10-Q 1 l10021ae10vq.txt TRAVELCENTERS OF AMERICA, INC. 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2004 Commission file number 333-52442 -------------------------- TRAVELCENTERS OF AMERICA, INC. (Exact name of Registrant as specified in its charter) DELAWARE 36-3856519 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 24601 Center Ridge Road, Suite 200 Westlake, OH 44145-5639 (Address of principal executive offices, including zip code) (440) 808-9100 (Telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of October 15, 2004, there were outstanding 6,934,569 shares of our common stock, par value $0.00001 per share. The outstanding shares of our common stock were issued in transactions not involving a public offering. As a result, there is no public market for our common stock. TRAVELCENTERS OF AMERICA, INC. This Quarterly Report on Form 10-Q contains historical information and forward-looking statements. Statements looking forward in time are included in this Form 10-Q pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause our actual results to differ from future performance suggested herein. In the context of forward-looking information provided in this Form 10-Q and in other reports, please refer to the discussion of risk factors detailed in, as well as the other information contained in, our filings with the Securities and Exchange Commission.

INDEX PAGE NO. ----- -------- PART I. FINANCIAL INFORMATION Item 1. Unaudited Consolidated Balance Sheet as of December 31, 2003 and ~~June~~September 30, 2004....................~~............................~~ 2 Unaudited Consolidated Statement of Operations and Comprehensive Income for the three months and ~~six~~nine months ended ~~June~~September 30, 2003 and 2004....................~~.................~~ 3 Unaudited Consolidated Statement of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2003 and 2004...........~~...................~~ 4 Unaudited Consolidated Statement of Nonredeemable Stockholders' Equity for the ~~six~~nine months ended ~~June~~September 30, 2003 and 2004................................. 5 Selected Notes to Unaudited Consolidated Financial Statements........................ ~~5 Selected Notes to Unaudited Consolidated Financial Statements~~.......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................~~...............~~ 2122 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................~~.....~~ 3033 Item 4. Controls and Procedures.....................................~~.....~~ 3033 PART II. OTHER INFORMATION Item 1. Legal Proceedings...........................................~~.....~~ 3133 Item ~~4. Submission of Matters to a Vote of Security Holders.............. 31 Item~~ 6. Exhibits and Reports on Form 8-K............................~~.....~~ 3133 SIGNATURE....................................................................... 3234

1 TRAVELCENTERS OF AMERICA, INC. UNAUDITED CONSOLIDATED BALANCE SHEET

DECEMBER 31, ~~JUNE~~SEPTEMBER 30, 2003 2004 ----~~--------~~ ----~~------~~ (IN THOUSANDS OF DOLLARS) ASSETS Current assets: Cash.............................................................................. $ 15,005 $ 2032,~~059~~360 Accounts receivable (less allowance for doubtful accounts of $1,707 for 2003 and $1,~~454~~366 for 2004)............................................................... 42,987 5563,~~279~~767 Inventories....................................................................... 63,981 6266,~~441~~325 Deferred income taxes............................................................. 3,823 3,871 Other current assets.............................................................. 6,962 57,~~247~~735 ---------- ---------- Total current assets......................................................... 132,758 ~~146~~174,~~897~~058 Property and equipment, net.......................................................... 438,133 ~~436~~434,~~013~~315 Goodwill............................................................................. 25,584 25,~~665~~905 Deferred financing costs, net........................................................ 24,012 2221,~~138~~162 Deferred income taxes................................................................ 14,519 128,~~748~~025 Other noncurrent assets.............................................................. 15,561 12,~~794~~634 ---------- ---------- Total assets................................................................. $ 650,567 $ ~~656~~676,~~255~~099 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt.............................................. $ 3,354 $ 3,132 Accounts payable.................................................................. 59,754 8591,~~003~~435 Other accrued liabilities......................................................... 50,020 5360,~~095~~022 ---------- ---------- Total current liabilities.................................................... 113,128 ~~141~~154,~~230~~589 Commitments and contingencies........................................................ - - Long-term debt (net of unamortized discount)......................................... 502,033 ~~468~~465,~~632~~779 Deferred income taxes................................................................ 2,137 2,~~189~~198 Other noncurrent liabilities......................................................... 8,318 1516,~~536~~321 ---------- ---------- 625,616 ~~627~~638,~~587~~887 Redeemable equity.................................................................... 1,909 2,~~083~~133 Nonredeemable equity: Common stock and other stockholders' equity....................................... 216,919 216,~~588~~639 Accumulated deficit............................................................... (193,877) (~~190~~181,~~003~~560) ---------- ---------- Total nonredeemable equity................................................... 23,042 2635,~~585~~079 ---------- ---------- Total liabilities, redeemable equity and nonredeemable stockholders' equity.. $ 650,567 $ ~~656~~676,~~255~~099 ========== ==========

The accompanying notes are an integral part of these consolidated financial statements. 2 TRAVELCENTERS OF AMERICA, INC. UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, ----------------------------- ----------------------------- 2003 2004 2003 2004 ------------ ------------ ------------ ------------ (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) Revenues: Fuel......................................~~.......~~ $ ~~360~~373,~~256~~842 $ ~~455~~506,~~365~~401 $ ~~774~~1,~~449~~148,291 $ ~~852~~1,~~776~~359,176 Nonfuel...................................~~.......~~ ~~166~~179,~~460~~097 ~~180~~190,~~507~~437 ~~312~~491,~~443~~540 ~~339~~530,~~811~~248 Rent and royalties........................~~.......~~ 3,~~500~~154 2,~~710~~719 710,~~015~~169 58,~~349~~069 ------------ ------------ ------------ ------------ Total revenues......................~~.......~~ ~~530~~556,~~216~~093 ~~638~~699,~~582~~557 1,~~093~~650,~~907~~000 1,~~197~~897,~~936~~493 Cost of goods sold (excluding depreciation): Fuel......................................~~.......~~ ~~330~~346,~~975~~582 ~~429~~483,~~695~~031 ~~719~~1,~~637~~066,219 ~~805~~1,~~522~~288,553 Nonfuel...................................~~.......~~ 6874,~~673~~484 7477,~~229~~958 ~~128~~202,~~210~~694 ~~138~~216,~~613~~571 ------------ ------------ ------------ ------------ Total cost of goods sold (excluding depreciation)....................~~.......~~ ~~399~~421,~~648~~066 ~~503~~560,~~924~~989 ~~847~~1,~~847~~268,913 ~~944~~1,~~135~~505,124 ------------ ------------ ------------ ------------ Gross profit (excluding depreciation)........~~.......~~ ~~130~~135,~~568~~027 ~~134~~138,~~658~~568 ~~246~~381,~~060~~087 ~~253~~392,~~801~~369 Operating expenses...........................~~.......~~ 8691,~~505~~330 8991,~~782~~570 ~~169~~260,~~350~~680 ~~175~~267,~~819~~389 Selling, general and administrative expenses~~........~~ 10,~~215~~089 10,~~303~~417 2030,~~305~~395 2031,~~707~~124 Depreciation and amortization expense........~~.......~~ 1415,~~626~~342 1513,~~897~~971 2944,~~200~~541 2943,~~974~~945 (Gain) loss on asset sales...................~~.......~~ (~~261~~10) (1,689) (~~293~~304) 11(1,678) ------------ ------------ ------------ ------------ Income from operations....................~~..........~~ 1918,~~483~~276 1824,~~677~~299 2745,~~498~~775 2751,~~290~~589 Equity in earnings of affiliate..............~~.......~~ ~~383~~224 -116 ~~623~~847 78194 Gain on sale of investment...................~~.......~~ - ~~1,491~~- - 1,491 Interest and other financial costs, net......~~.......~~ (11,~~525~~213) (11,~~255~~084) (2334,~~288~~502) (2233,~~732~~816) ------------ ------------ ------------ ------------ Income before income taxes and the cumulative effect of a of change in accounting principle...................... 87,~~341~~287 813,~~913~~331 412,~~833~~120 619,~~127~~458 Provision for income taxes...................~~.......~~ 32,~~080~~558 34,~~267~~888 14,~~850~~408 27,~~253~~141 ------------ ------------ ------------ ------------ Income before the cumulative effect of a change in accounting principle............~~.................~~ 54,~~261~~729 58,~~646~~443 27,~~983~~712 312,~~874~~317 Cumulative effect of a change in accounting principle, net of related taxes (Note 2)..~~.......~~ - - (253) - ------------ ------------ ------------ ------------ Net income................................~~..........~~ 54,~~261~~729 58,~~646~~443 27,~~730~~459 312,~~874~~317 Other comprehensive income (expense), net of tax (Note 3): Foreign currency translation adjustments~~........~~ ~~399~~7 ~~(106)~~279 ~~632~~625 ~~(158)~~121 ------------ ------------ ------------ ------------ Comprehensive income.........................~~.......~~ $ 54,~~466~~736 $ 58,~~540~~722 $ 38,~~168~~084 $ 312,~~716~~438 ============ ============ ============ ============

The accompanying notes are an integral part of these consolidated financial statements. 3 TRAVELCENTERS OF AMERICA, INC. UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ------------------------------- 2003 2004 ------------ ------------ (IN THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................................ $ 27,~~730~~459 $ 312,~~874~~317 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of a change in accounting principle.......................... 253 - Depreciation and amortization expense.......................................... 2944,~~200~~533 2943,~~974~~945 Amortization of deferred financing costs....................................... 12,~~671~~540 12,~~874~~850 Deferred income tax provision.................................................. 13,~~345~~785 16,~~791~~464 Provision for doubtful accounts................................................ ~~500~~750 ~~175~~25 (Gain) on ~~sales~~asset ~~of property and equipment~~sales.......................................................... (~~293~~304) (13,~~480~~169) Changes in assets and liabilities, adjusted for the effects of business acquisitions: Accounts receivable......................................................... (128,~~711~~676) (1221,~~896~~657) Inventories................................................................. 54,~~116~~641 (1,~~702~~802) Other current assets........................................................ 12,~~504~~149 ~~1,715~~(771) Accounts payable and other accrued liabilities.............................. 1218,~~323~~761 2937,~~892~~225 Other, net..................................................................... (~~952~~1,200) 12,~~813~~601 ----------- ----------- Net cash provided by operating activities.................................~~....~~ 4074,~~686~~691 5878,~~434~~028 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions......................................................... (89,~~302~~035) (~~144~~588) Proceeds from asset sales..................................................... 1,~~378~~866 911,~~078~~755 Capital expenditures.......................................................... (2132,~~236~~057) (2537,~~573~~623) ------------ ----------- Net cash used in investing activities.....................................~~....~~ (2839,~~160~~226) (1626,~~639~~456) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in checks drawn in excess of bank balances................ ~~696~~ (~~2,290~~4) 3,653 Revolving loan borrowings (repayments), net................................... 11(15,~~100~~500) (1113,~~100~~600) Long-term debt repayments..................................................... (13,~~014~~851) (2324,~~349~~132) Other......................................................................... (252) -(158) ----------- ----------- Net cash used in financing activities.....................................~~....~~ (129,~~470~~607) (3634,~~739~~237) ----------- ----------- Effect of exchange rate changes on cash...................................~~....~~ ~~201~~202 ~~(2)~~20 ----------- ----------- Net increase (decrease) in cash........................................... 116,~~257~~060 517,~~054~~355 Cash at the beginning of the period.................................................. 14,047 15,005 ----------- ----------- Cash at the end of the period........................................................ $ 2520,~~304~~107 $ 2032,~~059~~360 =========== ===========

The accompanying notes are an integral part of these consolidated financial statements. 4 TRAVELCENTERS OF AMERICA, INC. UNAUDITED CONSOLIDATED STATEMENT OF NONREDEEMABLE STOCKHOLDERS' EQUITY

