVICES.  COMPETITION, OR LACK THEREOF, AMONG THE FUEL CARD COMPANIES MAY RESULT IN FUTURE INCREASES IN OUR TRANSACTION FEE EXPENSES OR WORKING CAPITAL REQUIREMENTS, OR BOTH;

 

·                   IN THE PAST, INCREASES IN FUEL PRICES HAVE REDUCED THE DEMAND FOR THE PRODUCTS AND SERVICES THAT WE SELL BECAUSE HIGH FUEL PRICES MAY HAVE ENCOURAGED FUEL CONSERVATION, DIRECTED FREIGHT BUSINESS AWAY FROM TRUCKING OR OTHERWISE ADVERSELY AFFECTED THE BUSINESS OF OUR CUSTOMERS.  FUTURE INCREASES IN FUEL PRICES MAY HAVE SIMILAR AND OTHER ADVERSE EFFECTS ON OUR BUSINESS AND SOME OF THESE PAST CONSEQUENCES MAY CONTINUE, WHICH MAY ADVERSELY AFFECT OUR BUSINESS EVEN IF FUEL PRICES DO NOT INCREASE;

 

·                   OUR SUPPLIERS MAY BE UNWILLING OR UNABLE TO MAINTAIN OUR CURRENT TERMS FOR OUR PURCHASES ON CREDIT.  IF WE ARE UNABLE TO PURCHASE GOODS ON REASONABLE CREDIT TERMS, OUR REQUIRED WORKING CAPITAL MAY INCREASE AND WE MAY INCUR MATERIAL LOSSES.  IN TIMES OF RISING FUEL AND NONFUEL PRICES OUR SUPPLIERS MAY BE UNWILLING OR UNABLE TO INCREASE THE CREDIT AMOUNTS THEY EXTEND TO US, WHICH MAY REQUIRE US TO INCREASE OUR WORKING CAPITAL INVESTMENT. ALSO, IN LIGHT OF THE RECENT CREDIT MARKET CONDITIONS AND OUR HISTORICAL OPERATING LOSSES, THE AVAILABILITY AND THE TERMS OF ANY CREDIT WE MAY BE ABLE TO OBTAIN ARE UNCERTAIN;

 

·                   WE ARE CURRENTLY INVOLVED IN SEVERAL LITIGATION MATTERS.  DISCOVERY AND COURT DECISIONS DURING LITIGATION OFTEN HAVE UNANTICIPATED RESULTS.  LITIGATION IS USUALLY EXPENSIVE AND DISTRACTING TO MANAGEMENT.  WE CAN PROVIDE NO ASSURANCE AS TO THE OUTCOME OF ANY OF THE LITIGATION MATTERS IN WHICH WE ARE INVOLVED;

 

·                   ACTS OF TERRORISM, GEOPOLITICAL RISKS, WARS, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL MAY ADVERSELY AFFECT OUR OPERATING RESULTS;

 

·                   ALTHOUGH WE BELIEVE THAT WE BENEFIT FROM OUR CONTINUING RELATIONSHIPS WITH HPT, RMR AND THEIR AFFILIATED AND RELATED PERSONS AND ENTITIES, ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGING DIRECTORS, HPT, RMR AND AFFILIATED AND RELATED PERSONS AND ENTITIES MAY PRESENT A CONTRARY PERCEPTION OR RESULT IN LITIGATION;

 

·                   AS A RESULT OF CERTAIN TRADING IN OUR SHARES DURING 2007, WE EXPERIENCED AN OWNERSHIP CHANGE AS DEFINED BY SECTION 382 OF THE INTERNAL REVENUE CODE, OR THE CODE; CONSEQUENTLY, WE ARE 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, AS DEFINED IN THE CODE, OUR NET OPERATING LOSSES GENERATED AFTER 2007 COULD ALSO BE SUBJECT TO USAGE LIMITATIONS; AND

 

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·                   OUR LIMITED LIABILITY COMPANY AGREEMENT AND BYLAWS AND CERTAIN OF OUR OTHER AGREEMENTS INCLUDE VARIOUS PROVISIONS WHICH MAY DETER A CHANGE OF CONTROL OF US AND, AS A RESULT, OUR SHAREHOLDERS MAY BE UNABLE TO REALIZE A TAKE OVER PREMIUM FOR THEIR SHARES.

 

WE ACCUMULATED A SIGNIFICANT DEFICIT FROM SEVERAL YEARS OF NET LOSSES SINCE WE BECAME A PUBLICLY OWNED COMPANY ON JANUARY 31, 2007.  ALTHOUGH WE GENERATED NET INCOME FOR THE YEAR ENDED DECEMBER 31, 2011, AND THE SIX MONTHS ENDED JUNE 30, 2012, AND OUR PLANS ARE INTENDED TO GENERATE NET INCOME IN FUTURE PERIODS, THERE CAN BE NO ASSURANCE THAT THESE PLANS WILL SUCCEED.

 

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 IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2011, INCLUDING UNDER “WARNING CONCERNING FORWARD LOOKING STATEMENTS” AND “ITEM 1A.  RISK FACTORS,” AND ELSEWHERE IN THIS QUARTERLY 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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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

TRAVELCENTERS OF AMERICA LLC

 

 

 

 

 

 

 

By:

/s/

Andrew J. Rebholz

August 7, 2012

 

 

Name:

Andrew J. Rebholz

 

 

 

Title:

Executive Vice President,

 

 

 

 

Chief Financial Officer and Treasurer

 

 

 

 

(Principal Financial Officer and

 

 

 

 

Principal Accounting Officer)

 

33


Exhibit 10.2

 

AMENDED AND RESTATED

SHAREHOLDERS AGREEMENT

 

by and among

 

AFFILIATES INSURANCE COMPANY,

 

FIVE STAR QUALITY CARE, INC.,

 

HOSPITALITY PROPERTIES TRUST,

 

COMMONWEALTH REIT,

 

SENIOR HOUSING PROPERTIES TRUST,

 

TRAVELCENTERS OF AMERICA LLC,

 

REIT MANAGEMENT & RESEARCH LLC,

 

GOVERNMENT PROPERTIES INCOME TRUST

 

and

 

SELECT INCOME REIT

 

May 21, 2012

 



 

TABLE OF CONTENTS

 

 

 

Page

ARTICLE I

 

 

 

INVESTMENT IN THE COMPANY; FORMATION AND LICENSING EXPENSES

 

 

 

1.1

Share Issuances to Current Shareholders

2

1.2

Share Issuance to SIR

2

1.3

Future Share Issuances

2

1.4

Formation and Licensing Expenses

2

 

 

 

ARTICLE II

 

 

 

BOARD COMPOSITION

 

 

 

 

2.1

Board Composition

2

 

 

 

ARTICLE III

 

 

 

TRANSFER OF SHARES;

 

PREEMPTIVE RIGHTS; CALL RIGHTS

 

 

 

3.1

Transfer of Shares; No Pledging of Shares

4

3.2

Preemptive Rights

4

3.3

Change of Control Call Option

7

3.4

Permitted New Issuance of Shares

10

 

 

 

ARTICLE IV

 

 

 

SPECIAL SHAREHOLDER APPROVAL REQUIREMENTS.

 

 

 

4.1

Special Shareholder Approval Requirements

10

 

 

 

ARTICLE V

 

 

 

OTHER COVENANTS AND AGREEMENTS

 

 

 

 

5.1

Organizational Documents

10

5.2

Reports and Information Access

11

5.3

Compliance with Laws

11

5.4

Cooperation; Further Assurances

11

5.5

Confidentiality

12

5.6

Required Regulatory Approvals

12

5.7

REIT Matters

12

 



 

ARTICLE VI

 

 

 

REPRESENTATIONS AND WARRANTIES

 

 

 

 

6.1

The Company

13

6.2

The Shareholders

14

 

 

 

ARTICLE VII

 

 

 

TERMINATION

 

 

 

 

7.1

Termination

16

 

 

 

ARTICLE VIII

 

 

 

MISCELLANEOUS

 

 

 

 

8.1

Notices

16

8.2

Successors and Assigns; Third Party Beneficiaries

18

8.3

Amendment and Waiver

19

8.4

Counterparts

19

8.5

Headings

19

8.6

Governing Law

19

8.7

Dispute Resolution

19

8.8

Interpretation and Construction

21

8.9

Severability

22

8.10

Entire Agreement

22

8.11

Non-liability of Trustees and Directors

22

 



 

AMENDED AND RESTATED

SHAREHOLDERS AGREEMENT

 

AFFILIATES INSURANCE COMPANY

 

This Amended and Restated Shareholders Agreement (this “ Agreement ”), dated May 21, 2012, by and among Affiliates Insurance Company, an Indiana insurance corporation (the “ Company ”), Five Star Quality Care, Inc., a Maryland corporation (“ FVE ”), Hospitality Properties Trust, a Maryland real estate investment trust (“ HPT ”), CommonWealth REIT, a Maryland real estate investment trust (“ CWH ”), Senior Housing Properties Trust, a Maryland real estate investment trust (“ SNH ”), TravelCenters of America LLC, a Delaware limited liability company (“ TA ”), Reit Management & Research LLC, a Delaware limited liability company (“ RMR ”), and Government Properties Income Trust, a Maryland real estate investment trust (“ GOV ”, and together with FVE, HPT, CWH, SNH, TA and RMR, the “ Current Shareholders ”), and Select Income REIT, a Maryland real estate investment trust (“ SIR ”, and together with the Current Shareholders, the “ Shareholders ”), amends and restates the Amended and Restated Shareholders Agreement (the “ Shareholders Agreement ”), dated December 16, 2009, by and among the Company and the Current Shareholders, effective as of the date first set forth above.

