<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, 1999
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)
(858) 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 9, 1999: 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 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-Q
for the third quarter of 1999 may be deemed forward-looking, such as: the
possibility of a fourth quarter 1999 sale of one MD-80 aircraft currently on
lease to US Airways, Inc. ("US Airways"); the estimated amount of tax benefits
that will be used on account of the April 1999 sale of five BAe 146 aircraft,
the October 1999 sale of one BAe 146 aircraft, the potential fourth quarter 1999
sale of the MD-80 aircraft, and the estimated amounts of remaining tax benefits
as of December 31, 1999; 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 volatility of the prices of crude
oil and natural gas and the resultant effect on Statex Petroleum, Inc.
("Statex"), the oil and gas production and development segment of the Company,
including the effect on the fair value of Statex's commodity swap agreement for
crude oil and Statex's 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 the impact of Year 2000 issues on the Company. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties, including, but not limited to: the effect, if such sale occurs,
of the possible fourth quarter 1999 sale of one MD-80 aircraft on the Company's
financial condition and results of operations; the possibility that the amount
of tax benefits actually used in the 1999 aircraft sales and the amounts of
remaining tax benefits as of December 31, 1999 will be different from the
amounts estimated; the efficacy of the transfer restrictions on the Company's
common stock in preserving the Company's remaining substantial tax benefits, the
Company's ability to realize such benefits, and the possible effect on 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 uncertainties inherent in estimating the cost of environmental
remediation and related pending and potential litigation at SFIA; the future
effect of the volatility of the price of oil and gas on Statex's earnings from
operations and on the future value of Statex's commodity swap agreement; the
possibility of future non-compliance with financial loan covenants by Statex,
and the possible inability of Statex to obtain waivers from its bank with
respect to such noncompliance; 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 for the third quarter of
1999, the Company's Form 10-K/A for 1998 (including portions of the Company's
Annual Report to Stockholders for 1998 incorporated by reference in such Form
10-K/A), 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.
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PS Group Holdings, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Sep. 30, Dec. 31,
1999 1998
------------- -------------
(Unaudited) (Note A)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,099 $ 3,747
U.S. Government securities 19,107 636
Accounts and notes receivable 2,461 4,894
Current portion of aircraft leases 5,682 8,366
Net investment in aircraft held pending sales 10,644 -
Other current assets 1,933 1,410
------------- -------------
Total current assets 46,926 19,053
Property and equipment, net 11,238 10,980
Aircraft leased under operating leases, net 38,911 62,359
Investment in aircraft financing leases 60,459 74,944
Other assets 2,840 4,393
------------- -------------
$ 160,374 $ 171,729
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 3,307 $ 1,897
Accrued interest 545 1,023
Environmental remediation liability 1,129 1,076
Current portion of long-term obligations 11,318 19,706
------------- -------------
Total current liabilities 16,299 23,702
Long-term obligations 28,055 36,605
Deferred income taxes 20,608 18,680
Environmental remediation liability 2,661 3,498
Other liabilities 7,791 7,580
Stockholders' equity:
Common stock 6,068 6,068
Additional paid-in capital 75,596 75,596
Retained earnings 3,296 -
------------- -------------
Total stockholders' equity 84,960 81,664
------------- -------------
$ 160,374 $ 171,729
============= =============
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
<PAGE>
PS Group Holdings, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sep. 30, Ended Sep. 30,
------------------ -----------------
1999 1998 1999 1998
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Aircraft leasing $ 3,843 $ 6,042 $13,940 $18,330
Gain on aircraft sales - - 967 -
Oil and gas production 1,990 1,442 4,817 4,822
Fuel storage and distribution 219 216 606 598
Interest and other income 336 480 817 1,211
------- ------- ------- -------
6,388 8,180 21,147 24,961
------- ------- ------- -------
Costs and expenses:
Cost of sales 1,208 1,479 3,136 4,073
Depreciation, depletion and amortization 1,617 3,103 5,982 9,444
Impairment loss on oil and gas properties - 10,200 - 10,200
General and administrative expenses 914 557 2,655 2,145
Interest expense 1,174 1,626 3,677 5,621
------- ------- ------- -------
4,913 16,965 15,450 31,483
------- ------- ------- -------
Income (loss) before taxes 1,475 (8,785) 5,697 (6,522)
Provision (credit) for taxes 628 (3,409) 2,401 (2,453)
