TravelCenters of America LLC
400 Centre Street
Newton, MA 02458
Via Edgar
H. Christopher Owings
Assistant Director
Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 3561
100 F Street, N.E.
Washington, DC 20549
Dear Mr. Owings:
The purpose of this letter is to respond to your letter of January 10, 2007 with respect to the above-captioned filing. For ease of reference, your original comments are followed by our responses. We are concurrently filing Pre-Effective Amendment No. 1 to Form S-1 ("Amendment No. 1").
General
Response:
Any exhibits to the registration statement that have not been previously filed have been filed with Amendment No. 1.
Prospectus Cover Page
Response:
Disclosure has been added to the cover page as requested to confirm that, although we are a limited liability company, our common shares will have the voting, dividend and liquidation rights that are generally associated with common stocks.
About this Prospectus, page i
Response:
A cross reference has been added to page i as requested to the description of the material differences in the business before and after the transaction. We have also clarified on page i that the day to day operations of the business will not be materially different before and after the transaction.
Summary, page 1
Response:
The parenthetical phrases have been deleted.
Cautionary Note Regarding Forward Looking Statements, page 8
Response:
The references to the safe harbor have been deleted.
Risk Factors, page 9
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risks to your company or to the recipients in this offering. For example, we note that the following risk factors appear to contain generic disclosures:
Please note these are examples only. Review your entire risk factor section and revise as necessary.
Response:
We have reviewed as requested the risk factors presented and eliminated those which we believe may be generic risks, including the three specifically mentioned in your comment. We have also revised the risk factor,"Compliance with environmental laws can be costly." We have more specifically applied this risk factor, which begins on page 8, to our business by changing it to read:"Our storage and dispensing of petroleum products create the potential for environmental damage, and compliance with environmental laws is costly."
We have reviewed all of the risk factors and believe that the remainder directly relate to specific aspects of our business and are not generic.
Response:
We have added the following risk factor under the main heading of "Risks arising from our formation and certain relationships" beginning on page 9.
The restructuring of our business prior to the spin off will result in costs and cash outlays which are significantly higher than those of our predecessor and may result in a prolonged period of substantial losses. On a pro forma basis for the nine months ended September 30, 2006, we incurred expenses of $124.8 million under the terms of our lease agreement and our management and shared services agreement. This amount is significantly higher than the depreciation, which is a non-cash expense, and interest expenses that were incurred by our predecessor that we expect to avoid after the spin off transaction. In addition, our lease agreement with Hospitality Trust requires us to make capital
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expenditures to maintain the travel centers we lease and expenditures we make for improvements which are in excess of $125 million that we may draw from Hospitality Trust will either be paid by us directly without reimbursement, or if they are reimbursed by Hospitality Trust, increase our cash rental obligations and rent expense. These additional expenses and cash outlays may result in a prolonged period of substantial losses and negative cash flow. If we incur material losses or negative cash flow and these losses or negative cash flows persist over a substantial period of time, we may suffer material negative impacts on our business, including, but not limited to our ability to maintain our travel centers and make payments under our lease agreement with Hospitality Trust, and the market price of our common shares may decline substantially.
The Hospitality Trust Acquisition, page 15
Response:
The sentences related to the closing conditions of the acquisition have been rephrased on page 14 as follows:
However, the transaction may be terminated by Hospitality Trust for a material adverse change in the business of TravelCenters of America, Inc. or if TravelCenters of America, Inc. fails to deliver the consent of certain parties with which it contracts. Also, the transaction may be terminated by either TravelCenters of America, Inc. or Hospitality Trust if the closing has not occurred prior to June 30, 2007.
The Company, page 17
Response:
We have added a final heading and text in the Company section on page 34, which reads as follows:
"Intellectual Property" Neither we nor our predecessor own any patents. We will have the right to use the name "TravelCenters of America" and other trademarks used by our predecessor which will be owned by Hospitality Trust, generally during the term of our lease with Hospitality Trust. We also license certain trademarks used in the operation of our QSRs, generally for periods of 5 to 20 years. We believe that these trademarks are important to our business, but, without exception, could be replaced with alternative marks without significant disruption in our business.
