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The following is an excerpt from a 10-K SEC Filing, filed by TRAVELCENTERS OF AMERICA INC on 3/30/2004.
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TRAVELCENTERS OF AMERICA INC - 10-K - 20040330 - PART_I

PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

We are a holding company which, through our wholly owned subsidiaries, owns, operates and franchises travel centers along the United States interstate highway system to serve long-haul trucking fleets and their drivers, independent truck drivers and general motorists. Our network is the largest, and only nationwide, full-service travel center network in the United States. At December 31, 2003, our geographically diverse network consisted of 150 sites located in 41 states and the province of Ontario, Canada. In January 2003, we began operating in Canada through the acquisition of a travel center located in Woodstock, Ontario. Our operations are conducted through three distinct types of travel centers:

- sites owned or leased and operated by us, which we refer to as company-operated sites;
- sites owned by us and leased to independent lessee-franchisees, which we refer to as leased sites; and
- sites owned and operated by independent franchisees, which we refer to as franchisee-owned sites.

Our travel centers are located at key points along the U.S. interstate highway system and in Canada, typically on 20- to 25-acre sites. Most of our network properties were developed more than 20 years ago when prime real estate locations along the interstate highway system were more readily available than they are today, making a network such as ours difficult to replicate. Operating under the "TravelCenters of America" and "TA" brand names, our nationwide network provides an advantage to long-haul trucking fleets by enabling them to reduce the number of their suppliers by routing their trucks within our network from coast to coast.

One of the primary strengths of our business is the diversity of our revenue sources. We have a broad range of product and service offerings, including diesel fuel and gasoline, truck repair and maintenance services, full-service restaurants, more than 20 different brands of fast food restaurants, which we refer to as quick service restaurants, or QSRs, travel and convenience stores and other driver amenities.

The U.S. travel center and truck stop industry in which we operate consists of travel centers, truck stops, diesel fuel outlets and similar facilities designed to meet the needs of long-haul trucking fleets and their drivers, independent truck drivers and general motorists. According to the National Association of Truck Stop Operators, or "NATSO," the travel center and truck stop industry is highly fragmented, with in excess of 3,000 travel centers and truck stops located on or near interstate highways nationwide, of which we consider approximately 500 to be full-service facilities. Further, only eight chains in the United States have 25 or more travel center and truck stop locations on the interstate highways, which we believe is the minimum number of locations needed to provide even regional coverage to truck drivers and trucking fleets.

HISTORY AND ORGANIZATION

We were formed in December 1992 by a group of institutional investors. We were originally incorporated as National Auto/Truckstops Holdings Corporation but changed our name to TravelCenters of America, Inc. in March 1997. We primarily have created our network through the following series of acquisitions:

- In April 1993, we acquired the truckstop network assets of a subsidiary of Unocal Corporation, which sites we refer to as the "Unocal network." The Unocal network included a total of 139 facilities, of which 95 were leased sites, 42 were franchisee-owned sites and two sites were company-operated sites.

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- In December 1993, we acquired the truckstop network assets of certain subsidiaries of The British Petroleum Company p.l.c., which assets we refer to as the "BP network." The BP network included 38 company-operated sites and six franchisee-owned sites.

- In December 1998, we acquired substantially all of the truckstop network assets of Burns Bros., Inc. and certain of its affiliates, which assets we refer to as the Burns Bros. network. The Burns Bros. network included 17 company-operated sites, located in nine western and northwestern states.

- In June 1999, we acquired the travel center and truck stop network assets of Travel Ports of America, Inc. through the acquisition of 100% of the stock of Travel Ports. The Travel Ports network consisted of 16 company-operated sites in seven states, primarily in the northeastern region of the United States.

Historically, until 1997, the Unocal network operated principally as a fuel wholesaler and franchisor, with relatively few company-operated sites. In contrast to the Unocal network, the BP network operated principally as an owner-operator of travel centers. In January 1997, we instituted a plan to combine the Unocal network and the BP network, which had been previously managed and financed separately, into a single network to be operated under the "TravelCenters of America" and "TA" brand names under the leadership of a single management team. Prior to combining the Unocal and BP networks, the Unocal network was operated through National Auto/Truckstops, Inc. and the BP network was operated through TA Operating Corporation, each of National Auto/Truckstops, Inc. and TA Operating Corporation being a wholly owned subsidiary of ours. At the time we approved the plan to combine our networks, there were 122 sites operating in the Unocal network and 49 sites operating in the BP network. In November 2000, National Auto/Truckstops, Inc. merged with and into TA Operating Corporation.

In July 1999, we signed an agreement with Freightliner LLC to become an authorized provider of express service, minor repair work and a specified menu of warranty repairs to Freightliner's customers through the Freightliner ServicePoint Program. Under the agreement, our truck repair facilities have been added to Freightliner's 24-hour customer assistance center database as a major referral point for emergency and roadside repairs and also have access to Freightliner's parts distribution, service and technical information systems. Freightliner, a DaimlerChrysler company, is a leading manufacturer of heavy trucks in North America. Freightliner also acquired a minority ownership interest in us at that time.

