<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 June 30, 1999
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 033-73270
----------
Commission File Number 033-73270-1
------------
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 (I.R.S. Employer Identification No.)
of 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 June 30, 1999
INDEX
<TABLE>
<CAPTION>
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 7
Quantitative and Qualitative Disclosures About Market Risk 7
B. TRANSTAR, INC.
Consolidated Balance Sheet 8
Consolidated Statements of Income and Retained Earnings 9
Consolidated Statement of Cash Flows 10
Notes to Consolidated Financial Statements 11
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION 16
SIGNATURE 17
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
A. TRANSTAR HOLDINGS, L.P.
TRANSTAR HOLDINGS, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
--------- ---------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 292 $ 286
Other current assets -- 8
--------- ---------
Total current assets 292 294
Restricted cash 48,494 47,328
Investment in Transtar 61,668 54,258
Other assets 3,260 3,629
--------- ---------
Total assets $ 113,714 $ 105,509
========= =========
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities $ 301 $ 205
Long-term debt 205,625 192,736
--------- ---------
Total liabilities 205,926 192,941
PARTNERS' EQUITY (DEFICIT) (92,212) (87,432)
--------- ---------
Total liabilities and partners' equity $ 113,714 $ 105,509
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
TRANSTAR HOLDINGS, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30,
---------------------- - ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
Operating expenses:
Selling, general and administrative expenses 58 52 104 107
-------- -------- -------- --------
Operating (loss) (58) (52) (104) (107)
Interest income 582 640 1,172 1,294
Interest and other financial expenses (6,667) (5,880) (13,258) (11,693)
-------- -------- -------- --------
(Loss) before equity in earnings of Transtar (6,143) (5,292) (12,190) (10,506)
Equity in earnings of Transtar 10,018 11,637 8,615 13,956
-------- -------- -------- --------
Net income (loss) $ 3,875 $ 6,345 $ (3,575) $ 3,450
======== ======== ======== ========
</TABLE>
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
Partners' equity (deficit), beginning of period $(95,154) $(99,053) $(87,432) $(95,370)
Distribution to partners -- (745) -- (745)
Net income (loss) 3,875 6,345 (3,575) 3,450
Other adjustments to partners' equity (933) -- (1,205) (788)
-------- -------- -------- --------
Partners' equity (deficit), end of period $(92,212) $(93,453) $(92,212) $(93,453)
======== ======== ======== ========
</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>
Six months ended
June 30,
----------------------
1999 1998
-------- --------
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (3,575) $ 3,450
Adjustments to reconcile to net cash provide by
(used for) operating activities:
Amortization -- --
Non-cash interest and other financial expenses 13,258 11,693
Non-cash interest income (1,166) (1,274)
Equity in earnings of Transtar (8,615) (13,956)
Changes in:
Accounts payable 96 (80)
Other assets and liabilities 8 (14)
-------- --------
Net cash provided by (used for)
operating activities 6 (181)
-------- --------
INVESTING ACTIVITIES:
Net cash provided by investing activities -- --
-------- --------
FINANCING ACTIVITIES:
Distribution to partners -- (745)
Withdrawal from restricted cash -- 945
-------- --------
Net cash provided by financing activities -- 200
-------- --------
Increase in cash and cash equivalents 6 19
Cash and cash equivalents at beginning of period 286 260
-------- --------
Cash and cash equivalents at end of period $ 292 $ 279
======== ========
</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)
JUNE 30, 1999
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
six-month periods ended June 30, 1999 have been included. The results of
operations for the three and six-month periods ended June 30, 1999 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, 1998. 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 in cash 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 $12.9
million and $11.3 million in the first half of 1999 and 1998, respectively, and
was $6.5 million and $5.7 million in the second quarter of 1999 and 1998,
respectively.
In accordance with an Indenture relating to the issuance of the Notes (the Notes
Indenture) certain dividends received from Transtar in 1997 were paid into an
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.
Funds in the escrow account are invested in cash equivalents and may only be
released to pay interest and principal on the Notes, make certain payments
permitted under the Notes Indenture, purchase or optionally redeem Notes or to
pay administrative expenses of Holdings. As of June 30, 1999 the escrow balance
is $48.5 million. Interest earned on the escrow balance was $1.2 million and
$1.3 million in the first half of 1999 and 1998, respectively, and was $0.6
million in the second quarter of both 1999 and 1998.
NOTE 3: PARTNERS' EQUITY (DEFICIT)
In the first half of 1999 and 1998, Holdings recorded adjustments to Partners'
Equity (Deficit) of $(1.2) million and $(0.8) million, respectively. These
adjustments were recorded as a result of changes in ownership related to
Transtar treasury stock transactions with its Management Stock Trusts.