------- ------- ------- -------
Net income (loss) $ 847 $(5,376) $ 3,296 $(4,069)
======= ======= ======= =======
Basic and diluted net income (loss) per share $ .14 $ (.89) $ .54 $ (.67)
======= ======= ======= =======
Shares used in determining basic and
diluted net income (loss) per share 6,068 6,068 6,068 6,068
======= ======= ======= =======
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
PS Group Holdings, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended Sep. 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from continuing operations:
Cash provided from operating activities $ 11,997 $ 9,804
Cash flows from investing activities:
Proceeds from aircraft sales 20,151 -
Purchase of U.S. Government securities (18,300) (23,096)
Proceeds from maturities of U.S. Government securities 652 7,883
Capital additions (primarily oil and gas related) (1,321) (1,821)
Financing leases and other 5,511 7,329
-------- --------
Net cash provided from (used in) investing activities 6,693 (9,705)
-------- --------
Cash flows from financing activities:
Additions to long-term obligations 850 600
Reductions in long-term obligations (16,762) (16,077)
-------- --------
Net cash used in financing activities (15,912) (15,477
-------- --------
Cash provided from discontinued operation 574 6,652
-------- --------
Net increase (decrease) in cash and cash equivalents 3,352 (8,726)
Cash and cash equivalents at beginning of period 3,747 10,921
-------- --------
Cash and cash equivalents at end of period $ 7,099 $ 2,195
======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
PS Group Holdings, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Note A. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information 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 adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. 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. Operating results for the
quarter and nine month period ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's 1998 Annual
Report to Stockholders (Exhibit 13 to the Company's Form 10-K/A for the year
ending December 31, 1998).
Note B. 1999 Aircraft Sales and Pending Fourth Quarter Aircraft Sale
In April 1999, PS Group, Inc. ("PSG"), the aircraft leasing subsidiary of the
Company, sold five BAe 146 aircraft to US Airways under termination rights that
existed in the leases. The Company's second quarter 1999 net gain from these
sales was approximately $.6 million ($.09 per share). Net cash proceeds were
approximately $12.5 million after debt and accrued interest payments of
approximately $7.6 million. On October 1, 1999, US Airways exercised its lease
termination right and purchased the last remaining BAe 146 aircraft leased from
PSG. The sale did not result in any net gain or loss and the net cash proceeds
were approximately $.9 million after debt repayments of approximately $1
million.
PSG has executed an agreement to sell an MD-80 aircraft for approximately $10.1
million in cash proceeds (there is no debt on this aircraft). PSG is attempting
to conclude the sale during the fourth quarter of 1999. If the sale closes, the
net gain is estimated to be $130,000 ($.02 per share). The consummation of the
sale is subject to satisfaction of a number of conditions precedent and
therefore, there can be no assurance that the transaction will close in the
fourth quarter of 1999, or at all.
The amount shown on the Consolidated Balance Sheet as "Net investment in
aircraft held pending sales" represents PSG's carrying value of the BAe 146
aircraft sold in October
5
<PAGE>
1999, less the associated debt (which was paid by US Airways on September 30,
1999), and the carrying value of the MD-80 aircraft described above.
It is estimated that, with the tax gain on the sale of the six BAe 146 aircraft,
all of the federal net operating loss carryforwards ("NOL's") remaining as of
December 31, 1998 and approximately $.7 million of the unused investment tax
credits ("ITC's") will be utilized. It is also estimated that the pending sale
of the MD-80 aircraft will use approximately $2.7 million of the unused ITC's.
The Company currently estimates that, as of December 31, 1999, it will have
approximately $7.9 million of unused ITC's, which expire, if not used, in the
following years: $1.8 million in 2000, $2.9 million in 2001, and $3.2 million in
2002.
Note C. Final Settlement with the California Franchise Tax Board ("CFTB")
PSG's tentative settlement with the CFTB, which was paid in 1998, relating to
net tax claims for the years 1987 through 1990 became final in August 1999.
Note D. 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 were imposed in order to help preserve the
Company's NOL's, unused ITC's, and other tax benefits by decreasing the risk of
an "ownership change" for federal income tax purposes. At the time these
restrictions were imposed, the Company had substantial NOL's and unused ITC's.
As described in Note B above, it is estimated that with the sale of the six BAe
146 aircraft in 1999, these NOL's have been completely utilized, but unused
ITC's and other tax benefits still remain. 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.
