<PAGE> 1
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to ____________
Commission File Number
TRANSTAR HOLDINGS, L.P.
TRANSTAR CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3486874
DELAWARE 13-3745313
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
345 PARK AVENUE
NEW YORK, NY 10154
(Address and zip code of principal executive offices)
(212) 935-2626
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
- -------------------------------------------------------------------------------
<PAGE> 2
Transtar Holdings, L.P.
Transtar Capital Corporation
Form 10-Q
Quarterly Period Ended September 30, 1998
<TABLE>
<CAPTION>
INDEX
-----
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C>
A. TRANSTAR HOLDINGS, L.P.
Consolidated Balance Sheet 3
Consolidated Statements of Income and Partners' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Quantitative and Qualitative Disclosures About Market Risk 9
B. TRANSTAR, INC.
Consolidated Balance Sheet 10
Consolidated Statements of Income and Retained Earnings 11
Consolidated Statement of Cash Flows 12
Notes to Consolidated Financial Statements 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION 18
SIGNATURE 19
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
A. TRANSTAR HOLDINGS, L.P.
TRANSTAR HOLDINGS, L.P.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- ---------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 283 $ 260
Restricted cash 46,694 45,694
Investment in Transtar 48,148 23,825
Other assets 3,813 4,367
--------- ---------
Total assets $ 98,938 $ 74,146
========= =========
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities $ 151 $ 186
Long-term debt 186,659 169,330
--------- ---------
Total liabilities 186,810 169,516
PARTNERS' EQUITY (DEFICIT) (87,872) (95,370)
--------- ---------
Total liabilities and partners' equity $ 98,938 $ 74,146
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE> 4
TRANSTAR HOLDINGS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- --------- -------- --------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
-------- --------- -------- --------
Operating expenses:
Selling, general and administrative expenses 47 98 154 345
-------- --------- -------- --------
Operating (loss) (47) (98) (154) (345)
Interest income 673 576 1,967 1,733
Interest and other financial expenses (6,190) (5,460) (17,883) (16,599)
-------- --------- -------- --------
(Loss) before equity in earnings of Transtar (5,564) (4,982) (16,070) (15,211)
Equity in earnings of Transtar 11,145 13,461 25,101 25,451
-------- --------- -------- --------
Net income $ 5,581 $ 8,479 $ 9,031 $ 10,240
======== ========= ======== ========
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
Partners' equity (deficit), beginning of period ($93,453) ($102,266) ($95,370) ($98,606)
Distribution to partners -- -- (745) (5,250)
Net income 5,581 8,479 9,031 10,240
Other adjustments to partners' equity -- -- (788) (171)
-------- --------- -------- --------
Partners' equity (deficit), end of period ($87,872) ($ 93,787) ($87,872) ($93,787)
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE> 5
TRANSTAR HOLDINGS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,031 $ 10,240
Adjustments to reconcile to net cash used
for operating activities:
Amortization -- 258
Non-cash interest and other financial expenses 17,883 16,599
Non-cash interest income (1,944) (1,725)
Equity in earnings of Transtar (25,101) (25,451)
Changes in:
Accounts payable (35) (351)
Other assets and liabilities (11) --
-------- --------
Net cash used for operating activities (177) (430)
-------- --------
INVESTING ACTIVITIES:
Net cash provided by investing activities -- --
-------- --------
FINANCING ACTIVITIES:
Distribution to partners (745) (5,250)
Withdrawal from restricted cash 945 5,550
-------- --------
Net cash provided by financing activities 200 300
-------- --------
Increase (decrease) in cash and cash equivalents 23 (130)
Cash and cash equivalents at beginning of period 260 386
-------- --------
Cash and cash equivalents at end of period $ 283 $ 256
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE> 6
TRANSTAR HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1: BASIS OF FINANCIAL STATEMENT PRESENTATION:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all normal recurring adjustments considered
necessary for a fair statement of the results of operations for the three and
nine month periods ended September 30, 1998 have been included. The results of
operations for the three and nine month periods ended September 30, 1998 are not
necessarily indicative of the results of operations for the full year. When
reading the financial information contained in this quarterly report, reference
should be made to the financial statements, schedules and notes contained in
Transtar Holdings, L.P.'s (Holdings) Annual Report on Form 10-K for the year
ended December 31, 1997. Transtar Capital Corporation (TCC), a subsidiary of
Holdings, is a shell corporation which has nominal assets and no liabilities,
operations or cash flows. Accordingly, the financial statements of TCC are not
presented because they do not provide material information to investors.