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ------------------------------ 2003 2004 -----------~~----~~ ----------- (IN THOUSANDS OF DOLLARS) COMMON STOCK: Balance at beginning and end of period............................................ $ 3 $ 3 =========== =========== ADDITIONAL PAID-IN CAPITAL: Balance at beginning of period.................................................... $ 217,290 $ 216,112 Accretion of redeemable equity................................................ (219) (~~173~~401) ----------- ----------- Balance at end of period.......................................................... $ 217,071 $ 215,~~939~~711 =========== =========== ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Balance at beginning of period.................................................... $ - $ 804 Foreign currency translation adjustments, net of tax.......................... ~~632~~625 ~~(158)~~121 ----------- ----------- Balance at end of period......................................................... $ ~~632~~625 $ ~~646~~925 =========== =========== ACCUMULATED DEFICIT: Balance at beginning of period.................................................... $ (202,768) $ (193,877) Net income.................................................................... 27,~~730~~459 312,~~874~~317 ----------- ----------- Balance at end of period.......................................................... $ (~~200~~195,~~038~~309) $ (~~190~~181,~~003~~560) =========== ===========

The accompanying notes are an integral part of these consolidated financial statements. 5 1. BUSINESS DESCRIPTION AND SUMMARY OF OPERATING STRUCTURE 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. At September 30, 2004, our geographically diverse nationwide network of full-service travel centers consisted of 149 sites located in 41 states and the province of Ontario, Canada. Our operations are conducted through three distinct types of travel centers: (1) sites owned or leased and operated by us, which we refer to as company-operated sites; (2) sites owned by us and leased to independent lessee-franchisees, which we refer to as leased sites; and (3) 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, typically on 20- to 25-acre sites. Operating under the "TravelCenters of America" and "TA" brand names, our nationwide network provides our customers with diesel fuel and gasoline as well as non-fuel products and services such as truck repair and maintenance services, full-service restaurants, more than 20 different brands of fast food restaurants, travel and convenience stores with a selection of over 4,000 items and other driver amenities. We also collect rents and franchise royalties from the franchisees who operate the leased sites and franchisee-owned sites. The consolidated financial statements include the accounts of TravelCenters of America, Inc. and its wholly owned subsidiaries, TA Operating Corporation and TA Franchise Systems Inc., as well as TA Licensing, Inc., TA Travel, L.L.C., TravelCenters Realty, L.L.C., TravelCenters Properties, L.P., 3073000 Nova Scotia Company, TravelCentres Canada Inc., and TravelCentres Canada Limited Partnership, which are all direct or indirect wholly owned subsidiaries of TA Operating Corporation. Intercompany accounts and transactions have been eliminated. With only one of our 149 travel centers located in Canada, the amounts of revenues and long-lived assets located in Canada are not material. The accompanying unaudited, consolidated financial statements as of September 30, 2004 and for the three- and nine-month periods ended September 30, 2003 and 2004 have been prepared in accordance with generally accepted accounting principles. Accordingly, these statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2003. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, all of which were of a normal recurring nature, necessary to present fairly, in all material respects, our consolidated financial position at September 30, 2004, our results of operations for the three- and nine-month periods ended September 30, 2003 and 2004, and our changes in nonredeemable stockholders' equity and cash flows for the nine-month periods ended September 30, 2003 and 2004, and are not necessarily indicative of the results to be expected for the full year. 2. RECENTLY ISSUED ACCOUNTING STANDARDS FAS 143. As of January 1, 2003, we began recognizing the future costs to remove our underground storage tanks over the estimated useful lives of each tank in accordance with the provisions of Statement of Financial Accounting Standards (FAS) No. 143, "Accounting for Asset Retirement Obligations." A liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset is recorded at the time an underground storage tank is installed. We amortize the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the remaining life of the respective underground storage tank. The estimated liability is based on historical experiences in removing these tanks, estimated tank useful lives, external estimates as to the cost to remove the tanks in the future and regulatory requirements. The liability is a discounted liability using a credit-adjusted risk-free rate of approximately 12.8%. Revisions to the liability could occur due to changes in tank removal costs, tank useful lives or if new regulations regarding the removal of such tanks are enacted. 6 Upon adoption of FAS 143, we recorded a discounted liability of $589,000, increased property and equipment by $172,000 and recognized a one-time cumulative effect charge of $253,000 (net of a deferred tax benefit of $164,000). A reconciliation of our asset retirement obligation liability, which is included within other noncurrent liabilities in our consolidated balance sheet, for the nine months ended September 30, 2003 and 2004 was as follows:

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, --------------------------- 2003 2004 ------------- ----------- (IN THOUSANDS OF DOLLARS) Balance at January 1,............................................................... $ 589 $ 663 Liabilities incurred............................................................... 1011 - Liabilities settled................................................................ -(6) (917) Accretion expense.................................................................. 3858 4262 Revisions to estimates............................................................. - - ----------- ----------- Balance at ~~June~~September 30............................................................~~.....~~ $ ~~637~~652 $ ~~696~~708 =========== ===========

FIN 46. In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities." FIN 46 was intended to provide guidance in determining (1) whether consolidation is required under the "controlling financial interest" model I existing authoritative guidance or, alternatively, (2) whether the variable interest model under FIN 46 should be used to account for existing and new entities. In December 2003, the FASB issued a revised version of FIN 46 (FIN 46R) to clarify certain aspects of FIN 46 and to provide certain entities with exemptions from the requirements of FIN 46. We must adopt this accounting guidance in 2004 for any variable interest entities created after December 15, 2003 (there have been none to date), and on January 1, 2005 for all entities created before December 15, 2003. Under FIN 46R, we will be required to consolidate the entity that is the lessor under our master lease program covering eight of our sites. Consolidating the lessor would affect our consolidated balance sheet by increasing property and equipment, other assets and long-term debt and would affect our consolidated statement of operations by reducing operating expenses, increasing depreciation expense and increasing interest expense. Consolidating the lessor will not result in a violation of our debt covenants or have an effect on our liquidity. We are still evaluating the amounts by which our financial statements will be affected by consolidating the lessor. As discussed in Note 11, we expect to terminate this lease as part of a refinancing of our indebtedness. We are also evaluating whether FIN 46R will require consolidation of our franchisees, although we currently believe we will not be required to do so. 3. COMPREHENSIVE INCOME Income tax provision (benefit) related to other comprehensive income (loss) consisted of the following:

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, -------------------------- -------------------------- 2003 2004 2003 2004 ---------- ----------- ---------- ----------- (IN THOUSANDS OF DOLLARS) Related to foreign currency translation adjustments..... $ ~~100~~(3) $ ~~(28)~~93 $ ~~256~~253 $ ~~(47)~~46 ---------- ---------- ---------- ---------- Total................................................. $ ~~100~~(3) $ ~~(28)~~93 $ ~~256~~253 $ ~~(47)~~46 ========== ========== ========== ==========

7 4. INVENTORIES Inventories consisted of the following:

DECEMBER 31, ~~JUNE~~SEPTEMBER 30, 2003 2004 ------------ ------------ (IN THOUSANDS OF DOLLARS) Nonfuel merchandise.....................~~..........................................~~ $ 57,881 $ 5558,~~639~~271 Petroleum products......................~~..........................................~~ 6,100 68,~~802~~054 ------------ ------------ Total inventories...................~~..........................................~~ $ 63,981 $ 6266,~~441~~325 ============ ============

5. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the nine-month periods ended September 30, 2003 and 2004 were as follows:

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, --------------------------- 2003 2004 -----------~~----~~ ----------- (IN THOUSANDS OF DOLLARS) Balance as of beginning of period..........~~........................................~~ $ 23,585 $ 25,584 Goodwill recorded during the period........~~........................................~~ ~~651~~967 81321 ----------- ----------- Balance as of end of period................~~........................................~~ $ 24,~~236~~552 $ 25,~~665~~905 =========== ===========

During the nine months ended September 30, 2003, we recorded $967,000 of goodwill as a result of the business acquisitions we completed in connection with converting four leased sites to company-operated sites. During the nine months ended September 30, 2004, we recorded $321,000 of goodwill as a result of the business acquisitions we completed in connection with converting two leased sites to company-operated sites. The net carrying amount of intangible assets is included within other noncurrent assets in our consolidated balance sheet. Intangible assets, net consisted of the following:

DECEMBER 31, ~~JUNE~~SEPTEMBER 30, 2003 2004 ------------- ------------ (IN THOUSANDS OF DOLLARS) Amortizable intangible assets: Leasehold interest........................................~~...................~~ $ 1,724 $ 1,724 Other.....................................................~~...................~~ 1,015 1,015 ------------ ------------ Total amortizable intangible assets...................~~...................~~ 2,739 2,739 Less - accumulated amortization...........................~~...................~~ 2,334 2,~~428~~475 ------------ ------------ Net carrying value of amortizable intangible assets...~~...................~~ 405 ~~311~~264 Net carrying value of trademarks.................................~~...................~~ 1,398 1,398 ------------ ------------ Intangible assets, net................................~~...................~~ $ 1,803 $ 1,~~709~~662 ============ ============

Total amortization expense for our amortizable intangible assets for the nine-month periods ended September 30, 2003 and 2004 was $639,000 and $141,000, respectively. The estimated aggregate amortization expense for our amortizable intangible assets for the year ending December 31, 2004 and each of the four succeeding fiscal years are $191,000 for 2004; $87,000 for 2005; and $10,000 in each of 2006, 2007 and 2008. 8 6. STOCK-BASED EMPLOYEE COMPENSATION We account for our stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. For granted options that vest over time, no compensation expense is reflected in net income, as all of those options had an exercise price equal to or greater than the market value of the underlying common stock at the date of grant. For granted options that vest based on attaining certain measures of performance, compensation expense is recognized when it becomes probable that the performance triggers for such options will be achieved. The following table illustrates the effect on net income as if we had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation.

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, -------------------------- ------------------------- 2003 2004 2003 2004 ---------- ---------- ---------- ---------- (IN THOUSANDS OF DOLLARS) Net income, as reported................................... $ 54,~~261~~729 $ 58,~~646~~443 $ 27,~~730~~459 $ 312,~~874~~317 Add back - Stock-based employee compensation expense, net of related tax effects, included in net income ~~(loss)~~ as reported.............................................. - - - - Deduct - Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects....................~~.....~~ (~~157~~171) (~~166~~168) (~~327~~498) (~~334~~502) ---------- ---------- ---------- ---------- Pro forma net income...................................... $ 54,~~104~~558 $ 58,~~480~~275 $ 26,~~403~~961 $ 311,~~540~~815 ========== ========== ========== ==========