On May 31, 2000, we and shareholders owning a majority of our voting stock entered into a recapitalization agreement and plan of merger, as amended, with TCA Acquisition Corporation, a newly created corporation formed by Oak Hill Capital Partners, L.P. and its affiliates ("Oak Hill"), under which TCA Acquisition Corporation agreed to merge with and into us. This merger was completed on November 14, 2000. Concurrent with the closing of the merger, we completed a series of transactions to effect a recapitalization and a refinancing that included the following:

- TCA Acquisition Corporation issued 6,456,698 shares of common stock to Oak Hill and a group of other institutional investors, which we refer to as the Other Investors, for proceeds of $205.0 million and then merged TCA Acquisition Corporation with and into us. At the time of the merger, the Other Investors were Olympus Growth Fund III, L.P., Olympus Executive Fund, L.P., Monitor Clipper Equity Partners, L.P., Monitor Clipper Equity Partners (Foreign), L.P., UBS Capital Americas II, LLC, Credit Suisse First Boston LFG Holdings 2000, L.P. and Credit Suisse First Boston Corporation, each of whom is an affiliate of certain of our former shareholders. Since that time, certain of these investors have sold their shares to other investors, including affiliates of certain of the Other Investors. Such sales of our shares are not frequent but could occur in the future.

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- We redeemed all shares of our common and preferred stock outstanding prior to the closing of the merger, with the exception of 473,064 shares of common stock with a market value at that time of $15.0 million that were retained by continuing stockholders, and cancelled all then outstanding common stock options and warrants, for cash payments totaling $263.2 million.

- We repaid all amounts outstanding under our then existing debt agreements.

- We borrowed $328.3 million under a secured credit agreement with a group of lenders and issued units consisting of Senior Subordinated Notes due 2009 with a face amount of $190.0 million and initial warrants and contingent warrants that in the aggregate could be exercised in exchange for 277,165 shares of our common stock.

- We merged National Auto/Truckstops, Inc. with and into TA Operating Corporation.

Prior to the closing of the transactions described above, we issued 137,572 shares of common stock for cash proceeds of $3.7 million upon the exercise of stock options held by existing shareholders, which shares remained outstanding. After the transactions described above, Oak Hill owned 60.5% of our outstanding common stock, the Other Investors owned, in the aggregate, 32.7% of our outstanding common stock, Freightliner owned 4.3% of our outstanding common stock and certain members of our management owned 2.5% of our outstanding common stock. The total market value of our equity capitalization after these transactions was $220.0 million.

At December 31, 2003, we had two wholly owned subsidiaries, TA Operating Corporation, which is our primary travel center operating entity, and TA Franchise Systems Inc, which maintains our franchise agreements and relationships. TA Operating Corporation had the following direct or indirect wholly owned subsidiaries:

- TA Licensing, Inc.

- TA Travel, L.L.C.

- TravelCenters Properties, L.P.

- TravelCenters Realty, L.L.C.

- 3073000 Nova Scotia Company

- TravelCentres Canada Inc.

- TravelCentres Canada Limited Partnership

NETWORK DEVELOPMENT

Due to historical competition between the Unocal and BP networks, there were certain markets in which each of these networks had an existing site at the time we instituted our plan to combine these two networks. Likewise, there was competition in certain markets between our networks and the networks of Burns Bros. and of Travel Ports. In addition, there were certain franchisee-owned sites in the Unocal network that were not considered to be in strategic locations. Further, there were, and continue to be, locations on the interstate highway system that we consider to be strategic but in which we do not have an adequate presence. As a result, since 1997 we have significantly reshaped the composition of our network through the following:

- 17 company-operated sites were acquired from Burns Bros. in 1998;

- 16 company-operated sites in the Travel Ports network were acquired in 1999;

- 46 leased sites were converted to company-operated sites, six during 2003, five during 2002, three during 2000, five during 1998 and 27 during 1997;

- one franchisee-owned site was converted to a company-operated site during 2000;

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- five new network sites were constructed, one in 2002, one in 2001, one in 2000 and two in 1999;

- six sites were razed and rebuilt, two in 1999, two in 2000, one in 2001 and one in 2003;

- four company-operated sites were added to our network through individual site acquisitions, two during 2003 and two during 2000;

- franchise agreements covering 28 franchisee-owned sites were terminated, one in 2000 and 27 in 1997;

- 34 sites we owned were sold, three during 2003, three during 2002, four during 2001, two during 2000, five during 1999, two during 1998 and 15 during 1997;

- three franchisee-owned sites were added to our network, one in 2002, one in 1999 and one in 1998; and

- three company-operated sites were closed, one during 2003, and two during 1999 (one was sold during 2002 and our selling efforts are continuing for the other two).