Note E. Segment Information
<TABLE>
<CAPTION>
Three Months Nine Months
Ending Sep. 30, Ending Sep. 30,
------------------------ ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Aircraft leasing $ 3,843 $ 6,042 $ 14,907 $ 18,330
Oil and gas production 1,990 1,442 4,817 4,822
Fuel storage and distribution 219 216 606 598
Interest and other 336 480 817 1,211
-------- -------- -------- --------
Consolidated revenues $ 6,388 $ 8,180 $ 21,147 $ 24,961
======== ======== ======== ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ending Sep. 30, Ending Sep. 30,
------------------------ ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Segment profit (loss):
Aircraft leasing $ 1,698 $ 2,034 $ 6,943 $ 5,767
Oil and gas production (a) 7 (11,044) (113) (11,998)
Fuel storage and distribution 89 109 284 265
Other 278 613 725 1,385
Unallocated corporate expenses (597) (497) (2,142) (1,941)
-------- -------- -------- --------
Consolidated income before
income taxes $ 1,475 $ (8,785) $ 5,697 $ (6,522)
======== ======== ======== ========
</TABLE>
(a) Segment loss for oil and gas production for the three and nine months ended
September 30, 1998 includes a $10.2 million impairment loss.
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Segment assets:
Aircraft leasing $115,089 $150,588
Oil and gas production 13,664 12,254
Fuel storage and distribution 605 906
Other 31,016 7,981
-------- --------
Consolidated assets $160,374 $171,729
======== ========
</TABLE>
Segment assets for aircraft leasing decreased by $35.5 million (24%) from the
amount reported at December 31, 1998 primarily as a result of the sale of the
five BAe 146 aircraft sold in April 1999 (refer to Note B above), the September
1999 payoff of the debt associated with the BAe 146 aircraft sold in October
1999 (refer to Note B above), and normal depreciation. Segment assets - other
increased $23 million (289%) from December 31, 1998 largely because of the
increase in U.S. Government securities, which were purchased primarily with the
net sales proceeds of the aircraft sold in April 1999 (refer to Note B above),
and the increase in cash.
Item 2. 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.
7
<PAGE>
Financial Condition
At September 30, 1999, the Company's principal sources of liquidity were cash,
cash equivalents, and U.S. Government securities totaling $26.2 million, a $21.8
million increase from December 31, 1998. The major increase in liquidity related
to the net cash proceeds from the sale of the aircraft described in Note B of
the Notes to Unaudited Condensed Consolidated Financial Statements. Working
capital increased by $35.3 million since December 31, 1998 principally because
of the increase in U.S. Government securities (described above), the
reclassification of two aircraft to current assets (pending the sales described
in Note B of the Notes to Unaudited Condensed Consolidated Financial Statements,
one of which closed after the end of the third quarter on October 1, 1999) and
the increase in cash (detailed in the Consolidated Statement of Cash Flow). The
Company's capitalization consisted of 32% long and short-term obligations and
68% equity at September 30, 1999 compared to 41% long and short-term obligations
and 59% equity at December 31, 1998. The $16.9 million decrease in long and
short-term obligations from December 31, 1998 to September 30, 1999 resulted
primarily from US Airways' repayment of the debt on the six BAe 146 aircraft
sold in 1999 (the debt for the aircraft sold on October 1, 1999 was repaid in
September 1999) as well as normal debt payments.
At the end of the third quarter of 1999, $1 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, 1999, $6.7 million was borrowed under this
agreement. Due to losses in the third and fourth quarters of 1998, Statex did
not meet a financial covenant contained in its bank loan agreement relating to
the fixed charge ratio. Statex obtained waivers from the bank relating to its
non-compliance with this financial covenant in the third and fourth quarters of
1998. Statex was in compliance with all financial loan covenants in the first,
second, and third quarters of 1999. It is possible that future losses could
cause Statex to be out of compliance again 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 any
needed additional waivers are not granted, the bank could, by notice to Statex,
declare the outstanding principal and interest due and payable. The Company
believes that if, in the future, the bank declared the Statex note due and
payable, and if the Company felt it was appropriate, then 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. Following the 1999 sales of six BAe
146 aircraft (refer to Note B of the Notes to Unaudited Condensed Consolidated
Financial Statements), the lease portfolio consisted of nine aircraft (one of
which is held pending sale, refer to Note B of the Notes to Unaudited Condensed
Consolidated Financial Statements), of which six are leased to US Airways. For a
discussion of US Airways' financial condition and its potential impact on PSG,
refer to the section entitled "Aircraft Leasing" in the Company's 1998 Annual
Report to Stockholders (Exhibit 13 to the Company's Form 10-K/A for the
8
<PAGE>
year ending December 31, 1998). PSG refers readers to public information
regarding US Airways for further and more current 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.