 

RECITALS

 

WHEREAS, the Company has been formed and licensed as an insurance corporation domiciled in the State of Indiana;

 

WHEREAS, the Current Shareholders previously made the capital contributions to the Company contemplated by Section 1.1 of this Agreement;

 

WHEREAS, in connection with the purchase by SIR from the Company of 20,000 shares of common stock, par value of $10.00 per share, of the Company (the “ Shares ”) pursuant to a Subscription Agreement (the “ SIR Subscription Agreement ”) to be entered into by the Company and SIR, concurrently with the execution and delivery of this Agreement, the Company, the Current Shareholders and SIR desire to enter into this Agreement to, among other things, add SIR as a Shareholder hereunder; and

 

WHEREAS, the Shareholders and the Company desire to enter into this Agreement in order to set forth certain agreements and understandings relating to the business and governance of the Company, the Shares held by the Shareholders and certain other matters.

 



 

NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

 

ARTICLE I

 

INVESTMENT IN THE COMPANY; FORMATION AND LICENSING EXPENSES

 

1.1                                Share Issuances to Current Shareholders .  The Company previously issued and sold to each of the Current Shareholders, and each of the Current Shareholders purchased from the Company, 20,000 Shares.

 

1.2                                Share Issuance to SIR .  As described in the recitals, concurrently with the execution and delivery of this Agreement, SIR is purchasing 20,000 Shares from the Company pursuant to the SIR Subscription Agreement and, upon such purchase, SIR shall then become a Shareholder effective as of such purchase.

 

1.3                                Future Share Issuances .  No Shareholder shall be obligated to purchase additional Shares or any other securities of the Company and any future proposed issuance and sale of Shares or any other securities of the Company shall be subject to Section 3.2, except to the extent otherwise provided under this Agreement; provided, however, that the parties hereto acknowledge that the Company may need to seek additional capital in the future and that it is the intention of the Shareholders that they each may, but shall not be obligated to, contribute to the Company up to an additional $5 million of capital during the period between February 27, 2011 and February 27, 2014.

 

1.4                                Formation and Licensing Expenses .  The Company shall pay for all costs, fees and expenses in connection with the formation and licensing of the Company as an Indiana insurance company.  The Current Shareholders shall reimburse the Company for such amounts paid by the Company prior to the date hereof in equal proportion.  The Shareholders shall reimburse the Company for such amounts paid by the Company on or after the date hereof in equal proportion.

 

ARTICLE II

 

BOARD COMPOSITION

 

2.1                                Board Composition .

 

(a)                        For as long as the Shareholders collectively own a majority of the issued and outstanding Shares, the board of directors of the Company (the “ Board ”) shall consist of not less than five nor more than seventeen members, with the actual number determined in accordance with the Bylaws of the Company, as in effect from time to time, and subject in all instances to this Section 2.1.  As of the date of this Agreement, the Board shall consist of fourteen members.  For so long as required by applicable Indiana law, at least one member of the

 

2



 

Board shall be an Indiana resident.  Except as otherwise provided in Section 2.1(c), no Shareholder having a right to designate any director pursuant to this Article II shall be required to designate an Indiana resident as a director pursuant to such right; provided, however, that this sentence shall in no way limit the application of the immediately preceding sentence.

 

(b)                        For so long as a Shareholder (other than RMR) owns not less than 10% of the issued and outstanding Shares, such Shareholder shall have the right to designate two directors for election to the Board.

 

(c)                         For so long as RMR owns not less than 10% of the issued and outstanding Shares, RMR shall have the right to designate three directors for election to the Board.  For so long as RMR has the right to designate directors pursuant to the immediately preceding sentence, Indiana law requires the Board to include an Indiana resident as a director of the Company and no other Shareholder designates an Indiana resident as a director of the Company, RMR shall designate at least one Indiana resident to be a director.

 

(d)                        Each Shareholder will vote, execute and deliver written consents and take all other necessary action (including, if necessary, causing the Company to call a special meeting of shareholders of the Company) in favor of the election of each director designated by a Shareholder in accordance with this Article II and otherwise to ensure that the composition of the Board is at all times as set forth in this Article II.  Each Shareholder agrees that it will not vote any of its Shares in favor of removal of any director designated by another Shareholder unless such other Shareholder shall have consented to such removal in writing.  Each Shareholder agrees to cause to be called, if necessary, a special meeting of shareholders of the Company and to vote all the Shares owned by such Shareholder for, or to take all actions in lieu of any such meeting necessary to cause, the removal of any director designated by such Shareholder if the Shareholder entitled to designate such director requests in writing, signed by such Shareholder, such director’s removal for any reason or no reason.

 

(e)                         If, as a result of death, disability, retirement, resignation, removal or otherwise, there shall exist or occur any vacancy with respect to any director previously designated by a Shareholder in accordance with such Shareholder’s right under this Article II to so designate such director, such Shareholder shall have the right to designate a replacement director.  Upon such designation, the Shareholders shall promptly take all action necessary to ensure the election of such replacement director to fill the unexpired term of the director whom such new director is replacing, including, if necessary, calling a special meeting of shareholders of the Company and voting their Shares, or executing any written consent in lieu thereof, in favor of the election of such director.

 

3



 

ARTICLE III

 

TRANSFER OF SHARES;
PREEMPTIVE RIGHTS; CALL RIGHTS

 

3.1                                Transfer of Shares; No Pledging of Shares .

 

(a)                        The Shareholders may not, directly or indirectly, transfer any Shares, except that a Shareholder may transfer Shares owned by it to a wholly owned subsidiary of such Shareholder, to another Shareholder or to a wholly owned subsidiary of another Shareholder.  Any purported transfer of Shares in contravention of this Section 3.1 shall be null and void and of no force or effect.

 

(b)                        The Shareholders may not pledge their Shares (other than pledges arising from the operation of law and not as a result of the Shareholder’s express granting of a pledge); provided, however, that any pledge or other lien, charge or encumbrance which may arise by application of the terms of any agreement, contract, license, permit or instrument existing, for any of the Shareholders (an “ Existing Pledge ”), on a Shareholder’s Shares shall not be a violation of this Section 3.1(b); and provided further, however, any transfer which results from exercise of rights under a permitted lien, charge or encumbrance shall be subject to the call rights of the Company and the other Shareholders set forth in Section 3.3 to the fullest extent permitted by applicable law and existing contracts as if such a transfer constitutes a “Change of Control”.  Any Shareholder whose Shares would be subject to an Existing Pledge shall use best efforts to cause the pledgee under an Existing Pledge, prior to any exercise by the pledgee of its rights on the Shareholder’s Shares, to take all actions under applicable law which are required to be taken prior to any such exercise, including obtaining any necessary approvals from the Indiana Department of Insurance and Indiana Insurance Commissioner.

 

3.2                                Preemptive Rights .

 

(a)                        If, at any time after the date hereof, the Company wishes to issue any capital stock of the Company or any other securities convertible into or exchangeable or exercisable for capital stock of the Company (collectively, “ New Securities ”) to any person or entity (the “ Subject Purchaser ”), then the Company shall first offer the Appropriate Percentage (as defined herein) of the New Securities (the “ Allocated Shares ”) to each Shareholder (each, a “ Preemptive Rightholder ” and collectively, the “ Preemptive Rightholders ”) by sending written notice (the “ New Issuance Notice ”) to each of the Preemptive Rightholders, which New Issuance Notice shall state the terms of such proposed issuance, including the number of New Securities proposed to be issued and the proposed purchase price per security of the New Securities (the “ Proposed Price ”).  Upon delivery of the New Issuance Notice, such offer shall be irrevocable unless and until the Company shall have terminated the contemplated issuance of New Securities in its entirety at which time the rights set forth herein shall be applicable to any proposed issuance subsequent to any such termination.  For purposes of this Section 3.2, “ Appropriate Percentage ” shall mean that percentage of the New Securities determined by dividing (i) the total

 

4



 

number of Shares then owned by a Preemptive Rightholder by (ii) the total number of Shares owned by all the Preemptive Rightholders.

 

(b)                        For a period of 20 days after the giving of the New Issuance Notice pursuant to Section 3.2(a) (the “ Initial Preemptive Subscription Period ”), each of the Preemptive Rightholders shall have the right to purchase, in whole or in part, the Allocated Shares offered to such Preemptive Rightholder as determined pursuant to Section 3.2(a) at a purchase price equal to the Proposed Price and upon the terms and conditions set forth in the New Issuance Notice.

 

(c)                         The right of each Preemptive Rightholder to purchase the New Securities so offered under Section 3.2(b) shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the Initial Preemptive Subscription Period, to the Company, which notice shall state the amount of New Securities that such Preemptive Rightholder elects to purchase pursuant to Section 3.2(a).  The failure of a Preemptive Rightholder to respond prior to the expiration of the Initial Preemptive Subscription Period shall be deemed to be a waiver of such Preemptive Rightholder’s rights under this Agreement solely with respect to its right to purchase the New Securities referenced in the New Issuance Notice; provided that each Preemptive Rightholder may waive its rights under Section 3.2(b) prior to the expiration of the Initial Preemptive Subscription Period by giving written notice of such waiver to the Company.

