<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
___________________________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-7141
PS GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0692068
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
4370 LA JOLLA VILLAGE DRIVE, SUITE 1050
SAN DIEGO, CALIFORNIA 92122
(Address of principal executive offices)
(Zip code)
(619) 642-2999
(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 ____
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 2, 1998: 6,068,313 shares of common stock, $1 par
value.
================================================================================
<PAGE>
PS GROUP HOLDINGS, INC.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1996 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q for the third quarter of 1998 may be deemed forward-looking such as:
information relating to the future prospects of the aircraft lessees of PS
Group, Inc. (PSG), the aircraft leasing subsidiary of PS Group Holdings, Inc.
(the Company); the potential liability for environmental contamination at the
San Francisco International Airport (SFIA), the related cost of remediation and
pending and potential litigation, and the recoverability of any portion of this
cost from third parties; the availability of certain tax benefits, and the
amount of otherwise-taxable income against which such benefits may be offset;
the estimated fair value of oil and gas properties owned by Statex Petroleum,
Inc. (Statex), the oil and gas production and development segment of the
Company; the volatility of the prices of crude oil and natural gas and the
resultant effect on Statex including its ability to remain in compliance with
financial loan covenants contained in its separate bank credit agreement and the
Company's ability to pay the principal and interest outstanding under this
credit agreement if the bank is unwilling to grant future waivers and declares
the loan due and payable; and Year 2000 issues. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including, but not
limited to: the impact of the financial condition and results of operations of
the lessees of PSG's aircraft; the uncertainties inherent in estimating the cost
of environmental remediation and related pending and potential litigation at
SFIA; the efficacy of the transfer restrictions on the Company's common stock in
preserving the Company's substantial tax benefits, the Company's ability to
realize such benefits, and the possible effect of the availability of such
benefits if stockholders of the Company do not vote to extend such transfer
restrictions beyond their scheduled expiration in the year 2000; the impact of
the volatility of the prices of crude oil and natural gas on Statex, including
the possibility of future impairment losses and future non-compliance with
financial loan covenants; the impact on the business, financial condition and
results of operations of the Company if the Company or its subsidiaries, or
third parties with which they have material business relationships, are
unsuccessful in solving the Year 2000 issues in a timely manner; the impact of
economic conditions on each business segment; the impact of competition; the
impact of governmental legislation and regulation and possible future changes
therein; and other risks detailed in this Form 10-Q, the 1997 Annual Report to
Stockholders of the Company, and in other filings the Company has made with the
Securities and Exchange Commission. Should any of such risks or uncertainties
materialize or should other assumptions prove incorrect, actual results or
outcomes may vary materially from those contemplated in such forward-looking
statements. The Company does not undertake to publicly update or revise its
forward-looking statements.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Included herein on pages F-1 to F-4.
1
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Included herein on pages F-5 to F-8.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported in the Company's Form 10-K for the year ended
December 31, 1997, the City and County of San Francisco (CCSF), on July 11,
1997, filed a complaint in the Superior Court, State of California, County of
San Francisco (the Court), against various present and former tenants who had
operated fuel storage and other facilities at SFIA seeking to recover costs
incurred in connection with the investigation and clean-up of contamination in
and around SFIA. The action was removed to the United States District Court for
the Northern District of California and is now captioned City and County of San
Francisco v. ARCO, et. al., U.S. District Court, N. D. Cal., Case No. C97-2965
CAL (the CCSF Action). For additional information with respect to this action
and two related cross actions, see Note 4 of the Notes to Consolidated Financial
Statements included in the Company's 1997 Annual Report to Stockholders (Exhibit
13 to the Company's Form 10-K for the year ending December 31, 1997).
Most of the Parties in the CCSF Action have begun an extended mediation
presided over by retired Judge Daniel Weinstein in San Francisco. Judge
Weinstein is seeking to mediate and settle all of the claims by SFIA against the
various SFIA tenants, as well as the contribution and indemnity claims among the
tenants. The mediation began with a joint session among SFIA and all
participating tenants on September 22, 1998, and individual tenants, including
the Company, have participated in separate mediation sessions with SFIA and the
mediator since September 22, 1998. While some tenants have reached tentative
settlements with SFIA, neither the Company nor any of the major tenants have
settled. However, both the Company and the major tenants are continuing
mediation efforts with SFIA and the mediator. As the mediation continues, the
litigation is stayed as to the Company and the other mediating tenants. The
Company is unable to determine whether the on-going mediation will result in a
settlement, or the amount of a settlement, between SFIA and the Company, and the
Company and other tenants.