The fair value of these options used to calculate the pro forma compensation expense amounts was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: a risk-free interest rate of 5.5%, a dividend yield of 0.0%, a volatility factor of 0.0001%, and an expected life of the options of ten years. 7. COMMITMENTS AND CONTINGENCIES Guarantees In the normal course of business we periodically enter into agreements that incorporate indemnification provisions. While the maximum amount to which we may be exposed under such agreements cannot be estimated, it is the opinion of management that any potential indemnification is not expected to have a material adverse effect on our consolidated financial position or results of operations. We also offer a warranty of our workmanship in our truck maintenance and repair shops, but the annual warranty expense and corresponding liability are immaterial. Environmental Matters Our operations and properties are extensively regulated through environmental laws and regulations ("Environmental Laws") that (i) govern operations that may have adverse environmental effects, such as discharges to air, soil and water, as well as the management of petroleum products and other hazardous substances ("Hazardous Substances"), or (ii) 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. We must comply with requirements of Environmental Laws regarding tank construction, integrity testing, leak detection and monitoring, overfill and spill control, release reporting, financial assurance and corrective action in case of a release from a storage tank into the environment. At some locations, we must also comply with Environmental Laws relating to vapor recovery and discharges to water. We believe that all of our travel centers are in material compliance with applicable requirements of Environmental Laws. 9 We have received notices of alleged violations of Environmental Laws, or are aware of the need to undertake corrective actions to comply with Environmental Laws, at company-owned travel centers in a number of jurisdictions. We do not expect that any financial penalties associated with these alleged violations, 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 at a number of our sites. 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. In March 2004, we received notification from the Pennsylvania Underground Storage Tank Insurance Fund ("USTIF") that, as a result of our appeal, USTIF had reversed its denial of our claim for reimbursement of corrective action costs incurred or to be incurred to remediate a diesel fuel release at our Harrisburg site. USTIF has agreed that our claim is eligible for reimbursement. Accordingly, in March 2004, we recognized a $1,600,000 receivable for the recovery of the related corrective action costs, with an offsetting reduction of operating expenses. The expenses had been recognized by us in previous years, primarily in September 2003 when we expensed $1,335,000 as a result of USTIF's original denial of our claim. 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 be certain that additional contamination does not exist at these or additional network properties, or that material liability will not be imposed in the future. If additional environmental problems arise or are discovered, or if additional environmental requirements are imposed by government agencies, increased environmental compliance or remediation expenditures may be required, which could have a material adverse effect on us. Under the environmental agreement entered into as part of the acquisition of the BP network, BP is required to provide indemnification for, and conduct remediation of, certain pre-closing environmental conditions. Until January 2004, Unocal similarly was required to provide indemnification for, and conduct remediation of, certain environmental conditions that existed prior to our April 1993 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 $2,609,000 of cash, funded an escrow account with $5,415,000 to be drawn on by us as we incur related remediation costs, and purchased insurance policies that cap our total future expenditures for these matters at $9,648,000 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 $8,248,000 which amount we expect will be fully covered by the cash received from Unocal and reimbursements from state tank funds. Accordingly, we recognized no income or expense as a result of entering into the Unocal Buy-Out Agreement. Of the cash paid to us by Unocal, $1,000,000 was to reimburse us for the future costs of administering the remediation projects assumed from Unocal and was recorded as a deferred credit that will be recognized to offset our costs as the related remediation activities are completed. At September 30, 2004, we had a reserve for environmental matters of $12,599,000, a receivable for expected recoveries of these estimated future expenditures of $3,714,000 and $5,397,000 of cash in an escrow account to fund certain of these estimated future expenditures, leaving an estimated $3,488,000 to be funded from future operating cash flows. In our consolidated balance sheet, $4,673,000 of the reserve for environmental matters was included in the accrued liabilities balance and $7,926,000 of the reserve was included in the other noncurrent liabilities balance, $2,120,000 of the recoveries receivable amount was included in the accounts receivable balance and $1,594,000 of the recoveries receivable amount and the escrow accounts were included in the other noncurrent assets balance. We estimate that the gross amount of the cash outlays related to the matters for which we have accrued this reserve will be approximately $2,294,000 in the remainder of 2004; $3,173,000 in 2005; $2,437,000 in 2006; $1,914,000 in 2007; $1,389,000 in 2008 and $1,392,000 thereafter. These cash expenditure amounts do not reflect any amounts for the expected recoveries as we cannot accurately predict the timing of those cash receipts. These estimated future 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 obtained insurance of up to $35,000,000 for known environmental liabilities (which includes the insurance coverage purchased by Unocal as 10 described above) and up to $40,000,000 for unknown environmental liabilities, subject, in each case, to certain limitations and deductibles. While it is not possible to quantify with certainty the environmental exposure, in our opinion, the potential liability, beyond that considered in the reserve, for all environmental proceedings, based on information known to date, will not have a material adverse effect on our financial condition, results of operations or liquidity. Pending Litigation 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 that we are not now involved in any litigation, individually, or in the aggregate, which could have a material adverse affect on our business, financial condition, results of operations or cash flows. 8. SUPPLEMENTAL CASH FLOW INFORMATION

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, -------------~~---------------~~ 2003 2004 ----~~-------~~ ----~~--------~~ (IN THOUSANDS OF DOLLARS) Revolving loan borrowings........................................~~.................~~ $ ~~269~~370,~~000~~600 $ ~~213~~264,~~700~~300 Revolving loan repayments........................................~~.................~~ (~~257~~386,~~900~~100) (~~224~~277,~~800~~900) ------------- ------------- Revolving loan borrowings (repayments), net....................~~.................~~ $ 11(15,~~100~~500) $ (1113,~~100~~600) ============= ============= Cash paid during the period for: Interest.......................................................~~.................~~ $ 2322,~~343~~593 $ 2124,~~264~~064 Income taxes (net of refunds)..................................~~.................~~ $ ~~335~~635 $ ~~634~~1,065

During the nine-month periods ended September 30, 2003 and 2004, we acquired $735,000 and $635,000, respectively, of inventory and equipment in settlement of accounts receivable as part of the conversions of leased sites to company-operated sites. 9. OTHER INFORMATION

THREE MONTHS ENDED ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~JUNE~~SEPTEMBER 30, -------------~~-------------~~ -------------~~-------------~~ 2003 2004 2003 2004 ----~~-------~~ ----~~-------~~ ----~~-------~~ ----~~-------~~ (IN THOUSANDS OF DOLLARS) Interest and other financial costs consists of the following: Cash interest expense........................................... $ (10,~~271~~008) $ (9,~~902~~854) $ (2030,~~912~~921) $ (2029,~~077~~931) Cash interest income............................................ 2324 22176 4266 45221 Amortization of discount on debt................................ (~~381~~360) (~~422~~430) (~~747~~1,107) (~~826~~1,256) Amortization of deferred financing costs........................ (~~850~~869) (~~953~~976) (12,~~671~~540) (12,~~874~~850) ------------ ------------ ------------ ------------ Interest and other financial costs, net......................... $ (11,~~525~~213) $ (11,~~255~~084) $ (2334,~~288~~502) $ (2233,~~732~~816) ============ ============ ============ ============

11 10. RELATED PARTY TRANSACTIONS Certain members of our senior management have purchased common stock pursuant to management subscription agreements. As a result of such purchases, we have notes and related interest receivable from the management stockholders totaling $1,490,000 and $1,486,000 at December 31, 2003 and September 30, 2004, respectively. We owned 21.5% of the voting stock of Simons Petroleum, Inc. until April 9, 2004 when we sold the Simons shares we owned. After that date, Simons was no longer an equity investee of ours and, therefore, no longer a related party. The following disclosures include transactions and balances related to our business activities with Simons for the period while were a Simons stockholder. During the nine-month periods ended September 30, 2003 and 2004, diesel fuel provided by Simons, accounted for $171,942,000 and $70,652,000, respectively, of our cost of goods sold and we made sales of diesel fuel to Simons in the amounts of $2,514,000 and $152,000, respectively. We also lease a travel center from Simons. Rent paid with respect to this site for the nine-month periods ended September 30, 2003 and 2004 was $306,000 and $102,000, respectively. At December 31, 2003, our receivables from Simons were $150,000, while our payables to Simons were $49,000. We received proceeds from the sale of our Simons shares of $9,073,000. This sale represented a prepayment event under our Senior Credit Facility and, therefore, in April we made a mandatory prepayment of our term loan borrowings in the amount of $9,073,000. The merger agreement pursuant to which we sold these shares provides two opportunities for us to receive additional sales proceeds in late 2005: we could receive an additional $921,000 based on Simons achieving specified earnings targets, and we could receive $1,053,000 that was paid into escrow at closing if certain conditions are met and certain representations and warranties are maintained. Due to the uncertainty surrounding the future realization of these receivables, the gain on sale we recognized in the second quarter of $1,491,000 does not reflect these amounts. 11. SUBSEQUENT EVENT On October 1, 2004, we entered into an asset purchase agreement (the "Acquisition Agreement") with B.R.G., Inc. and Rip Griffin Truck Service Center, Inc. (collectively "Rip Griffin") to acquire eleven travel center facilities operated by Rip Griffin. The Acquisition Agreement provides for the acquisition of the assets at the eleven travel center facilities operated by Rip Griffin on interstate highways. The eleven travel centers to be acquired are located in Arizona, Arkansas, California, Colorado, New Mexico, Texas and Wyoming. The purchase price for the acquisition is $120,000,000 plus an additional amount for site cash and inventories that will be determined at closing but is estimated to be approximately $8,000,000. These amounts will be paid in cash. We will also assume the environmental liability related to the acquired sites. The estimated amount of the environmental liability is $1,100,000. The closing of the acquisition is subject to certain conditions, including regulatory approval under the Hart-Scott-Rodino Antitrust Improvements Act. We expect to consummate the transaction before the end of 2004. In order to consummate the acquisition, we expect to complete a refinancing of our Senior Credit Facilities (the Refinancing). As amended and restated, we expect that our Senior Credit Facilities will be composed of a seven-year Term Loan of $475,000,000 and a five-year $100,000,000 Revolving Credit Facility. The proceeds received will be used to refinance our current Term Loan, fund the Rip Griffin acquisition, refinance our master lease facility and for general corporate purposes. We believe the terms of the amended and restated credit agreement will be substantially similar to those included in the current credit agreement and consistent with current financing market conditions. As a result of the Refinancing, we will incur a non-cash charge against operating income of approximately $8,500,000 in connection with writing off the unamortized amount of the deferred financing costs incurred in 2000 with respect to the Senior Credit Facilities. 12 12. CONDENSED CONSOLIDATING FINANCIAL STATEMENT SCHEDULES The following schedules set forth our condensed consolidating balance sheet schedules as of December 31, 2003 and September 30, 2004, our condensed consolidating statement of operations schedules for the three- and nine-month periods ended September 30, 2003 and 2004 and our condensed consolidating statement of cash flows schedules for the nine-month periods ended September 30, 2003 and 2004. In the following schedules, "Parent Company" refers to the unconsolidated balances of TravelCenters of America, Inc., "Guarantor Subsidiaries" refers to the consolidated balances of TA Operating Corporation and its domestic subsidiaries, but excluding its three Canadian subsidiaries, and "Nonguarantor Subsidiaries" refers to the combined balances of TA Franchise Systems Inc. and our three Canadian subsidiaries. "Eliminations" represent the adjustments necessary to (a) eliminate intercompany transactions and (b) eliminate investments in subsidiaries. The Guarantor Subsidiaries (TA Operating Corporation, TA Licensing, Inc., TA Travel, L.L.C., TravelCenters Realty, L.L.C. and TravelCenters Properties, L.P.) are direct or indirect 100% owned subsidiaries of ours and have fully and unconditionally, jointly and severally, guaranteed the indebtedness of TravelCenters of America, Inc., which consists of the Senior Credit Facility and the Senior Subordinated Notes due 2009. 13 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING BALANCE SHEET SCHEDULES:

DECEMBER 31, 2003 ---------------------------------------------------------------------~~-----~~ PARENT GUARANTOR NONGUARANTOR COMPANY SUBSIDIARIES ~~SUBSIDIARY~~SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------~~---~~ ------------ ------------ ------------ ------------ (IN THOUSANDS OF DOLLARS) ASSETS Current assets: Cash ............................................... $ - $ 14,746 $ 259 $ - $ 15,005 Accounts receivable, net ........................... - 43,489 1,056 (1,558) 42,987 Inventories ........................................ - 63,771 210 - 63,981 Deferred income taxes .............................. - 3,820 3 - 3,823 Other current assets ............................... 620 6,598 4 (260) 6,962 ---------- ------------ ------------ ------------ ------------ Total current assets ......................... 620 132,424 1,532 (1,818) 132,758 Property and equipment, net ............................ - 431,470 6,663 - 438,133 Goodwill ............................................... - 25,584 - - 25,584 Deferred financing costs, net .......................... 24,012 - - - 24,012 Deferred income taxes .................................. 21,002 (6,612) 129 - 14,519 Other noncurrent assets ................................ 896 18,949 - (4,284) 15,561 Investment in subsidiaries ............................. 266,844 1,702 - (268,546) - ---------- ------------ ------------ ------------ ------------ Total assets ................................. $ 313,374 $ 603,517 $ 8,324 $ (274,648) $ 650,567 ========== ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt ............... $ 3,165 $ 189 $ - $ - $ 3,354 Accounts payable ................................... - 59,524 854 (624) 59,754 Other accrued liabilities .......................... 2,686 47,037 1,491 (1,194) 50,020 ---------- ------------ ------------ ------------ ------------ Total current liabilities .................... 5,851 106,750 2,345 (1,818) 113,128 Long-term debt (net of unamortized discount) ........... 499,417 2,616 4,284 (4,284) 502,033 Deferred income taxes .................................. - 2,137 - - 2,137 Intercompany ~~advances~~payable (receivable) ........................ (217,296) 222,964 (5,668) - - Other noncurrent liabilities ........................... - 8,318 - - 8,318 ---------- ------------ ------------ ------------ ------------ Total liabilities ............................ 287,972 342,785 961 (6,102) 625,616 Redeemable equity ...................................... 1,909 - - - 1,909 Nonredeemable stockholders' equity: Common stock and other nonredeemable stockholders' equity............................................. 217,370 186,155 2,125 (188,731) 216,919 Retained earnings (~~accumulated~~ deficit) ....................... (193,877) 74,577 5,238 (79,815) (193,877) ---------- ------------ ------------ ------------ ------------ Total nonredeemable stockholders' equity .....~~.......................~~ 23,493 260,732 7,363 (268,546) 23,042 ---------- ------------ ------------ ------------ ------------ Total liabilities, redeemable equity and nonredeemable stockholders' equity ........~~....................~~ $ 313,374 $ 603,517 $ 8,324 $ (274,648) $ 650,567 ========== ============ ============ ============ ============

14 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~JUNE~~SEPTEMBER 30, 2004 ----------------------------------------------------------------------- PARENT GUARANTOR NONGUARANTOR COMPANY SUBSIDIARIES ~~SUBSIDIARY~~SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------~~---~~ ------------ ------------ ------------ ------------ (IN THOUSANDS OF DOLLARS) ASSETS Current assets: Cash ......................................... $ - $ 1931,~~862~~926 $ ~~197~~434 $ - $ 2032,~~059~~360 Accounts receivable, net ..................... - 5565,~~931~~240 ~~945~~996 (12,~~597~~469) 5563,~~279~~767 Inventories .................................. - 6265,~~261~~942 ~~180~~383 - 6266,~~441~~325 Deferred income taxes ........................ - 3,~~820~~821 5150 - 3,871 Other current assets ......................... ~~270~~715 57,~~389~~536 112 (~~413~~528) 57,~~247~~735 ---------- ------------ ------------ ------------ ------------ Total current assets ................... ~~270~~715 ~~147~~174,~~263~~465 1,~~374~~875 (2,~~010~~997) ~~146~~174,~~897~~058 Property and equipment, net ...................... - ~~429~~426,~~414~~931 67,~~599~~384 - ~~436~~434,~~013~~315 Goodwill ......................................... - 25,~~665~~905 - - 25,~~665~~905 Deferred financing costs, net .................... 2221,~~138~~162 - - - 2221,~~138~~162 Deferred income taxes ............................ 2015,~~509~~836 (7,~~887~~944) ~~126~~133 - 128,~~748~~025 Other noncurrent assets .......................... ~~860~~824 16,~~098~~212 - (4,~~164~~402) 12,~~794~~634 Investment in subsidiaries ....................... ~~278~~290,~~673~~958 1,~~650~~576 - (~~280~~292,~~323~~534) - ---------- ------------ ------------ ------------ ------------ Total assets ........................... $ ~~322~~329,~~450~~495 $ ~~612~~637,~~203~~145 $ 89,~~099~~392 $ (~~286~~299,~~497~~933) $ ~~656~~676,~~255~~099 ========== ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt ......... $ 2,943 $ 189 $ - $ - $ 3,132 Accounts payable ............................. - 8491,~~783~~135 ~~827~~1,733 (~~607~~1,433) 8591,~~003~~435 Other accrued liabilities .................... 17,~~068~~622 5152,~~720~~361 1,~~710~~603 (1,~~403~~564) 5360,~~095~~022 ---------- ------------ ------------ ------------ ------------ Total current liabilities .............. 410,~~011~~565 ~~136~~143,~~692~~685 23,~~537~~336 (2,~~010~~997) ~~141~~154,~~230~~589 Long-term debt (net of unamortized discount) ~~466~~..... 463,~~052~~218 2,~~580~~561 4,~~164~~402 (4,~~164~~402) ~~468~~465,~~632~~779 Deferred income taxes ............................ - 2,~~189~~198 - - 2,~~189~~198 Intercompany payable (receivable) ................ (~~176~~181,~~889~~830) ~~182~~187,~~663~~354 (5,~~774~~524) - - Other noncurrent liabilities ..................... - 1516,~~536~~321 - - 1516,~~536~~321 ---------- ------------ ------------ ------------ ------------ Total liabilities ...................... ~~293~~291,~~174~~953 ~~339~~352,~~660~~119 ~~927~~2,214 (67,~~174~~399) ~~627~~638,~~587~~887 Redeemable equity ................................ 2,~~083~~133 - - - 2,~~083~~133 Nonredeemable stockholders' equity: Common stock and other stockholders' equity ...................... ~~217~~216,~~196~~969 186,~~053~~227 2,~~069~~175 (188,~~730~~732) 216,~~588~~639 Retained earnings (accumulated deficit) ..................... (~~190~~181,~~003~~560) 8698,~~490~~799 5,~~103~~003 (91103,~~593~~802) (~~190~~181,~~003~~560) ---------- ------------ ------------ ------------ ------------ Total nonredeemable stockholders' equity~~...........................~~ 2735,~~193~~409 ~~272~~285,~~543~~026 7,~~172~~178 (~~280~~292,~~323~~534) 2635,~~585~~079 ---------- ------------ ------------ ------------ ------------ Total liabilities, redeemable equity and nonredeemable stockholders' equity ..~~...........~~ $ ~~322~~329,~~450~~495 $ ~~612~~637,~~203~~145 $ 89,~~099~~392 $ (~~286~~299,~~497~~933) $ ~~656~~676,~~255~~099 ========== ============ ============ ============ ============

15 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SCHEDULES:

THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2003 ---------------------------------------------------------------------------- PARENT GUARANTOR NONGUARANTOR COMPANY SUBSIDIARIES ~~SUBSIDIARY~~SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------~~---~~ ------------ ------------ ------------ ------------ (IN THOUSANDS OF DOLLARS) Revenues: Fuel........................................ $ - $ ~~357~~370,~~783~~724 $ 23,~~473~~118 $ - $ ~~360~~373,~~256~~842 Nonfuel..................................... - ~~165~~178,~~595~~200 ~~865~~897 - ~~166~~179,~~460~~097 Rent and royalties.......................... - 32,~~120~~832 1,~~481~~399 (1,~~101~~077) 3,~~500~~154 ------------- ------------- ------------- ------------- ------------- Total revenues.............................. - ~~526~~551,~~498~~756 45,~~819~~414 (1,~~101~~077) ~~530~~556,~~216~~093 Cost of goods sold (excluding depreciation)..... - ~~396~~417,~~964~~685 23,~~684~~381 - ~~399~~421,~~648~~066 ------------- ------------- ------------- ------------- ------------- Gross profit (excluding depreciation)........... - ~~129~~134,~~534~~071 2,~~135~~033 (1,~~101~~077) ~~130~~135,~~568~~027 Operating expenses.............................. - 8590,~~936~~780 1,~~670~~627 (1,~~101~~077) 8691,~~505~~330 Selling, general and administrative expenses..................... ~~201~~284 9,~~775~~529 ~~239~~276 - 10,~~215~~089 Depreciation and amortization expense........... - 1415,~~497~~209 ~~129~~133 - 1415,~~626~~342 (Gain) on asset sales........................... - (~~261~~10) - - (~~261~~10) ------------- ------------- ------------- ------------- ------------- Income (loss) from operations................... (~~201~~284) 1918,~~587~~563 97(3) - 1918,~~483~~276 Equity income (loss)............................ 98,~~383~~829 ~~279~~117 - (98,~~279~~722) ~~383~~224 Interest and other financial costs, net......... (65,~~017~~976) (5,~~437~~164) (7173) - (11,~~525~~213) ------------- ------------- ------------- ------------- ------------- Income (loss) before income taxes............... 32,~~165~~569 1413,~~429~~516 26(76) (98,~~279~~722) 87,~~341~~287 Provision (benefit) for income taxes............ (2,~~096~~160) 54,~~132~~707 4411 - 32,~~080~~558 ------------- ------------- ------------- ------------- ------------- Net income (loss)............................... $ 54,~~261~~729 $ 98,~~297~~809 $ (1887) $ (98,~~279~~722) $ 54,~~261~~729 ============= ============= ============= ============= =============

16 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2004 ---------------------------------------------------------------------------- PARENT GUARANTOR NONGUARANTOR COMPANY ~~SUBSIDIARY~~SUBSIDIARIES ~~SUBSIDIARY~~SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------~~---~~ ------------ ------------ ------------ ------------ (IN THOUSANDS OF DOLLARS) Revenues: Fuel........................................ $ - $ ~~450~~501,~~724~~036 $ 45,~~641~~365 $ - $ ~~455~~506,~~365~~401 Nonfuel..................................... - ~~179~~189,~~611~~350 ~~896~~1,087 - ~~180~~190,~~507~~437 Rent and royalties.......................... - 2,~~456~~459 1,~~244~~296 (~~990~~1,036) 2,~~710~~719 ------------ ------------ ------------ ------------- ------------ Total revenues.............................. - ~~632~~692,~~791~~845 67,~~781~~748 (~~990~~1,036) ~~638~~699,~~582~~557 Cost of goods sold (excluding depreciation)..... - ~~499~~555,~~075~~323 45,~~849~~666 - ~~503~~560,~~924~~989 ------------ ------------ ------------ ------------ ------------ Gross profit (excluding depreciation)........... - ~~133~~137,~~716~~522 12,~~932~~082 (~~990~~1,036) ~~134~~138,~~658~~568 Operating expenses.............................. - 8990,~~265~~913 1,~~507~~693 (~~990~~1,036) 8991,~~782~~570 Selling, general and administrative expenses....~~.............~~ ~~332~~339 9,~~671~~786 ~~300~~292 - 10,~~303~~417 Depreciation and amortization expense........... - 1513,~~765~~834 ~~132~~137 - 1513,~~897~~971 (Gain) on asset sales........................... - (1,689) - - (1,689) ------------ ------------ ------------ ------------ ------------ Income (loss) from operations................... (~~332~~339) 1924,~~016~~678 (740) - 1824,~~677~~299 Equity income (loss)........................ ~~9,522 (29) - (9,493) - Gain on sale of investment~~....~~..............~~ ~~- 1~~12,~~491~~285 -40 - 1(12,~~491~~209) 116 Interest and other financial costs, net......... (5,~~831~~780) (5,~~351~~227) (7377) - (11,~~255~~084) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes............... 36,~~359~~166 1519,~~127~~491 (80117) (912,~~493~~209) 813,~~913~~331 Provision (benefit) for income taxes............ (2,~~287~~277) 57,~~573~~182 (1917) - 34,~~267~~888 ------------ ------------ ------------ ------------ ------------ Net income (loss)............................... $ 58,~~646~~443 $ 912,~~554~~309 $ (61100) $ (912,~~493~~209) $ 58,~~646~~443 ============ ============ ============ ============ ============