Our Lease with Hospitality Trust, page 25
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Shared Services Agreement and the Form of Master Lease Agreement. In this regard, please provide a discussion of the manner in which decisions will be made regarding your future growth, operations and major corporate decisions as they relate to Hospitality Trust. For example, will you be required to accept future property site selections and decisions by Hospitality Trust for Travel Centers? We may have further comments.
Response:
Under"Our Lease with Hospitality Trust" we have added the disclosure relating to the non-arm's length nature of the reorganization as follows to page 24:
We were formed for the benefit of Hospitality Trust and not for our own benefit. Our formation allows Hospitality Trust to acquire and retain ownership of 146 travel centers. Because we were formed to benefit Hospitality Trust, the lease was prepared by Hospitality Trust and was not negotiated in an arm's length negotiation. Consequently, the lease may provide more benefits to Hospitality Trust than to us.
As previously noted, all exhibits have now been filed, including the form of Transaction Agreement, Shared Services Agreement and Lease Agreement.
In response to this comment, we have added a new subsection under "Management" entitled"Board Decisions and Certain Conflicts of Interest," on page 55, which reads as follows:
Past and future decisions by our board regarding our future growth, operations and major corporate decisions will be subject to certain possible conflicts of interest. These conflicts may have caused, and in the future may cause, our business to be adversely affected. Nevertheless, our board will be responsible for making decisions on our behalf, and, although we are parties to various agreements with Hospitality Trust, we are not obligated to follow the recommendations of Hospitality Trust with regard to our future business. In appropriate circumstances, we expect to submit transactions with any related party for approval or negotiation by our independent directors.
Competition, page 31
Response:
The references to the National Association of Truck Stop Operators on pages 18 and 31 have been eliminated.
Management's Discussion and Analysis of Financial Condition and Results of Operations, page 31
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decreasing or increasing in any material way. Discuss whether you expect that trend to continue. Please provide additional analysis concerning the quality and variability of your earnings and cash flows so that investors can ascertain the likelihood or the extent past performance is indicative of future performance. Please discuss whether you expect levels to remain at this level or to increase or decrease. Also, you should consider discussing the impact of any changes on your earnings. Further, please discuss in reasonable detail:
See Item 303 of Regulation S-K and SEC Release No. 33-8350.
Response:
The requested disclosure has been added at the end of "Overview" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, appearing on page 36.
Response:
The disclosure on page 40 has been revised to agree with the information presented on page F-33.
Legal Proceedings, Page 33
Response:
The IRS matter has been settled and disclosure has been added to page 33 to so indicate.
Management, page 48
Response:
Under "Management—Directors" on page 49, we have added the following sentence: "There are no voting agreements or other contractual arrangements relating to the election of the members of our board."
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Executive Officers, page 49
Response:
The section has been revised as requested. Revisions appear on pages 50 and 51.
Executive Compensation, page 52
Response:
The 2006 executive compensation information has been provided in Amendment No. 1.
We supplementally note to the Staff our view that the executive compensation format prescribed by Regulation 4-02 of S-K is not required in this document due to the nature of the spin off transaction. We note that the Registrant, TravelCenters of America LLC, has no historical operations. The Registrant will not make any cash payments to any executives prior to the date of the spin off and the Registrant has not committed any share based compensation to any executive for periods prior to the spin off date.
Our approach to disclosure of executive compensation has been to provide certain historical information of the predecessor company and to indicate forward looking information about the commitments we have made to executives, such as the assumption of employment contracts of our predecessor. We also note that the overall compensation philosophy and objectives will be determined after the completion of the spin off. As a result of these factors and conditions, certain of the disclosures that are called for by recently issued executive compensation rules are not applicable. However, we have supplemented the filing with voluntary disclosures regarding compensation paid in 2006. Accordingly, we have retained the format of our prior filing in order to provide additional information regarding executive compensation of the predecessor company.
Security Ownership After the Spin Off, page 56
Response:
Confirmed. Since our shares will be distributed pro rata to the shareholders of Hospitality Trust, those shares will comprise all of our shares that will be beneficially owned after the spin off. Please note that there are no options, warrants or similar securities giving anyone the right to purchase any of our shares and no share based compensation has been, or is expected to be awarded to executives within 60 days of the spin off.