 

(d)                        If as of the expiration of the Initial Preemptive Subscription Period, some but not all of the Preemptive Rightholders have exercised their right to purchase the full amount of New Securities to which they are entitled to purchase pursuant to Sections 3.2(b) and (c) (any such Preemptive Rightholder which has exercised in full its rights to purchase such New Securities, a “ Fully Exercising Preemptive Rightholder ”), the Fully Exercising Preemptive Rightholders shall have the right to purchase, in whole or in part, their Oversubscription Appropriate Percentage (as defined herein) of the New Securities which the Preemptive Rightholders did not exercise their right to purchase pursuant to Sections 3.2(b) and (c) (the “ Undersubscribed Shares ”) at a purchase price equal to the Proposed Price and upon the terms and conditions set forth in the New Issuance Notice.  The right of the Fully Exercising Preemptive Rightholders to purchase the Undersubscribed Shares may be exercised for a period of ten days following the earlier of the expiration of the Initial Preemptive Subscription Period or the date on which notice is given by the Company to such Fully Exercising Preemptive Rightholders that all the Preemptive Rightholders have either exercised their right to purchase the New Securities pursuant to Sections 3.2(b) and (c) or waived their rights to purchase any of such New Securities pursuant to Section 3.2(c) (the “ Oversubscription Period ”).  For purposes of this Section 3.2, “ Oversubscription Appropriate Percentage ” shall mean that percentage of the Undersubscribed Shares determined by dividing (i) the total number of Shares then owned by a Fully Exercising Preemptive Rightholder by (ii) the total number of Shares owned by all the Fully Exercising Preemptive Rightholders.

 

(e)                         The right of each Fully Exercising Preemptive Rightholder to purchase Undersubscribed Shares pursuant to Section 3.2(d) shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the Oversubscription Period, to the Company, which notice shall state the amount of Undersubscribed Shares that such Fully Exercising Preemptive Rightholder elects to purchase pursuant to Section 3.2(d).  The failure of

 

5



 

a Fully Exercising Preemptive Rightholder to respond prior to the expiration of the Oversubscription Period shall be deemed to be a waiver of such Fully Exercising Preemptive Rightholder’s rights under this Agreement solely with respect to its right to purchase the Undersubscribed Shares included in the New Securities referenced in the New Issuance Notice; provided that each Fully Exercising Preemptive Rightholder may waive its rights under Section 3.2(d) prior to the expiration of the Oversubscription Period by giving written notice of such waiver to the Company.

 

(f)                          The closing of the purchase of New Securities subscribed for by the Preemptive Rightholders, including the Fully Exercising Preemptive Rightholders, pursuant to this Section 3.2 shall be held at such time and place as the parties to the transaction may reasonably agree.  At such closing, the New Securities subscribed for shall be issued by the Company free and clear of all liens, charges or encumbrances (other than those arising hereunder and those attributable to actions by the purchasers thereof).  Each Preemptive Rightholder, including each Fully Exercising Preemptive Rightholder, purchasing the New Securities shall deliver at the closing payment in full in immediately available funds for the New Securities purchased by it.  At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary, appropriate or customary for similar financing transactions.  If any Preemptive Rightholder, including any Fully Exercising Preemptive Rightholder, fails to purchase any New Securities for which it exercised its right to purchase pursuant to Sections 3.2(b) and (c) or 3.2(d) and (e), such New Securities may be purchased by the Fully Exercising Preemptive Rightholders which did purchase all the New Securities for which they exercised their rights to purchase pursuant to Sections 3.2(b), (c), (d) and (e) in the same manner provided in this Section 3.2 with respect to Undersubscribed Shares and the resulting Oversubscription Period with respect to such right to purchase shall be an “Oversubscription Period” for all instances such term is used in this Section 3.2.  Notwithstanding the preceding sentence, the obligations and liability of any Preemptive Rightholder, including any Fully Exercising Preemptive Rightholder, which fails to purchase any New Securities for which it exercised its right to purchase pursuant to Sections 3.2(b) and (c) or 3.2(d) and (e) shall not be relieved as a result of any Fully Exercising Preemptive Rightholder’s right to purchase, or any actual purchase by any Fully Exercising Preemptive Rightholder of, any such New Securities.

 

(g)                         Following the expiration of the later of the Initial Preemptive Subscription Period and, if applicable, the Oversubscription Period, if the Preemptive Rightholders, including any Fully Exercising Preemptive Rightholders, did not exercise their right to purchase any of the New Securities, including the Undersubscribed Shares, which were originally the subject of the New Issuance Notice, then the Company may sell the remaining New Securities to the Subject Purchaser on terms and conditions that are no more favorable to the Subject Purchaser than those set forth in the New Issuance Notice; provided, however, that such sale is bona fide and made pursuant to a contract entered into between the Company and the Subject Purchaser and that such sale is consummated by not later than 90 days following the earlier to occur of (i) receipt by the Company of written waivers pursuant to Section 3.2(c) from all the Preemptive Rightholders of their rights to purchase the Appropriate Percentage of New Securities and, if applicable, written waivers pursuant to Section 3.2(e) from all the Fully Exercising Preemptive Rightholders of their rights to purchase the Oversubscription Appropriate Percentage of New Securities, and (ii) the expiration of the Oversubscription Period, if

 

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applicable, and if not applicable, the expiration of the Initial Preemptive Subscription Period.  If the sale of any of the New Securities is not consummated by the expiration of such 90 day period, then the preemptive rights afforded to the Shareholders under this Section 3.2 shall again become effective, and no issuance and sale of New Securities may be made thereafter by the Company without again offering the same in accordance with this Section 3.2.

 

3.3                                Change of Control Call Option .

 

(a)                        By not later than five days following a Change of Control (as defined herein or in Section 3.1(b)) of any Shareholder, such Shareholder shall give the Company and each other Shareholder notice of such Change of Control and shall disclose the number of Shares and any other securities of the Company which were owned by the Shareholder as of immediately prior to such Change of Control of such Shareholder (the “ Change of Control Securities ”).  If the Shareholder fails to give the notice required by the preceding sentence by the time required thereby, and another Shareholder or the Company is or becomes aware that such Shareholder underwent a Change of Control, then (i) if it is a Shareholder that is or becomes aware of such Change of Control, that Shareholder shall reasonably promptly inform the Company of such Change of Control and upon the Company being of the reasonable belief that such a Change of Control has occurred, the Company shall reasonably promptly provide the notice to the Shareholders that such Shareholder which underwent the Change of Control failed to provide, or (ii) if it is the Company that is or becomes aware of such Change of Control, the Company shall reasonably promptly provide the notice that such Shareholder which underwent the Change of Control failed to provide.  Any liability of a Shareholder which undergoes a Change of Control for failure to give the notice required by the first sentence of this Section 3.3(a) shall not be relieved as a result of the Company or any other Shareholder being obligated to give, or giving, the notice required by the second sentence of this Section 3.3(a).

 

(b)                        For a period of 20 days following the receipt of a notice given pursuant to Section 3.3(a), the Company shall have the right to purchase from such Shareholder (or its successor, as applicable), in whole or in part, the Change of Control Securities.  The purchase price for the Change of Control Securities shall be the book value, as determined in accordance with the statutory accounting principles applicable to the Company, of the Change of Control Securities as of the time such Shareholder underwent the Change of Control (the “ Call Option Purchase Price ”).  To exercise its right to purchase the Change of Control Securities, the Company shall deliver written notice of such exercise to the Shareholder which underwent the Change of Control and the other Shareholders prior to the expiration of such 20 day call exercise period.  The closing for any such exercised call option shall occur on the fifth business day (or such longer period as may be required by applicable law or in order to obtain applicable regulatory approval) following receipt of the Company’s notice of exercise of its call option by the Shareholder which underwent the Change of Control, or on such other date as may be agreed by the Company and such Shareholder.  At its option, the Company may pay in cash the entire amount of the Call Option Purchase Price at such closing or it may elect to defer any amount of the Call Option Purchase Price.  Any amounts so deferred shall bear interest at the Deferred Interest Rate (as defined herein).  The Company may pay any such deferred amounts and accrued interest thereon at any time and from time to time; provided, however, that all such deferred

 

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amounts and accrued but unpaid interest, shall be due and payable on the fifth anniversary of the closing of the applicable call option exercise.