In 1997, we initiated a capital program to upgrade, rebrand and re-image our travel centers and to build new travel centers. This capital program was substantially completed during 2002. Under this capital program, as revised as a result of the Burns Bros. acquisition and the Travel Ports acquisition, we invested approximately $465 million in our sites by the end of 2003. Through December 31, 2003, we had completed full re-image projects at 38 of our sites at an average investment of $2.2 million per site. These full re-image projects typically include expanding the square footage of the travel and convenience store, adding a fast food court with two or three QSRs, upgrading showers and restrooms and updating the full-service restaurant. We also had completed smaller scale re-image projects at another 57 sites at an average cost of $0.3 million. In addition to improving our existing sites, we have identified several new interstate areas available for our network's expansion. We have designed a "protoype" facility and a smaller "protolite" facility to standardize our travel centers and expand our brand name into new geographic markets while also increasing our appeal to motorists. The prototype and protolite designs combine an improved and efficient facility layout with nationally branded QSRs and gasoline brands as well as expanded product and service offerings. Since May 1999, we have completed construction of eight prototype facilities and three protolite facilities. Further, we are currently developing one prototype facility and one protolite facility, each of which we expect to open during 2005. Most of our future expansion will be with the protolite format, which requires significantly less land and capital investment than the prototype design and enables us to quickly and cost efficiently gain a presence in smaller markets. We also intend to pursue strategic acquisitions and additional franchisee-owned sites. Our franchisees will also continue to invest additional amounts of their own capital for reimaging and other projects at the sites they operate.

REFINANCING

As part of the transactions we completed to consummate our merger with TCA Acquisition Corporation and the related recapitalization, we completed a refinancing of our indebtedness, which refinancing transactions we refer to as the "2000 Refinancing." In the 2000 Refinancing, we issued $190 million of senior subordinated notes due 2009 and borrowed $328.3 million under our amended and restated senior credit facility that consists of a fully-drawn $328 million term loan facility and a $100 million revolving credit facility. The proceeds from these borrowings, along with proceeds from the issuance of common stock and other cash on hand, were used to:

- pay for the tender offer and consent solicitation for our 10 1/4% Senior Subordinated Notes due 2007, including accrued interest, premiums and a prepayment penalty;

- repay all amounts, including accrued interest, then outstanding under our existing amended and restated credit agreement;

- redeem in full all of our then existing senior secured notes and pay related accrued interest and prepayment penalties;

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- make cash payments to certain of our then current equity owners, whose shares and unexercised stock options and warrants were redeemed and cancelled pursuant to the recapitalization agreement and plan of merger; and

- pay fees and expenses related to the financings and the merger and recapitalization transactions.

The $190 million of Senior Subordinated Notes were issued as part of units that also included warrants exercisable for 277,165 shares of our common stock. See "Liquidity and Capital Resources" in Item 7 for a further discussion of our outstanding indebtedness.

OUR TRAVEL CENTERS

Our travel centers are designed to appeal to drivers seeking either a quick stop or a more extended visit. Substantially all of our travel centers are full-service facilities located on or near an interstate highway and offer fuel and non-fuel products and services 24 hours per day, 365 days per year.

Property. The layouts of the travel centers we own vary from site to site. The facilities we own are located on properties averaging 22 acres, of which an average of approximately 19 acres are developed. The majority of the developed acreage consists of truck and car fuel islands, separate truck and car paved parking and the main building, which contains a full-service restaurant and one or more QSRs, a travel and convenience store and driver amenities and a truck maintenance and repair shop. The remaining developed acreage contains landscaping and access roads.

Product and Service Offerings. We have developed an extensive and diverse offering of products and services to complement our diesel fuel business, which includes:

- Gasoline. We sell nationally recognized branded gasoline, consistently offering one of the top three gasoline brands in each geographic region. Of our 126 company-operated sites as of December 31, 2003, we offered branded gasoline at 98 sites and unbranded gasoline at 17 sites. Eleven company-operated sites do not sell gasoline.

- Full-Service and Fast Food Restaurants. Most of our travel centers have both full-service restaurants and QSRs that offer customers a wide variety of nationally recognized brand names and food choices. Our full-service restaurants, branded under our "Country Pride," "Buckhorn Family Restaurants" and "Fork in the Road" proprietary brands, offer "home style" meals through menu table service and buffets. We also offer nationally branded QSRs such as Arby's, Burger King, Pizza Hut, Popeye's Chicken & Biscuits, Sbarro, Starbuck's Coffee, Subway, Taco Bell and 13 other brands. We generally attempt to locate QSRs within the main travel center building, as opposed to constructing stand-alone buildings. As of December 31, 2003, we had 154 QSRs in our company-operated sites, and 96 of our network travel centers offered at least one branded QSR.

- Truck Repair and Maintenance Shops. All but eight of our network travel centers have truck repair and maintenance shops. The typical repair shop has between two and four service bays, a parts storage room and trained mechanics on duty at all times. These shops, which generally operate 24 hours per day, 365 days per year, offer extensive maintenance and emergency repair and road services, ranging from basic services such as oil changes and tire repair to specialty services such as diagnostics and repair of air conditioning, air brake and electrical systems. Our work is backed by a warranty honored at all of our repair and maintenance facilities. As of December 31, 2003, all but two of our network sites that have truck repair and maintenance shops were participating in the Freightliner ServicePoint Program.

- Travel and Convenience Stores. Each travel center has a travel and convenience store that caters to truck drivers, motorists, recreational vehicle operators and bus drivers and passengers. Each travel and

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convenience store has a selection of over 4,000 items, including food and snack items, beverages, non-prescription drug and beauty aids, batteries, automobile accessories, and music and video products. In addition to complete travel and convenience store offerings, the stores sell items specifically designed for the truck driver's on-the-road lifestyle, including laundry supplies and clothing as well as truck accessories. Most stores also have a "to go" snack bar installed as an additional food offering.