17 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2003 ---------------------------------------------------------------------- PARENT GUARANTOR NONGUARANTOR COMPANY SUBSIDIARIES ~~SUBSIDIARY~~SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------~~----~~ ------------ ------------- ------------ ------------ (IN THOUSANDS OF DOLLARS) Revenues: Fuel....................................... $ - $ ~~769~~1,~~911~~140,635 $ 47,~~538~~656 $ - $ ~~774~~1,~~449~~148,291 Nonfuel.................................... - ~~310~~489,~~964~~165 12,~~479~~375 - ~~312~~491,~~443~~540 Rent and royalties......................... - 69,~~241~~072 24,~~839~~239 (23,~~065~~142) 710,~~015~~169 ---------- ---------- ---------- ---------- ---------- Total revenues............................. - 1,~~087~~638,~~116~~872 814,~~856~~270 (23,~~065~~142) 1,~~093~~650,~~907~~000 Cost of goods sold (excluding depreciation)... - ~~842~~1,~~945~~260,629 48,~~902~~284 - ~~847~~1,~~847~~268,913 ---------- ---------- ---------- ---------- ---------- Gross profit (excluding depreciation)......... - ~~244~~378,~~171~~243 35,~~954~~986 (23,~~065~~142) ~~246~~381,~~060~~087 Operating expenses............................ - ~~168~~259,~~402~~182 34,~~013~~640 (23,~~065~~142) ~~169~~260,~~350~~680 Selling, general and administrative expenses..~~.............~~ ~~401~~685 1928,~~413~~943 ~~491~~767 - 2030,~~305~~395 Depreciation and amortization expense......... - 2944,~~200~~212 ~~197~~329 - 2944,~~200~~541 (Gain) on asset sales......................... - (~~293~~304) - - (~~293~~304) ---------- ---------- ---------- ---------- ---------- Income (loss) from operations................. (~~401~~685) 2746,~~646~~210 ~~253~~250 - 2745,~~498~~775 Equity income (loss).......................... 1019,~~865~~694 ~~498~~615 - (1019,~~740~~462) ~~623~~847 Interest and other financial costs, net....... (1117,~~876~~852) (1116,~~293~~458) (~~119~~192) - (2334,~~288~~502) ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and the cumulative effect of a change in accounting principle....................... (1,~~412)~~157 1630,~~851~~367 ~~134~~58 (1019,~~740~~462) 412,~~833~~120 Provision (benefit) for income taxes.......... (46,~~142~~302) 510,~~904~~611 8899 - 14,~~850~~408 ---------- ---------- ---------- ---------- ---------- Income (loss) before the cumulative effect of a change in accounting principle........ 27,~~730~~459 1019,~~947~~756 46(41) (1019,~~740~~462) 27,~~983~~712 Cumulative effect of a change in accounting principle, net of related taxes.........~~......................~~ - (253) - - (253) ---------- ---------- ---------- ---------- ---------- Net income (loss)............................. $ 27,~~730~~459 $ 1019,~~694~~503 $ 46(41) $ (1019,~~740~~462) $ 27,~~730~~459 ========== ========== ========== ========== ==========

18 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2004 ---------------------------------------------------------------------- PARENT GUARANTOR NONGUARANTOR COMPANY ~~SUBSIDIARY~~SUBSIDIARIES ~~SUBSIDIARY~~SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------~~----~~ ------------ ------------ ------------ ------------ (IN THOUSANDS OF DOLLARS) Revenues: Fuel....................................... $ - $ ~~844~~1,~~080~~345,116 $ 814,~~696~~060 $ - $ ~~852~~1,~~776~~359,176 Nonfuel.................................... - ~~338~~527,~~071~~420 12,~~740~~828 - ~~339~~530,~~811~~248 Rent and royalties......................... - 47,~~795~~256 23,~~418~~714 (12,~~864~~901) 58,~~349~~069 --------- ----------- --------- --------- ----------- Total revenues............................. - 1,~~186~~879,~~946~~792 1220,~~854~~602 (12,~~864~~901) 1,~~197~~897,~~936~~493 Cost of goods sold (excluding depreciation)... - ~~935~~1,~~044~~490,368 914,~~091~~756 - ~~944~~1,~~135~~505,124 --------- ----------- --------- --------- ----------- Gross profit (excluding depreciation)......... - ~~251~~389,~~902~~424 35,~~763~~846 (12,~~864~~901) ~~253~~392,~~801~~369 Operating expenses............................ - ~~174~~265,~~765~~679 24,~~918~~611 (12,~~864~~901) ~~175~~267,~~819~~389 Selling, general and administrative expenses..~~.............~~ ~~649~~988 1929,~~447~~233 ~~611~~903 - 2031,~~707~~124 Depreciation and amortization expense......... - 2943,~~705~~538 ~~269~~407 - 2943,~~974~~945 (Gain) on asset sales......................... - 11(1,678) - - 11(1,678) --------- ----------- --------- --------- ----------- Income (loss) from operations................. (~~649~~988) 2752,~~974~~652 (3575) - 2751,~~290~~589 Equity income (loss).......................... 1124,~~830~~114 2667 - (1123,~~778~~987) 78194 Gain on sale of investment.................... - (1,491) - - (1,491) Interest and other financial costs, net....... (1117,~~929~~708) (1015,~~655~~883) (~~148~~225) - (2233,~~732~~816) --------- ----------- --------- --------- ----------- Income (loss) before income taxes............. ~~(748)~~5,418 1838,~~836~~327 (~~183~~300) (1123,~~778~~987) 619,~~127~~458 Provision (benefit) for income taxes.......... (46,~~622~~899) 614,~~923~~105 (4865) - 27,~~253~~141 --------- ----------- --------- --------- ----------- Net income (loss)............................. $ 312,~~874~~317 $ 1124,~~913~~222 $ (~~135~~235) $ (1123,~~778~~987) $ 312,~~874~~317 ========= =========== ========= ========= ===========

19 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW SCHEDULES:

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2003 --------------------------------------------------------------------- PARENT GUARANTOR NONGUARANTOR COMPANY SUBSIDIARIES ~~SUBSIDIARY~~SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------~~----~~ ------------ ------------ ------------ ------------ (IN THOUSANDS OF DOLLARS) CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES................... $ ~~(6,073)~~906 $ 4472,~~702~~080 $ ~~241~~(111) $ 1,816 $ 4074,~~686~~691 ---------- ----------- ---------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions.................. - (3,~~035~~768) (5,267) - (89,~~302~~035) Proceeds from asset sales.............. - 1,~~378~~866 - - 1,~~378~~866 Capital expenditures................... - (2131,~~060~~833) (~~176~~224) - (2132,~~236~~057) ---------- ----------- ---------- ---------- ----------- Net cash used in investing activities........................ - (2233,~~717~~735) (5,~~443~~491) - (2839,~~160~~226) ---------- ----------- ---------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in checks drawn in excess of bank balances............. - ~~696~~(4) - - ~~696~~(4) Revolving loan borrowings (repayments), net................... 11(15,~~100~~500) - - - 11(15,~~100~~500) Long-term debt repayments.............. (1213,~~925~~717) (89134) - - (13,~~014~~851) Other.................................. (252) - 1,816 (1,816) (252) Intercompany advances.................. 828,~~150~~563 (1132,~~531~~250) 3,~~381~~687 - - ---------- ----------- ---------- ---------- ----------- Net cash provided by (used in) financing activities.............. ~~6,073~~(906) (1032,~~924~~388) 5,~~197~~503 (1,816) (129,~~470~~607) ---------- ----------- ---------- ---------- ----------- Effect of exchange rate changes on cash.............................. - - ~~201~~202 - ~~201~~202 ---------- ----------- ---------- ---------- ----------- Net increase (decrease) in cash..... - 115,~~061~~957 ~~196~~103 - 116,~~257~~060 ~~---------- ---------- ---------- ---------- ----------~~ Cash at the beginning of the period....... - 14,047 - - 14,047 ---------- ----------- ---------- ---------- ----------- Cash at the end of the period............. $ - $ 2520,~~108~~004 $ ~~196~~103 $ - $ 2520,~~304~~107 ========== =========== ========== ========== ===========

20 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2004 -----------------------------------------------------------------~~-----~~ PARENT GUARANTOR NONGUARANTOR COMPANY SUBSIDIARIES ~~SUBSIDIARY~~SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------~~----~~ ------------ ------------ ------------ ------------ (IN THOUSANDS OF DOLLARS) CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES................... $ (62,~~051)~~283 $ 6474,~~041~~782 $ ~~444~~963 $ - $ 5878,~~434~~028 ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions.................. - (~~144~~588) - - (~~144~~588) Proceeds from asset sales.............. - 911,~~078~~755 - - 911,~~078~~755 Capital expenditures................... - (2536,~~175~~671) (~~398~~952) - (2537,~~573~~623) ---------- ---------- ---------- ---------- ---------- Net cash used in investing activities........................ - (1625,~~241~~504) (~~398~~952) - (1626,~~639~~456) ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in checks drawn in excess of bank balances............. - (23,~~290)~~653 - - (23,~~290)~~653 Revolving loan borrowings (repayments), net................... (1113,~~100~~600) - - - (1113,~~100~~600) Long-term debt repayments.............. (23,~~256~~991) (93141) - - (2324,~~349~~132) Other.................................. (158) - - - (158) Intercompany advances.................. 4035,~~407~~466 (4035,~~031~~610) ~~(106)~~144 - - ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities.............. 6(2,~~051~~283) (4232,~~684~~098) 144 - (~~106~~34,237) - ---------- ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash............................ - - ~~(2)~~20 ~~(2)~~- 20 ---------- ---------- ---------- ---------- ---------- Net increase in cash................ - 517,~~116~~180 ~~(62)~~175 - 517,~~004~~355 Cash at the beginning of the period....... - 14,746 259 - 15,005 ---------- ---------- ---------- ---------- ---------- Cash at the end of the period............. $ - $ 1931,~~862~~926 $ ~~197~~434 $ - $ 2032,~~059~~360 ========== ========== ========== ========== ==========

21 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements and selected notes to unaudited consolidated financial statements included herein, and the audited financial statements and the Management's Discussion and Analysis included with our Form 10-K for the year ended December 31, 2003. Our results of operations for a particular quarter may not be indicative of results expected during the other quarters or for the entire year. CRITICAL ACCOUNTING POLICIES We have no material changes to the disclosure on this matter made in our annual report on Form 10-K for the year ended December 31, 2003. 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 September 30, 2004, our geographically diverse network consisted of 149 sites located in 41 states and Ontario, Canada. 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, typically on 20- to 25-acres 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 route their trucks within a single 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, travel and convenience stores with a selection of over 4,000 items and other driver amenities. The non-fuel products and services we offer to our customers complement our fuel business and provide us a means to increase our revenues and gross profit despite price pressure on fuel as a result of competition and volatile crude oil and petroleum product prices, particularly in times of historically high prices. For the nine-month periods ended September 30, 2003 and 2004, our revenues and gross profit were composed as follows: 22 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ------------------------ 2003 2004 --------- --------- Revenues: Fuel...............................................~~.........~~ 7069.86% 71.26% Non-fuel...........................................~~.........~~ 2829.68% 28.40% Rent and royalties.................................~~.........~~ 0.6% 0.4% -------- -------- Total revenues...............................~~.........~~ 100.0% 100.0% ======== ======== Gross profit (excluding depreciation): Fuel...............................................~~.........~~ 2221.25% 18.60% Non-fuel...........................................~~.........~~ 7475.98% 7980.30% Rent and royalties.................................~~.........~~ 2.87% 2.10% -------- -------- Total gross profit (excluding depreciation)..~~.........~~ 100.0% 100.0% ======== ========

COMPOSITION OF OUR NETWORK The changes in the number of sites within our network and in their method of operation (company-operated, leased or franchisee-owned) are significant factors influencing the changes in our results of operations. The following table summarizes the changes in the composition of our network from December 31, 2002 through September 30, 2004:

COMPANY- FRANCHISEE- OPERATED LEASED OWNED TOTAL SITES SITES SITES SITES -----~~---~~ ------ ------~~-----~~ ------ Number of sites at December 31, 2002...................... 122 20 10 152 January - ~~June~~September 2003 Activity: New sites.............................................. 2 - - 2 Sales of sites......................................... (12) - - (12) Conversions of leased sites to company-operated sites.. 24 (24) - - ------ ------ ------ ----- Number of sites at ~~June~~September 30, 2003...................~~.......~~ ~~125~~126 1816 10 ~~153~~152 ~~July~~October - December 2003 Activity: Sales of sites......................................... (21) - - (21) Closed sites........................................... (1) - - (1) Conversions of leased sites to company-operated sites.. 42 (42) - - ------ ------ ------ ----- Number of sites at December 31, 2003...................... 126 14 10 150 2004 Activity: Sales of sites....................................... (1) - - (1) Conversions of leased sites to company-operated sites.. 12 (12) - - ------ ------ ------ ----- Number of sites at ~~June~~September 30, 2004...................~~.......~~ 127 1312 10 ~~150~~149 ====== ====== ====== =====

As of September 30, 2004, one of our company-operated sites was under contract to be sold. This sale transaction is expected to close in 2004 and will not have a material effect on continuing results of operation. In September 2004, we entered into an agreement pursuant to which we expect to acquire one of the franchisee-owned sites and convert it to a company-operated site during the fourth quarter of 2004. On October 1, 2004, we entered into an agreement through which we expect to acquire 11 company-operated sites before the end of 2004. See the "Acquisition and Refinancing" section below for further description of the acquisition. 23 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS RESULTS OF OPERATIONS SAME-SITE RESULTS COMPARISONS As part of our discussion and analysis of operating results we refer to increases and/or decreases in results on a same-site basis. For purposes of these comparisons, we include a site in the same-site comparisons if it was open for business under the same method of operation (company-operated, leased or franchisee-owned) for the like period under discussion in both years being compared. Sites are not excluded from the same-site comparisons as a result of expansions in the square footage of the sites or in the amenities offered at the sites. RELEVANCE OF FUEL REVENUES Due to the market pricing of commodity fuel products and the pricing arrangements we have with our fuel customers, fuel revenue is not a reliable metric for analyzing our relative results from period to period. As a result solely of changes in crude oil and refined products market prices, our fuel revenue balances may increase or decrease significantly, in both absolute amounts and on a percentage basis, without a comparable change in fuel sales volumes or in gross margin per gallon. THREE-MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE-MONTHS ENDED SEPTEMBER 30, 2003 Revenues. Our consolidated revenues for the quarter ended September 30, 2004 were $699.6 million, which represents an increase from the quarter ended September 30, 2003 of $143.5 million, or 25.8%, that is primarily attributable to an increase in fuel revenue. Fuel revenue for the quarter ended September 30, 2004 increased by $132.6 million, or 35.5%, as compared to the same period in 2003. The increase was attributable principally to increased average selling prices for both diesel fuel and gasoline. Average diesel fuel and gasoline sales prices for the quarter ended September 30, 2004 increased by 42.4% and 24.8%, respectively, as compared to the same period in 2003, reflecting increases in commodity prices that were attributable to higher crude oil costs, due to increased worldwide demand, refinery outages and other refined petroleum product supply disruptions. The fuel revenue price variance increase was somewhat offset by decreases in diesel fuel and gasoline sales volumes, primarily in wholesale fuel sales. Diesel fuel and gasoline sales volumes for the quarter ended September 30, 2004 decreased 1.6% and 10.2%, respectively, as compared to the same period in 2003. For the quarter ended September 30, 2004, we sold 333.7 million gallons of diesel fuel and 47.6 million gallons of gasoline, as compared to 339.3 million gallons of diesel fuel and 53.0 million gallons of gasoline for the quarter ended September 30, 2003. The diesel fuel sales volume decrease of 5.6 million gallons resulted from a decrease in wholesale diesel fuel sales volume that was partially offset by a 0.6% increase in same-site diesel fuel sales volumes and a net increase in sales volumes at sites we added to or eliminated from our network during 2003 and 2004. The gasoline sales volume decrease was primarily attributable to a 3.7% decrease in same-site gasoline sales volumes and a 3.9 million gallon decrease in wholesale gasoline sales volumes. We believe the same-site diesel fuel sales volume increase resulted from our aggressive trucking fleet pricing strategy and our competitive street pricing posture during a period of intense price competition and an improved freight market. These factors were offset by an increase in the level of freight carried by train instead of truck and an increase in trucking fleets' self-fueling at their own terminals due to the wide fluctuations in, and high levels of, diesel prices in 2004. We believe the same-site decrease in gasoline sales volume resulted primarily from the high price levels as the cost of crude oil sharply increased during the quarter and as compared to the prior year. We believe the decreases in wholesale sales volumes for both diesel and gasoline result from the sharp volatility in commodity prices during 2004 coupled with the high level of commodity prices. Non-fuel revenues for the quarter ended September 30, 2004 of $190.4 million reflected an increase of $11.3 million, or 6.3%, as compared to the same period in 2003. The increase was primarily attributable to a 5.5% increase in same-site non-fuel revenues and also was attributable to the increased sales at the company-operated sites added to our network in 2003 and 2004. We believe the same-site increase reflected increased customer traffic resulting, in part, from the significant capital improvements that we have made in the network under our capital investment program to upgrade our travel centers, an improved freight market and also from our fuel pricing strategy. 24 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Rent and royalty revenues for the quarter ended September 30, 2004 reflected a $0.4 million, or 13.8%, decrease as compared to the same period in 2003. This decrease was attributable to the rent and royalty revenue lost as a result of the conversions of four leased sites to company-operated sites since September 30, 2003. This decrease was partially offset by a 3.1% increase in same-site royalty revenue and a 4.3% increase in same-site rent revenue. Gross Profit (excluding depreciation). Our gross profit for the quarter ended September 30, 2004 was $138.6 million, compared to $135.0 million for the same period in 2003, an increase of $3.5 million, or 2.6%. The increase in our gross profit was primarily due to the increase in non-fuel sales volume that was partially offset by a decrease in diesel fuel sales volume, decreased fuel margin per gallon and decreased rent and royalty revenue, as discussed above. Operating and Selling, General and Administrative Expenses. Operating expenses included the direct expenses of company-operated sites and the ownership costs of leased sites. Selling, general and administrative expenses included corporate overhead and administrative costs. Our operating expenses increased by $0.2 million, or 0.3%, to $91.6 million for the quarter ended September 30, 2004 compared to $91.3 million for the same period in 2003. This increase was attributable to a $0.3 million, or 0.3% decrease on a same-site basis and a net increase resulting from company-operated sites we added to our network or eliminated from our network during 2003 and 2004. On a same-site basis, operating expenses as a percentage of non-fuel revenues for 2004 were 47.8%, compared to 50.7% for the same period in 2003, reflecting the results of our cost-cutting measures at our sites and an increased level of non-fuel sales relative to our fixed costs. Our selling, general and administrative expenses for the quarter ended September 30, 2004 were $10.4 million, which reflected a $0.3 million, or 3.3% increase from the same period in 2003 that is primarily attributable to personnel costs. Depreciation and Amortization Expense. Depreciation and amortization expense for the quarter ended September 30, 2004 was $14.0 million, compared to $15.3 million for the same period in 2003, a decrease of $1.4 million, or 8.9%, that was primarily due to an impairment charge of $0.5 million recognized in 2003. (Gain) loss on asset sales. For the quarter ended September 30, 2004, the gain on asset sales of $1.7 million primarily was generated from the sale of one company-operated site and of fractional shares of three aircraft. Income from Operations. We generated income from operations of $24.3 million for the quarter ended September 30, 2004, compared to income from operations of $18.3 million for the same period in 2003. This increase of $6.0 million, or 33.0%, as compared to the 2003 period was primarily attributable to the increased level of non-fuel revenues and gross margin which was partially offset by the decreased level of diesel fuel sales volumes and fuel margins per gallon. Interest and Other Financial Costs--Net. Interest and other financial costs, net, for the quarter ended September 30, 2004 decreased by $0.1 million, or 1.2%, compared to the same period in 2003. This decrease resulted from our reduced level of indebtedness in 2004 as compared to 2003 and was somewhat offset by rising interest rates. Income Taxes. Our effective income tax rates for the quarters ended September 30, 2004 and 2003 were 36.7% and 35.1%, respectively. These rates differed from the federal statutory rate due primarily to state income taxes and nondeductible expenses, partially offset by the benefit of certain tax credits. The increase from 2003 is primarily related to state income taxes. NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003 Revenues. Our consolidated revenues for the nine-month period ended September 30, 2004 were $1,897.5 million, which represents an increase from the nine-month period ended September 30, 2003 of $247.5 million, or 15.0%, that is primarily attributable to an increase in fuel revenue. Fuel revenue for the nine-month period ended September 30, 2004 increased by $210.9 million, or 18.4%, as compared to the same period in 2003. The increase was attributable principally to increased average selling prices for both diesel fuel and gasoline. Average diesel fuel and gasoline sales prices for the nine-month period ended September 30, 2004 increased by 21.9% and 22.8%, respectively, as compared to the same period in 2003, reflecting 25 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS increases in commodity prices that were attributable to higher crude oil costs due to increased worldwide demand, refinery outages and other refined petroleum product supply disruptions. The fuel revenues price variance increase was somewhat offset by decreases in diesel fuel and gasoline sales volumes, primarily in wholesale fuel sales. Diesel fuel and gasoline sales volumes for the nine-month period ended September 30, 2004 decreased 2.6% and 5.1%, respectively, as compared to the same period in 2003. For the nine-month period ended September 30, 2004, we sold 985.3 million gallons of diesel fuel and 136.3 million gallons of gasoline, as compared to 1,011.6 million gallons of diesel fuel and 143.6 million gallons of gasoline for the nine-month period ended September 30, 2003. The diesel fuel sales volume decrease of 26.3 million gallons resulted from a 1.4% decrease in same-site diesel fuel sales volumes, a net increase in sales volumes at sites we added to or eliminated from our network during 2003 and 2004 and a decrease in wholesale diesel fuel sales volume. The gasoline sales volume decrease was primarily attributable to a decrease in wholesale gasoline sales volumes that was partially offset by a 2.2% increase in same-site gasoline sales volumes. We believe the same-site diesel fuel sales volume decrease resulted from intense price competition, in conjunction with an increase in the level of freight carried by train instead of truck and an increase in trucking fleets' self-fueling at their own terminals due to the wide fluctuations in, and high levels of, diesel prices in 2004. These factors were somewhat offset by an improved freight market in 2004. We believe the same-site increase in gasoline sales volume resulted primarily from increased general motorist visits to our sites as a result of our more aggressive retail gasoline pricing program as well as site improvements made as part of our capital investment program. We believe the decreases in wholesale sales volumes for both diesel and gasoline result from the sharp volatility in commodity prices during 2004 coupled with the high level of commodity prices. Non-fuel revenues for the nine-month period ended September 30, 2004 of $530.2 million reflected an increase of $38.7 million, or 7.9%, as compared to the same period in 2003. The increase was primarily attributable to a 4.7% increase in same-site non-fuel revenues and also attributable to the increased sales at the company-operated sites added to our network in 2003 and 2004. We believe the same-site increase reflected increased customer traffic resulting, in part, from the significant capital improvements that we have made in the network under our capital investment program to upgrade our travel centers, an improved freight market and also from our fuel pricing strategy. Rent and royalty revenues for the nine-month period ended September 30, 2004 reflected a $2.1 million, or 20.7%, decrease as compared to the same period in 2003. This decrease was attributable to the rent and royalty revenue lost as a result of the conversions of eight leased sites to company-operated sites during 2003 and 2004. This decrease was partially offset by a 3.1% increase in same-site royalty revenue and a 3.7% increase in same-site rent revenue. Gross Profit (excluding depreciation). Our gross profit for the nine-month period ended September 30, 2004 was $392.4 million, compared to $381.1 million for the same period in 2003, an increase of $11.3 million, or 3.0%. The increase in our gross profit was primarily due to the increase in non-fuel sales volume that was partially offset by a decrease in diesel fuel sales volume, decreased fuel margin per gallon and decreased rent and royalty revenue, as discussed above. Operating and Selling, General and Administrative Expenses. Operating expenses included the direct expenses of company-operated sites and the ownership costs of leased sites. Selling, general and administrative expenses included corporate overhead and administrative costs. Our operating expenses increased by $6.7 million, or 2.6%, to $267.4 million for the nine-month period ended September 30, 2004 compared to $260.7 million for the same period in 2003. This increase was primarily attributable to a net increase resulting from company-operated sites we added to our network or eliminated from our network during 2003 and 2004 that was partially offset by a 0.1% decrease on a same-site basis that primarily resulted from a $1.6 million credit to environmental expense related to remediation activities at a site (see further discussion in the "Environmental Matters" section of this Management's Discussion and Analysis). On a same-site basis, operating expenses as a percentage of non-fuel revenues for 2004 were 50.0%, compared to 52.3% for the same period in 2003, reflecting the results of our cost-cutting measures at our sites and an increased level of non-fuel sales relative to our fixed costs. Our selling, general and administrative expenses for the nine-month period ended September 30, 2004 were $31.1 million, which reflected a $0.7 million, or 2.4%, increase from the same period in 2003 that is primarily attributable to personnel costs. 