Results of Operations - Comparison of the Three and Nine Months Periods Ended
September 30, 1999 and 1998
Refer to Note E of the Notes to Unaudited Condensed Consolidated Financial
Statements for a schedule showing revenues, profit (loss), and assets by
reportable segment.
Aircraft Leasing
Aircraft leasing revenues (excluding the gain on aircraft sales) declined 36%
and 24%, respectively, in the third quarter and first nine months of 1999
compared to the same periods in 1998 principally due to (i) reduced revenues due
to the sale of the five BAe 146 aircraft in April 1999, (ii) reduced revenue
recognition associated with aircraft leased under financing leases, and (iii)
lease rate resets on certain aircraft leases tied to lower interest rates (these
lower lease rates were matched by lower interest expense on the related debt).
In future periods, leasing revenues will continue to decline because of the
reduced revenue recognition associated with aircraft leased under financing
leases, possible lease rate resets on certain aircraft, and possible future
aircraft sales.
The segment profit from aircraft leasing in the first nine months of 1999
included a gain of $967,000 from the sale of the five BAe 146 aircraft. Segment
profit from aircraft leasing was 16.5% lower in the third quarter of 1999
compared to the comparable 1998 quarter primarily due to fewer aircraft on lease
(which was the result of the sale of the five BAe 146 aircraft in April 1999).
Segment profit from aircraft leasing, excluding the gain on the aircraft sales,
was 3.6% higher in the first nine months of 1999 compared to the same period in
1998 primarily due to lower interest expense (due to lower debt balances and
lower interest rates) and an adjustment to the lease revenue that resulted from
the sale of the five BAe 146 aircraft. These items were partially offset by
lower finance lease income and fewer aircraft on lease.
Refer to Note B of the Notes to Unaudited Condensed Consolidated Financial
Statements for information on the five BAe 146 aircraft sold in April 1999, the
one BAe 146 aircraft sold on October 1, 1999, and the pending sale of one MD-80
aircraft. As aircraft are sold, revenues and net income from the aircraft
leasing segment will be reduced.
Oil and Gas Production and Development
Oil and gas production revenues for the third quarter of 1999 were 38% higher
than in the third quarter of 1998 principally due to 61% higher average oil
prices per barrel, partially offset by the negative effect of the swap agreement
discussed below. Revenues in the first nine months of 1999 were approximately
the same as the 1998 period. However, there
9
<PAGE>
were offsetting items that caused this. While oil prices were up 21%, oil
volumes were down by 9% and, in addition, there was the negative effect of the
swap agreement discussed below. For September 1999, the average monthly oil
price received by Statex (before the negative effect of the swap discussed
below) was 137% greater than the December 1998 average price. There has been
significant volatility in oil and gas prices and such volatility is expected to
continue.
In order to reduce the effect of the volatility in oil prices, Statex entered
into a commodity swap agreement ("the swap") in April 1999 which hedges the
price of crude oil for approximately 55% of its current average oil production
for a twelve month period starting in May 1999. Gains or losses under the swap
are deferred and recognized as an adjustment to oil revenues in each month as
the swap is settled. As a result of the swap, Statex recognized a $216,000 and
$226,000 reduction in revenues in the third quarter and first nine months of
1999, respectively. Although the swap was entered into to reduce Statex's
exposure to decreases in crude oil prices, it also limits the benefit that
Statex might otherwise receive from increases in crude oil prices. As of
September 30, 1999, Statex has hedged the price of 15,000 barrels of crude oil
for each of the next seven months at a weighted average price of $16.20 per
barrel. At September 30, 1999, based on the difference between the swap prices
and the posted future prices for crude oil over the remaining term of the swap,
the estimated fair value of the swap is a negative $718,000. The actual market
price of crude oil when the swap is settled each month will differ from
September 30, 1999 posted future prices.
The operating results from oil and gas production and development were
significantly improved in the third quarter and first nine months of 1999
compared to the similar periods of 1998 because of the $10.2 million impairment
loss recorded in September 1998. Third quarter 1999 operating results were
reduce by approximately $221,000 relating to deferred compensation agreements
with two retirees.
Fuel Storage and Distribution
Revenues and the segment profit from the fuel storage and distribution segment
were approximately the same in the third quarter and first nine months of 1999
as they were in the 1998 periods.
Other
Other segment profit is down in both the third quarter and first nine months of
1999 compared to the 1998 periods due to reduced interest income which resulted
from lower average balances in cash and cash equivalents, marketable securities,
and notes receivable.