NOTE 2: LONG-TERM DEBT:
On December 7, 1993, Holdings and TCC (Issuers) issued $218 million aggregate
principal amount of 13.375% Senior Discount Notes due December 15, 2003 (Notes).
The Notes are the joint and several obligations of the Issuers. An original
issue discount of $118 million is being amortized over a six year period
commencing December 15, 1993 and ending December 15, 1999. Interest will be
payable semi-annually in arrears on June 15 and December 15 commencing on June
15, 2000. The Notes have a principal amount at maturity of $218 million. The
carrying value represents the principal at maturity less the unamortized
discount. The Notes are not guaranteed by Transtar, Inc. (Transtar) or any of
its subsidiaries and are subordinated to all existing and future liabilities of
the Issuers' subsidiaries. Interest expense attributable to the Notes was $17.3
million and $16.0 million in the first nine months of 1998 and 1997,
respectively, and was $6.0 million and $5.3 million in the third quarter of 1998
and 1997, respectively.
NOTE 3: RELATED PARTY TRANSACTIONS:
On October 27, 1997, Transtar declared a cash dividend in the amount of $625 per
share on both its Class A Voting Common Stock (Voting Stock) and its Class B
Nonvoting Common Stock (Nonvoting Stock) to holders of record of the stock on
October 27, 1997. Holdings received $6.4 million on October 30, 1997,
representing its 53% economic interest in the Transtar dividend. Pursuant to an
Indenture Agreement relating to the issuance of the Notes (the Notes Indenture),
the dividend payment was paid into an escrow account. On December 16, 1997,
Transtar declared a cash dividend of $625 per share on both its Voting Stock and
its Nonvoting Stock to holders of record of the stock on December 16, 1997.
Holdings received $6.4 million on December 19, 1997, representing its 53%
economic interest in the Transtar dividend. In accordance with the Notes
Indenture, this dividend was paid into the escrow account.
In February 1998, in accordance with the Notes Indenture, Holdings offered to
repurchase a portion of the Notes at an offer price equal to 101% of the
accreted value of such Notes on the date of purchase. The offer to purchase the
Notes was made by a notice to holders of the Notes and was held open for 20
business Days. No notes were tendered for repurchase. In March 1998, in
accordance with the Notes Indenture and an agreement governing the escrow
account, Holdings withdrew from the escrow account $0.7 million to distribute to
its partners and $0.2 million to pay certain administrative expenses.
In February, 1997, in accordance with the Notes Indenture and related to certain
dividends paid into the escrow account in 1996, Holdings offered to repurchase a
portion of the Notes at an offer price equal to 101% of the accreted value of
such Notes on the date of purchase. The offer to purchase the Notes was made by
a notice to holders of the Notes and was
6
<PAGE> 7
TRANSTAR HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
held open for 20 business days. No Notes were tendered for repurchase. In March
1997, in accordance with the Notes Indenture and the agreement governing the
escrow account, Holdings withdrew from the escrow account $5.3 million to
distribute to its partners and $0.3 million to pay certain administrative
expenses.
Funds in the escrow account are invested in cash equivalents and may only be
released to pay interest and principal on the Notes, make a Restricted Payment
(as defined by the Notes Indenture), purchase or optimally redeem Notes or to
pay administrative expenses of Holdings. Interest earned on the escrow balance
was $1.9 million and $1.7 million in the first nine months of 1998 and 1997,
respectively, and was $0.7 million and $0.6 million in the third quarter of 1998
and 1997, respectively.