- Additional Driver Services. We believe that fleets can improve the retention and recruitment of truck drivers by directing them to visit high-quality, full-service travel centers. We strive to provide a consistently high level of service and amenities to drivers at all of our travel centers, making our network an attractive choice for trucking fleets. Most of our travel centers provide truck drivers with access to specialized business services, including an information center where drivers can send and receive faxes, overnight mail and other communications and a banking desk where drivers can cash checks and receive fund transfers from fleet operators. Most sites have installed telephone rooms with 15 to 20 pay telephones. The typical travel center also has a video game room and designated "truck driver only" areas, including a television room with a VCR and comfortable seating for drivers, a laundry area with washers and dryers and an average of six to 12 private showers.

Additionally, we offer truck drivers a loyal fueler program, which we call the RoadKing Club, that is similar to the frequent flyer programs offered by airlines. Drivers receive a point for each gallon of diesel fuel purchased and can redeem their points for discounts on non-fuel products and services at any of our travel centers.

- Motels. Twenty of our company-operated travel centers offer motels, with an average capacity of 40 rooms. Seventeen of these motels are operated under franchise grants from nationally branded motel chains, including Days Inn, HoJo Inn, Super 8, Rodeway and Travelodge.

OPERATIONS

Fuel Supply. We purchase diesel fuel from various suppliers at rates that fluctuate with market prices and generally are reset daily, and resell fuel to our customers at prices that we establish daily. By establishing supply relationships with an average of four to five alternate suppliers per location, we have been able to effectively create competition for our purchases among various diesel fuel suppliers on a daily basis. We believe that this positioning with our suppliers will help our sites avoid product outages during times of diesel fuel supply disruptions. We have a single source of supply for gasoline at most of our sites that offer branded gasoline. Sites selling unbranded gasoline do not have exclusive supply arrangements.

Other than pipeline tenders, fuel purchases made by us are delivered directly from suppliers' terminals to our travel centers. We do not contract to purchase substantial quantities of fuel for our inventory and are therefore susceptible to price increases and interruptions in supply. We hold less than three days of diesel fuel inventory at our sites. We use pipeline tenders and leased terminal space to mitigate the risk of supply disruptions. The susceptibility to market price increases for diesel fuel is substantially mitigated by the significant percentage of our total diesel fuel sales volume that is sold under pricing formulae that are indexed to market prices, which reset daily. We do not engage in any fixed-price contracts with customers. We may engage, from time to time, in a minimal level of hedging of our fuel purchases with futures and other derivative instruments that primarily are traded on the New York Mercantile Exchange.

The Environmental Protection Agency has promulgated regulations to decrease the sulfur content of diesel fuel by 2006. The enactment of these regulations could reduce the supply and/or increase the cost of diesel fuel. A material decrease in the volume of diesel fuel sold for an extended period of time or instability in the prices of diesel fuel could have a material adverse effect on us.

Non-fuel products supply. There are many sources for the large variety of non-fuel products that we purchase and sell. We have developed strategic relationships with several suppliers of key non-fuel products, including Freightliner LLC for truck parts, Bridgestone/Firestone Tire Sales Company for truck tires, and

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ExxonMobil for Mobil brand lubricants and oils. We believe that our relationships with these and our other suppliers are satisfactory and that supply of the non-fuel products we require is adequate.

Centralized Purchasing and Distribution. We maintain a distribution and warehouse center that services our network. The distribution center is located near Nashville, Tennessee and has approximately 85,000 square feet of storage space. Approximately every two weeks, the distribution center delivers products to our network sites using a combination of contract carriers and our fleet of trucks and trailers. In 2003, the distribution center shipped approximately $47.1 million of products. We believe the distribution center provides us with cost savings by using its consolidated purchasing power to negotiate volume discounts with third-party suppliers. The distribution center is also able to obtain further price reductions from suppliers in the form of reduced shipping charges, as suppliers need only deliver their products to the distribution center warehouse, as opposed to each site individually.

COMPETITION

The U.S. travel center and truck stop industry in which we operate consists of travel centers, truck stops, diesel fuel outlets and similar facilities designed to meet the needs of long-haul trucking fleets and their drivers, independent truck drivers and general motorists. The travel center and truck stop industry is highly competitive and fragmented. According to NATSO, there are in excess of 3,000 travel center and truck stops located on or near highways nationwide, of which we consider approximately 500 to be full-service facilities. Further, only eight chains in the United States have 25 or more travel center and truck stop locations on the interstate highways, which we believe is the minimum number of locations needed to provide even regional coverage to truck drivers and trucking fleets. There are generally two types of facilities designed to serve the trucking industry:

- full-service travel centers, such as those in our network, which offer a broad range of products and services to long-haul trucking fleets and their drivers, independent truck drivers and general motorists, such as diesel fuel and gasoline; full-service and fast food dining; truck repair and maintenance; travel and convenience stores; secure parking areas and other driver amenities; and,

- pumper-only truck stops, which provide diesel fuel, typically at discounted prices, with a more limited mix of additional services than a full-service travel center.