 

(c)                         Shareholders other than the Shareholder which underwent the Change of Control shall have the right to purchase, in whole or in part, any Change of Control Securities not elected to be purchased by the Company pursuant to Section 3.3(b) at a price equal to the Call Option Purchase Price.  To exercise its right to purchase the Change of Control Securities, the applicable Shareholder shall deliver written notice of such exercise to the Shareholder which underwent the Change of Control, the Company and the other Shareholders by not later than the 20 days following the earlier of (i) the expiration of the 20 day period during which the Company has the right to exercise its call option for the Change of Control Securities pursuant to Section 3.3(b) and (ii) the date the Company waives its right to purchase such Change of Control Securities and has given notice of the same to all the Shareholders (such deadline for exercising a right to purchase Change of Control Securities referred to as the “ Call Option Exercise Deadline ”).  The notice of exercise shall indicate the number of Change of Control Securities that the Shareholder seeks to purchase.  If the aggregate number of Change of Control Securities sought to be purchased by the exercising Shareholders (determined by adding all the eligible securities each Shareholder states it seeks to purchase in its notice of exercise) exceeds the actual number of Change of Control Securities eligible for purchase, the number of Change of Control Securities which may be purchased by a particular applicable Shareholder shall be reduced by an amount equal to the product of the aggregate number of such excess Change of Control Securities sought to be purchased by all the exercising Shareholders multiplied by the quotient of (x) the number of Shares owned by all eligible Shareholders which are exercising their call option rights minus the number of Shares owned by the particular applicable exercising Shareholder divided by (y) the number of Shares owned by all eligible Shareholders which are exercising their call option rights, with any such result rounded up or down to the nearest whole share as reasonably determined by the Company.  The closing of any such exercised call option shall occur on the fifth business day (or such longer period as may be required by applicable law or in order to obtain applicable regulatory approval) following the Call Option Exercise Deadline, or on such other date as may be agreed by the exercising Shareholder, the Company and the Shareholder which underwent the Change of Control.  At its option, the exercising Shareholder may pay in cash the entire amount of the Call Option Purchase Price at such closing or it may elect to defer any amount of the Call Option Purchase Price.  Any amounts so deferred shall bear interest at the Deferred Interest Rate.  The exercising Shareholder may pay any such deferred amounts and accrued interest thereon at any time and from time to time; provided, however, that all such deferred amounts and accrued but unpaid interest, shall be due and payable on the fifth anniversary of the closing of the applicable call option exercise.

 

(d)                        Definitions .  For purposes of this Section 3.3, the following terms have the meanings set forth below:

 

(i)              Change of Control ” means (A) the acquisition by any person or entity, or two or more persons or entities acting in concert, of beneficial ownership (such term, for purposes of this Section 3.3(d)(i), having the meaning provided such term in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of 9.8% or more, or rights, options or warrants to acquire 9.8% or more, or any combination

 

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thereof, of the outstanding shares of voting stock or other voting interests of the Shareholder, including voting proxies for such shares, or the power to direct the management and policies of the Shareholder, directly or indirectly, excluding with respect to RMR, any person or entity, or two or more persons or entities acting in concert, beneficially owning 9.8% or more of RMR’s outstanding voting interests as of the date of this Agreement, and excluding with respect to FVE, persons or entities that have rights to acquire 9.8% or more of FVE’s shares of common stock by virtue of their holding convertible notes of FVE outstanding as of the date of this Agreement, (B) the merger or consolidation of the Shareholder with or into any other person or entity (other than the merger or consolidation of any person or entity into the Shareholder that does not result in a Change of Control of the Shareholder under clauses (A), (C), (D) or (E) of this definition), (C) any one or more sales or conveyances to any person or entity of all or any material portion of the assets (including capital stock or other equity interests) or business of the Shareholder, (D) the cessation, for any reason, of the individuals who at the beginning of any 38 consecutive month period constituted the board of directors (or analogous governing body) of the Shareholder (together with any new directors (or analogous position) whose election by such board or whose nomination for election by the shareholders of the Shareholder was approved by a vote of a majority of the directors (or analogous position) then still in office who were either directors (or analogous position) at the beginning of any such period or whose election or nomination for election was previously so approved) to constitute a majority of the board of directors (or analogous governing body) of the Shareholder then in office or (E) in respect of a Shareholder other than RMR, the termination (including by means of nonrenewal) of the Shareholder’s management agreement with RMR by such Shareholder or, in response to a breach of such agreement by such Shareholder, by RMR; provided, however, a Change of Control shall not include:  (1) the acquisition by any person or entity, or two or more persons or entities acting in concert, of beneficial ownership of 9.8% or more of the outstanding shares of voting stock or other voting interests of a Shareholder if such acquisition is approved by the governing board of such Shareholder in accordance with the organizational documents of such Shareholder and if such acquisition is otherwise in compliance with applicable law; (2) the merger or consolidation of a Shareholder with one or more other Shareholders or wholly owned subsidiaries of any such Shareholders; or (3) a Change of Control which is approved by Shareholders owning 75% of the Shares owned by all Shareholders.

 

(ii)           Deferred Interest Rate ” means the London Interbank Offered Rate (rounded upward, if necessary, to the nearest 1/100 th  of 1%) appearing on Reuters Screen LIBO Page (or any successor page) as the London interbank offered rate for three month deposits in U.S. dollars at approximately 11:00 a.m. (London time) two days prior to applicable closing date (provided that if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates), plus 100 basis points, and this rate shall be adjusted in three month intervals thereafter, in accordance with the foregoing, with such adjustment date being treated as an “applicable closing date” for purposes of determining the adjusted rate in accordance with the foregoing, for so long as any deferred amount pursuant to Sections 3.2(b) or 3.2(c) may be unpaid.

 

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3.4                                Permitted New Issuance of Shares .  The prohibition on transfer of Shares, the preemptive rights and the change of control call options created by Sections 3.1, 3.2 and 3.3 of this Article III shall not apply to any sale of Shares by the Company, or by any Shareholder or Shareholders, if the Shares are sold to an entity which is managed by RMR that purchases insurance from the Company, provided that any such sale does not reduce the ownership of any Shareholder to less than ten percent (10%) of the Company’s outstanding voting Shares.  The prohibition on the preemptive rights and the change of control call options created by Sections 3.2 and 3.3, respectively, of this Article III shall not apply to the 20,000 Shares issued and sold by the Company to each of GOV and SIR, and each of the Shareholders waive any rights they may have or have had under Sections 3.2 and 3.3 of this Article III with respect to such transactions.

 

ARTICLE IV

 

SPECIAL SHAREHOLDER APPROVAL REQUIREMENTS .

 

4.1                                Special Shareholder Approval Requirements .  For so long as the Shareholders beneficially own a majority of the Company’s issued and outstanding Shares, no action by the Company shall be taken with respect to any of the following matters without the prior affirmative approval of Shareholders owning 75% of the Shares owned by all the Shareholders:

 

(a)                        any amendment to the articles of incorporation or bylaws of the Company;

 

(b)                        any merger of the Company;

 

(c)                         the sale of all or substantially all of the Company’s assets;

 

(d)                        any reorganization or recapitalization of the Company; or

 

(e)                         any liquidation or dissolution of the Company.

 

If applicable law permits any of the foregoing actions to be taken by the Company without a shareholders vote, the vote of all directors of the Company designated by a Shareholder shall be considered the vote of the Shareholder for purposes of any such action.

 

ARTICLE V

 

OTHER COVENANTS AND AGREEMENTS

 

5.1                                Organizational Documents .  Subject to applicable law, each Shareholder shall vote its Shares or execute any consents necessary, and each Shareholder and the Company shall take all other actions necessary, to ensure that the Company’s organizational documents facilitate, and do not at any time conflict with any provision of, this Agreement or any applicable law, and to ensure that the provisions hereof are implemented notwithstanding any inconsistent

 

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provision in the Company’s organizational documents.  The parties hereto agree to amend, if necessary, the Company’s organizational documents to conform to the provisions set forth in this Agreement, to the extent permitted by applicable law.  In the event of any actual or apparent inconsistency between this Agreement and the organizational documents, then, as among the Shareholders, to the extent permitted by applicable law, this Agreement shall control.

 

5.2                                Reports and Information Access .  For so long as a Shareholder owns not less than 10% of all the issued and outstanding Shares, the Company shall provide periodically, through the director(s) designated by such Shareholder under Section 2.1, to the Shareholder financial information regarding the Company and its operations and the Company shall permit the Shareholder and its representatives reasonable access to the financial reports and records of the Company so that the Shareholder may comply with its financial reporting and tax reporting obligations and procedures, and disclosure obligations under the federal securities laws and other applicable laws.

 

5.3                                Compliance with Laws .  The Company shall comply in all material respects with all applicable laws governing its business and operations.  Except as provided in Section 5.7, if a Shareholder, by virtue of such Shareholder’s ownership interest in the Company or actions taken by the Shareholder affecting the Company, triggers the application of any requirement or regulation of any federal, state, municipal or other governmental or regulatory body on the Company or any subsidiary of the Company or any of their respective businesses, assets or operations, including any obligations to make any filing with or otherwise notifying or obtaining the consent, approval or other action of any federal, state, municipal or other governmental or regulatory body, such Shareholder shall promptly take all actions necessary and fully cooperate with the Company to ensure that such requirements or regulations are satisfied without restricting, imposing additional obligations on or in any way limiting the business, assets, operations or prospects of the Company or any subsidiary of the Company.  Each Shareholder shall use best efforts to cause its shareholders, directors (or analogous position), nominees for director (or analogous position), officers, employees and agents to comply with any applicable laws impacting the Company or any of its subsidiaries or their respective businesses, assets or operations.

 

5.4                                Cooperation; Further Assurances .

 

(a)                        The Shareholders shall cooperate with each other and the Company in furtherance of the Company’s underwriting of insurance policies and coverage with respect to the Shareholders and their respective businesses, assets and properties as well as in furtherance of the development and execution of the Company’s business as an insurer.  The Shareholders intend to transition (but shall not be obligated to do so) their applicable insurance policies and coverage to the Company so that the Company or its third party agents or contracting parties shall become the underwriters of such current and future policies and coverage.