NOTE 4: PARTNERS EQUITY
In the first half of 1998, Holdings recorded an adjustment to Partners Equity of
$(0.8) million. This adjustment was recorded as a result of a change in
ownership related to a Transtar purchase of treasury stock from its Management
Stock Trusts.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes an analysis of Holdings' equity investment in Transtar.
Holdings is a Delaware limited partnership. It was originally formed in 1988 as
Blackstone Transportation Partners L. P. ("BTP") for the sole purpose of holding
voting and non-voting stock of Transtar. BTP was renamed Transtar Holdings, L.P.
in November 1993. Holdings earnings are derived solely from its 53.0 percent
economic interest in Transtar. The following discussion should be read in
conjunction with Holdings' Consolidated Financial Statements and the notes
related hereto included within this filing.
Transtar Holdings Results
For the Three and Nine Months ended September 30, 1998
Compared to the
Three and Nine Months ended September 30, 1997
Overall
Holdings recorded net income for the third quarter and the first nine months of
1998 of $5.6 million and $9.0 million, respectively. This represents a $2.9
million and $1.2 million decrease respectively from the $8.5 million and $10.2
million of net income recorded during the third quarter and the first nine
months of 1997. Holdings' results reflect its equity investment in Transtar. For
a discussion of results of operations of Transtar, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for Transtar,
Inc.
Revenues and Expenses
Holdings did not record any revenues in either 1998 or 1997. Holdings' selling,
general and administrative expenses for the third quarter and first nine months
of 1998 were slightly lower than those incurred in both periods of 1997. There
were minor increases in interest income when compared to both periods of 1997.
Equity earnings of Transtar showed a modest decline in the first nine months of
1998 to $25.1 million or $0.4 million lower than the similar period of 1997.
Third quarter equity earnings of Transtar decreased $2.3 million to $11.1
million versus the same period in 1997. Interest and other financial expense
increased by $0.7 million during the third quarter of 1998 to $6.2 million and
increased by $1.3 million in the first nine months of 1998 to $17.9 million.
Liquidity and Capital Resources
During 1997, Transtar declared two cash dividends, each in the amount of $625
per share, on both its Class A Voting Common Stock and its Class B Nonvoting
Common Stock. Holdings received dividends totaling $12.8 million, representing
its 53 percent economic interest in the Transtar dividend. Pursuant to an
Indenture relating to the issuance of the Notes (Notes Indenture), both
dividends were deposited into an escrow account. In accordance with the Notes
Indenture and an agreement governing the escrow account, during the first half
of 1998 Holdings withdrew from the escrow account $0.7 million to distribute to
its partners and $0.2 million to pay administrative expenses. In the first half
of 1997, Holdings distributed $5.3 million to its partners and paid $0.3 million
of administrative expenses from the escrow account. No further withdrawal or
distributions were made in the third quarter of either year.
In February of both 1998 and 1997, Holdings offered to repurchase a portion of
its Senior Discount Notes at an offer price equal to 101% of the accreted value
of such notes on the date of purchase. These offers to purchase the notes were
made by a notice to holders of the Senior Discount Notes and were held open for
20 business days. No notes were tendered for repurchase. Holdings interest
income from the balance in the escrow account increased by $0.1 million during
the third quarter of 1998 to $0.7 million and increased by $0.2 million in the
first nine months of 1998 to $2.0 million.
The only business activity of Holdings is its investment in Transtar. Holdings
does not require any additional liquidity or capital resources, other than for
professional fees and certain other administrative expenses, until the first
cash interest payment is due on the Notes on June 15, 2000.
8
<PAGE> 9
Forward-looking Statements
Statements in this report that are not historical (including, but not limited
to, statements regarding the future impact of the tentatively agreed upon
Transportation Services Agreement) are forward-looking statements subject to
risk and uncertainties that could cause actual results to differ materially.
