10-Q 1 j8492002e10-q.txt TRANSTAR CAPITAL CORPORATION THIRD QUARTER 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 September 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 September 30, 2000 INDEX

3 4 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 $(88,087) $(92,212) $(85,379) $(87,432) Net income 3,966 3,749 1,258 174 Other adjustments to partners' equity -- (421) -- (1,626) -------- -------- -------- -------- Partners' equity (deficit), end of period $(84,121) $(88,884) $(84,121) $(88,884) ======== ======== ======== ========

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) SEPTEMBER 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 nine month periods ended September 30, 2000 have been included. The results of operations for the three and nine month periods ended September 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 $21.9 million and $19.7 million in the first nine months of 2000 and 1999, respectively, and was $7.3 million and $6.8 million in the third 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 September 30, 2000, the escrow balance is $37.4 million. Interest earned on the escrow balance was $2.1 million and $1.8 million in the first nine months of 2000 and 1999, respectively, and was $0.6 million and $0.7 million in the third quarter of 2000 and 1999, respectively. NOTE 3: PARTNERS' EQUITY (DEFICIT) In the first nine months of 1999, Holdings recorded an adjustment to Partners' Equity (Deficit) of $(1.6) million. This adjustment was recorded as a result of changes in ownership related to treasury stock transactions of Transtar with its Management Stock Trusts. NOTE 4: SUBSEQUENT EVENTS On October 4, 2000, Holdings announced that it has entered into a Reorganization and Exchange Agreement (the Reorganization Agreement) with USX Corporation (USX) and Transtar regarding the organization of Transtar. In this reorganization, Holdings will exchange all of its shares in Transtar for 100% of the ownership of four direct Transtar subsidiaries - Bessemer and Lake Erie Railroad Company; the Duluth, Missabe and Iron Range Railway Company; the Pittsburgh & Conneaut Dock Company; and USS Great Lakes Fleet, Inc. and their subsidiaries (collectively, the "Holdings Companies"). As a result of this transaction, USX will become the sole owner of Transtar and its remaining direct subsidiaries - the Birmingham Southern Railroad Company; the Elgin, Joliet and 6 7 Eastern Railway Company; the Lake Terminal Railroad Company; the McKeesport Connecting Railroad Company; the Mobile River Terminal Company, Inc.; the Union Railroad Company; the Warrior and Gulf Navigation Company; and Tracks Traffic and Management Services, Inc., and their subsidiaries. Currently Holdings' only business activity is its investment in Transtar. Immediately after the consummation of the reorganization, Holdings' only business activity will be its investment in the Holdings Companies. Consummation of the reorganization is conditioned upon (i) receipt of required approvals of the Surface Transportation Board, (ii) receipt of applicable antitrust clearances and (iii) receipt by Holdings of the proceeds of a financing in an amount sufficient to refinance the Notes and the Holdings Companies' allocable portion of certain indebtedness of Transtar and of financing commitments in an amount sufficient to fund the working capital needs of the Holdings Companies. In addition, the reorganization is subject to other conditions customary for similar transactions of its type. 7 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, 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 Nine Months ended September 30, 2000 Compared to the Three and Nine Months ended September 30, 1999 Overall Holdings recorded net income of $4.0 million for the third quarter of 2000, and $1.3 million during the first nine months of 2000. This represents a $0.2 million favorable change from the $3.8 million net income recorded during the third quarter of 1999 and a $1.1 million favorable change from the $0.2 million net income reported for the first nine 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 nine months of 2000 were essentially the same as what was incurred during the same period of 1999. During the first nine months of 2000 equity in earnings of Transtar and interest income improved from 1999 levels by $2.9 million and $0.3 million, respectively. Interest and other financial expense increased by $0.5 million during the third quarter of 2000 to $7.5 million, and by $2.2 million in the first nine months to $22.4 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 years prior to 1999 were paid into an escrow account. Transtar declared no dividends during 1999 or the first nine months of 2000. The previous dividend payments and interest earned thereon have been the source of all of the money currently on deposit in the escrow account. During the third quarter of 2000, Holdings earned $0.6 million in interest from the balance in the escrow account, versus $0.7 million earned in the third 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. As of September 30, 2000 the balance in the escrow account is $37.4 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. Future dividends of Transtar are governed by Transtar's bylaws that require unanimous approval by the Company's directors and the Reorganization Agreement (see Note 4: Subsequent Events in Holdings' Notes to Consolidated Financial Statements) prohibits Transtar from paying any dividends prior to the earlier of the consummation of the transactions contemplated by the Reorganization Agreement and the termination of the Reorganization Agreement without the consent of each of Holdings and USX. The consummation of the transactions contemplated by the Reorganization Agreement will result in the occurrence of a change in control under the Notes, which, if it occurs, will require Holdings to offer to repurchase the Notes at an aggregate price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereof. The consummation of the transactions contemplated by the Reorganization Agreement is conditioned on, among other things, the receipt of financing in an amount sufficient to refinance the Notes. 8 9 New Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This pronouncement, as amended by SFAS 137 and 138, requires all derivative instruments to be reported at fair value on the balance sheet; depending on the nature of the derivative instrument, changes in fair value will be recognized either in net income or as an element of other comprehensive income. SFAS 133 is effective for fiscal years beginning after June 15, 2000. The Company has not engaged in significant activity with respect to derivative instruments or hedging activities in recent years. Management of the Company has not yet determined the impact, if any, of the adoption of SFAS 133 on the Company's financial position or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 9 10 B. TRANSTAR, INC. TRANSTAR, INC. CONSOLIDATED BALANCE SHEET