26 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Depreciation and Amortization Expense. Depreciation and amortization expense for the nine-month period ended September 30, 2004 was $43.9 million, compared to $44.5 million for the same period in 2003, a decrease of $0.6 million, or 1.3%, that was primarily due to an impairment charge of $0.5 million recognized in 2003 and a $0.5 million decrease in amortization expense that resulted from an intangible asset related to a noncompetition agreement becoming fully amortized in April 2003. (Gain) loss on asset sales. For the nine-month period ended September 30, 2004, the gain on asset sales of $1.7 million primarily was generated from the sale of one company-operated site and of fractional shares of three aircraft, while the gain on asset sales of $0.3 million for the nine-month period ended September 30, 2003 primarily was generated from the sale of one company-operated site. Income from Operations. We generated income from operations of $51.6 million for the nine-month period ended September 30, 2004, compared to income from operations of $45.8 million for the same period in 2003. This increase of $5.8 million, or 12.7%, as compared to the 2003 period was primarily attributable to the increased level of non-fuel revenues and gross margin which was partially offset by the decreased level of diesel fuel sales volumes and fuel margins per gallon. Gain on sale of investment. The gain on sale of investment of $1.5 million for the nine-month period ended September 30, 2004 resulted from the sale in April of our investment in Simons Petroleum, Inc. for cash proceeds of $9.1 million. We could receive an additional $2.0 million of proceeds if Simons achieves certain earnings targets and certain other conditions are met and representations and warranties are maintained. Due to the uncertainty surrounding the future realization of these receivables, the gain on sale we recognized did not reflect these amounts. Interest and Other Financial Costs--Net. Interest and other financial costs, net, for the nine-month period ended September 30, 2004 decreased by $0.7 million, or 2.0%, compared to the same period in 2003. This decrease resulted from our reduced level of indebtedness in 2004 as compared to 2003 that was somewhat offset by rising interest rates. Income Taxes. Our effective income tax rates for the nine-month periods ended September 30, 2004 and 2003 were 36.7% and 36.4%, respectively. These rates differed from the federal statutory rate due primarily to state income taxes and nondeductible expenses, partially offset by the benefit of certain tax credits. Cumulative Effect of a Change in Accounting Principle. Effective January 1, 2003, we adopted FAS 143, "Accounting for Asset Retirement Obligations." As of January 1, 2003, we recognize the future cost to remove an underground storage tank over the estimated useful life of the storage tank. A liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset is recorded at the time an underground storage tank is installed. We will amortize the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the remaining life of the respective underground storage tank. The estimated liability is based on historical experiences in removing these tanks, estimated tank useful lives, external estimates as to the cost to remove the tanks in the future and regulatory requirements. The liability is a discounted liability using a credit-adjusted risk-free rate of approximately 12.8%. Revisions to the liability could occur due to changes in tank removal costs, tank useful lives or if new regulations regarding the removal of such tanks are enacted. Upon adoption of FAS 143, we recorded a discounted liability of $589,000, increased property and equipment by $172,000 and recognized a one-time cumulative effect charge of $253,000 (net of deferred tax benefit of $164,000). LIQUIDITY AND CAPITAL RESOURCES Our principal liquidity requirements are to meet our working capital and capital expenditure needs, including expenditures for acquisitions and expansion, and to service the payments of principal and interest on outstanding indebtedness. Our principal source of liquidity to meet these requirements is operating cash flows. The revolving credit facility of our Senior Credit Facility provides us a secondary source of liquidity, primarily to better match the timing of cash expenditures to the timing of our cash receipts primarily due to effects of changes in petroleum product prices, the uneven level of capital expenditures throughout the year and the timing of debt and interest payments. The primary risks we face with respect to the expected levels of operating cash flows are a decrease in the demand by our customers for our products and services, increases in crude oil and/or petroleum product prices and increases in interest rates. It is reasonably likely that the United States economy could either worsen, or reflect slower growth than expected during the remainder of 2004. Similarly, it is reasonably likely that interest rates and petroleum product prices will increase further during the remainder of 2004 from levels that existed during 2003 and the first nine months of 2004, possibly to levels greater than that contemplated in our expectations. The uncertainty surrounding each of the economy, interest rates and petroleum product prices is exacerbated by the 27 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS political and military situation in Iraq, crude oil production issues in various countries and the intentions and actions of OPEC member nations. If the United States economy worsens, our customers could be adversely affected, which could further intensify competition within our industry and reduce the level of cash we could generate from our operations. Based on our outstanding obligations as of September 30, 2004, a one-percentage point increase in interest rates increases our annual cash outlays by approximately $3.5 million. A significant increase in diesel fuel and gasoline prices increases our cash investment in working capital and can also have a depressing effect on our sales volumes and fuel margins per gallon. The primary risk we face with respect to the expected availability of borrowing under our revolving credit facility are the limitations imposed upon us by the covenants contained in our Senior Credit Facility. Should our level of sales volume or interest rate and petroleum products price levels vary adversely and significantly from expectations, it is reasonably likely that we would need to reduce our capital expenditures or be effectively barred from further revolving credit facility borrowings in order to maintain compliance with our debt covenants, in the absence of a debt covenant waiver or an amendment to the related agreement. We were in compliance with all of our debt covenants throughout the first nine months of 2004 and as of September 30, 2004, and we expect to remain in compliance with all of our debt covenants throughout 2004. See "Adjusted EBITDA and Debt Covenant Compliance" below for further discussion. We anticipate that we will be able to fund our 2004 working capital requirements and capital expenditures primarily from funds generated from operations, supplemented, to the extent necessary, from borrowings under our revolving credit facility. Our long-term liquidity requirements, including capital expenditures, are expected to be financed by a combination of internally generated funds, borrowings and other sources of external financing as needed. Our ability to fund our capital investment requirements, interest and principal payment obligations and working capital requirements and to comply with all of the financial covenants under our debt agreements depends on our future operations, performance and cash flow. These are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. At September 30, 2004, we had no outstanding revolving credit facility borrowings and outstanding issued letters of credit of $26.9 million, leaving $73.1 million of our $100 million revolving credit facility available for borrowings. The forecasted level of capital expenditures for 2004 is approximately $49 million. Given our forecasted level of cash flows from operations for 2004 and our planned level of capital expenditures, and barring an event or series of events that leads to significantly increased petroleum product prices, we expect that during the remainder of 2004 we will make our scheduled debt payments and will have no net borrowings under our revolving credit facilities. In April 2004, we made mandatory prepayments of term loan borrowings of $21.8 million. These prepayments consisted of $12.7 million related to Excess Cash Flow generated during the year ended December 31, 2003, and $9.1 million related to the net cash proceeds generated from the sale of our investment in an equity investee. ACQUISITION AND REFINANCING On October 1, 2004, we entered into an asset purchase agreement (the "Acquisition Agreement") with B.R.G., Inc. and Rip Griffin Truck Service Center, Inc. (collectively "Rip Griffin") to acquire eleven travel center facilities operated by Rip Griffin. Other than the Agreement, there is no material relationship between us and Rip Griffin. The Acquisition Agreement provides for the acquisition of the assets at the eleven travel center facilities operated by Rip Griffin on interstate highways. The eleven travel centers to be acquired are located in Arizona, Arkansas, California, Colorado, New Mexico, Texas and Wyoming. The purchase price for the acquisition is $120 million plus an additional amount for site cash and inventories that will be determined at closing but is estimated to be approximately $8 million. These amounts will be paid in cash. We will also assume the environmental liability related to the acquired sites. The estimated amount of the environmental liability is $1.1 million. The closing of the acquisition is subject to certain conditions, including regulatory approval under the Hart-Scott-Rodino Antitrust Improvements Act. We expect to consummate the transaction before the end of 2004. In order to consummate the acquisition, we expect to complete a refinancing of our Senior Credit Facilities (the Refinancing). We have received a fully underwritten commitment for an amended and restated credit facility that is expected to close simultaneous with the closing of the acquisition. As amended and restated, we expect that our Senior Credit Facilities will be composed of a seven-year Term Loan C of $475 million and a five-year $100 million Revolving Credit Facility. The proceeds received will be used to refinance our current Term Loan B, fund 28 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS the Rip Griffin acquisition, refinance our master lease facility and for general corporate purposes. We believe the terms of the amended and restated credit agreement will be substantially similar to those included in the current credit agreement and consistent with current financing market conditions. As a result of the Refinancing, we will incur a non-cash charge against operating income of approximately $8.5 million in connection with writing off the unamortized amount of the deferred financing costs incurred in 2000 with respect to the Senior Credit Facilities. HISTORICAL CASH FLOWS Net cash provided by operating activities totaled $78.0 million for the first nine months of 2004, compared to $74.7 million for the same period in the prior year. The $3.3 million increase in cash from operations primarily resulted from greater profitability in 2004. The increases in the accounts receivable and accounts payable balances are attributable to the significant increase in diesel fuel and gasoline commodity prices in the United States, primarily as a result of the significant increases in crude oil costs. Net cash used in investing activities was $26.5 million for the first nine months of 2004, as compared to $39.2 million for the first nine months of 2003. During 2004, we received $11.8 million of proceeds from the sale of stock of an equity investee and other property and equipment sales and invested $0.6 million to convert two leased sites to company-operated sites. During 2003, we invested $9.0 million to acquire two new operating sites and convert four leased sites to company-operated sites. We realized $1.9 million of proceeds from two site sales in 2003. Net cash used in financing activities was $34.2 million during the first nine months of 2004 and $29.6 million during the first nine months of 2003. During 2004, we made mandatory term loan prepayments of $21.8 million as a result of Excess Cash generated in 2003 and the sale of our investment in an equity investee. We also made net repayments under our revolving credit facility of $13.6 million. During 2003, we made net repayments of our revolving credit facility indebtedness of $15.5 million, and also made repayments of long-term loan indebtedness of $13.9 million, which includes an $11.3 million mandatory prepayment in April 2003 resulting from excess cash flow we generated in 2002. DESCRIPTION OF INDEBTEDNESS We have no material changes to the disclosure on this matter made in our annual report on Form 10-K for the year ended December 31, 2003, except that at September 30, 2004, we had no outstanding revolving credit facility borrowings and outstanding issued letters of credit of $26.9 million, leaving $73.1 million of our $100 million revolving credit facility available for borrowings. The Refinancing is not expected to significantly change the terms of our Senior Credit Facilities. However, as a result of the Refinancing, the total amount of scheduled debt repayments in the next five years will be greatly reduced as the repayment of the Term Loan borrowings will be heavily weighted to the seventh year of the new agreement. ADJUSTED EBITDA AND DEBT COVENANT COMPLIANCE Adjusted EBITDA, as used here, is based on the definition for "EBITDA" in our bank debt agreement and consists of net income plus the sum of (a) income taxes, (b) interest expense, net, (c) depreciation, amortization and other noncash charges, (d) transition expense, (e) extraordinary losses and cumulative effects of accounting changes and (f) the costs of the merger and recapitalization transactions. We have included this information concerning Adjusted EBITDA because Adjusted EBITDA is a primary component for calculating the financial ratio covenants in our debt agreements. We also use Adjusted EBITDA as a basis for determining bonus payments to our corporate and site-level management employees and as a key component in the formula for calculating the fair value of our redeemable common stock and stock options. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, net income, income from operations, cash flows from operating activities or other consolidated income or cash flow statement data prepared in accordance with generally accepted accounting principles. While the non-GAAP measures "EBITDA" and "Adjusted EBITDA" are frequently used by other companies as measures of operations and/or ability to meet debt service requirements, Adjusted EBITDA as we use the term is not necessarily comparable to similarly titled captions of other companies due to differences in methods of calculation. 29 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS We consider our Senior Credit Facility to be a material agreement. A majority of our outstanding indebtedness has been borrowed under the Senior Credit Facility. Further, the Senior Credit Facility requires us to maintain compliance with a variety of affirmative and negative covenants which primarily act to limit the types of business activities we can undertake; limits the amounts we can spend for items such as capital expenditures, dividends and distributions, investments, operating leases, etc.; and limits the amount of additional indebtedness we can incur and the liens that can be placed on our assets. We have maintained compliance with all of these covenants for all periods presented and expect to remain in compliance with all of the debt covenants to which we are subject through the remainder of 2004. Of the many debt covenants to which we are subject, there are two primary financial ratio covenants against which our quarterly results are compared. These two key debt covenant financial ratios are (a) an interest expense coverage ratio and (b) a leverage ratio. The interest expense coverage ratio is calculated by dividing Adjusted EBITDA for the trailing four quarters by interest expense (excluding the interest expense related to the amortization of debt discount and deferred financing costs) for the trailing four quarters. The leverage ratio is calculated by dividing net debt by Adjusted EBITDA for the trailing four quarters. Net debt is calculated by subtracting from total debt the cash balance in excess of $2.5 million. Failure to meet either of the financial ratio debt covenants could result in the lenders under our Senior Credit Facility declaring our indebtedness under the Senior Credit Facility immediately due and payable. However, we believe, in such an instance, that we would be able to negotiate a waiver and/or amendment of the covenants, which is reasonably likely to require us to pay a significant amount of fees to the lenders and legal counsel and to further limit our ability to make cash disbursements, such as for capital expenditures. The following table sets forth the calculation of Adjusted EBITDA and information related to the debt covenant financial ratios.