Such risk and uncertainties include fluctuations in economies worldwide, in
general, and the industries which Transtar serves, in particular, fluctuations
in Transtar's customers' demand for transportation and related services, changes
in relationships with key customers (including the loss of certain major
customers), changes in variations in weather and climatic patterns, competitive
pressure from other carriers, changes in governmental regulations, changes in
terms from lenders, ability to retain key management and to reach agreement on
labor issues, or other factors identified in the Company's 1997 Annual Report on
Form 10-K or in this report.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
9
<PAGE> 10
B. TRANSTAR, INC.
TRANSTAR, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,755 $ 24,316
Accounts receivable from related parties 19,731 16,274
Accounts receivable from others 56,669 56,459
Other current assets 12,848 9,726
--------- ---------
Total current assets 110,003 106,775
Property, plant, and equipment,
less accumulated depreciation 379,989 384,118
Operating parts and supplies 16,248 15,551
Other assets 19,564 15,548
--------- ---------
Total assets $ 525,804 $ 521,992
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 73,351 $ 73,663
Payroll and benefits payable 40,992 38,456
Accrued taxes 12,346 12,143
Accrued interest 1,634 2,177
Current portion of long-term debt 39,800 68,464
Other current liabilities 3,305 1,096
--------- ---------
Total current liabilities 171,428 195,999
Long-term debt less current portion 103,200 128,766
Postretirement benefits other than pensions 109,735 106,270
Deferred credits and other liabilities 50,590 45,887
--------- ---------
Total liabilities 434,953 476,922
STOCKHOLDERS' EQUITY
Common stock 1,000 1,000
Paid-in capital 24,220 23,979
Retained earnings 73,786 26,538
Treasury stock (8,155) (6,447)
--------- ---------
Total stockholders' equity 90,851 45,070
--------- ---------
Total liabilities and stockholders' equity $ 525,804 $ 521,992
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
10
<PAGE> 11
TRANSTAR, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Revenues from related parties $ 79,784 $ 87,282 $ 218,212 $ 222,595
Revenues from others 59,420 57,846 161,904 161,164
--------- --------- --------- ---------
Total revenues 139,204 145,128 380,116 383,759
--------- --------- --------- ---------
Operating expenses (excluding items shown below) 93,596 91,416 267,681 266,748
Selling, general, and administrative expenses 3,534 3,627 9,272 8,845
Depreciation and amortization 6,313 6,622 19,701 19,996
--------- --------- --------- ---------
Total operating expenses 103,443 101,665 296,654 295,589
--------- --------- --------- ---------
Operating income 35,761 43,463 83,462 88,170
Other income 661 1,034 2,040 1,898
Interest income 296 286 1,336 695
Interest and other financial expenses (2,985) (4,119) (10,235) (13,430)
--------- --------- --------- ---------
Income before income taxes 33,733 40,664 76,603 77,333
Less provision for income taxes 12,758 15,261 29,355 29,301
--------- --------- --------- ---------
Net income $ 20,975 $ 25,403 $ 47,248 $ 48,032
========= ========= ========= =========
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(UNAUDITED)
Retained earnings (deficit), beginning of period $ 52,811 $ 4,807 $ 26,538 ($ 17,822)
Net income 20,975 25,403 47,248 48,032
--------- --------- --------- ---------
Retained earnings end of period $ 73,786 $ 30,210 $ 73,786 $ 30,210
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
11
<PAGE> 12
TRANSTAR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 47,248 $ 48,032
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 19,701 19,996
Amortization 371 497
Deferred taxes 3,673 4,810
(Gain) on sale of assets (879) (903)
Changes in other assets and liabilities (1,692) 1,942
-------- --------
Net cash provided by operating activities 68,422 74,374
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (21,050) (14,346)
Proceeds from the sale of assets 3,624 1,799
-------- --------
Net cash used for investing activities (17,426) (12,547)
-------- --------
FINANCING ACTIVITIES:
Repayment of debt (53,000) (62,003)
Payments to acquire Treasury Stock (1,557) (325)
-------- --------
Net cash used for financing activities (54,557) (62,328)
-------- --------
Decrease in cash and cash equivalents (3,561) (501)
Cash and cash equivalents at beginning of period 24,316 24,691
-------- --------
Cash and cash equivalents at end of period $ 20,755 $ 24,190
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
12
<PAGE> 13
TRANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1: BASIS OF FINANCIAL STATEMENT PRESENTATION:
Separate consolidated financial statements of Transtar are included in this 10-Q
because Transtar is a majority owned subsidiary of Holdings which is not
consolidated in the consolidated financial statements of Holdings. The
accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all normal recurring adjustments considered
necessary for a fair statement of the results of operations for the three and
nine month periods ended September 30, 1998 have been included. The results of
operations for the three and nine month periods ended September 30, 1998 are not
necessarily indicative of the results of operations for the full year. When
reading the financial information contained in this quarterly report, reference
should be made to the Transtar financial statements, schedules and notes
contained in Holdings' Annual Report on Form 10-K for the year ended December
31, 1997.