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

CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED) Retained earnings beginning of period $ 159,985 $ 101,863 $ 139,742 $ 85,577 Net income 20,256 19,140 40,499 35,426 --------- --------- --------- --------- Retained earnings end of period $ 180,241 $ 121,003 $ 180,241 $ 121,003 ========= ========= ========= =========

The accompanying notes are an integral part of these consolidated financial statements. 11 12 TRANSTAR, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 12 13 TRANSTAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 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 nine month periods ended September 30, 2000 have been included. The results of operations for the three and nine-month periods ended September 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.

13 14 NOTE 3: CURRENT PORTION OF LONG-TERM DEBT: Transtar's Credit Agreement, as amended and restated on August 26, 1999 (the Restated Credit Agreement) provided for Term Loans in the aggregate principal amount of $130 million, all of which are collateralized by the stock of the Transtar subsidiaries. As of September 30, 2000, Transtar has a remaining balance of $71 million on its term loan obligations. Under the terms of the Restated Credit Agreement, the entire $71 million is scheduled for payment on December 31, 2000. Transtar is negotiating a refinancing which would entail entering into a new credit agreement or obtaining an extension of the existing Restated Credit Agreement for approximately $42 million of these obligations. It would also provide for an extension or replacement of the existing $25 million revolving credit facility. 14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Transtar, Inc. Results For the Three and Nine Months ended September 30, 2000 Compared to the Three and Nine Months ended September 30, 1999 Overall Transtar is a transportation holding company composed of two segments: the Railroad Group and the Marine Group. Transtar's net income of $20.3 million for the quarter ending September 30, 2000 was an improvement of $1.1 million compared with the same period of 1999. Operating income of $30.9 million recorded in the third quarter of 2000 was $1.8 million less than the comparable period of 1999. Net income for the nine months ended September 30, 2000 was $40.5 million, a $5.1 million increase from the first nine months of 1999. Operating income of $66.4 million generated during the first nine months of 2000 was $4.0 million more than the same period of 1999. Increased business volume, additional employment costs, and continued escalation in fuel prices impacted Transtar's third quarter and first nine months operating results as compared to similar periods of the previous year. Operating Revenues Operating revenues totaled $139.4 million in the third quarter of 2000, an increase of $12.2 million from the third quarter of 1999. The Railroad Group's operating revenues declined by $2.6 million while the Marine Group's revenues increased by $14.8 million in the third quarter of 2000 when compared to the same period of 1999. In the first nine months of 2000, Transtar's operating revenues improved to $379.3 million, a $40.3 million increase over the comparable period of 1999. During this period, both groups' operating revenues were greater than 1999, $4.5 million for the Railroad Group and $35.7 million for the Marine Group. The operating revenue increase between these two periods resulted from increased participation in the transportation of raw materials for steel production. Also contributing to the revenue gain was transportation of additional coal tonnages for export to Asian markets, coupled with increased consumption of coal by domestic utilities served by Transtar. Operating Expenses Transtar's operating expenses increased $13.9 million and $36.3 million, respectively, during the third quarter and first nine months of 2000 when compared to the same periods of 1999. The Railroad Group's operating expenses totaled $67.1 million and $207.3 million during the third quarter and first nine months of 2000, representing increases of $2.4 million and $10.6 million, respectively. The Marine Group's operating expenses increased $11.6 million and $25.9 million in the third