Unallocated Corporate Overhead
Unallocated corporate overhead was higher in the third quarter of 1999 and in
the first nine months of 1999 compared to the same periods in 1998 due
principally to higher professional services fees.
10
<PAGE>
Income Taxes
Income taxes in both 1999 and 1998 differ from the corporate federal tax rate
primarily because of the effect of state taxes.
Year 2000 Issues
The Company and each of its subsidiaries continue to monitor the potential
impact of the Year 2000 on the ability of their computerized information systems
to accurately process information that may be date sensitive. Since all of the
systems used by the Company and each of its subsidiaries use only standardized
computer programs developed by major software vendors, the Company and its
subsidiaries are dependent on those software vendors to make any modifications
to accommodate the Year 2000. Based on advice (either in correspondence or on
their Web sites) from software vendors and outside consultants, the Company
believes that its computerized information systems are Year 2000 compliant in
all material respects.
The Company and its subsidiaries are dependent upon third parties to provide
many services including insurance coverage, employee benefit program
administration, shareholder related services, printing, utilities, and
communications. Correspondence from most of these providers, as well as general
information on their Web sites, indicates that they have resolved their Year
2000 issues. The Company will continue to monitor 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 is not Year 2000 compliant, the
Company, in many cases, may be able to change to another service provider that
is compliant. However, since all the Company's major service providers have
indicated that they expect to be Year 2000 compliant on a timely basis, there is
no formal contingency plan.
The Company's largest revenue source is aircraft lease revenue from US Airways,
America West Airlines, Inc., and Continental Airlines, Inc. Lease revenue
represented 69% of consolidated revenues (excluding gain on aircraft sales) for
the first nine months of 1999. Revenue from US Airways alone represented 54% of
total revenues for the same period. The Company has approached each lessee
regarding its compliance with Year 2000 issues. Each has indicated in
correspondence to the Company, on their Web sites, and in filings made with the
Securities and Exchange Commission that they are working towards being Year 2000
compliant on a timely basis. However, 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, accordingly, no contingency plan is available
to the Company. 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. 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.
11
<PAGE>
Oil and gas revenues generated by Statex amounted to 24% of consolidated
revenues (excluding gain on aircraft sales) for the first nine months of 1999.
Approximately 66% of Statex's revenues come directly or indirectly from Sunoco,
Inc. ("Sunoco") which has disclosed in public filings and on its Web site that
it is working to resolve its Year 2000 issues on a timely basis. To the extent
that Sunoco or other current purchasers from Statex 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 currently in place. Most of Statex's power to operate its
production equipment comes from one large Texas utility which has indicated on
its Web site that it is Year 2000 compliant. 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.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The information called for by this item is provided under the caption "Oil and
Gas Production and Development" under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As reported in the Company's Form 10-K/A for the year ended December 31, 1998,
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,
against various present and former tenants at SFIA, including oil companies,
rental car companies, and airlines. As the owner of SFIA, CCSF alleged that the
tenants were liable for environmental contamination at SFIA. CCSF sought to
recover from the tenants the costs it had incurred in investigating and cleaning
up 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 information with respect to the
CCSF Action, the related cross actions, and the environmental remediation
liability, see Note 4 of the Notes to Consolidated Financial Statements included
in the Company's 1998 Annual Report to Stockholders (Exhibit 13 to the Company's
Form 10-K/A for the year
12
<PAGE>
ending December 31, 1998). The following paragraphs update the status of the
CCSF Action.
In April 1999, CCSF filed a Second Amended Complaint naming PS Trading, Inc.
("PST") as a defendant. Previously, CCSF had not alleged claims against PST or
PSG, although ARCO had filed a Cross-Complaint and Third Party Complaint against
PSG in 1997. PST filed an answer to the Second Amended Complaint in May 1999,
denying the claims alleged against it by CCSF. At the same time, PST filed
claims against ARCO, Texaco, and Lockheed Air Terminal Inc. ("Lockheed"),
alleging that each company was liable for any potential liability of PST to
CCSF. ARCO, Texaco, and Lockheed have each denied PST's claims, and each has
filed claims alleging that PST and/or PSG are liable for their environmental
liability to CCSF.