 

(b)                        Each of the parties shall execute such documents and perform such further acts (including obtaining any consents, exemptions, authorizations or other actions by, or giving any notices to, or making any filings with, any governmental authority) as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement or

 

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the transactions contemplated hereby, including in connection with any subsequent exercise by a party of a right afforded hereunder to such party.

 

5.5                                Confidentiality .  Except as may be required by applicable law or the rules of any national securities exchange upon which a party’s shares are listed for trading, none of the parties hereto shall make any disclosure concerning this Agreement, the transactions contemplated hereby or the business, operations and financial affairs of the Company without prior approval by the other parties hereto; provided, however, that nothing in this Agreement shall restrict any of the parties from disclosing information (a) that is already publicly available, (b) that was known to such party on a non-confidential basis prior to any relevant disclosure, (c) that may be required or appropriate in response to any summons or subpoena or in connection with any litigation, provided that such party will use reasonable efforts to notify the other party in advance of such disclosure so as to permit the other party to seek a protective order or otherwise contest such disclosure, and such party will use reasonable efforts to cooperate, at the expense of the other party, with the other party in pursuing any such protective order, (d) to the extent that such party reasonably believes it appropriate in order to protect its investment in its Shares in order to comply with any applicable law, (e) to such party’s officers, directors, trustees, advisors, employees, auditors or counsel or (f) as warranted pursuant to the parties’ disclosure obligations under federal securities laws.

 

5.6                                Required Regulatory Approvals .  Certain transactions required, permitted or otherwise contemplated by this Agreement may under certain circumstances require prior filings with and approvals, or non-disapprovals, from the Indiana Department of Insurance or the Indiana Insurance Commissioner.  Such transactions include: (a) issuance or purchase of any additional capital stock of the Company or other securities convertible into or exchangeable or exercisable for capital stock of the Company pursuant to Sections 1.2 or 3.4; (b) transfer of Shares to a wholly owned subsidiary of a Shareholder, to another Shareholder or to a wholly owned subsidiary of another Shareholder pursuant to Sections 3.1(a) or 3.4; (c) exercise of preemptive rights by a Shareholder pursuant to Section 3.2; and (d) exercise of call rights by the Company or a Shareholder pursuant to Section 3.3 (including pursuant to the two provisos in Section 3.1(b)).  Notwithstanding anything to the contrary contained in this Agreement, any such transactions requiring filings with and approvals, or non-disapprovals, from the Indiana Department of Insurance or the Indiana Insurance Commissioner shall not, to the extent within the control of a party hereto, be entered into or consummated unless and until the required filings have been made and the required approvals (or non-disapprovals) have been obtained, and to the extent not within the control of an applicable party hereto, such party shall use best efforts to cause such transactions not to be entered into or consummated unless and until the required filings have been made and the required approvals (or non-disapprovals) have been obtained.

 

5.7                                REIT Matters .  At the request of any Shareholder that intends (for itself or for any of its affiliates) to qualify and be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the “ Code ”), the Company shall (a) join with such Shareholder (or, as applicable, such Shareholder’s affiliate) in making a “taxable REIT subsidiary” election under Section 856(l) of the Code and (b) otherwise reasonably cooperate with any request of such Shareholder (or its affiliate) pertaining to such real estate investment trust status or taxation under the Code.

 

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ARTICLE VI

 

REPRESENTATIONS AND WARRANTIES

 

6.1                                The Company .  The Company represents and warrants to each Shareholder, as of the date of this Agreement (unless any such representation or warranty speaks as of another date, in which case, as of such date), as follows:

 

(a)                        Organization, Existence, Good Standing and Power .  The Company is an Indiana insurance corporation duly organized, validly existing and in good standing under the laws of the State of Indiana and has the power and authority to execute, deliver and perform its obligations under this Agreement.

 

(b)                        Capitalization; Subsidiaries .

 

(i)              As of immediately prior to the execution and delivery of this Agreement, there are no securities of the Company issued and outstanding, except for the Shares previously issued pursuant to Section 1.1.  Except as provided and contemplated by this Agreement, as of the date of this Agreement, the Company has no commitment or arrangement to issue securities of the Company to any person or entity.

 

(ii)           As of the date of this Agreement, the Company has no subsidiaries.

 

(c)                         Valid Issuance of Shares .  The Shares being purchased by the Shareholders hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable law.

 

(d)                        Binding Effect .  This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligations of the Company, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability (regardless of whether considered in a proceeding at law or in equity).

 

(e)                         No Contravention .  The execution and delivery of this Agreement by the Company and the performance of its obligations hereunder and the consummation by the Company of the transactions contemplated by this Agreement and compliance by the Company with the provisions of this Agreement (i) have been duly authorized by all necessary company action, (ii) do not contravene the terms of the Company’s organizational documents, (iii) do not materially violate, conflict with or result in any breach or contravention of, or the creation of any material lien, charge or encumbrance under, any material agreement, contract, license, permit or instrument to which the Company is a party or by which the Company or any of its assets or

 

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properties are bound and (iv) do not materially violate any law, statute, regulation, order or decree applicable to, or binding upon, the Company or any of its assets or properties.

 

(f)                          Consents .  No approval, consent, compliance, exemption, authorization or other action by, or notice to, or filing with, any local, state or federal governmental authority or any other person or entity (individually and collectively, a “ Consent ”), not already obtained or made, and no lapse of a waiting period under any applicable law, statute, regulation, order or decree, is necessary or required in connection with the execution, delivery or performance by the Company of this Agreement or the transactions contemplated hereby; provided, however, that the foregoing representation and warranty shall not apply to any Consent which may be required in the future as a result of the application of the rights and obligations provided for hereunder or the conducting of the Company’s business.

 

(g)                          Compliance with Laws .  The Company is in compliance in all material respects with all applicable laws, statutes, regulations, orders or decrees applicable to, or binding upon, the Company or any of its assets or properties.

 

(h)                         Offering .  Subject to the accuracy of the Shareholder’s representations and warranties set forth in Sections 6.2(f) through 6.2(i), the offer, sale and issuance of the Shares to be issued in conformity with the terms of this Agreement constitute transactions which are exempt from the registration requirements of the Securities Act of 1933, as amended (the “ Securities Act ”), and from all applicable state registration or qualification requirements.  Neither the Company nor any person or entity acting on its behalf will take any action that would cause the loss of such exemption.

 

(i)                             No Integration .  The Company has not, directly or through any agent, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the Shares sold pursuant to this Agreement in a manner that would require the registration of the Shares under the Securities Act.

 

6.2                                The Shareholders .  Each Shareholder represents and warrants to the Company and the other Shareholders, as of the date of this Agreement, as follows:

 

(a)                        Organization, Existence, Good Standing and Power .  The Shareholder (i) is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation; (ii) has all requisite power and authority to conduct the business in which it is currently engaged; and (iii) has the power and authority to execute, deliver and perform its obligations under this Agreement.

 

(b)                        Binding Effect .  This Agreement has been duly executed and delivered by the Shareholder and constitutes the legal, valid and binding obligations of the Shareholder, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability (regardless of whether considered in a proceeding at law or in equity).

 

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(c)                         No Contravention .  The execution and delivery of this Agreement by the Shareholder and the performance of its obligations hereunder and the consummation by the Shareholder of the transactions contemplated by this Agreement and compliance by the Shareholder with the provisions of this Agreement (i) have been duly authorized by all necessary company action, (ii) do not contravene the terms of the Shareholder’s organizational documents, (iii) do not materially violate, conflict with or result in any breach or contravention of, or, except with respect to any Existing Pledge which the Shareholder or any of its assets or properties may be subject, the creation of any material lien, charge or encumbrance under, any material agreement, contract, license, permit or instrument to which the Shareholder is a party or by which the Shareholder or any of its assets or properties are bound and (iv) do not materially violate any law, statute, regulation, order or decree applicable to, or binding upon, the Shareholder or any of its assets or properties.

 

(d)                        Consents .  No Consent, not already obtained or made, and no lapse of a waiting period under any applicable law, statute, regulation, order or decree, is necessary or required in connection with the execution, delivery or performance by the Shareholder of this Agreement or the transactions contemplated hereby; provided, however, that the foregoing representation and warranty shall not apply to any Consent which may be required in the future as a result of the application of the rights and obligations provided for hereunder or the conducting of the Company’s business.

 

(e)                          Compliance with Laws .  The Shareholder is in compliance in all material respects with all applicable laws, statutes, regulations, orders or decrees applicable to, or binding upon, the Shareholder or any of its assets or properties.

 

(f)                           Purchase Entirely for Own Account .  The Shares are being acquired for investment for the Shareholder’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Shareholder has no present intention of selling, granting any participation with respect to or otherwise distributing the Shares.  Except as provided by this Agreement, the Shareholder does not have any contract, undertaking, agreement or arrangement with any person or entity to sell or transfer to any person or entity, or grant participation rights to any person or entity with respect to, any of the Shares.

 

(g)                          Disclosure of Information .  The Shareholder has received all the information from the Company and its management that the Shareholder considers necessary or appropriate for deciding whether to purchase the Shares hereunder.  The Shareholder further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the Company, its financial condition, results of operations and prospects and the terms and conditions of the offering of the Shares sufficient to enable it to evaluate its investment.

 

(h)                         Investment Experience and Accredited Investor Status .  The Shareholder is an “accredited investor” (as defined in Regulation D under the Securities Act).  The Shareholder has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares to be purchased hereunder.

