10-Q 1 e10-q.txt TRANSTAR CAPITAL CORPORATION, FORM 10-Q 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, 2000 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 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 ___ -------------------------------------------------------------------------------- 2 Transtar Holdings, L.P. Transtar Capital Corporation Form 10-Q Quarterly Period Ended June 30, 2000 INDEX -----

3 PART I - FINANCIAL INFORMATION ------------------------------ A. TRANSTAR HOLDINGS, L.P. TRANSTAR HOLDINGS, L.P. CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of these consolidated financial statements. 3 4 TRANSTAR HOLDINGS, L.P. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (DEFICIT) (UNAUDITED) Partners' equity (deficit), beginning of period $(91,061) $(95,154) $(85,379) $(87,432) Net income (loss) 2,974 3,875 (2,708) (3,575) Other adjustments to partners' equity -- (933) -- (1,205) -------- -------- -------- -------- Partners' equity (deficit), end of period $(88,087) $(92,212) $(88,087) $(92,212) ======== ======== ======== ========

The accompanying notes are an integral part of these consolidated financial statements. 4 5 TRANSTAR HOLDINGS, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 5 6 TRANSTAR HOLDINGS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 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, 2000 have been included. The results of operations for the three and six month periods ended June 30, 2000 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, 1999. 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 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 was amortized over a six-year period commencing December 15, 1993 and ending December 15, 1999. Interest is payable in cash semi-annually in arrears on June 15 and December 15 commencing on June 15, 2000. Interest paid on June 15, 2000 was $14.6 million. The carrying value of the Notes is the same as the principal at maturity of $218 million. 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 $14.6 million and $12.9 million in the first half of 2000 and 1999, respectively, and was $7.3 million and $6.5 million in the second quarter of 2000 and 1999, respectively. In accordance with an Indenture relating to the issuance of the Notes (the Notes Indenture) certain dividends received from Transtar were paid into an escrow account. 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. On June 15, 2000 in accordance with the Notes Indenture and an agreement governing the escrow account, Holdings withdrew from the escrow account $14.6 million to pay interest on the Notes. As of June 30, 2000, the escrow balance is $36.8 million. Interest earned on the escrow balance was $1.5 million and $1.2 million in the first half of 2000 and 1999, respectively, and was $0.7 million and $0.6 million in the second quarter of 2000 and 1999, respectively. NOTE 3: PARTNERS' EQUITY (DEFICIT) In the first half of 1999, Holdings recorded an adjustment to Partners' Equity (Deficit) of $(1.2) million. This adjustment was recorded as a result of changes in ownership related to Transtar treasury stock transactions with its Management Stock Trusts. 6 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 54.0 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, 2000 Compared to the Three and Six Months ended June 30, 1999 Overall Holdings recorded net income for the second quarter of $3.0 million and a net loss of $2.7 million during the first six months of 2000. This represents a $0.9 million unfavorable change from the $3.9 million net income recorded during the second quarter of 1999 and a $0.9 million favorable change from the $3.6 million net loss reported for the first six months of 1999. Holdings' results include its equity investment in Transtar and interest and other financial expenses. 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 2000 or 1999. Holdings' selling, general and administrative expenses of $0.1 million during the first six months of 2000 were essentially the same as what was incurred during the first half of 1999. During the first six months of 2000, equity in earnings of Transtar and interest income improved from 1999 levels by $2.2 million and $0.3 million, respectively. Interest and other financial expense increased by $0.8 million during the second quarter of 2000 to $7.5 million and by $1.7 million in the first six months to $15.0 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 were paid into an escrow account. Transtar declared no dividends during 1999 or the first six months of 2000. During the second quarter of 2000, Holdings earned $0.7 million in interest from the balance in the escrow account, an increase of $0.1 million from the amount earned in the second quarter of 1999. 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. In June 2000, Holdings withdrew from the escrow account $14.6 million to make the first cash interest payment due for the period commencing December 15, 1999 and ending on June 15, 2000. Cash interest will thereafter be payable semi-annually in arrears on June 15 and December 15 of each year through 2003. As of June 30, 2000 the balance in the escrow account is $36.8 million. Funds currently in the escrow account will be sufficient to make the next two semi-annual interest payments on the Notes. When funds in the escrow account have been expended, Holdings will be required to seek additional sources of funds in order to make future interest payments on the Notes. Holdings cannot give any assurances that they will be able to obtain additional funds in order to make such interest payments. 7 8 In the past Holdings has received dividends from Transtar in respect of the common stock of Transtar held by Holdings. These dividends and interest earned thereon have been the source of substantially all of the money currently on deposit in the escrow account. Future dividends of Transtar are governed by Transtar's bylaws that require unanimous approval by the Company's directors to declare a dividend or other distribution (absent a decision by an independent consultant breaking a deadlocked vote). Holdings and USX Corporation (USX) each have the right, pursuant to a Stockholders' Agreement dated as of December 28, 1988, as amended (the Stockholders' Agreement), to designate certain directors to the board of directors of the Company. As such, Holdings' ability to cause the Company to declare and pay a dividend or other distribution is dependent upon the concurrence of USX and no assurances can be given that USX will concur in the declaration and payment of such dividends or that any such dividends will actually be declared and paid or that, if declared and paid, any such dividends will be sufficient to fund the remaining payments due under the Notes. The only business activity of Holdings is its investment in Transtar. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 8 9 B. TRANSTAR, INC. TRANSTAR, INC. CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of these consolidated financial statements. 9 10 TRANSTAR, INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED) Retained earnings beginning of period $ 141,773 $ 82,925 $ 139,742 $ 85,577 Net income 18,212 18,938 20,243 16,286 --------- --------- --------- --------- Retained earnings end of period $ 159,985 $ 101,863 $ 159,985 $ 101,863 ========= ========= ========= =========

The accompanying notes are an integral part of these consolidated financial statements. 10 11 TRANSTAR, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 11 12 TRANSTAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 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, 2000 have been included. The results of operations for the three and six-month periods ended June 30, 2000 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, 1999. Certain reclassifications of prior years' data have been made to conform to 2000 classifications. 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.