NOTE 2: RELATED-PARTY TRANSACTIONS:
Transtar's current Transportation Services Agreements provide Transtar with
certain rights including: (i) sole serving rail carrier status at USX's Minntac,
Gary, Fairfield and Mon Valley facilities as well as USS/Kobe's Lorain facility;
(ii) sole rights to perform specified USX in-plant switching services; (iii)
sole serving Great Lakes Fleet bulk commodity carrier status for USX, including
USS/Kobe; and (iv) primary inland barge operator status for the water transport
of USX's commodities originating at or destined for Birmingham, Alabama. With
respect to the services referred to in clause (i) above, the Transportation
Service Agreements provide that such services will continue indefinitely as long
as a non-Transtar rail carrier has not obtained access to the USX facility being
served; with respect to the services referred to in clause (ii) above, the
agreements are exclusive through 1998 and provide that such services will
continue indefinitely so long as USX has not purchased from Transtar or
otherwise obtained the Transtar track on which such services are provided; with
respect to the services referred to in clause (iii) above, the agreements
provide that such services will continue for a term ending on March 15,1999 for
USS/Kobe and March 15, 2000 for the other USX facilities, which terms will be
automatically renewed for successive one-year periods unless either USX or
Transtar has given the other at least three years prior written notice of
termination; with respect to the services described in clause (iv) above, the
agreements provide that such services will generally continue until December 28,
1998.
With respect to the services referred to in clause (iii) above, USS/Kobe Steel
Company, on March 14, 1996, provided written notice to terminate on March 15,
1999, the end of their primary term. With respect to the services referred to in
clause (iii) above, USX on February 12, 1997 provided written notice of their
intent to terminate effective March 15, 2000.
With respect to the services referred to in clause (ii) above, USS/Kobe Steel
Company, on December 21, 1997, solicited bids from parties interested in
providing in-plant switching services at their Lorain, Ohio facility effective
December 29, 1998. USS/Kobe has not purchased or otherwise obtained any Transtar
track at this facility. In-plant switching services provided by parties other
than Transtar would be performed on tracks currently owned by USS/Kobe. On
February 19, 1998, the Lake Terminal Railroad Company (a Transtar subsidiary)
submitted a bid to continue providing these services. Transtar has since been
advised that the Lake Terminal Railroad was not the successful bidder. As a
result, Transtar will experience an annual decrease of approximately $7.7
million in revenue and approximately $1.0 million in income before income taxes.