Fuel and non-fuel products and services can be obtained by long-haul truck drivers from a wide variety of sources other than us, including regional full-service travel center and pumper-only truck stop chains, independently owned and operated truck stops, some large service stations and fleet-operated fueling terminals.

We believe that we experience substantial competition from pumper-only truck stop chains and that this competition is based principally on diesel fuel prices. In the pumper-only truck stop segment, the largest networks, based on the number of facilities, are Pilot Travel Centers LLC, with approximately 270 sites, Flying J Inc., with approximately 157 sites, and Love's Travel Stops & Country Stores, Inc., with approximately 96 sites. We experience additional substantial competition from major full-service travel center networks and independent chains, which is based principally on diesel fuel prices, non-fuel product and service offerings and customer service. In the full-service travel center segment, the only large network, other than ours, is operated by Petro Stopping Centers, L.P., with approximately 60 sites. Our truck repair and maintenance shops compete with regional full-service travel center and truck stop chains, full-service independently owned and operated truck stops, fleet maintenance terminals, independent garages, truck dealerships and auto parts service centers. We also compete with a variety of establishments located within walking distance of our travel centers, including full-service restaurants, QSRs, electronics stores, drugstores and travel and convenience stores.

A significant portion of all intercity diesel fuel consumption by trucking fleets and companies with their own trucking capability occurs through self-fueling at both dedicated terminals and at fuel depots strategically located across the country. These terminals often provide facilities for truck repair and maintenance. Our pricing decisions for diesel fuel and truck repair and maintenance services cannot be made without considering the existence of these operations and their capacity for expansion. We believe that a long-term trucking industry trend has been to

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reduce the use of these terminals and to outsource fuel, repair and maintenance services to maximize the benefits of competitive fuel pricing, superior driver amenities and reduced environmental compliance expenditures. However, during the past few years of a struggling United States economy and historically high fuel prices, this long-term trend has been somewhat slowed, at least temporarily, as trucking fleets have utilized their existing terminals to supply an increased level of their fuel and repair service needs.

A potential additional source of competition in the future could result from the possible commercialization of state-owned interstate rest areas. Historically, these rest areas have been precluded from offering for sale fuel and non-fuel products and services similar to that of a travel center. State governments that want to earn additional revenues from these rest areas have repeatedly requested that the federal government allow for commercialization. Past attempts for such commercialization historically have been successfully opposed by a group of opponents that includes NATSO, fast food restaurant operators and others. If commercialized, these rest areas will increase the number of outlets competing with us for the business of highway travelers. It is possible we may have an opportunity to play a role in these commercialization efforts, which would reduce any negative effects of such commercialization on our travel center business. As of early 2004, language in the pending highway reauthorization bill clearly sets forth a continued ban on commercialization of state-owned interstate rest areas.

RELATIONSHIPS WITH THE OPERATORS AND FRANCHISEE-OWNERS

TA Licensing, Inc., a wholly owned subsidiary of TA Operating Corporation, licenses its trademarks to TA Operating Corporation and TA Franchise Systems. We enter into franchise agreements with operators and franchisee-owners of travel centers through TA Franchise Systems, and TA Franchise Systems collects franchise fees and royalties under these agreements. TA Franchise System's assets consist primarily of the rights under the original franchise agreements, the network franchise agreements and its trademark license from TA Licensing. TA Franchise Systems has no tangible assets.

Network Franchise Agreement

As of December 31, 2003, there were 17 sites operating under network franchise agreements. The more significant provisions of the network franchise agreement are described in the following paragraphs.

Initial Franchise Fee. The initial franchise fee for a new franchise is $100,000.

Term of Agreement. The initial term of the network franchise agreement is ten years. The network franchise agreement provides for two five-year renewals on the terms being offered to prospective franchisees at the time of the franchisee's renewal. We reserve the right to decline renewal under certain circumstances or if specified terms and conditions are not satisfied by the franchisee. The average remaining term of these agreements, including all renewal periods, is approximately 19 years. The initial terms of the current network franchise agreements expire in July 2012 through July 2013.

Protected Territory. Subject to specified exceptions, including existing operations, so long as the franchisee is not in default under the network franchise agreement, we agree not to operate, or allow another person to operate, a travel center or travel center business that uses the "TA" brand, within 75 miles in either direction along the primary interstate on which the franchised site is located.

Restrictive Covenants. Except for the continued operation of specified businesses identified by the franchisee at the time of execution of the network franchise agreement, the franchisee cannot, during the term of the agreement, operate any travel center or truck stop-related business under a franchise agreement, licensing agreement or marketing plan or system of its own or another person or entity. If the franchisee owns the franchised premises, the franchisee may continue to operate a travel center at the franchised premises after termination of the franchise agreement, but if the termination is for any reason other than a default by TA Franchise System, the franchisee is restricted for a two-year period from re-branding the facility with any other truck stop or travel center company or other organization offering similar services and/or fleet billing services.

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Royalty Payments. Franchisees are required to pay us a continuing services and royalty fee generally equal to 3.75% of all non-fuel revenues. If branded fast food is sold from the franchised premises, the franchisee must pay us 3% of all net revenues earned directly or indirectly in connection with those sales after deduction of royalties paid to the fast food franchisor.