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Response:
We believe we have supplied all of the information that is available to us in the footnotes to the beneficial ownership table.
Certain Relationships, page 58
Response:
We have added the following language on page 60 following the recitation of the various potential conflicts of interest:
We are party to a lease agreement with Hospitality Trust and a management and shared services agreement with Reit Management. We were formed for the benefit of Hospitality Trust and not for our own benefit. Our formation allows Hospitality Trust to acquire and retain ownership of 146 travel centers. Because we were formed to benefit Hospitality Trust, the lease agreement was prepared by Hospitality Trust and is not the result of an arm's length negotiation. Consequently, the lease agreement may provide more benefits to Hospitality Trust than to us. The management and shared services agreement was approved by our independent directors on January , 2007.
Past and future decisions by our board regarding our future growth, operations and major corporate decisions will be subject to certain possible conflicts of interest. These conflicts may have caused, and in the future may cause, our business to be adversely affected. Nevertheless, our board will be responsible for making decisions on our behalf, and, although we are parties to various agreements with Hospitality Trust, we are not obligated to follow the recommendations of Hospitality Trust with regard to our future business. In appropriate circumstances, we expect to submit transactions with any related party for approval or negotiation by our independent directors.
All related party contracts have been filed.
Regarding the decision making process of our Board of Directors, please see our response to Comment No. 10.
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Response:
The requested disclosure appears under "Management—Other Transaction Benefits" on page 55.
Unaudited Pro Forma Consolidated Financial Statements, page F-2
Response:
We have expanded Note C on page F-6 to describe how the amount of cash to be contributed by Hospitality Trust is calculated under the transaction agreement and to disclose that the actual contribution amount cannot be determined until the distribution date. The note has also been expanded to disclose that we do not expect the difference between the cash amount reflected in the pro forma financial statements and the actual cash on the distribution date to have a material impact on our expected operations.
Response:
We have added a new note (Note J) on page F-8 to clarify that we are not acquiring the goodwill of our predecessor. In addition, we have expanded Note D on page F-6 to reconcile the total purchase price to the fair value of assets and liabilities acquired.
Response:
We have expanded Note F on page F-8 to show how the amount of the property and equipment adjustment was determined and to reconcile the historical amounts.
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Response:
Paragraph 6 of SFAS 98 indicates that the guidance in paragraphs 7 - 13 should be applied to any transaction in which a company sells and leases back real estate. While SFAS 98 does not explicitly suggest that the guidance should also be applied to transactions other than those in the form of a sale-leaseback, practice has developed a much broader view of the applicability of SFAS 98 in light of the following:
Authoritative guidance dealing with transactions other than sale-leasebacks in form
Practice relating to spin-offs and business combinations:
"... A spin-off leaseback is also within the scope of Statement 98, and sale-leaseback accounting is appropriate only when all of the conditions in paragraph 7 of Statement 98 are met."
The interpretation expressed the same view with respect to contribution-leasebacks, exchange-leasebacks and lease-leasebacks.
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Consistent with the above, PricewaterhouseCoopers' Accounting and Reporting Manual section 4650.551 "Sale-leaseback of real estate in a purchase business combination," provides the following guidance:
"In some recent purchase business combinations, the acquisition has been structured in a fashion in which the acquirer purchases many of the assets of the target business but arranges to lease the real estate from a third party under an operating lease. These transactions may be structured in various ways, but the seller always sells all of the business' assets and an intermediary is always involved as the lessor to the acquirer. We believe that FAS 98 should be applied to the lease, as if it resulted from a sale-leaseback, since the two transactions are part of a single, integrated transaction. We do not believe that an entity should be able to remove assets and related debt from its balance sheet in the context of being acquired if the same transaction would not result in sale-leaseback accounting absent the acquisition."
Based on the items indicated above, it is clear that SFAS 98 applies in many transactions not structured in the form of a sale-leaseback. We are not aware of any fact patterns in which the authoritative literature or prevalent practice would permit an entity to avoid applying SFAS 98 to a situation in which a business owned real estatebefore executing one or more related transactions but had only a lease of the real estateafter the execution of the transaction(s). Accordingly, it is our view that in our circumstances, i.e., a reverse spin-off of the operations of the Company and a leaseback of the Company's real estate, SFAS 98 must be applied.