13
<PAGE> 14
TRANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
Transtar has been negotiating with USX and USS/Kobe Steel to replace the
existing Transportation Services Agreements with new agreements. With respect to
the services referred to in clause (i) through (iv) above, and with the
exception of the rail and rail related services provided at USS/Kobe Steel,
Transtar on June 30, 1998 reached agreement in principle with USX on new
Transportation Service Agreements. The new agreements are subject to approval by
the lending institutions who participate in Transtar's Credit Agreement and the
final approval of both USX and Transtar. There can be no assurance that
agreements will be obtained. If approved, the new agreements will be effective
July 1, 1998 and will extend through December 31, 2004 for the services referred
to in clauses (i), (ii) and (iv) above, with the exception of rail and rail
related services at USS/Kobe Steel, and will extend through March 15, 2005 for
the services referred to in clause (iii) above. Under the terms of the new
agreements, USX will be entitled to a refund of approximately $6.3 million (with
an equal reduction in Transtar's operating income which was recognized in June
1998) for services already provided during the first half of 1998. With the
exception of rail and rail related services at USS/Kobe Steel, the new
agreements cover all of the services currently provided by Transtar, except that
a third party may provide transportation services for: a maximum of six hundred
thousand gross tons of iron ore pellets destined for USS/Kobe Steel in 1998 and
through March 15, 1999; a maximum per year of ten percent of tonnage via the
Great Lakes from March 16, 1999 through March 15, 2003, and a maximum per year
of fifteen percent of tonnage via the Great Lakes from March 16, 2003 through
March 15, 2005; a maximum per year of ten percent of imported iron ore and coke
tonnage destined for USX's Fairfield, Alabama facility; a maximum per year of
ten percent of export coal tonnage originating at US Steel's Concord Preparation
Plant, and a maximum per year of ten percent of domestic coal tonnage via barge
originating at US Steel's Concord Preparation Plant; and a maximum per year of
forty percent of blast furnace burden tonnage destined for USX's Edgar Thomson
facility in the Mon Valley. The agreements also provide for certain price
concessions and market based price changes. It is anticipated that the price
concessions at current volume levels will decrease annual revenues and operating
income by approximately $17 million per year during the term of the agreements.
Transtar is continuing to negotiate with USS/Kobe Steel to replace its existing
agreement.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Transtar Results
For the Three and Nine Months ended September 30, 1998
Compared to the
Three and Nine Months ended September 30, 1997
Overall
Transtar is a transportation holding company composed of two business groups:
the Railroad Group and the Marine Group. Transtar's net income for the quarter
ending September 30, 1998 totaled $21.0 million, or a decrease of $4.4 million
compared with the same period of 1997. Operating income of $35.8 million
recorded for the third quarter of 1998 was $7.7 million less than the comparable
period of 1997. Net income for the nine months ended September 30, 1998 was
$47.2 million, a $0.8 million decrease from the first nine months of 1997.
Operating income of $83.5 million during the first nine months of 1998 was $4.7
million less than the same period of 1997. The third quarter and nine months
operating results were influenced by reduced operating revenues resulting
primarily from rate reductions contained in tentatively agreed upon
Transportation Service Agreements with USX (see Transportation Service
Agreements), offset by lower fuel prices in 1998, additional shared maintenance
billing, and the impact in 1997 of a limited early retirement program.
Operating Revenues
Operating revenues totaled $139.2 million for the third quarter of 1998, or a
decrease of $5.9 million from the third quarter of 1997. During the first nine
months of 1998, Transtar's operating revenues were $380.1 million, reflecting a
decline of $3.6 million when compared to the same period of 1997. This decline
was a result of rate reductions recognized during the first nine months of 1998.
The first nine months revenue decrease occurred primarily within the Marine
Group, while Railroad Group revenues were 2 percent ahead of last year's first
nine months. The Railroad Group's improvement was achieved as a result of
increased traffic volumes for both ore and coal shipments. Railroad Group
revenues in the third quarter of 1998 were $2.1 million less than the $96.5
million earned in the same period last year. Continued strong shipments of ore
and coal by the Railroad Group were tempered by the softening of markets for
domestically produced steel and the associated impact on the demand for coke and
steel products. Marine Group revenues declined by $3.2 million as lake ore
tonnage dropped as a result of the softening steel market. During the first nine
months of 1998, Marine Group revenues declined $7.9 million from amounts earned
in the same period of 1997. This decrease is attributed to lake tonnage advanced
to the fourth quarter of 1997 because of favorable weather conditions during
that period, reduced ore shipments to facilities in Indiana, Ohio and Alabama
due to current steel market conditions and recognition of rate reductions
contained in the tentatively agreed upon Transportation Service Agreements with
USX, along with other rate reductions.