Advertising, Promotion and Image Enhancement. The network franchise agreement requires the franchisees to contribute 0.6% of their non-fuel revenues and net revenues from fast food sales to partially fund system-wide advertising, marketing and promotional expenses we incur. We are required to match the amounts of the franchisees' contributions.

Fuel Purchases and Sales. Under the network franchise agreement for those franchisees operating leased sites, we agree to sell to franchisees, and franchisees agree to buy from us, 100% of their requirements of diesel fuel. Those franchisees operating franchisee-owned sites are not required to purchase their diesel fuel from us. The franchisee agrees to purchase gasoline from only those suppliers that we approve in writing. The franchisee generally must pay a $0.03 per gallon royalty fee to us on all gallons of gasoline sold.

Non-fuel Product Offerings. Franchisees are required to operate their sites in conformity with guidelines that we establish and offer any products and services that we deem integral to the network.

Termination/Nonrenewal. We may terminate the network franchise agreement for the following reasons, among others:

- the default of the franchisee;

- our withdrawal from the marketing of motor fuel in the state, county or parish where the franchise is located; or

- the default or termination of the lease.

The foregoing reasons also constitute grounds for nonrenewal of the network franchise agreement. In addition, we can decline to renew the network franchise agreement for the following reasons, among others:

- we and the operator fail to agree to changes or additions to the network franchise agreement;

- we make a good faith determination not to renew the network franchise agreement because it would be uneconomical to us; or

- if we own the franchise premises, we make a good faith determination to sell the premises or convert it to a use other than for a truck stop or travel center.

If we do not renew the network franchise agreement due to any of the three foregoing reasons, we may not enter into another network franchise agreement relating to the same franchised premises with another party within 180 days of the expiration date on terms materially different from those offered to the prior franchisee, unless the prior franchisee is offered the right, for a period of 30 days, to accept a renewal of the network franchise agreement on those different terms. If we do not renew the network franchise agreement because we make a good faith determination to withdraw from the marketing of fuel in the area of the franchised premises, we may not sell the franchised premises or franchised business for 90 days following the expiration of the network franchise agreement. The prior franchisee does not have a right of first refusal on the sale of the franchised premises.

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Network Lease Agreement

In addition to franchise fees, we also collect rent from those franchisees that operate a travel center owned by us. As of December 31, 2003, there were 14 leased sites. Each operator of a leased site that enters into a network franchise agreement also must enter into a network lease agreement. The more significant provisions of the network lease agreement are described in the following paragraphs.

Term of Agreement. The lease agreements we have with our franchisees have a term of ten years and allow for two renewals of five years each. We reserve the right to decline renewal under certain circumstances or if specified terms and conditions are not satisfied by the operator. The average remaining term of these agreements, including all renewal periods, is approximately 19 years. The initial terms of the current network lease agreements expire in July 2012 through December 2012.

Rent. Under the network lease, an operator must pay annual fixed rent equal to the sum of

- base rent agreed upon by the operator and us, plus

- improvement rent, if any, which is defined as an amount equal to 14% of the cost of all capital improvements we fund that we and the operator mutually agree will enhance the value of the leased premises and which cost in excess of $2,500, plus

- an annual inflator equal to the percentage increase in the consumer price index.

The base rent will not be increased by the improvement rent if the operator elects to pay for the capital improvements. If we and the operator agree upon an amortization schedule for a capital improvement funded by the operator, we will, upon termination of the network lease, reimburse the operator for an amount equal to the unamortized portion of the cost of the capital improvement. The operator is responsible for the payment of all charges and expenses in connection with the operation of the leased sites, including environmental registration fees and certain maintenance costs.

Use of the Leased Site. The operator must operate the leased site as a travel center in compliance with all laws, including all environmental laws. The operator must submit to quality inspections that we request and appoint a manager that we approve, who is responsible for the day-to-day operations at the leased site.

Termination/Nonrenewal/Transferability/Right of First Refusal. The network lease agreement contains terms and provisions regarding termination, nonrenewal, transferability and our right of first refusal which are substantially the same as the terms and provisions of the network franchise agreement.

Original Franchise Agreement with BP Network Independent Franchisees

There are seven sites that continue to operate under the franchise agreements they had with TA Franchise Systems prior to the network franchise agreement being revised to its current form in 2002. The terms of these franchise agreements are generally the same as the network franchise agreement, but they do not require the franchises to purchase their diesel fuel from us and their provisions vary. At the expiration of these agreements, the respective franchisees may be offered an option to renew their franchises under a form of our then-current franchise agreement for franchisee-owned sites.

Term of Agreement. In general, the initial terms of the original franchise agreements are 10 years. The original franchise agreements provide for one or two renewals for an aggregate of 10 years. The original franchise agreements offer no assurance that the terms of the renewal will be the same as those of the initial franchise agreements. We may decline renewal under some circumstances or if specified terms and conditions are not satisfied by the franchisee. The average remaining term of these agreements is approximately five years.

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Protected Territory. So long as the franchisee is not in default under the franchise agreement, we agree not to operate, or allow another person to operate, a travel center or travel center business that uses the "TA" brand, within a specified area in either direction along one or more interstates at which the franchised site is located.

