<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, 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
------ -------
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<PAGE> 2
Transtar Holdings, L.P.
Transtar Capital Corporation
Form 10-Q
Quarterly Period Ended June 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
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>
June 30, December 31,
1998 1997
------------------ ------------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 279 $ 260
Restricted cash 46,024 45,694
Investment in Transtar 37,005 23,825
Other assets 3,999 4,367
-------- --------
Total assets $ 87,307 $ 74,146
======== ========
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities $ 106 $ 186
Long-term debt 180,654 169,330
-------- --------
Total liabilities 180,760 169,516
PARTNERS' EQUITY (DEFICIT) (93,453) (95,370)
-------- --------
Total liabilities and partners' equity $ 87,307 $ 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 Six months ended
June 30, June 30,
---------- ---------
1998 1997 1998 1997
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative expenses 52 133 107 247
-------- -------- -------- --------
Operating (loss) (52) (133) (107) (247)
Interest income 640 561 1,294 1,157
Interest and other financial expenses (5,880) (6,009) (11,693) (11,139)
-------- -------- -------- --------
(Loss) before equity in earnings of Transtar (5,292) (5,581) (10,506) (10,229)
Equity in earnings of Transtar 11,637 11,055 13,956 11,990
-------- -------- -------- --------
Net income $ 6,345 $ 5,474 $ 3,450 $ 1,761
======== ======== ======== ========
</TABLE>
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
Partners' equity (deficit), beginning of period ($99,053) ($107,569) ($95,370) ($98,606)
Distribution to partners (745) -- (745) (5,250)
Net income 6,345 5,474 3,450 1,761
Other adjustments to partners' equity -- (171) (788) (171)
-------- --------- -------- ---------
Partners' equity (deficit), end of period ($93,453) ($102,266) ($93,453) ($102,266)
======== ========= ======== =========
</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,
------------------------------
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,450 $ 1,761
Adjustments to reconcile to net cash used
for operating activities:
Amortization -- 172
Non-cash interest and other financial expenses 11,693 11,139
Non-cash interest income (1,274) (1,152)
Equity in earnings of Transtar (13,956) (11,990)
Changes in:
Accounts payable (80) (363)
Other assets and liabilities (14) --
-------- --------
Net cash used for operating activities (181) (433)
-------- --------
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 19 (133)
Cash and cash equivalents at beginning of period 260 386
-------- --------
Cash and cash equivalents at end of period $ 279 $ 253
======== ========
</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, 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
six month periods ended June 30, 1998 have been included. The results of
operations for the three and six month periods ended June 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 $11.3
million and $10.8 million in the first half of 1998 and 1997, respectively, and
was $5.7 million and $5.8 million in the second 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 $1.3 million and $1.2 million in the first half of 1998 and 1997,
respectively, and was $0.6 million in the second quarter of both 1998 and 1997.
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 Six Months ended June 30, 1998
Compared to the
Three and Six Months ended June 30, 1997
Overall
Holdings recorded net income for the second quarter and the first half of 1998
of $6.3 million and $3.5 million, respectively. This represents a $0.8 million
and $1.7 million increase respectively from the $5.5 million and $1.8 million of
net income recorded during the second quarter and the first half 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 were slightly lower than those incurred in
both periods of 1997. Both the equity earnings of Transtar and interest income
improved from 1997 levels, as equity earnings increased by $0.6 million and $2.0
million and interest income by $0.1 million in both the second quarter and first
half of 1998, respectively. Interest and other financial expense decreased by
$0.1 million during the second quarter of 1998 to $5.9 million and increased by
$0.6 million in the first half to $11.7 million in 1998.
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 Agreement 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 dividends received from
Transtar in 1996.
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 earned
interest from the balance in the escrow account for the second quarter and the
first half of 1998 of $0.6 million and $1.3 million, respectively.