NOTE 3: SUBSEQUENT EVENTS: Effective August 1, 2000, Thomas W. Sterling was elected President and Chief Executive Officer of Transtar, Inc. He succeeds Robert S. Rosati who retired July 31, 2000. 12 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, 2000 Compared to the Three and Six Months ended June 30, 1999 Overall Transtar is a transportation holding company composed of two segments: the Railroad Group and the Marine Group. Transtar's net income for the quarter ending June 30, 2000 of $18.2 million was a decline of $0.7 million compared with the same period of 1999. Operating income of $29.9 million recorded in the second quarter of 2000 was $1.9 million less than the comparable period of 1999. Net income for the six months ended June 30, 2000 was $20.2 million, a $4.0 million increase from the first six months of 1999. Operating income of $35.5 million generated during the first half of 2000 was $5.7 million more than the same period of 1999. Increased tonnage, additional employment costs, and escalating fuel prices impacted Transtar's second quarter and first half 2000 operating results. Operating Revenues Operating revenues totaled $140.5 million in the second quarter of 2000, an increase of $13.0 million over the second quarter of 1999. Railroad Group operating revenues improved by $2.8 million while Marine Group revenues increased by $10.2 million between these periods. During the first six months of 2000, Transtar's operating revenues improved to $239.9 million, a $28.1 million increase over the comparable period of 1999. Both the operating revenues of the Railroad Group and the Marine Group improved during this period, $7.2 million for the Railroad Group and $20.9 million for the Marine Group. The operating revenue increases between these periods were created by the transportation of higher volumes of raw materials for steel production, and other improvements in steel related business driven by increased demand for domestically produced steel. Also contributing to the revenue gain was transportation of additional coal tonnage for export to Asian markets coupled with increased consumption of coal by domestic utilities served by Transtar. Operating Expenses Transtar's operating expenses increased $14.9 million and $22.3 million, respectively, during the second quarter and first half of 2000 when compared to the same periods of 1999. The Railroad Group's operating expenses totaled $70.0 million and $140.2 million during the second quarter and first six months of 2000, increases of $5.5 million and $8.2 million, respectively. The Marine Group's operating expenses were $9.4 million and $14.3 million more in the second quarter and first six months of 2000, respectively, as compared to the same periods of 1999. These costs were driven by higher employment costs, increased fuel consumption associated with improved business volumes, a 78 percent ($6.8 million) increase in fuel prices and additional usage by the Marine Group of charter service for the movement of various products. Partially offsetting these increases was a $1.1 million (18 percent) improvement in car hire earnings (a contra to cost) as Transtar's freight car fleet was used in additional off-line loadings. In addition, a $0.9 million charge was recorded in the second quarter of 1999 for additional pension expense relating to the reduced service levels provided by the Lake Terminal Railroad at the USS/Kobe facility in Lorain, Ohio. Other Expense, net Transtar's other expense, net, declined by $0.1 million during the first half of 2000 when compared with the first six months of 1999. Interest and other financial expense recorded during the first six months of 2000 was $4.6 million, or $0.3 million more than the same period in 1999. Other miscellaneous income improved by $0.1 million. 13 14 Provision for Income Taxes Transtar's provision for income taxes decreased $0.7 million during the second quarter and increased $1.7 million for the first six months of 2000, when compared to the same period of 1999, directly as a result of changes in before tax earnings. Liquidity and Capital Resources Transtar's cash and temporary investments were $11.5 million at June 30, 2000, a $2.8 million reduction from the balance at December 31, 1999. Cash flow from operating activities during the six months ended June 30, 2000 was $36.0 million or $6.3 million more than was generated during the same period of 1999. Contributing to this increase were higher business activity levels, which produced a $4.0 million improvement in net income. Gross capital expenditures were $12.1 million in the first half of 2000, a decline of $42.8 million from the same period of 1999. Capital expenditures in the first half of 1999 included the purchase of a tug barge lake vessel. Proceeds from the disposition of assets were $1.5 million more in the first six months of 2000 than in the same period of 1999. In August 1999 Transtar amended and restated its original Credit Agreement to acquire additional term loans in the amount of $45.0 million to refinance certain short-term borrowings used in June 1999 for the purchase of a tug barge lake vessel that was previously operated under a long-term lease. This restated term loan facility was collateralized by the stock of Transtar's subsidiaries. During the first six months of 2000, Transtar retired $29.0 million of debt compared to $21.0 million retired during the first half of 1999. Including the August 1999 borrowing, Transtar has a remaining balance of $81.0 million on its term loan obligations. Only nominal letters of credit are currently outstanding against Transtar's $25.0 million Revolving Credit Facility. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 14 15 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 three-month period ended June 30, 2000. 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 8K during the quarter ended June 30, 2000. 15 16 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 10, 2000 TRANSTAR HOLDINGS, L.P. TRANSTAR CAPITAL CORPORATION By: /s/Howard A. Lipson ---------------------------- Howard A. Lipson, Treasurer 16

TRANSTAR CAPITAL CORP 10-Q