 

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(i)                             Restricted Securities .  The Shareholder understands that the Shares, when issued, shall be “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws the Shares may be resold without registration under the Securities Act only in certain limited circumstances.

 

ARTICLE VII

 

TERMINATION

 

7.1                                Termination .  This Agreement shall remain in full force and effect until the sooner of:  (a) its termination pursuant to the next succeeding sentence of this Section 7.1 or (b) the dissolution of the Company; provided, however, that the dissolution of the Company, the merger of the Company with, or the transfer of all or substantially all the assets of the Company to, another entity which continues substantially all of the Company’s business shall not of itself terminate this Agreement.  This Agreement may be terminated at any time by the Shareholders owning at least 75% of the issued and outstanding Shares owned by all Shareholders.  Section 5.5 and Article VIII shall survive any termination or expiration of this Agreement.

 

ARTICLE VIII

 

MISCELLANEOUS

 

8.1                                Notices .  Any notices or other communications required or permitted under, or otherwise in connection with, this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person, upon confirmation of receipt when transmitted by facsimile transmission, on the next business day if transmitted by a nationally recognized overnight courier or on the third business day following mailing by first class mail, postage prepaid, in each case as follows (or at such other United States address or facsimile number for a party as shall be specified by like notice):

 

Notices to the Company:

 

Affiliates Insurance Company
101 West Washington Street, Suite 1100
Indianapolis, Indiana 46204
Attention:  President/Vice President
Facsimile No.:  (317) 632-2883

 

with a copy to:

 

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Affiliates Insurance Company
Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention:  President/Vice President
Facsimile No.:  (617) 928-1305

 

Notices to FVE:

 

Five Star Quality Care, Inc.
400 Centre Street
Newton, Massachusetts 02458
Attention:  President
Facsimile No.:  (617) 796-8385

 

Notices to HPT:

 

Hospitality Properties Trust
Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention:  President
Facsimile No.:  (617) 969-5730

 

Notices to CWH:

 

CommonWealth REIT

Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention:  President
Facsimile No.:  (617) 332-2261

 

Notices to SNH:

 

Senior Housing Properties Trust

Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention:  President
Facsimile No.:  (617) 796-8349

 

17



 

Notices to TA:

 

TravelCenters of America LLC

24601 Center Ridge Road, Suite 200
Westlake, Ohio 44145
Attention:  President
Facsimile No.:  (440) 808-3301

 

Notices to RMR:

 

Reit Management & Research LLC

Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention:  President
Facsimile No.:  (617) 928-1305

 

Notices to GOV:

 

Government Properties Income Trust
Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention:  President
Facsimile No.:  (617) 219-1441

 

and

 

Notices to SIR:

 

Select Income REIT

Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention:  President
Facsimile No.:  (617) 796-8335

 

8.2                                Successors and Assigns; Third Party Beneficiaries .  This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto.  Except as permitted by Section 3.1 and Section 3.4, no party may assign this Agreement or its rights hereunder or delegate its duties hereunder without the written consent of the other parties.  Except as otherwise provided in Section 8.7, no person or entity other than the parties

 

18



 

hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement.

 

8.3                                Amendment and Waiver .

 

(a)                        No failure or delay on the part of any party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy.  The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to each party at law, in equity or otherwise.  Any party hereto may waive in whole or in part any right afforded to such party hereunder.

 

(b)                        Any amendment, supplement or modification of or to any provision of this Agreement, shall be effective upon the written agreement of the Company and the Shareholders owning not less than 75% of all Shares owned by the Shareholders; provided, however, that any amendment, supplement or modification of Article I or Article II shall require the approval of any Shareholder which may be adversely affected by any such amendment, supplement or modification.

 

8.4                                Counterparts .  This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

 

8.5                                Headings .  The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

 

8.6                                Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana without regard to the conflicts of laws rules thereof, which would require the application of the laws of another jurisdiction.

 

8.7                                Dispute Resolution

 

(a)                                  Any disputes, claims or controversies between the parties (i) arising out of or relating to this Agreement, the Company, its business, assets or operations or any insurance policies or coverage underwritten by the Company or any of its third party agents in furtherance of the Company’s insurance business or (ii) brought by or on behalf of any shareholder of the Company (which, for purposes of this Section 8.7, shall mean any shareholder of record or any beneficial owner of shares of the Company, or any former shareholder of record or beneficial owner of shares of the Company), either on his, her or its own behalf, on behalf of the Company or on behalf of any series or class of shares of the Company or shareholders of the Company against the Company or any director, officer, manager (including RMR or its successor), agent or employee of the Company, including disputes, claims or controversies relating to the meaning, interpretation, effect, validity, performance or enforcement of this Agreement or the articles of incorporation or bylaws of the Company (all of which are referred to as “ Disputes ”), or relating in any way to such a Dispute or Disputes shall, on the demand of any party to such Dispute, be resolved through binding and final arbitration in accordance with the

 

19



 

Commercial Arbitration Rules (the “ Rules ”) of the American Arbitration Association (“ AAA ”) then in effect, except as those Rules may be modified in this Section 8.7.  For the avoidance of doubt, and not as a limitation, Disputes are intended to include derivative actions against directors, officers or managers of the Company and class actions by a shareholder against those individuals or entities and the Company.  For the avoidance of doubt, a Dispute shall include a Dispute made derivatively on behalf of one party against another party.

 

(b)                                  There shall be three arbitrators.  If there are only two parties to the Dispute, each party shall select one arbitrator within 15 days after receipt by respondent of a copy of the demand for arbitration.  Such arbitrators may be affiliated or interested persons of such parties.  If either party fails to timely select an arbitrator, the other party to the Dispute shall select the second arbitrator who shall be neutral and impartial and shall not be affiliated with or an interested person of either party.  If there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, shall each select, by the vote of a majority of the claimants or the respondents, as the case may be, one arbitrator. Such arbitrators may be affiliated or interested persons of the claimants or the respondents, as the case may be.  If either all claimants or all respondents fail to timely select an arbitrator then such arbitrator (who shall be neutral, impartial and unaffiliated with any party) shall be appointed by the parties who have appointed the first arbitrator.  The two arbitrators so appointed shall jointly appoint the third and presiding arbitrator (who shall be neutral, impartial and unaffiliated with any party) within 15 days of the appointment of the second arbitrator.  If the third arbitrator has not been appointed within the time limit specified herein, then the AAA shall provide a list of proposed arbitrators in accordance with the Rules, and the arbitrator shall be appointed by the AAA in accordance with a listing, striking and ranking procedure, with each party having a limited number of strikes, excluding strikes for cause.

 

(c)                                   The place of arbitration shall be Indianapolis, Indiana unless otherwise agreed by the parties.

 

(d)                                  There shall be only limited documentary discovery of documents directly related to the issues in dispute, as may be ordered by the arbitrators.

 

(e)                                   In rendering an award or decision (the “ Award ”), the arbitrators shall be required to follow the laws of the State of Indiana.  Any arbitration proceedings or Award rendered hereunder and the validity, effect and interpretation of this arbitration agreement shall be governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq.  The Award shall be in writing and may, but shall not be required to, briefly state the findings of fact and conclusions of law on which it is based.

 

(f)                                    Except to the extent otherwise agreed by the parties, each party involved in a Dispute shall bear its own costs and expenses (including attorneys’ fees), and the arbitrators shall not render an award that would include shifting of any such costs or expenses (including attorneys’ fees) or, in a derivative case or class action, award any portion of the Company’s award to the claimant or the claimant’s attorneys.  Each party (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, respectively) shall bear the costs and expenses of its (or their) selected arbitrator and the parties (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and

 

20



 

all respondents, on the other hand) shall equally bear the costs and expenses of the third appointed arbitrator.

 

(g)                                   An Award shall be final and binding upon the parties thereto and shall be the sole and exclusive remedy between such parties relating to the Dispute, including any claims, counterclaims, issues or accounting presented to the arbitrators.  Judgment upon the Award may be entered in any court having jurisdiction.  To the fullest extent permitted by law, no application or appeal to any court of competent jurisdiction may be made in connection with any question of law arising in the course of arbitration or with respect to any award made except for actions relating to enforcement of this agreement to arbitrate or any arbitral award issued hereunder and except for actions seeking interim or other provisional relief in aid of arbitration proceedings in any court of competent jurisdiction.

 

(h)                                  Any monetary award shall be made and payable in U.S. dollars free of any tax, deduction or offset.  Each party against which the Award assesses a monetary obligation shall pay that obligation on or before the 30 th  day following the date of the Award or such other date as the Award may provide.

 

(i)                                      This Section 8.7 is intended to benefit and be enforceable by the shareholders, directors, officers, managers (including RMR or its successor), agents or employees of the Company and the Company and shall be binding on the shareholders of the Company and the Company, as applicable, and shall be in addition to, and not in substitution for, any other rights to indemnification or contribution that such individuals or entities may have by contract or otherwise.

 

8.8                                Interpretation and Construction .

 

(a)                        The words “hereof”, “herein”, “hereby” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement.

 

(b)                        Unless the context otherwise requires, references to sections, subsections or Articles refer to sections, subsections or Articles of this Agreement.

 

(c)                         Terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa.

 

(d)                        The words “include” and “including” and words of similar import shall be deemed to be followed by the words “without limitation”.