Restrictive Covenants. Although the restrictive covenants in the original franchise agreements may vary slightly from franchise to franchise, each franchisee is subject to restrictions that prohibit two or more of the following during the term of the franchise agreement and for two years after its expiration:

- operation of any other truck stop or travel center within its protected territory;

- operation of the franchise location under any national brand other than "TA";

- operation of the branded facility within a certain distance of any other TA facility; and

- operation of any competitive business or a business that trades upon the franchise within the area adjacent to the franchise location.

Royalty Payments. In general, we require franchisees to pay us a continuing services and royalty fee generally equal to 4% of all revenues earned directly or indirectly by the franchisee from any business conducted at or from the franchised premises, excluding fuel sales and sales of branded fast food. As part of the royalty fee, we generally require the franchisee to pay us $0.004 per gallon on all sales of qualified diesel fuel.

Advertising, Promotion and Image Enhancement. The network franchise agreement requires the franchisees to contribute 0.25% of all revenues, including revenues from fuel and fast food sales, to partially fund system-wide advertising, marketing and promotional expenses we incur, and mandates certain minimum franchisee expenditures on advertising. We are required to match the amounts of the franchisees' contributions towards the system-wide expenses.

Fuel Purchases and Sales. We do not require franchisees to purchase gasoline or diesel fuel from us. However, we charge royalty fees generally on diesel fuel sales as described above.

Non-fuel Product Offerings. Franchisees are required to operate their travel centers in conformity with our guidelines, participate in and comply with all programs that we prescribe as mandatory and offer any products and services we deem integral to the network.

Termination of an Original Franchise Agreement. We may terminate the franchise agreement upon the occurrence of certain defaults, upon notice and without affording the franchisee an opportunity to cure the defaults. When other defaults occur, we may terminate the franchise agreement if, after receipt of a notice of default, the franchisee has not cured the default within the applicable cure period. The franchisee may terminate the franchise agreement upon thirty days notice, if we are in material default under the franchise agreement and we fail to cure or attempt to cure the default within a reasonable period after notification.

REGULATION

Franchise Regulation. State franchise laws apply to TA Franchise Systems, and some of these laws require TA Franchise Systems to register with the state before it may offer a franchise, require TA Franchise Systems to deliver specified disclosure documentation to potential franchisees, and impose special regulations upon petroleum franchises. Some state franchise laws also impose restrictions on TA Franchise Systems' ability to terminate or not to renew its respective franchises, and impose other limitations on the terms of the franchise relationship or the conduct of the franchisor. Finally, a number of states include, within the scope of their petroleum franchising statutes, prohibitions against price discrimination and other allegedly anticompetitive conduct. These provisions supplement applicable antitrust laws at the federal and state levels.

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The Federal Trade Commission, or the FTC, regulates us under their rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures." Under this rule, the FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. We believe that we are in compliance with this rule.

We cannot predict the effect of any future federal, state or local legislation or regulation on our franchising operations.

Environmental Regulation. Our operations and properties are extensively regulated by Environmental Laws that:

- govern operations that may have adverse environmental effects, such as discharges to air, soil and water, as well as the management of Hazardous Substances or

- impose liability for the costs of cleaning up sites affected by, and for damages resulting from disposal or other releases of Hazardous Substances.

We own and use underground storage tanks and aboveground storage tanks to store petroleum products and waste at our facilities. These tanks must comply with requirements of Environmental Laws regarding tank construction, integrity testing, leak detection and monitoring, overfill and spill control, release reporting, financial assurance and corrective action in case of a release. At some locations, we must also comply with Environmental Laws relating to vapor recovery and discharges to water. We have completed necessary upgrades to underground storage tanks to comply with federal regulations that took effect on December 22, 1998, and believe that all of our travel centers are in material compliance with applicable requirements of Environmental Laws.

We have received notices of alleged violations of Environmental Laws, or are otherwise aware of the need to undertake corrective actions to comply with Environmental Laws, at travel centers owned by us in a number of jurisdictions. We do not expect that any financial penalties associated with these alleged violations, or instances of noncompliance, or compliance costs incurred in connection with these violations or corrective actions, will be material to our results of operations or financial condition. We are conducting investigatory and/or remedial actions with respect to releases of Hazardous Substances that have occurred subsequent to the acquisition of the BP network and also regarding historical contamination at certain of the former Unocal, Burns Bros. and Travel Ports facilities. While we cannot precisely estimate the ultimate costs we will incur in connection with the investigation and remediation of these properties, based on our current knowledge, we do not expect that the costs to be incurred at these properties, individually or in the aggregate, will be material to our results of operations or financial condition. While the matters discussed above are, to the best of our knowledge, the only proceedings for which we are currently exposed to potential liability, we cannot assure you that additional contamination does not exist at these or additional network properties, or that material liability will not be imposed on us in the future. If additional environmental problems arise or are discovered, or if additional environmental requirements are imposed by government agencies, increased environmental compliance or remediation expenditures may be required, which could have a material adverse effect on us. As of December 31, 2003, we had a reserve for those matters of $4.6 million. In addition, we have obtained environmental insurance of up to $35.0 million for unanticipated costs regarding certain known environmental liabilities and for up to $40.0 million regarding certain unknown environmental liabilities.