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ------------------------------ 2003 2004 ------------- ------------- (IN THOUSANDS OF DOLLARS, EXCEPT RATIOS) Net income.......................................................................... $ 27,~~730~~459 $ 312,~~874~~317 Adjustments to reconcile net income to Adjusted EBITDA: Cumulative effect of a change in accounting principle, net of related taxes...... 253 - Provision (benefit) for income taxes.............................................~~.....~~ 14,~~850~~408 27,~~253~~141 Interest and other financial costs, net.......................................... 2334,~~288~~502 2233,~~732~~816 Depreciation and amortization expense............................................ 2944,~~200~~541 2943,~~974~~945 Other non-cash charges (credits), net............................................ ~~482~~628 ~~227~~412 ------------- ------------- Adjusted EBITDA..................................................................... $ 5791,~~803~~791 $ 5997,~~060~~631 ============= ============= Adjusted EBITDA for trailing 12-month ratio measurement period...................... $ 120,~~447~~557 $ ~~123~~127,~~177~~760 ~~-----------~~============= ~~-----------~~============= Interest expense coverage ratio: Actual ratio at period end....................................................... 2.~~74x~~85x 3.~~00x~~13x Required ratio at period end (no less than)...................................... 1.80x 2.00x Minimum amount of Adjusted EBITDA to meet required ratio......................... $ 7976,~~223~~018 $ 8281,~~236~~624 Leverage ratio: Actual ratio at period end....................................................... 43.~~18x~~99x 3.~~69x~~44x Required ratio at period end (no greater than)................................... 4.65x 4.15x Minimum amount of Adjusted EBITDA to meet required ratio......................... $ ~~108~~103,~~190~~558 $ ~~109~~105,~~447~~795

OFF-BALANCE SHEET ARRANGEMENTS We have no material changes to the disclosure on this matter made in our annual report on Form 10-K for the year ended December 31, 2003, except that, as part of the planned Refinancing, we intend to borrow the funds to purchase the assets that we currently lease under our master lease facility. The amount to be paid is expected to be approximately $65.1 million. The rent we paid with respect to the master lease agreement was $5.7 million, $4.3 million and $4.3 million for the year ended December 31, 2003 and the nine-month periods ended September 30, 2003 and 2004, respectively. 30 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS We have no material changes to the disclosure on this matter made in our annual report on Form 10-K for the year ended December 31, 2003, except that (i) we have entered into an agreement to acquire one of our franchisee-owned sites for approximately $10 million, and (ii) we have entered into the Acquisition Agreement under which we expect to pay approximately $128 million to acquire the travel center assets from Rip Griffin during the fourth quarter. See the "Acquisition and Refinancing" section above for further description of the acquisition. ENVIRONMENTAL MATTERS Under the environmental agreement entered into as part of the acquisition of the BP network, BP is required to provide indemnification for, and conduct remediation of, certain pre-closing environmental conditions. Until January 2004, Unocal similarly was required to provide indemnification for, and conduct remediation of, certain environmental conditions that existed prior to our April 1993 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 on by us as we incur related remediation costs, and purchased insurance policies that cap our total future expenditures for these matters at $9.6 million 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 million, which amount we expect will be fully covered by the cash received from Unocal and reimbursements from state tank funds. Accordingly, we recognized no income or expense as a result of entering into the Unocal Buy-Out Agreement. Of the cash paid to us by Unocal $1,000,000 was to reimburse us for the future costs of administering the remediation projects assumed from Unocal and was recorded as a deferred credit that will be recognized to offset our costs as the related remediation activities are completed. In March 2004, we received notification from the Pennsylvania Underground Storage Tank Insurance Fund ("USTIF") that, as a result of our appeal, USTIF had reversed its denial of our claim for reimbursement of corrective action costs incurred or to be incurred to remediate a diesel fuel release at our Harrisburg site. USTIF has agreed that our claim is eligible for reimbursement. Accordingly, in March 2004, we recognized a $1.6 million receivable for the recovery of the related corrective action costs, with an offsetting reduction of operating expenses. The expenses had been recognized by us in previous years, primarily in September 2003 when we expensed $1.3 million as a result of USTIF's original denial of our claim. We have estimated the current ranges of remediation costs at currently active sites and what we believe will be our ultimate share for those costs and, as of September 30, 2004, we had a reserve of $12.6 million for unindemnified environmental matters for which we are responsible, a receivable for estimated recoveries of these estimated future expenditures of $3.7 million and $5.4 million of cash in an escrow account to fund certain of these estimated future expenditures, leaving an estimated $3.5 million to be funded from future operating cash flow. We estimate that the cash outlays related to the matters for which we have accrued this reserve will be approximately $2.3 million in the remainder of 2004; $3.2 million in 2005; $2.4 million in 2006; $1.9 million in 2007; $1.4 million in 2008 and $1.4 million thereafter. We have obtained insurance of up to $35.0 million for known and up to $40.0 million for unknown environmental liabilities, subject, in each case, to certain limitations. While it is not possible to quantify with certainty our environmental exposure, we believe that the potential liability, beyond that considered in the reserve, for all environmental proceedings, based on information known to date, will not have a material adverse effect on our financial condition, results of operations or our liquidity. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities." FIN 46 was intended to provide guidance in determining (1) whether consolidation is required under the "controlling financial interest" model in existing authoritative guidance or, alternatively, (2) whether the variable interest model under FIN 46 should be used to account for existing and new entities. In December 2003, the FASB issued a revised version of FIN 46 (FIN 46R) to clarify certain aspects of FIN 46 and to provide certain entities with exemptions from the requirements of FIN 46. We must adopt this accounting guidance in 2004 for any variable interest entities created after December 15, 2003 (there have been none to date), and on January 1, 2005 for all 31 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS entities created before December 15, 2003. Under FIN 46R, we will be required to consolidate the entity that is the lessor under our master lease program covering eight of our sites. Consolidating the lessor would affect our consolidated balance sheet by increasing property and equipment, other assets and long-term debt and would affect our consolidated statement of operations by reducing operating expenses, increasing depreciation expense and increasing interest expense. Consolidating the lessor will not result in a violation of our debt covenants or have an effect on our liquidity. We are still evaluating the amounts by which our financial statements will be affected by consolidating the lessor. We expect to terminate this lease as part of the Refinancing discussed above. We are also evaluating whether FIN 46R will require consolidation of our franchisees, although we currently believe we will not be required to do so. FORWARD-LOOKING STATEMENTS This quarterly report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future prospects, developments and business strategies. The statements contained in this quarterly report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. We have used the words "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend" and similar expressions in this report to identify forward-looking statements. These forward-looking statements are made based on our expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by forward-looking statements. The following factors are among those that could cause our actual results to differ materially from the forward-looking statements: - competition from other travel center and truck stop operators, including additional or improved services or facilities of competitors; - the economic condition of the trucking industry, which in turn is dependent on general economic factors; - increased environmental governmental regulation; - changes in governmental regulation of the trucking industry, including regulations relating to diesel fuel and gasoline; - changes in the highway infrastructure; - changes in accounting standards generally accepted in the United States; - changes in interest rates; - diesel fuel and gasoline pricing; - availability of diesel fuel and gasoline supply; - availability of sufficient qualified personnel to staff company-operated sites; and - success of new business ventures, including the risks that the business acquired and any other businesses or investments that we have acquired or may acquire may not be successfully integrated into our current business operations. All of our forward-looking statements should be considered in light of these factors and all other risks discussed from time to time in our filings with the Securities and Exchange Commission. We do not undertake to update our forward-looking statements to reflect future events or circumstances. 32 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have no material changes to the disclosure on this matter made in our annual report on Form 10-K for the year ended December 31, 2003. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer, after conducting an evaluation, together with other members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, have concluded that our disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 (c)) were effective to ensure that information required to be disclosed by us in our reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "SEC"). (b) Changes in internal controls. There were no changes in our internal controls over financial reporting that occurred during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. 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 that we are not now involved in any litigation, individually, or in the aggregate, which could have a material adverse affect on our business, financial condition, results of operations or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Section 302 Certification of Chief Executive Officer 31.2 Section 302 Certification of Chief Financial Officer 32.1 Section 906 Certification of Chief Executive Officer 32.2 Section 906 Certification of Chief Financial Officer (b) Reports on Form 8-K We filed no reports on Form 8-K during the third quarter of 2004. On October 7, 2004, we filed a Form 8-K to report that we had signed an agreement to acquire eleven travel centers from Rip Griffin. On October 19, 2004, we filed a Form 8-K to report our financial data for the interim periods ended September 30, 2004, and to provide data regarding the travel centers being acquired from Rip Griffin and the related refinancing. 33 TRAVELCENTERS OF AMERICA, INC. SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRAVELCENTERS OF AMERICA, INC. (Registrant) Date: October 22, 2004 By: /s/ James W. George --------------------------------------------- Name: James W. George Title: Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 34

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