6
<PAGE> 7
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, Inc.
(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 nonvoting stock of Transtar. BTP was renamed Transtar
Holdings, L. P. in November 1993. Holdings net earnings are derived primarily
from its 53.0 percent economic interest in Transtar and interest expense related
to certain Senior Discount Notes (Notes) issued in 1993. The following
discussion should be read in conjunction with Holdings' Consolidated Financial
Statements and the notes related hereto included within this filing.
Transtar Holdings L.P. Results
For the Three and Six Months ended June 30, 1999
Compared to the
Three and Six Months ended June 30, 1998
Overall
- -------
Holdings recorded net income for the second quarter of $3.9 million and a net
loss of $3.6 million during the first six months of 1999. This represents
unfavorable changes of $2.4 million and $7.0 million from the $6.3 million and
$3.5 million recorded during the respective periods of 1998. Holdings' results
include its equity investment in Transtar, interest expense and other financial
expenses, all of which were unfavorable when compared to 1998 results. 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 1999 or 1998. Holdings' selling,
general and administrative expenses of $0.1 million during the first six months
of 1999 were essentially the same as that incurred during the first half of
1998. Equity in earnings of Transtar and interest income declined from 1998
levels, as equity earnings decreased by $1.6 million and $5.3 million in the
second quarter and the first half to $10.0 million and $8.6 million,
respectively, while interest income decreased by $0.1 million in each of the
same periods to $0.6 million and $1.2 million, respectively. Interest and other
financial expense increased in 1999 by $0.8 million during the second quarter to
$6.7 million and by $1.6 million in the first half to $13.3 million.
Liquidity and Capital Resources
- -------------------------------
In accordance with an Indenture relating to the issuance of the Notes (the Notes
Indenture) certain dividends received from Transtar in 1995, 1996 and 1997 were
paid into an escrow account. Transtar declared no dividends during the first six
months of either 1998 or 1999. In March of 1998, Holdings withdrew from the
escrow account $0.7 million to make distributions to its partners and $0.2
million to pay administrative expenses. As of June 30, 1999 the balance in the
escrow account is $48.5 million. During the first half of 1999, Holdings earned
$1.2 million in interest from the balance in the escrow account, similar to the
amount earned in the first six months of 1998.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
7
<PAGE> 8
B. TRANSTAR, INC.
TRANSTAR, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,501 $ 21,428
Accounts receivable from related parties 23,161 14,499
Accounts receivable from others 58,764 46,778
Other current assets 14,152 10,181
--------- ---------
Total current assets 114,578 92,886
Property, plant, and equipment,
less accumulated depreciation 420,452 379,287
Operating parts and supplies 15,342 14,930
Other assets 17,795 15,701
--------- ---------
Total assets $ 568,167 $ 502,804
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 78,263 $ 64,560
Payroll and benefits payable 39,445 38,614
Accrued taxes 14,412 6,215
Accrued interest 1,019 1,146
Current portion of long-term debt 66,100 57,700
Revolving credit agreement 15,000 --
Other current liabilities 4,258 1,498
--------- ---------
Total current liabilities 218,497 169,733
Long-term debt less current portion 66,900 66,300
Postretirement benefits other than pensions 112,032 110,425
Deferred credits and other liabilities 54,354 53,704
--------- ---------
Total liabilities 451,783 400,162
STOCKHOLDERS' EQUITY
Common stock 1,000 1,000
Paid-in capital 23,442 23,417
Retained earnings 101,863 85,577
Treasury stock (9,921) (7,352)
--------- ---------
Total stockholders' equity 116,384 102,642
--------- ---------
Total liabilities and stockholders' equity $ 568,167 $ 502,804
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
8
<PAGE> 9
TRANSTAR, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Revenues from related parties $ 67,467 $ 80,406 $ 110,628 $ 138,428
Revenues from others 60,048 61,421 101,218 102,484
--------- --------- --------- ---------
Total revenues 127,515 141,827 211,846 240,912
--------- --------- --------- ---------
Operating expenses (excluding items shown below) 86,278 95,518 163,488 174,085
Selling, general, and administrative expenses 3,190 2,829 5,978 5,738
Depreciation 6,253 6,671 12,589 13,388
--------- --------- --------- ---------
Total operating expenses 95,721 105,018 182,055 193,211
--------- --------- --------- ---------
Operating income 31,794 36,809 29,791 47,701
Other income 709 1,082 1,029 1,379