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 services, in particular, fluctuations
in Transtars' 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>
June 30, December 31,
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,852 $ 24,316
Accounts receivable from related parties 17,174 16,274
Accounts receivable from others 57,484 56,459
Other current assets 14,442 9,726
--------- ---------
Total current assets 120,952 106,775
Property, plant, and equipment,
less accumulated depreciation 379,387 384,118
Operating parts and supplies 16,771 15,551
Other assets 16,970 15,548
--------- ---------
Total assets $ 534,080 $ 521,992
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 78,945 $ 73,663
Payroll and benefits payable 41,687 38,456
Accrued taxes 19,309 12,143
Accrued interest 1,773 2,177
Current portion of long-term debt 58,800 68,464
Other current liabilities 3,868 1,096
--------- ---------
Total current liabilities 204,382 195,999
Long-term debt less current portion 103,200 128,766
Postretirement benefits other than pensions 108,757 106,270
Deferred credits and other liabilities 47,865 45,887
--------- ---------
Total liabilities 464,204 476,922
STOCKHOLDERS' EQUITY
Common stock 1,000 1,000
Paid-in capital 24,220 23,979
Retained earnings 52,811 26,538
Treasury stock (8,155) (6,447)
--------- ---------
Total stockholders' equity 69,876 45,070
--------- ---------
Total liabilities and stockholders' equity $ 534,080 $ 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 Six months ended
June 30, June 30,
-------------------------------- ---------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Revenues from related parties $ 80,406 $ 85,558 $138,428 $135,313
Revenues from others 61,421 56,992 102,484 103,318
------------- ------------- -------------- -------------
Total revenues 141,827 142,550 240,912 238,631
------------- ------------- -------------- -------------
Operating expenses (excluding items shown below) 95,518 96,005 174,085 175,332
Selling, general, and administrative expenses 2,829 2,598 5,738 5,218
Depreciation and amortization 6,671 6,741 13,388 13,374
------------- ------------- -------------- -------------
Total operating expenses 105,018 105,344 193,211 193,924
------------- ------------- -------------- -------------
Operating income 36,809 37,206 47,701 44,707
Other income 1,082 675 1,379 864
Interest income 793 276 1,040 409
Interest and other financial expenses (3,424) (4,657) (7,250) (9,311)
------------- ------------- -------------- -------------
Income before income taxes 35,260 33,500 42,870 36,669
Less provision for income taxes 13,355 12,635 16,597 14,040
------------- ------------- -------------- -------------
Net income $ 21,905 $ 20,865 $ 26,273 $ 22,629
============= ============= ============== =============
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(UNAUDITED)
Retained earnings (deficit), beginning of period $30,906 ($16,058) $26,538 ($ 17,822)
Net income 21,905 20,865 26,273 22,629
------------- ------------- -------------- -------------
Retained earnings end of period $52,811 $ 4,807 $52,811 $ 4,807
============= ============= ============== =============
</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>
Six months ended
June 30,
-----------------------------
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 26,273 $ 22,629
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 13,388 13,374
Amortization 248 332
Deferred taxes 1,922 1,070
(Gain) on sale of assets (859) (252)
Changes in other assets and liabilities 11,719 7,232
-------- --------
Net cash provided by operating activities 52,691 44,385
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (12,676) (6,434)
Proceeds from the sale of assets 3,078 622
-------- --------
Net cash used for investing activities (9,598) (5,812)
-------- --------
FINANCING ACTIVITIES:
Repayment of debt (34,000) (36,003)
Payments to acquire Treasury Stock (1,557) (325)
-------- --------
Net cash used for financing activities (35,557) (36,328)
-------- --------
Increase in cash and cash equivalents 7,536 2,245
Cash and cash equivalents at beginning of period 24,316 24,691
-------- --------
Cash and cash equivalents at end of period $ 31,852 $ 26,936
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
12
<PAGE> 13
TRANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 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
six month periods ended June 30, 1998 have been included. The results of
operations for the three and six month periods ended June 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)
JUNE 30, 1998
Transtar has been negotiating with USX to replace the existing agreements,
except as they apply to rail and rail related services at USS/Kobe Steel's
Lorain facility, 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) for services already provided in 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; a maximum per year
of ten percent of tonnage via the Great Lakes from January 1, 1999 through
December 31, 2002, and a maximum per year of fifteen percent of tonnage via the
Great Lakes from January 1, 2003 through March 15, 2005; a maximum per year of
ten percent of imported iron ore and coke destined for USX's Fairfield, Alabama
facility; a maximum per year of ten percent of export coal originating at US
Steel's Concorde Preparation Plant, and a maximum per year of ten percent of
coal via barge originating at US Steel's Concorde Preparation Plant; and a
maximum per year of forty percent of blast furnace burden 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.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Transtar Results
For the Three and Six Months ended June 30, 1998
Compared to the
Three and Six Months ended June 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 June 30, 1998 totaled $21.9 million, or an increase of $1.0 million
compared with the same period of 1997. Operating income of $36.8 million
recorded for the second quarter of 1998 was $0.4 million less than the
comparable period of 1997. Net income for the six months ended June 30, 1998 was
$26.3 million, a $3.6 million increase from the first half of 1997. Operating
income of $47.7 million during the first half of 1998 was $3.0 million greater
than the same period of 1997. The second quarter and six months operating
results were influenced by reduced operating revenues resulting from tentatively
agreed to Transportation Service Agreements with USX (see Transportation Service
Agreements), offset by lower fuel prices in 1998, and the impact in 1997 of a
limited early retirement program.