Operating Expenses
Transtar's operating expenses increased $1.8 million and $1.1 million,
respectively, during the third quarter and the first nine months of 1998, when
compared to the same periods of 1997. The Railroad Group's third quarter 1998
expenses increased by $4.2 million over the $68.7 million incurred for the same
period of 1997, while increasing $5.8 million during the first nine months of
1998 to $215.3 million. These cost increases are a result of wage rate
escalation and increased volumes of coal traffic handled, partially offset by
reduced fuel prices, additional shared maintenance billings related to trackage
rights agreements (a contra to cost), and the absence in 1998 of expenses
associated with the limited early retirement program recognized in 1997. Marine
Group operating expenses totaled $34.5 million and $92.1 million during the
third quarter and the first nine months of 1998, decreases of $1.8 million and
$3.2 million, respectively. These reductions in costs were driven by reduced
fuel prices, lower operating costs on inland waterways due to reduced tonnage,
and favorable personal property tax adjustments recorded in 1998.
15
<PAGE> 16
Other Income, net
Transtar's other income, net, improved by $0.8 million and $4.0 million,
respectively during the third quarter and the first nine months of 1998, when
compared to the same periods of 1997. Interest expense recognized in the first
nine months of 1998 was $10.2 million, or $3.2 million less than the same period
of 1997. This reduction in interest expense was attributed to lower outstanding
debt.
Provision for Income Taxes
Transtar's provision for income taxes decreased $2.5 million to $12.8 million
during the third quarter of 1998 while increasing $0.1 million to $29.4 in the
first nine months, when compared to the same periods of 1997.
Liquidity and Capital Resources
Transtar's cash and temporary investments were $20.8 million at September 30,
1998, or $3.6 million less than the balance at the end of 1997, and $3.4 million
less than the balance at September 30, 1997. Cash flow from operating activities
during the nine months ended September 30, 1998 amounted to $68.4 million, or
$6.1 million less than the comparable period of 1997. Cash flow used for
investing activities during the first nine months of 1998 totaled $17.4 million,
or $4.9 million more than was utilized during the same period of 1997. Gross
capital expenditures, amounted to $21.1 million for the first nine months of
1998, an increase of $6.7 million versus the same period of 1997. Proceeds from
the sale of property amounted to $3.6 million during the first nine months of
1998 versus the $1.8 million that was generated in the comparable period of
1997.
For the first nine months of 1998, Transtar retired $53.0 million of Term Loan
obligation, versus the $62.0 million Term Loan retirement in the same period of
1997. Since its December 7, 1993 refinancing, Transtar has retired $302.0
million of its long-term obligations. Only nominal letters of credit are
currently outstanding against Transtar's $25.0 million Revolving Credit
Facility.
Year 2000
Transtar is committed to addressing the Year 2000 issue that could impact its
existing computer and operating systems. A plan to identify and correct Year
2000 problems as they apply to mainframe information systems was completed in
mid-1997. Outside contractors were hired to assist in the implementation of the
plan during 1997 and 1998. Transtar expects to spend approximately $3.4 million
on mainframe applications, of which $2.5 million has already been incurred.
Management believes that Transtar has made substantial progress in determining
outside software vendor Year 2000 compliance on all acquired software, and in
formulating plans for ensuring that compliant versions of vendor code are
implemented prior to the Year 2000. The last component of the mainframe arena is
hardware. Transtar continues to assess the compliance of its mainframe hardware
components; and, based on ongoing internal testing and review of information
received from its vendors, believes that vendor compliance will meet our
requirements.
An assessment of non-information technology systems was initiated during the
fourth quarter of 1997 to determine the Year 2000 compliance status. This review
encompassed train and process control systems, communication systems, as well as
any other equipment in which embedded chip technology could create date
functionality problems. This assessment is continuing and recommendations have
been made for upgrades and replacement, if necessary, to insure Year 2000
compliance. Including non-information technology systems, Transtar expects to
spend a total of approximately $5.0 million to become Year 2000 ready.