Interest income 117 793 300 1,040
Interest and other financial expenses (2,089) (3,424) (4,332) (7,250)
--------- --------- --------- ---------
Income before income taxes 30,531 35,260 26,788 42,870
Less provision for income taxes 11,593 13,355 10,502 16,597
--------- --------- --------- ---------
Net income $ 18,938 $ 21,905 $ 16,286 $ 26,273
========= ========= ========= =========
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
Retained earnings beginning of period $ 82,925 $ 30,906 $ 85,577 $ 26,538
Net income 18,938 21,905 16,286 26,273
-------- -------- -------- --------
Retained earnings end of period $101,863 $ 52,811 $101,863 $ 52,811
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
9
<PAGE> 10
TRANSTAR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
1999 1998
-------- --------
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 16,286 $ 26,273
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 12,589 13,388
Amortization 138 248
Deferred taxes 1,243 1,922
Gain on sale of assets (449) (859)
Changes in other assets and liabilities (72) 11,719
-------- --------
Net cash provided by operating activities 29,735 52,691
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (54,914) (12,676)
Proceeds from the sale of assets 855 3,078
-------- --------
Net cash used for investing activities (54,059) (9,598)
-------- --------
FINANCING ACTIVITIES:
Short term debt net 15,000 --
New long term debt 30,000 --
Repayment of long term debt (21,000) (34,000)
Payments to acquire Treasury Stock (2,603) (1,557)
-------- --------
Net cash provided by (used for) financing activities 21,397 (35,557)
-------- --------
Increase (decrease) in cash and cash equivalents (2,927) 7,536
Cash and cash equivalents at beginning of period 21,428 24,316
-------- --------
Cash and cash equivalents at end of period $ 18,501 $ 31,852
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
10
<PAGE> 11
TRANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
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
six month periods ended June 30, 1999 have been included. The results of
operations for the three and six-month periods ended June 30, 1999 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, 1998.
NOTE 2: OPERATING SEGMENTS:
Transtar consists of two reportable segments: Railroad Group and Marine Group.
Summarized financial information concerning reportable segments is shown on the
following table. The "Other" column includes non-allocated corporate related
items and the elimination of inter-business unit transactions.
<TABLE>
<CAPTION>
Railroad Marine
Group Group Other Total
-------- ------ ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
For the three months ended June 30, 1999
----------------------------------------
Revenues - external customers $ 88,443 $ 39,072 $ -- $ 127,515
Income before income taxes 22,959 7,563 9 30,531
For the six months ended June 30, 1999
--------------------------------------
Revenues - external customers $ 163,217 $ 48,629 $ -- $ 211,846
Income (loss) before incomes taxes 28,547 (1,779) 20 26,788
As of June 30, 1999
-------------------
Total Assets $ 429,658 $ 165,576 $ (27,067) $ 568,167
For the three months ended June 30, 1998
----------------------------------------
Revenues - external customers $ 95,764 $ 46,063 $ -- $ 141,827
Income before income taxes 24,399 10,836 25 35,260
For the six months ended June 30, 1998
--------------------------------------
Revenues - external customers $ 178,698 $ 62,214 $ -- $ 240,912
Income before income taxes 38,705 4,136 29 42,870
As of December 31, 1998
-----------------------
Total assets $ 405,212 $ 119,191 $ (21,599) $ 502,804
</TABLE>
11
<PAGE> 12
NOTE 3: LONG-TERM DEBT:
On June 29, 1999 Transtar entered into a Credit Agreement with a bank which
enabled Transtar to borrow, on an unsecured term basis, an aggregate principal
of $30 million (Credit Facility). The Credit Facility was used by Transtar to
finance a portion of the purchase price of the Tug/Barge Presque Isle, which
previously was operated by Transtar under a long-term lease. The Credit Facility
matures on December 31, 2000. Interest accrues at variable rates based on either
an alternate base rate or an adjusted London Interbank Offered Rate. As of June
30, 1999 the effective interest rate was 6.7 percent. Transtar periodically
selects from these debt instruments to determine the variable rates of the loan.
Interest rates are available in multiples of $1 million in durations ranging
from 1 day to 6 months. Required payments under the Credit Facility are $1
million on December 31, 1999, $2 million on June 30, 2000 and $27 million on
December 31, 2000. This Credit Facility contains certain restrictions on capital
spending, levels of new indebtedness, and the payment of dividends, as well as
certain financial covenant requirements.