As part of the acquisition of the Unocal network, Phase I environmental assessments were conducted at the 97 Unocal network properties purchased by us. Under an environmental indemnification agreement with Unocal, Phase II environmental assessments of all Unocal network properties were completed by Unocal by December 31, 1998. Under the terms of this environmental agreement, Unocal was responsible for all costs incurred for:

- remediation of environmental contamination, and

- otherwise bringing the properties into compliance with Environmental Laws as in effect at the date of the acquisition of the Unocal network,

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with respect to the matters identified in the Phase I or Phase II environmental assessments, which matters existed on or prior to the date of the acquisition of the Unocal network. Under the terms of this agreement, Unocal also was required to indemnify us against any other environmental liabilities that arise out of conditions at, or ownership or operations of, the Unocal network prior to the date of the acquisition of the Unocal network. In January 2004, a Buy-Out Agreement between Unocal and us became effective and Unocal's obligations to us under the April 1993 environmental agreement were terminated. In consideration for releasing Unocal from its obligations under the environmental agreement, Unocal paid us $2.6 million of cash, funded an escrow account with $5.4 million to be drawn by us as we incur related remediation costs, and purchased insurance policies that cap our total future expenditures and provide protection against significant unidentified matters that existed prior to April 1993. We are now responsible for all remediation at the former Unocal sites that we still own. We estimate the costs of the remediation activities for which we assumed responsibility from Unocal in January 2004 to be approximately $8.2, which amount we expect will be fully covered by the cash received from Unocal and reimbursements from state tank funds. The liability we assumed was recorded in 2004. We estimate that the cash outlays related to the matters for which we assumed responsibility in January 2004 will be approximately $1.1 million in 2004; $2.2 million in 2005; $1.5 million in 2006; $1.2 million in 2007; $0.9 million in 2008 and $1.3 million thereafter. These estimated future cash disbursements are subject to change based on, among other things, changes in the underlying remediation activities and changes in the regulatory environment. We have just recently assumed responsibility for these matters and expect that our knowledge of the specific facts, related costs and timing of payments for each site will improve over time.

Prior to the acquisition of the BP network, all of the 38 company-owned locations purchased by us were subject to Phase I and Phase II environmental assessments, undertaken at BP's expense. The environmental agreement with BP provides that, with respect to environmental contamination or non-compliance with Environmental Laws identified in the Phase I or Phase II environmental assessments, BP is responsible for:

- all costs incurred for remediation of the environmental contamination, and

- for otherwise bringing the properties into compliance with Environmental Laws as in effect at the date of the acquisition of the BP network.

The remediation must achieve compliance with the Environmental Laws in effect on the date the remedial action is completed. The environmental agreement with BP requires BP to indemnify us against any other environmental liabilities that arise out of conditions at, or ownership or operations of, the BP network locations prior to the date of the acquisition of the BP network. We must make claims for indemnification before December 11, 2004. BP must also indemnify us for liabilities relating to non-compliance with Environmental Laws for which claims were made before December 11, 1996. Except as described above, BP does not have any responsibility for any environmental liabilities arising out of the ownership or operations of the BP network after the date of the acquisition of the BP network. We cannot be certain that BP, if additional environmental claims or liabilities were to arise under the environmental agreement, would not dispute our claims for indemnification.

As part of the Burns Bros. acquisition, Phase I environmental assessments were conducted on all 17 sites acquired. Based on the results of those assessments, Phase II environmental assessments were conducted on nine of the sites. The purchase price paid to Burns Bros. was adjusted based on the findings of the Phase I and Phase II environmental assessments. Under the asset purchase agreement with Burns Bros., we released Burns Bros. from any environmental liabilities that may have existed as of the Burns Bros. acquisition date, other than specified non-waived environmental claims as described in the agreement with Burns Bros.

As part of the Travel Ports acquisition, Phase I environmental assessments were conducted on all 16 sites acquired. Based on the results of those assessments, Phase II environmental assessments were conducted on five of these sites. The results of these assessments were taken into account in recognizing the related environmental contingency accrual for purchase accounting purposes.

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EMPLOYEES

As of December 31, 2003, we employed approximately 10,500 people on a full- or part-time basis. Of this total, approximately 10,110 were employees at our company-operated sites, approximately 340 performed managerial, operational or support services at our headquarters or elsewhere and approximately 50 employees staffed the distribution center. All but nine of our employees are non-union. We believe that our relationship with our employees is satisfactory.

ITEM 2. PROPERTIES

Our principal executive offices are leased and are located at 24601 Center Ridge Road, Suite 200, Westlake, Ohio 44145-5639. Our distribution center is a leased facility located at 1450 Gould Boulevard, LaVergne, Tennessee 37086-3535.

Of our 140 owned sites in operation as of December 31, 2003, the land and improvements at 13 are leased, the improvements but not the land at eight are leased, four are subject to ground leases of the entire site and seven are subject to ground leases of portions of these sites. We consider our facilities suitable and adequate for the purposes for which they are used. In addition to these 140 sites, we own two sites that will be developed as travel centers and two sites that are closed and held for sale.

ITEM 3. LEGAL PROCEEDINGS

We are involved from time to time in various legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of our business. We believe we are currently not involved in any litigation, individually or in the aggregate, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

BROKERAGE PARTNERS