The Company is unable to determine whether any of the claims mentioned
above will ultimately have any material adverse consequences to it beyond the
environmental remediation charges the Company recorded in the year ended
December 31, 1997 described in Note 4 of the Notes to Consolidated Financial
Statements included in the Company's 1997 Annual Report to Stockholders (Exhibit
13 to the Company's Form 10-K for the year ending December 31, 1997).
ITEM 2. CHANGES IN SECURITIES.
None.
2
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1998
PS GROUP HOLDINGS, INC.
-----------------------
(Registrant)
/s/ Lawrence A. Guske
--------------------------
LAWRENCE A. GUSKE
Vice President - Finance and
Chief Financial Officer and
Authorized Officer of the Registrant
3
<PAGE>
PS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,195 $ 10,921
U.S. Government securities 21,965 5,815
Accounts and notes receivable 4,915 6,090
Current portion of aircraft leases 8,298 8,630
Other current assets 1,584 1,631
Net current assets of discontinued operation 667 7,293
-------- --------
Total current assets 39,624 40,380
Property and equipment, net 13,294 23,772
Aircraft leased under operating leases, net 65,015 72,444
Investment in aircraft financing leases 75,691 82,067
Other assets 4,868 6,359
-------- --------
$198,492 $225,022
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 1,749 $ 2,057
Accrued interest 997 4,404
Environmental remediation liability 1,024 1,384
Current portion of long-term obligations 13,834 18,211
-------- --------
Total current liabilities 17,604 26,056
Long-term obligations 44,410 55,511
Deferred income taxes 33,422 36,450
Environmental remediation liability 3,632 3,716
Other liabilities 6,785 6,581
Stockholders' equity:
Common stock 6,068 6,068
Additional paid-in capital 90,640 90,640
Deficit (4,069) -
-------- --------
Total stockholders' equity 92,639 96,708
-------- --------
$198,492 $225,022
======== ========
</TABLE>
See accompanying notes.
F-1
<PAGE>
PS GROUP HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
----------------------------- ----------------------------
1998 1997 * 1998 1997 *
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Continuing operations:
Revenues:
Aircraft leasing $ 6,042 $ 7,898 $18,330 $23,741
Oil and gas production 1,442 3,022 4,822 7,673
Fuel storage and distribution 216 163 598 479
Interest and other income 480 363 1,211 1,130
------------ ------------- ------------ ------------
8,180 11,446 24,961 33,023
------------ ------------- ------------ ------------
Costs and expenses:
Cost of sales 1,479 1,532 4,073 4,182
Depreciation, depletion, and amortization 3,103 5,761 9,444 15,153
Impairment loss on oil and gas properties 10,200 - 10,200 -
Environmental remediation expenses - 1,804 - 5,533
General and administrative expenses 557 642 2,145 2,494
Interest expense 1,626 2,863 5,621 8,693
------------ ------------- ------------ ------------
16,965 12,602 31,483 36,055
------------ ------------- ------------ ------------
Loss from continuing operations
before taxes (8,785) (1,156) (6,522) (3,032)
Credit for taxes (3,409) (480) (2,453) (1,267)
------------ ------------- ------------ ------------
Loss from continuing operations (5,376) (676) (4,069) (1,765)
Loss from discontinued operation, net of tax - (329) - (2,001)
------------ ------------- ------------ ------------
Net loss $(5,376) $(1,005) $(4,069) $(3,766)
------------ ------------- ------------ ------------
Basic and diluted loss per share:
Continuing operations $ (.89) $ (.11) $ (.67) $ (.29)
Discontinued operation - (.06) - (.33)
------------ ------------- ------------ ------------
Net loss per share $ (.89) $ (.17) $ (.67) $ (.62)
============ ============= ============ ============
Shares used in determining basic and diluted
loss per share 6,068 6,068 6,068 6,068
============ ============= ============ ============
</TABLE>
* Restated as described in Note 1.
See accompanying notes.
F-2
<PAGE>
PS GROUP HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997 *
------------- -------------
<S> <C> <C>
Cash flows from continuing operations:
Cash provided from operating activities $ 9,804 $ 14,632
Cash flows from investing activities:
Purchase of U.S. Government securities (23,096) -
Proceeds from maturities of U.S. Government securities 7,883 2,349
Capital additions (primarily oil and gas related) (1,821) (4,403)
Financing leases and other 7,329 9,839
------------- -------------
Net cash provided from (used in) investing activities (9,705) 7,785
------------- -------------
Cash flows from financing activities:
Additions to long-term obligations 600 2,000
Reductions in long-term obligations (16,077) (20,255)
Special cash distribution to stockholders - (9,102)
------------- -------------
Net cash used in financing activities (15,477) (27,357)
------------- -------------
Cash provided from discontinued operation 6,652 9,471
------------- -------------
Net increase (decrease) in cash and cash equivalents (8,726) 4,531
Cash and cash equivalents at beginning of period 10,921 7,290
------------- -------------
Cash and cash equivalents at end of period $ 2,195 $ 11,821
============= =============
</TABLE>
* Restated as described in Note 1.