 

(e)                         Words importing gender include both genders.

 

(f)                          Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments

 

21



 

incorporated therein.  In addition, references to any statute are to that statute and to the rules and regulations promulgated thereunder.

 

(g)                         The parties hereto have participated jointly in the negotiation and drafting of this Agreement and, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as jointly drafted by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.

 

8.9                                Severability .  If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof.

 

8.10                         Entire Agreement .  This Agreement and the SIR Subscription Agreement constitute the entire agreement, and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement.

 

8.11                         Non-liability of Trustees and Directors .

 

(a)                        COPIES OF THE DECLARATIONS OF TRUST OF HPT, CWH, SNH, GOV AND SIR, AS IN EFFECT ON THE DATE HEREOF, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IF ANY, ARE DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND.  THE DECLARATIONS OF TRUST, AS AMENDED AND SUPPLEMENTED, OF HPT, CWH, SNH, GOV AND SIR, PROVIDE THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HPT, CWH, SNH, GOV AND SIR, AS APPLICABLE, SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HPT, CWH, SNH, GOV AND SIR.  ALL PERSONS DEALING WITH HPT, CWH, SNH, GOV AND SIR IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HPT, CWH, SNH, GOV AND SIR, AS APPLICABLE, FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

 

(b)                        A COPY OF THE ARTICLES OF INCORPORATION, AS IN EFFECT ON THE DATE HEREOF, OF FVE, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND.  NO DIRECTOR, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF FVE SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, FVE.  ALL PERSONS DEALING WITH FVE, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF FVE FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

 

22



 

(c)        A COPY OF THE LIMITED LIABILITY COMPANY AGREEMENT, AS IN EFFECT ON THE DATE HEREOF, OF TA, TOGETHER WITH ALL AMENDMENTS THERETO, IS AVAILABLE TO A SHAREHOLDER PARTY HERETO UPON WRITTEN REQUEST MADE TO TA.  NO DIRECTOR, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF TA SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, TA.  ALL PERSONS DEALING WITH TA, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF TA FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

 

[The Remainder of This Page Intentionally Left Blank]

 

23



 

IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Amended and Restated Shareholders Agreement on the date first written above.

 

AFFILIATES INSURANCE COMPANY

 

 

 

 

 

By:

 

 

 

Name:

Jennifer B. Clark

 

 

Title:

President

 

 

 

 

 

FIVE STAR QUALITY CARE, INC.

 

 

 

 

 

 

 

 

 

By:

 

 

 

Name:

Bruce J. Mackey Jr.

 

 

Title:

President and Chief Executive Officer

 

 

 

 

 

HOSPITALITY PROPERTIES TRUST

 

 

 

 

 

By:

 

 

 

Name:

John G. Murray

 

 

Title:

President and Chief Operating Officer

 

 

 

 

 

COMMONWEALTH REIT

 

 

 

 

 

By:

 

 

 

Name:

John C. Popeo

 

 

Title:

Treasurer and Chief Financial Officer

 

 

 

 

 

SENIOR HOUSING PROPERTIES TRUST

 

 

 

 

 

By:

 

 

 

Name:

David J. Hegarty

 

 

Title:

President and Chief Operating Officer

 

 



 

TRAVELCENTERS OF AMERICA LLC

 

 

 

 

 

By:

 

 

 

Name:

Thomas M. O’Brien

 

 

Title:

President and Chief Executive Officer

 

 

 

 

 

REIT MANAGEMENT & RESEARCH LLC

 

 

 

 

 

By:

 

 

 

Name:

Adam D. Portnoy

 

 

Title:

President

 

 

 

 

 

 

 

 

 

GOVERNMENT PROPERTIES INCOME

 

TRUST

 

 

 

 

 

By:

 

 

 

Name:

Mark L. Kleifges

 

 

Title:

Treasurer and Chief Financial Officer

 

 

 

 

 

SELECT INCOME REIT

 

 

 

 

 

By:

 

 

 

Name:

David M. Blackman

 

 

Title:

President and Chief Operating Officer

 

 


Exhibit 12.1

 

Statement of Computation of Ratio of Earnings to Fixed Charges

 

 

 

Six Months
Ended
June 30, 2012

 

 

 

 

 

Pre-tax income from continuing operations

 

$

16,300

 

 

 

 

 

Income from equity investees

 

(462

)

Fixed charges

 

37,954

 

Distribution of income from equity investee

 

2,000

 

Total earnings

 

$

55,792

 

 

 

 

 

Interest expense (1)

 

$

4,994

 

Estimated interest within rent expense (2)  

 

32,960

 

Total fixed charges

 

$

37,954

 

 

 

 

 

Ratio of earnings to fixed charges

 

1.47

 

 


(1)                   Includes interest expense and amortization of premiums and discounts related to indebtedness.

 

(2)                   Estimated interest within rent expense includes one third of real estate rental expense, which approximates the interest component of operating leases.

 


Exhibit 31.1

 

CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

 

I, Thomas M. O’Brien, certify that:

 

1.                                       I have reviewed this Quarterly Report on Form 10-Q of TravelCenters of America LLC;

 

2.                                       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                                       The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)                                      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)                                      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

c)                                       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)                                      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                                       The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)                                      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)                                      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 7, 2012

/s/ THOMAS M. O’BRIEN

 

Thomas M. O’Brien

 

President and Chief Executive Officer

 


Exhibit 31.2

 

CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

 

I, Andrew J. Rebholz, certify that:

 

1.                                       I have reviewed this Quarterly Report on Form 10-Q of TravelCenters of America LLC;

 

2.                                       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                                       The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)                                      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)                                      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

c)                                       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)                                      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                                       The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)                                      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)                                      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 7, 2012

/s/ ANDREW J. REBHOLZ

 

Andrew J. Rebholz

 

Executive Vice President, Chief Financial Officer and Treasurer

 


Exhibit 32.1

 

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 Quarterly Report on Form 10-Q for the period ended June 30, 2012 (the “Report”), each of the undersigned hereby certifies, to the best of his knowledge:

 

1.               The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.               The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

Date: August 7, 2012

/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 99.1

 

AMENDED AND RESTATED REIMBURSEMENT AGREEMENT

 

AMENDED AND RESTATED REIMBURSEMENT AGREEMENT (this “Agreement”), dated May       , 2012, among Reit Management & Research LLC (“RMR”), TravelCenters of America LLC (“TA”) and Five Star Quality Care, Inc. (“FVE”).

 

RECITAL

 

RMR provides management and administrative services to TA pursuant to an Amended and Restated Business Management and Shared Services Agreement dated January 25, 2010, and to FVE pursuant to an Amended and Restated Business Management and Shared Services Agreement dated January 4, 2010, as amended, including, with respect to telecommunications services, the negotiation of contracts with third party vendors and suppliers.

 

RMR and AT&T Corp. (“AT&T”) are parties to a Master Agreement No.: 0789 dated December 16, 2003 and the schedules, exhibits, addenda and service order attachments related thereto (collectively, as amended from time to time, the “AT&T Agreement”).  Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the AT&T Agreement.

 

Under the AT&T Agreement, RMR secured more favorable pricing for services than is generally available from AT&T, but is responsible for meeting minimum revenue commitments, which AT&T agreed to make available to TA and FVE, as affiliates of RMR.

 

RMR entered into the AT&T Agreement in reliance on TA and FVE having agreed to be responsible for portions of any unsatisfied minimums related to the provision of services to them under the AT&T Agreement as set forth in a Reimbursement Agreement dated October 17, 2008 (“Reimbursement Agreement”).

 

RMR and AT&T entered amendments to the AT&T Agreement dated September 9, 2011, and April 23, 2012, and desire to amend and restate the Reimbursement Agreement to reflect their understanding and agreement as to the obligations of each with respect to the increased minimum revenue commitments (MARC/MAC”) resulting from the provision of services to TA and RMR under the AT&T Agreement as so amended and upon any termination of the AT&T Agreement.

 

NOW, THEREFORE, in consideration of the premises and the mutual undertakings in this Agreement, the parties hereto agree:

 

1.                                       Usage and Payment .  (a) Effective September 9, 2011, RMR will be responsible for a MARC/MRC with respect to voice and data telecommunications services under the AT&T Agreement in the amount of $3,000,000 annually.  Based upon their historical usage of voice and data telecommunications services, the parties agree that for the period beginning September 9, 2011 and ending September 8, 2012, TA will be responsible for satisfaction of 53.21%, FVE will be responsible for 35.90% and RMR will be responsible for 10.89% (in each case, the “voice and data Pro-Rata Percentage”) of the MARC/MRC for voice and data telecommunications services during such period.  The voice and data Pro-Rata Percentages will be readjusted on September 8, 2012, and each September 8 thereafter, based on charges for actual usage of telecommunications

 