In order to insure that third party vendors will be Year 2000 compliant,
Transtar initiated a vendor compliance survey program during the second quarter
of 1998. Initial contacts with all "key" vendors have been completed and
indicate that approximately two-thirds are either compliant or in the process of
insuring compliance. In addition, Transtar has modified purchase order verbiage
requiring that all products with electrical/electronic elements come equipped
with Year 2000 certified components.
16
<PAGE> 17
While Transtar management believes that it will succeed in its plan to make
Transtar, a Year 2000 ready company, there is no guarantee that it will be
completely successful. Transtar's management has not yet quantified the impact
of partial non-compliance on the operating results of Transtar and has not
finalized contingency plans to address potential partial non-compliance. No
assurance can be given that the effect of any such partial non-compliance will
not have a material adverse effect on the operating results of Transtar.
Transportation Service Agreements
On June 30, 1998, Transtar reached agreement in principle with USX on new
Transportation Service Agreements. The new Agreements are subject to approval by
the lending institutions who participate in Transtar's Credit Agreement, and the
final approval of both USX and Transtar. There can be no assurance that
agreements will be obtained. These agreements which extend through December 31,
2004, ensure Transtar's position as a participant at all the US Steel and US
Steel Mining facilities it presently services, with the exception of rail and
rail related services at USS/Kobe Steel. Third parties will be permitted to
handle selected movements (See Note 2). The new Transportation Service
Agreements rate reductions, including a $6.25 million revenue refund recorded in
June 1998, are anticipated to reduce Transtar's operating revenues and operating
income by approximately $15.2 million in 1998 and $17 million per year in future
years.
USS/Kobe Steel Mills
Since 1895, the Lake Terminal Railroad has performed intra-plant switching of
hot metal and other steel products within the USS/Kobe Steel mill, maintained
the rail line that operates inside and around this facility, and provided
maintenance services to USS/Kobe's freight car and locomotive fleet. In late
1997, USS/Kobe put these services out for competitive bid. Transtar was not the
successful bidder to continue to be the sole provider of all rail and rail
related transportation services for the USS/Kobe steel mill located at Lorain,
Ohio. After December 28, 1998 Transtar's subsidiary, the Lake Terminal Railroad,
will only provide interchange service between linehaul carriers and the in-plant
rail provider for this facility. As a result, Transtar will experience an annual
decrease of approximately $7.7 million in revenue and approximately $1.0 million
in income before income taxes.
Forward-looking Statements
Statements in this report that are not historical (including, but not limited
to, statements regarding the future impact of the tentatively agreed upon
Transportation Services Agreement) are forward-looking statements subject to
risk and uncertainties that could cause actual results to differ materially.
Such risk and uncertainties include fluctuations in economies worldwide, in
general, and the industries which Transtar serves, in particular, fluctuations
in Transtar's customers' demand for transportation and related services, changes
in relationships with key customers (including the loss of certain major
customers), changes in variations in weather and climatic patterns, competitive
pressure from other carriers, changes in governmental regulations, changes in
terms from lenders, ability to retain key management and to reach agreement on
labor issues, or other factors identified in the Company's 1997 Annual Report on
Form 10-K or in this report.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Holdings and TCC had no reportable events of material pending legal proceedings
other than ordinary routine litigation incidental to the business during the
nine month period ended September 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on 8-K
Holdings and TCC did not file any Current Reports on Form 8-K during the
quarter ended September 30, 1998.
18
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: November 12, 1998
TRANSTAR HOLDINGS, L.P.
TRANSTAR CAPITAL CORPORATION
By: /s/ HOWARD A. LIPSON
-----------------------------------
Howard A. Lipson, Treasurer
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 283
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 283
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 98,938
<CURRENT-LIABILITIES> 151
<BONDS> 186,659
0
0
<COMMON> 0
<OTHER-SE> (87,872)
<TOTAL-LIABILITY-AND-EQUITY> 98,938
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 154
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,883
<INCOME-PRETAX> 9,031
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,031
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,031
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