See accompanying notes.
F-3
<PAGE>
PS GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) In the opinion of management, the accompanying Unaudited Condensed
Consolidated Financial Statements include all adjustments (consisting only
of normal recurring adjustments, other than the impairment loss described
below) necessary for a fair statement of the consolidated financial position
at September 30, 1998, and the results of operations for the three and nine
months ended September 30, 1998 and 1997, and the cash flows for the nine
months ended September 30, 1998 and 1997. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements. Actual results could differ
from those estimates. During the fourth quarter of 1997, PS Trading, Inc.
(PST) completed the sale of the assets of its wholesale division, and during
the first quarter of 1998, the assets of its aviation fuel sales division
were sold. Accordingly, fuel sales is shown as a discontinued operation in
all periods presented and amounts for 1997 have been restated. Certain
reclassifications have been made to the 1997 financial statements to make
them comparable to the 1998 presentation. These Unaudited Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto contained in the
Company's 1997 Annual Report to Stockholders (Exhibit 13 to the Company's
Form 10-K for the year ending December 31, 1997).
(b) Statex Petroleum, Inc. (Statex), PSGH's oil and gas subsidiary recorded a
pretax, noncash impairment loss of $10,200,000 related to the write-down of
specific oil and gas properties to estimated fair value as of September 30,
1998. This decision was based primarily on the decreased market value of
oil and gas properties and also reflected weak oil prices and further
operating losses recorded by Statex. Fair value was based on the current
indicated price for oil and gas properties, estimated discounted future net
cash flows, and input and discussions with oil and gas professionals
(c) Restrictions on the transfer of common shares - There are certain
restrictions imposed on the transfer of common shares of the Company. In
general, and subject to an exemption for certain dispositions of shares by
persons who were "pre-existing 5% shareholders" (as defined in the Company's
Restated Certificate of Incorporation) on June 5, 1996, the transfer
restrictions prohibit, without prior approval of the Board of Directors, the
direct or indirect disposition or acquisition of any stock of the Company by
or to any holder who owns, or would, as a result thereof, own (either
directly or through the tax attribution rules) 5% or more of the stock upon
such acquisition. These restrictions have been imposed in order to help
preserve the Company's substantial net operating loss and investment tax
credit carryforwards and other tax benefits by decreasing the risk of an
"ownership change" for federal income tax purposes. The transfer
restrictions, by their terms, are scheduled to expire immediately following
the conclusion of the Company's annual meeting of stockholders for the year
2000, unless the stockholders pass a resolution extending such expiration
date.
F-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
READERS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS CONTAINED IN MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD
BE READ IN CONJUNCTION WITH THE COMPANY'S DISCLOSURES UNDER THE HEADING:
"CAUTION REGARDING FORWARD-LOOKING STATEMENTS" FOUND ON PAGE 1.
FINANCIAL CONDITION
At September 30, 1998, the Company's principal sources of liquidity were
cash, cash equivalents, and U.S. Government securities totaling $24.2 million, a
$7.4 million increase from December 31, 1997. The major changes in cash and
cash equivalents are reported in the Unaudited Condensed Consolidated
Statements of Cash Flows. Working capital increased by $7.7 million since
December 31, 1997. The Company's capitalization consisted of 39% long and
short-term obligations and 61% equity at September 30, 1998 compared to 43%/57%
at December 31, 1997.
At the end of the third quarter of 1998, $1.9 million was outstanding under
a bank credit agreement, consisting entirely of letters of credit, all of which
were fully cash collateralized. No additional letters of credit or borrowings
are permitted under the bank credit agreement.
Statex has a separate bank credit agreement collateralized by its major oil
and gas properties. As of September 30, 1998, $5.6 million was borrowed under
this agreement. Due to losses in the third quarter of 1998, Statex did not meet
a financial covenant contained its bank loan agreement relating to the fixed
charge ratio. In November 1998, Statex obtained a waiver from the bank relating
to its non-compliance with this financial covenant in the third quarter of 1998.
It is possible that future losses by Statex could cause it to again be out of
compliance with this financial covenant or with other covenants in its bank
credit agreement. There can be no assurances that the bank will be willing to
grant additional waivers in the future. If the bank was unwilling to grant
additional waivers if needed, the bank could by notice to Statex declare the
outstanding principal and interest due and payable. If that occurred the
Company expects that, if it so decided, it would have adequate funds to advance
to Statex to pay the outstanding principal and interest.