quarter and first nine months of 2000, respectively, when compared to the same periods of 1999. Transtar's increased costs were driven by higher employment costs and fuel consumption associated with increased business volumes, a 66 percent or $10.7 million year-to-date 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 or 11 percent year-to-date improvement in car hire earnings (a contra to cost) as Transtar's freight car fleet was used in additional off-line loadings. Other Expense, net Transtar's other expense, net, improved by $3.2 million during the first nine months of 2000 when compared with the same period of 1999. Interest and other financial expenses recorded during the first nine months of 2000 were $6.4 million, or $0.5 million less than the same period in 1999. In the first nine months of 2000, other miscellaneous income improved by $2.6 million primarily as the result of asset sales. 15 16 Provision for Income Taxes Transtar's provision for income taxes increased by $0.5 million during the third quarter and $2.2 million for the first nine 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 $21.4 million at September 30, 2000, or $7.1 million more than the balance at December 31, 1999. Cash flow from operating activities during the nine months ended September 30, 2000 was $60.1 million or $5.6 million more than was generated during the same period of 1999. The major contributor to this increase was a $5.1 million improvement in net income. Gross capital expenditures were $21.3 million in the first nine months of 2000, a decline of $39.5 million from the same period of 1999. Capital expenditures in 1999 included the $45.0 million purchase of a tug barge lake vessel. Proceeds from the disposition of assets were $3.6 million more in the first nine 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 nine months of 2000, Transtar retired $39.0 million of debt, the same as retired during the first nine months of 1999. Including the August 1999 borrowing, Transtar has a remaining balance of $71.0 million on its term loan obligations. Only nominal letters of credit are currently outstanding against Transtar's $25.0 million revolving credit facility. Transtar's Credit Agreement, as amended and restated on August 26, 1999 (the Restated Credit Agreement) provided for Term Loans in the aggregate principal amount of $130 million, all of which are collateralized by the stock of the Transtar subsidiaries. As of September 30, 2000, Transtar has a remaining balance of $71 million on its term loan obligations. Under the terms of the Restated Credit Agreement, the entire $71 million is scheduled for payment on December 31, 2000. Transtar is negotiating a refinancing which would entail entering into a new credit agreement or obtaining an extension of the existing Restated Credit Agreement for approximately $42 million of these obligations. It would also provide for an extension or replacement of the existing $25 million revolving credit facility. New Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This pronouncement, as amended by SFAS 137 and 138, requires all derivative instruments to be reported at fair value on the balance sheet; depending on the nature of the derivative instrument, changes in fair value will be recognized either in net income or as an element of other comprehensive income. SFAS 133 is effective for fiscal years beginning after June 15, 2000. The Company has not engaged in significant activity with respect to derivative instruments or hedging activities in recent years. Management of the Company has not yet determined the impact, if any, of the adoption of SFAS 133 on the Company's financial position or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 16 17 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 September 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 8-K during the quarter ended September 30, 2000. On October 4, 2000, Holdings and TCC filed a Form 8-K announcing that it has entered into a Reorganization and Exchange Agreement with USX Corporation and Transtar. 17 18 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 13, 2000 TRANSTAR HOLDINGS, L.P. TRANSTAR CAPITAL CORPORATION By: /s/ Howard A. Lipson -------------------------- Howard A. Lipson, Treasurer 18

TRANSTAR CAPITAL CORP 10-Q