Operating Revenues
Operating revenues totaled $141.8 million for the second quarter of 1998, or a
decrease of $0.7 million from the second quarter of 1997. During the first six
months of 1998, Transtar's operating revenues were $240.9 million, reflecting an
improvement of $2.3 million over the same period of 1997. The first half revenue
increase was driven by the Railroad Group, while Marine Group revenues were 7
percent behind last year's first half. The Railroad Group's improvement was
achieved as a result of increased traffic volumes involving all commodities.
Railroad Group revenues in the second quarter of 1998 were $2.2 million greater
than the $97.3 million earned in the same period last year, inclusive of the
recognition of reduced revenues due to the acknowledgment of the tentative
transportation agreements with USX. These improvements were the result of: mild
weather and solid production at Minnesota taconite plants helping to increase
pellet ore shipments; additional coal movements to electric utility companies;
additional semi-finished steel shipments to steel finishing facilities; and
increased demurrage revenues. Marine Group revenues declined by $2.3 million in
the second quarter of 1998 when compared with the same period of 1997. Revenues
for the first half of 1998 decreased $4.7 million from the levels earned in the
first half of 1997. This decrease is attributable to lake tonnage advancing to
the fourth quarter of 1997 because of favorable weather conditions during that
period, coupled with reduced tonnage moved on the inland waterway system, and
the recognition of the tentatively agreed to Transportation Service Agreements
with USX.
Operating Expenses
Transtar's operating expenses decreased $0.3 million and $0.7 million
respectively during the second quarter and the first half of 1998, when compared
to the same periods of 1997. The Railroad Group's second quarter 1998 expenses
increased by $0.7 million over the $72.9 million incurred for the same period of
1997, while increasing $1.6 million during the first six months of 1998 to
$142.5 million. These cost increases are a result of higher employment and
maintenance expenses associated with increased volumes of traffic handled,
partially offset by reduced fuel prices, a 15 percent increase in car hire
earnings (a contra to cost), and the absence of expenses associated with the
limited early retirement program recognized in 1997. Marine Group operating
expenses totaled $35.3 million and $57.6 million during the second quarter and
the first half of 1998, decreases of $0.3 million and $1.4 million,
respectively. These cost reductions were driven by reduced fuel prices, lower
operating costs on inland waterways due to reduced tonnage, and favorable
personal property and sales tax adjustments recorded in 1998.
15
<PAGE> 16
Other Income, net
Transtar's other income, net, improved by $2.2 million and $3.2 million,
respectively during the second quarter and the first half of 1998, when compared
to the same periods of 1997. Interest expense recognized in the first half of
1998 was $7.3 million, or $2.1 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 increased $0.7 million during the second
quarter of 1998 and $2.6 million in the first half, when compared to the same
periods of 1997, directly as a result of higher before tax earnings in 1998.
Liquidity and Capital Resources
Transtar's cash and temporary investments were $31.9 million at June 30, 1998,
or $7.5 million greater than the balance at the end of 1997, and $4.9 million
greater than the balance at June 30, 1997. Cash flow from operating activities
during the six months ended June 30, 1998 amounted to $52.7 million, or $8.2
million greater than the comparable period of 1997. Cash flow used for investing
activities during the first half of 1998 totaled $9.6 million, or $3.8 million
more than was utilized during the same period of 1997. Gross capital
expenditures, amounted to $12.7 million for the first six months of 1998, an
increase of $6.2 million versus the same period of 1997. Proceeds from the sale
of property amounted to $3.1 million during the first half of 1998 versus the
$0.6 million that was generated in the comparable period of 1997.
For the first six months of 1998, Transtar retired $34.0 million of Term Loan
obligation, versus the $36.0 million Term Loan retirement in the same period of
1997. Since its December 7, 1993 refinancing, Transtar has retired $283.0
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 was completed in mid-1997, and outside contractors were hired to
assist in the implementation of the plan during 1997 and 1998. Transtar expects
to spend approximately $3.4 million to make the Company Year 2000 ready. 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.
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, ensures 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 able 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
16
<PAGE> 17
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 with linehaul carriers to and
from 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 services, in particular, fluctuations
in Transtars' 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 six
month period ended June 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 June 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: August 14, 1998
TRANSTAR HOLDINGS, L.P.
TRANSTAR CAPITAL CORPORATION
By: /s/HOWARD A. LIPSON
-----------------------------
Howard A. Lipson, Treasurer
19
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