On June 29, 1999, Transtar borrowed $15 million from its revolving credit
facility to finance the remainder of the purchase price of the Tug/Barge Presque
Isle.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Transtar Inc. Results
For the Three and Six Months ended June 30, 1999
Compared to the
Three and Six Months ended June 30, 1998
Overall
- -------
Transtar is a transportation holding company comprised of two business groups:
the Railroad Group and the Marine Group. Transtar's net income for the quarter
ending June 30, 1999 totaled $18.9 million, or a decline of $3.0 million
compared with the same period of 1998. Operating income of $31.8 million
recorded for the second quarter of 1999 was $5.0 million less than the
comparable period of 1998. Net income for the six months ended June 30, 1999 was
$16.3 million, a $10.0 million decrease from the first half of 1998. Operating
income of $29.8 million during the first half of 1999 was $17.9 million less
than the same period of 1998. The second quarter and first half operating
results of 1999 were adversely impacted by decreased revenues driven by the soft
domestic steel markets resulting from an influx of imported foreign steel, and a
depressed export coal market.
Operating Revenues
- ------------------
Operating revenues totaled $127.5 million for the second quarter of 1999, or a
decrease of $14.3 million from the second quarter of 1998. During the first six
months of 1999, Transtar's operating revenues were $211.8 million, reflecting a
decline of $29.1 million from the comparable period of 1998. The operating
revenue decline experienced in 1999 has been caused by: lower volumes of ore,
coke and steel and general merchandise products resulting from the impact of
excess imported steel; reduced coal volumes primarily on the Marine Group as the
demand for export coal remained weak; and the December 1998 termination of
in-plant rail services provided at USS/Kobe Steel in Lorain, Ohio.
Operating Expenses
- ------------------
Transtar's operating expenses decreased by $9.3 million and $11.2 million,
respectively during the second quarter and the first half of 1999 when compared
to the same periods of 1998. The Railroad Group's operating expenses totaled
$64.4 million and $132.0 million during the second quarter and first half of
1999, which represents decreases of $5.3 million and $3.7 million, respectively.
The Marine Group's operating expenses declined $4.0 million and $7.4 million to
$31.3 million and $50.1 million in the second quarter and first six months of
1999, respectively when compared to the same periods of 1998. The reductions in
operating expenses for both groups were directly influenced by lower business
volumes resulting in reduced employment costs and fuel consumption.
Additionally, material and outside contractor expenditures were lower than
previous periods. Adversely impacting Railroad Group expenses was a 33 percent
($3.0 million) reduction in car hire earnings (a contra to cost) due to fewer
off-line loadings for a substantial portion of Transtar's gondola freight car
fleet. Also, a charge of $0.9 million was recorded in the second quarter of 1999
for additional expense reflecting a refinement of the estimate of pension
expense that was recorded in the fourth quarter of 1998 relating to the reduced
service levels provided by the Lake Terminal Railroad at the USS/Kobe facility.
Other Income, net
- -----------------
Transtar's other income, net improved by $0.3 million and $1.8 million,
respectively during the second quarter and the first half of 1999, when compared
to the same periods of 1998. Interest expense recognized in the first six months
of 1999 was $4.3 million, or $2.9 million less than the same period of 1998. The
reduction in interest expense was attributable to lower outstanding debt and
lower interest rates during the first half of 1999.
13
<PAGE> 14
Provision for Income Taxes
- --------------------------
Primarily as a result of lower before-tax earnings in 1999, Transtar's provision
for income taxes decreased $1.8 million during the second quarter and decreased
$6.1 million in the first half, when compared to the same periods of 1998.
Liquidity and Capital Resources
- -------------------------------
Transtar's cash and temporary investments were $18.5 million at June 30, 1999 or
$2.9 million less than the balance at the end of 1998 and $13.4 million less
than the balance at June 30, 1998. Cash flow from operating activities during
the six months ended June 30, 1999 was $29.7 million or $23.0 million less than
that generated during the same period of 1998. Influencing this decline were the
lower business activity levels, which produced a $10.0 million reduction in net
income. Primarily due to increased capital expenditures in the first six months
of 1999, cash flow used for investing activities totaled $54.1 million, or $44.5
million more than was utilized during the same period of 1998.
On June 29, 1999 Transtar, Inc. purchased the Tug/Barge Presque Isle for $45.0
million. This acquisition was financed with a $15.0 million borrowing under
Transtar's Revolving Credit Facility and a $30.0 million borrowing under a new
unsecured term loan facility with Chase Manhattan Bank. This new term loan will
mature on December 31, 2000.