PSG's aircraft lease portfolio represents the major portion of the
Company's assets and its largest source of cash flow. The lease portfolio
consists of 15 aircraft, of which 12 are leased to US Airways, Inc. (US
Airways). PSG's assets include $95.2 million for which realization is
substantially dependent upon the future performance of US Airways under those
aircraft leases with PSG. For a complete discussion of US Airways' relationships
to PSG's financial condition, refer to the section entitled "Aircraft Leasing"
in the Company's 1997 Annual Report to Stockholders (Exhibit 13 to the Company's
Form 10-K for the year ending December 31, 1997). PSG refers readers to public
information regarding US Airways for further details relating to its financial
condition.
The Company believes that its cash, cash equivalents, U.S. Government
securities, and projected cash flow are adequate to meet the operating and
planned capital needs of the Company in both the short and long-term.
F-5
<PAGE>
RESULTS OF OPERATIONS - COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 1998 AND 1997
REVENUES
Aircraft leasing revenues were 23% lower in the third quarter and the first
nine months of 1998 compared to the same periods in 1997 principally due to
fewer aircraft under lease. Four BAe 146 aircraft were sold in the fourth
quarter of 1997 reducing the total number of aircraft under lease from 19 to 15.
Oil and gas production revenues for the third quarter were 52% lower and
for the first nine months of 1998 were 37% lower compared to the 1997 periods
principally due to sharply lower oil prices, reduced gas prices, and lower gas
volumes (particularly in the third quarter of 1998).
COSTS AND EXPENSES
The net decrease in depreciation expense in the third quarter and first
nine months of 1998 relates primarily to (i) reduced depreciation expense which
resulted from the sale of the four BAe 146 aircraft discussed above and (ii)
additional depreciation expense of $1.5 million in the third quarter and $2.9
million in the first nine months of 1997 related to five of the ten BAe 146
aircraft which were then leased to US Airways. With respect to those five
aircraft, the specified lease termination values were below the net book values
of the aircraft. This additional depreciation was recorded to reflect
notification received from US Airways that it might exercise its lease
termination rights with respect to four of the ten BAe 146 aircraft (including
three of these five aircraft on which additional depreciation was being
recorded) at specified lease termination values, and, in fact, US Airways did
exercise these rights in the fourth quarter of 1997. In light of this
notification and the improved market for possible sales by US Airways, PSG
adjusted its depreciation to reflect the lease termination values on these five
aircraft.
The impairment loss on oil and gas properties is described in Note (b) in
the Notes to the Unaudited Condensed Consolidated Financial Statements.
The environmental remediation expenses in 1997 relate to estimated costs
for the investigation and remediation of potential soil and groundwater
pollution at San Francisco International Airport where PST, as the operator of
various fuel storage and distribution facilities, has been named as a
potentially responsible party. Refer to Item 1. Legal Proceedings for additional
information.
General and administrative expenses were lower in the third quarter and
first nine months of 1998 compared to 1997 primarily due to lower professional
fees and lower rent expense.
Interest expense was lower in the third quarter and first nine months of
1998 compared to the same periods in 1997 primarily due to lower levels of
outstanding debt.
F-6
<PAGE>
INCOME TAXES
Taxes in both 1998 and 1997 differ from the corporate federal tax rate
primarily because of the effect of state taxes.
SEGMENT RESULTS
PSG recorded higher net income in the third quarter and first nine months
of 1998 compared to 1997's results which were depressed by the additional
depreciation expense described above.
Statex recorded a net loss in the third quarter and first nine months of
1998 due to sharply lower oil prices in 1998 versus 1997 and the impairment loss
described above. There is significant volatility in oil and gas prices and such
volatility is expected to continue. Future declines in oil and gas prices could
result in additional impairment losses.
PST's fuel storage and distribution operation recorded a small profit in
the 1998 periods versus a large loss in the 1997 periods due to the
environmental remediation expenses described above.
YEAR 2000 ISSUES
The Company and each of its subsidiaries are working to resolve the
potential impact of the Year 2000 on the ability of their computerized
information systems to accurately process information that may be date
sensitive. Any system that recognizes a date using "00" as the year 1900 rather
that the year 2000 could result in errors or systems failures. The Company, PSG,
and PST share a number of common computer systems in their operations. In
addition, Statex uses a number of computer systems in its operations. Since all
of these systems use only standardized computer programs developed by major
software vendors, the Company and its subsidiaries are dependent on those
software vendors to make the needed modifications to accommodate the Year 2000.