If the transaction were not accounted for within the scope of SFAS 98, certain leased sites accounted for and disclosed as financings would be re-characterized as locations leased under operating leases. As a result, the balance sheet asset captioned "Property and equipment, net" and an offsetting balance sheet liability captioned "Capital lease obligations" would each be reduced by $102.6 million in the pro forma balance sheet as of September 30, 2006; shareholders' equity would remain unchanged from the amounts now presented. On the pro forma income statement, if the transaction were not accounted for within the scope of SFAS 98, the company would recognize increased rent expense and an offsetting decrease in interest expense, in the pro forma amounts of $7.9 million and $10.5 million for the nine months ended September 30, 2006, and the year ended December 31, 2005, respectively. Also on the pro forma income statement, no depreciation expense would be recognized related to the $102.6 million of assets removed and discussed above; this would have resulted in depreciation expense which is lower than the amounts presented by approximately $2.3 million and $3.0 million for the nine months ended September 30, 2006, and the year ended December 31, 2005, respectively.
Response:
We have revised Note Q (previously Note P) on page F-10 to clarify that the pro forma financial statements do not include adjustments for interest income which would be earned on our excess cash or related income taxes on such income.
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Financial Statements—TravelCenters of America LLC, page F-10
Balance Sheet, page F-11
Response:
There are no authorized preferred shares.
Note 1—Organization, page F-12
Response:
The requested revisions have been added to page F-14.
Response:
The disclosure on page 4 has been revised to clarify that it was our predecessor that owned or had agreements with respect to the parcels.
Response:
We have added to the disclosure on page 4 the following: "As of the date of this prospectus, we do not have any commitments, understandings or agreements to acquire travel centers."
Financial Statements—TravelCenters of America, Inc., page F-28
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Response:
We have added the requested disclosure on the face of the balance sheet on page .
Response:
As disclosed in Note 15, "Under the terms of the management subscription agreements and other agreements governing the management shares, the management employees have rights to require us to repurchase the management shares at fair market value upon the employee's termination of employment due to death, disability, or scheduled retirement." It is important to note that the Company is not obligated to purchase the shares upon the occurrence of death, disability or scheduled retirement. In contrast, the employees have a conditional right that is exercisable at their sole option. Therefore, the shares issued to these employees do not embody an unconditional obligation to redeem at any specified or determinable date, or upon an event certain to occur, such as the employees' death. Therefore, the instruments are not mandatorily redeemable financial instruments as defined in paragraph 9 of SFAS 150. We believe the employees' rights upon notice of scheduled retirement, or upon death or disability, to opt to redeem the shares represents a conditional obligation as defined in paragraph 10 of SFAS 150. Once one of these events occurs and the employee exercises their conditional rights, the Company would have an unconditional obligation to transfer assets to the holder resulting in the Company reclassifying these shares from the mezzanine section to a liability.
As outlined in paragraph 15 of EITF D-98, the initial carrying amount of the redeemable equity was its fair value at the date of issue. Paragraph 15 of EITF D-98 further states that if a security is not redeemable currently and it is not probable that the security will become redeemable, subsequent adjustment is not necessary until it is probable that the security will become redeemable. Though certain management employees are eligible for retirement, they have not provided written notice of their intention to do so. Furthermore, the shares are not redeemable should a management employee voluntarily or involuntarily leave the Company in advance of retirement. Given these facts, we do not believe it is probable that the securities will become redeemable and therefore have concluded that adjusting the securities to their redemption amount is not necessary until it is probable that the securities will become redeemable.
Undertakings, page II-4
Response:
All necessary undertakings required by Item 512(a)(5) and (6) of Regulation S-K have been added in Part II of Amendment No. 1.
[Signature page follows]
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We acknowledge the following:
We appreciate your comments and welcome the opportunity to discuss with you our responses provided above. Please call me at (617) 964-8389, or our attorney, Edwin Miller of Sullivan & Worcester in Boston, at (617) 338-2447 if you have any questions or require additional information.
| Sincerely, | |||
TRAVELCENTERS OF AMERICA LLC | |||
By: | /s/ MARK L. KLEIFGES Mark L Kleifges, Treasurer | ||
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