During the first six months of 1999, Transtar retired $21.0 million of debt
associated with its December 1993 Credit Agreement, compared to the $34.0
million retired during the first half of 1998. As of June 30, 1999, the
outstanding balance on this facility is $103.0 million. In addition to the $15.0
million borrowed on June 29, 1999 under the Revolving Credit Facility, letters
of credit totaling $0.9 million are currently outstanding.
Year 2000
- ---------
Transtar is committed to addressing the Year 2000 issue that could impact its
existing computer and operating systems. Management continues to execute a plan
which addresses mainframe information systems, non-information technology
systems and third parties. A plan to identify and address Year 2000 issues as
they apply to mainframe information systems was completed in mid-1997. An
outside contractor was hired to assist in the implementation of the plan during
1997, 1998 and 1999. All of Transtar's proprietary systems lines of code have
been renovated. Approximately 75% have been tested and reintegrated and the
final 25% are scheduled for completion during the third quarter of 1999.
Transtar expects to spend approximately $4.4 million on mainframe applications,
$4.1 million of which has already been incurred. Transtar has assessed the
compliance of its mainframe components and based on ongoing testing and review
of information received from its vendors, has confirmed that approximately 80%
are either compliant or that non-compliance will not materially affect
Transtar's operations. Transtar believes the remaining 20% will meet its
compliance requirements. All major business systems are certified compliant with
the exception of two systems, which are scheduled to be updated for Year 2000
compliance during the third quarter of 1999. The first of three comprehensive
tests was completed in the second quarter of 1999. During the test, hardware,
system software and applications software were combined in an advanced date
scenario at Transtar's disaster recovery facility. Subsequent tests are
scheduled for August and October 1999. Transtar's Management Information Systems
department has undertaken a contingency planning program to identify potential
Year 2000 failures. Potential failures have been identified and ranked according
to greatest risks to Transtar operations. Contingency plans have been drafted to
set forth alternative practices to be followed.
An assessment of non-information technology systems that are an integral part of
Transtar's rail and marine operations was initiated during the fourth quarter of
1997 to determine the Year 2000 compliance status. This review encompassed train
and process control systems, navigation systems, communication systems, as well
as any other equipment in which embedded chip technology could create date
functionality problems. This assessment has been completed and recommendations
have been made for upgrades and replacements, if necessary, to ensure Year 2000
compliance. The high-risk components and systems involving operations, such as
crossing warning systems, train dispatching systems, communication systems and
radar systems have been given the highest priority for Year 2000 compliance
remediation. Crossing warning systems have been reviewed and certified
14
<PAGE> 15
compliant. Train dispatching systems at all locations with the exception of the
Elgin, Joliet and Eastern Railway Company (EJ&E) are compliant. The EJ&E has
purchased a new Year 2000 compliant system which is scheduled for installation
in the fourth quarter of 1999. Purchase orders for communication system upgrades
or replacements have been placed and are in progress for completion in the third
quarter of 1999. Radar systems on the Marine Group have been certified Year 2000
compliant. All Coast Guard Year 2000 requirements are scheduled for completion
in the third quarter of 1999. Including non-information technology systems,
Transtar expects to spend approximately $6.4 million to become Year 2000 ready.
Formal contingency plans are now in the process of being formulated by
Transtar's operating departments and will be completed during the third quarter
of 1999.
In order to ensure that third party vendors will be Year 2000 compliant,
Transtar initiated a vendor compliance survey program during the second quarter
of 1998. Follow-up contacts with major vendors have been completed and indicate
that vendors are either compliant or in the process of ensuring compliance.
Transtar believes that alternate sources are available to replace vendors who
are unable to perform due to Year 2000 problems. Additionally, Transtar has
modified the language of its purchase orders to require that all products with
electrical/electronic elements come equipped with Year 2000 certified
components.
While Transtar management believes that Transtar's critical information and
operating systems will be Year 2000 ready, there can be no guarantee that it
will be completely successful. Formal contingency plans are being developed for
those potential Year 2000 failures, which could pose the greatest risks to
Transtar's operations. The "most reasonably likely worst case" scenario would be
failures of systems or equipment of Transtar or third parties which would result
in reliance on manual contingency procedures that would reduce efficiency in the
performance of business activities or cause the temporary suspension of
operations and the consequent deferral of revenue until such failures have been
corrected. No assurance can be given that the effect of any such failures will
not have a material adverse effect on the operating results of Transtar.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
<PAGE> 16
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
six-month period ended June 30, 1999.
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 June 30, 1999
16
<PAGE> 17
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: August 11, 1999
TRANSTAR HOLDINGS, L.P.
TRANSTAR CAPITAL CORPORATION
By: /s/ Howard A. Lipson
----------------------------
Howard A. Lipson, Treasurer
17
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