Some of these programs have already been modified. For other programs, the
vendors have indicated that the modifications will be completed in advance of
the Year 2000, although the vendors have stated that there are no assurances
that this will be accomplished. As a contingency, if any vendor does not modify
its software to address the Year 2000 issues on a timely basis, management
believes that there will be appropriate alternative software available that is
Year 2000 compliant and that can be substituted with no material effect on
operations. The Company and its subsidiaries believe, based on advice from
outside consultants, that their computer hardware is already Year 2000
compliant. Based on information currently available, management believes that
the costs to address the Year 2000 issues discussed above will be less than
$100,000 and that the software modifications using existing or substitute
vendors will be completed by mid-1999.
The Company and its subsidiaries are dependent upon third party providers
to perform many services including insurance coverage, employee benefit
programs, shareholder related services, printing, utilities, and communications.
The Company has received correspondence from many of these providers which
indicates that they expect to address their significant Year 2000 issues on a
timely basis. The Company plans to contact the remaining significant providers
by early 1999, and it will continue to monitor the progress of all of its
significant third party providers. The Company has no control over these
providers becoming Year 2000 compliant. As a contingency, if a provider does not
become Year
F-7
<PAGE>
2000 compliant in a timely manner, the Company, in many cases, may be able to
change to another party that is compliant. Such a contingency plan is expected
to be in place by mid-1999.
The Company's largest revenue source is aircraft lease revenue from US
Airways, America West Airlines, Inc., and Continental Airlines, Inc. Lease
revenue represented 73% of total revenues for the first nine months of 1998.
Revenue from US Airways alone represented 58% of total revenues for the first
nine months of 1998. The Company has approached each lessee regarding its
compliance with Year 2000 issues. Each has indicated to the Company and in
public filings that it is not currently Year 2000 compliant. However, each has
disclosed that they are working toward becoming compliant. These lessees have
further indicated that they could suffer material adverse effects on their
results of operations and financial condition if they or third parties they rely
upon are not Year 2000 compliant. Such an adverse effect could jeopardize the
lessees' ability to make lease payments to the Company. The Company has no
control over these lessees becoming Year 2000 compliant and there is no
contingency plan. In the event that failure to become Year 2000 compliant on
the part of any lessee adversely affects its ability to make lease payments to
the Company, the Company is unable to estimate the amount of lease revenue, if
any, that would not be paid to it. It is possible that the Company could
sustain a significant interruption in its revenue stream that would affect the
Company's ability to make its debt payments on loans secured by leased aircraft.
Oil and gas revenues generated by Statex amounted to 19% of consolidated
revenues for the first nine months of 1998. Approximately 70% of Statex's
revenues come directly or indirectly from one large independent oil refiner and
marketer. This refiner and marketer has disclosed in public filings that it is
working to resolve its Year 2000 issues. To the extent this purchaser or other
current purchasers were unable to purchase oil and gas due to Year 2000 issues,
Statex expects that, at least in most cases, it will be able to find alternative
purchasers. However, there is no assurance that this could be done or that
pricing from alternative purchasers would be the same as that obtained from
current purchasers. A contingency plan for alternative purchasers is expected
to be in place by mid-1999. Most of Statex's power to operate its production
equipment comes from one large Texas utility. Statex's operations could be
negatively impacted if this utility company or any of its other utility
providers were not Year 2000 compliant and could not provide their services.
The Company is unable to estimate the potential impact on its operations if
Statex's customers or its utility providers are not Year 2000 compliant.
If the Company or its subsidiaries, or any third parties with which they
have material business relationships, are unsuccessful in solving the Year 2000
issues in a timely manner it could have a material adverse effect on the
Company's business, financial condition, and results of operations. Beyond the
information disclosed above, the Company is unable to determine the extent of
such potential adverse effects.
F-8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,195
<SECURITIES> 21,965
<RECEIVABLES> 13,213
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,624
<PP&E> 213,288
<DEPRECIATION> 134,979
<TOTAL-ASSETS> 198,492
<CURRENT-LIABILITIES> 17,604
<BONDS> 0
0
0
<COMMON> 6,068
<OTHER-SE> 86,571
<TOTAL-LIABILITY-AND-EQUITY> 198,492
<SALES> 4,822
<TOTAL-REVENUES> 24,961
<CGS> 4,073
<TOTAL-COSTS> 4,073
<OTHER-EXPENSES> 11,589
<LOSS-PROVISION> 10,200
<INTEREST-EXPENSE> 5,621
<INCOME-PRETAX> (6,522)
<INCOME-TAX> (2,453)
<INCOME-CONTINUING> (4,069)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,069)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