 

services for the preceding twelve months ended immediately prior thereto, with each party being responsible for the voice and data Pro-Rata Percentage obtained by multiplying 100 by the decimal resulting from dividing the aggregate charges for actual usage of voice and data telecommunications services of TA, FVE or RMR, as the case may be, by the aggregate charges for actual usage of voice and data telecommunications services of all the parties for the relevant twelve months ended. (b)  Effective April 23, 2012, RMR will be responsible for a MARC/MRC with respect to wireless telecommunications services under the AT&T Agreement in the amount of $2,900,000 annually.  Based upon their historical usage of wireless telecommunications services, the parties agree that for the period beginning April 23, 2012 and ending April 22, 2013, TA will be responsible for satisfaction of 30%, FVE will be responsible for 43% and RMR will be responsible for 27% (in each case, the “wireless Pro-Rata Percentage”) of the MARC/MRC for wireless telecommunications services during such period.  The wireless Pro-Rata Percentages will be readjusted on April 22, 2013, and on each April 22 thereafter, based on charges for actual usage of telecommunications services for the preceding twelve months ended immediately prior thereto, with each party being responsible for the wireless Pro-Rata Percentage obtained by multiplying 100 by the decimal resulting from dividing the aggregate charges for actual usage of wireless telecommunications services of TA, FVE or RMR, as the case may be, by the aggregate charges for actual usage of wireless telecommunications services of all the parties for the relevant twelve months ended. (c) It is expected that each of RMR, TA and FVE will be separately invoiced by AT&T for its actual usage of each of voice and data and wireless telecommunications services and each agrees to be responsible for timely payment.  If for any reason either TA or FVE does not timely pay AT&T or is not separately invoiced, TA and/or FVE, as the case may be, will promptly reimburse RMR for any payment to AT&T made on their behalf, promptly on demand.  If there is a material reduction in a party’s voice and data Pro-Rata Percentage or wireless Pro-Rata Percentage as a result of its purchasing telecommunications services from a carrier other than AT&T, the party whose voice and data Pro-Rata Percentage or wireless Pro-Rata Percentage is reduced will cooperate with the other parties in making an equitable adjustment.

 

2.                                       Reimbursement .  If a MARC/MRC for any year of the Attachment Term (or any shorter period) is not satisfied, RMR will be billed a Shortfall Charge by AT&T equal to the difference between the applicable MARC/MRC and the total of the actual MARC/MRC-Eligible Charges for such year or period.  If the MARC/MRC-Eligible Charges of either of TA or FVE fall below their respective Pro-Rata Percentage (as adjusted) at any time, TA or FVE, as the case may be, will be solely responsible for the Shortfall Charge attributable thereto and will reimburse RMR an amount equal to Shortfall Charge attributable thereto, promptly on demand.

 

3.                                       Termination for Convenience by RMR .  If the AT&T Agreement is terminated by RMR for its convenience, which will only be done with the agreement of TA and FVE, each of TA and FVE will reimburse RMR an amount of the Termination Charge and any other amounts due AT&T under the AT&T Agreement equitably determined by the parties and based upon the respective voice and data Pro-Rata Percentages and wireless Pro-Rata Percentages, promptly on demand.

 

4.                                       Severability. Any provision of this Agreement which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such unenforceability

 

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without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

 

5.                                       Governing Law. This Agreement shall be construed in accordance with and governed by the internal laws of the Commonwealth of Massachusetts (without giving effect to any conflicts or choice of laws provisions that would cause the application of the domestic substantive laws of any other jurisdiction).

 

6.                                       Arbitration .

 

(a)                                  Disputes . Any disputes, claims or controversies between the parties (i) arising out of or relating to this Agreement, or (ii) brought by or on behalf of any shareholder of any party or a direct or indirect parent of a party (which, for purposes of this Section 6, shall mean any shareholder of record or any beneficial owner of shares of any party, or any former shareholder of record or beneficial owner of shares of any party), either on his, her or its own behalf, on behalf of any party or on behalf of any series or class of shares of any party or shareholders of any party against any party or any member, trustee, officer, manager (including RMR or its successor), agent or employee of any party, including disputes, claims or controversies relating to the meaning, interpretation, effect, validity, performance or enforcement of this Agreement, including this arbitration provision, or the declarations of trust, limited liability company agreements or bylaws of any party hereto (all of which are referred to as “Disputes”), or relating in any way to such a Dispute or Disputes shall, on the demand of any party to such Dispute be resolved through binding and final arbitration in accordance with the Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (“ AAA ”) then in effect, except as those Rules may be modified in this Section 6.  For the avoidance of doubt, and not as a limitation, Disputes are intended to include derivative actions against trustees, officers or managers of any party and class actions by a shareholder against those individuals or entities and any party.  For the avoidance of doubt, a Dispute shall include a Dispute made derivatively on behalf of one party against another party.   For purposes of this Section 6, the term “party” shall include any direct or indirect parent of a party .

 

(b)                                  Selection of Arbitrators .  There shall be three arbitrators.  If there are only two parties to the Dispute, each party shall select one arbitrator within 15 days after receipt of a demand for arbitration.  Such arbitrators may be affiliated or interested persons of such parties.  If there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, shall each select, by the vote of a majority of the claimants or the respondents, as the case may be, one arbitrator within 15 days after receipt of a demand for arbitration.  Such arbitrators may be affiliated or interested persons of the claimants or the respondents, as the case may be.  If either a claimant (or all claimants) or a respondent (or all respondents) fail to timely select an arbitrator then the party (or parties) who has selected an arbitrator may request the AAA to provide a list of three proposed arbitrators in accordance with the Rules (each of whom shall be neutral, impartial and unaffiliated with any party) and the party (or parties) that failed to timely appoint an arbitrator shall have ten days from the date the AAA provides such list to select one of the three arbitrators proposed by AAA.  If such party (or parties) fail to select such arbitrator by such time, the party (or parties) who have appointed the first arbitrator shall then have ten days to select one of the three arbitrators proposed by AAA to be the second arbitrator; and, if he/they should fail to select such arbitrator by such time, the

 

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AAA shall select, within 15 days thereafter, one of the three arbitrators it had proposed as the second arbitrator.  The two arbitrators so appointed shall jointly appoint the third and presiding arbitrator (who shall be neutral, impartial and unaffiliated with any party) within 15 days of the appointment of the second arbitrator.  If the third arbitrator has not been appointed within the time limit specified herein, then the AAA shall provide a list of proposed arbitrators in accordance with the Rules, and the arbitrator shall be appointed by the AAA in accordance with a listing, striking and ranking procedure, with each party having a limited number of strikes, excluding strikes for cause.

 

(c)                                   Location of Arbitration .  The place of Arbitration shall be Boston, Massachusetts unless otherwise agreed by the parties.

 

(d)                                  Scope of Discovery .  There shall be only limited documentary discovery of documents directly related to the issues in dispute, as may be ordered by the arbitrators.

 

(e)                                   Arbitration Award .  In rendering an award or decision (the “Arbitration Award”), the arbitrators shall be required to follow the laws of the State of New York.  Any arbitration proceedings or Arbitration Award rendered hereunder and the validity, effect and interpretation of this Section 6 shall be governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq.  The Arbitration Award shall be in writing and may, but shall not be required to, briefly state the findings of fact and conclusions of law on which it is based.

 

(f)                                    Costs .  Except to the extent expressly provided by this Agreement or as otherwise agreed between the parties, each party involved in a Dispute shall bear its own costs and expenses (including attorneys’ fees), and the arbitrators shall not render an award that would include shifting of any such costs or expenses (including attorneys’ fees) or, in a derivative case or class action, award any portion of a party’s award to the claimant or the claimant’s attorneys.  Each party (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, respectively) shall bear the costs and expenses of its (or their) selected arbitrator and the parties (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand) shall equally bear the costs and expenses of the third appointed arbitrator.

 

(g)                                   Final Judgment .  An Arbitration Award shall be final and binding upon the parties thereto and shall be the sole and exclusive remedy between such parties relating to the Dispute, including any claims, counterclaims, issues or accounting presented to the arbitrators.  Judgment upon the Arbitration Award may be entered in any court having jurisdiction.  To the fullest extent permitted by law, no application or appeal to any court of competent jurisdiction may be made in connection with any question of law arising in the course of arbitration or with respect to any award made except for actions relating to enforcement of this agreement to arbitrate or any arbitral award issued hereunder and except for actions seeking interim or other provisional relief in aid of arbitration proceedings in any court of competent jurisdiction.

 

(h)                                  Payment .  Any monetary award shall be made and payable in U.S. dollars free of any tax, deduction or offset.  Each party against which the Arbitration Award assesses a monetary obligation shall pay that obligation on or before the 30 th  day following the date of the Arbitration Award or such other date as the Arbitration Award may provide.

 

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(i)                                      Beneficiaries .  This Section 6 is intended to benefit and be enforceable by the shareholders, members, direct and indirect parents, trustees, directors, officers, managers (including RMR or its successor), agents or employees of any party and the parties and shall be binding on the shareholders of any party and the parties, as applicable, and shall be in addition to, and not in substitution for, any other rights to indemnification or contribution that such individuals or entities may have by contract or otherwise.

 

7.                                       Assignability; Successors and Assigns. No party hereto may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the express prior written consent of the other parties.

 

8.                                       Complete Agreement. The parties acknowledge that this Agreement constitutes the complete agreement among the parties with respect to the subject matter hereof, and supersedes any previous agreements between them with respect thereto.

 

9.                                       Amendments. No provisions of this Agreement shall be deemed waived, amended, supplemented or modified by either party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the party against whom such waiver, amendment, supplement or modification it is sought to be enforced.

 

[Remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written.

 

 

Reit Management & Research LLC

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

 

 

TravelCenters of America LLC

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

 

 

Five Star Quality Care, Inc.

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

[Signature Page to Amended and Restated Reimbursement Agreement]

 

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