In May 1999, PST entered into a settlement agreement with CCSF, which would
require PST to pay $680,000 in exchange for a release by CCSF of any and all
investigatory and clean-up costs incurred by CCSF as of May 1998. The SFIA
Airports Commission approved the settlement in June 1999. On August 23, 1999,
the proposed settlement agreement became final when the Federal District Court
adjudged the settlement a "good faith settlement." The $680,000 was paid to CCSF
in September 1999. The granting of the "good faith settlement" motion bars other
SFIA tenants from asserting non-contractual contribution and indemnity claims
against PST or PSG. The CCSF settlement agreement does not affect those claims
among PST/PSG and ARCO, Texaco, and Lockheed which are not barred by the "good
faith settlement" determination. It will also not preclude CCSF from seeking to
recover future investigatory and remediation costs from PST.
By September 1999, all tenants had settled CCSF's claims for investigatory and
remediation costs incurred through May 1998, except for CCSF's claims against
American Airlines ("American"), Unocal, and TWA. In September 1999, the Court
entered a case management order providing for the discovery and trial of SFIA's
claims against American, Unocal, and TWA, as well as American's claims against
five other tenants (neither PST nor PSG have been sued by American). The trial
of those claims has been set for January 2001. Other claims in the case,
including CCSF's post-May 1998 claims against all tenants (including PST) and
the claims among PST/PSG, ARCO, Texaco, and Lockheed have not been set for
trial. CCSF has not disclosed the nature and extent of its post-May 1998 claims,
or whether it intends to pursue such claims against those tenants, such as PST,
who have settled.
Apart from the CCSF Action, in June 1999, the Regional Water Quality Control
Board, San Francisco Bay Region, approved an order that identifies PST and other
SFIA tenants as dischargers at certain locations at SFIA, establishes clean-up
standards, and orders that certain investigation, remediation, and monitoring be
conducted at SFIA. While PST has already undertaken some of this work, PST is
preparing to participate with other tenants in certain investigatory,
remedation, and monitoring activities that have not yet been undertaken or
completed.
The Company is unable to determine whether any of the claims mentioned above
will ultimately have any material adverse consequences to it beyond the
approximately $3.8 million (representing the unspent balance of the estimated
remediation liabilities
13
<PAGE>
recorded in 1997 and 1996) of estimated environmental remediation liability
recorded as of September 30, 1999.
Item 2. Changes in Securities and Use of Proceeds.
None.
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.
(2) Plan of Reorganization - Restated Agreement and Plan of
Reorganization dated January 31, 1996 among PS Group, Inc., the
Company and PSG Merger Subsidiary. (Incorporated by reference from
the Company's prospectus filed with the SEC on April 17, 1996 as
part of the Company's Registration Statement on Form S-4
[Registration Statement No. 333-00821] filed on February 9, 1996,
as supplemented by supplements dated May 1, May 14, and May 22,
1996.)
(3)(i) Articles of Incorporation - Restated Certificate of Incorporation,
effective May 30, 1997. (Incorporated by reference to Exhibit 99.1
to the Company's Form 8-K filed on May 30, 1997.)
(3)(ii) Bylaws - Restated Bylaws as amended effective May 30, 1997.
(Incorporated by reference to Exhibit 99.4 to the Company's Form 8-
K filed on May 30, 1997.)
(10) Material Contracts:
(a) Form of Indemnity Agreement with the Directors and Officers of
the Company. (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-4 [Registration
Statement No. 333-00821] filed on February 9, 1996.)
14
<PAGE>
(b) Retirement Plan for Corporate Officers of PSA, Inc. (now PS
Group, Inc.) and Participating Subsidiaries effective March 12,
1984, amending and restating the Retirement Plan for Corporate
Officers of Pacific Southwest Airlines. (Incorporated by
reference to Exhibit 10(d) to PSG's 1994 Annual Report on Form
10-K.)
(c) Split Dollar Insurance Agreement dated as of January 1, 1986
between PS Group, Inc. (PSG) and Lawrence A. Guske. This
Agreement is substantially identical in all material respects
to the Split Dollar Insurance Agreement between PSG and Johanna
Unger. (Incorporated by reference to Exhibit 10(c) to the
Company's 1997 Annual Report on Form 10-K.)
(d) Employment Agreement dated January 15, 1988 between PSG and
Lawrence A. Guske. This Agreement is substantially identical in
all material respects to the Employment Agreement between PSG
and Johanna Unger. (Incorporated by reference to Exhibit 10(f)
to the Company's 1996 Annual Report on Form 10-K.)
(e) Amendment dated April 1, 1989 to Employment Agreement between
PSG and Lawrence A. Guske. This Amendment is substantially
identical in all material respects to Amendment to Employment
Agreement between PSG and Johanna Unger. (Incorporated by
reference to Exhibit 10(g) to the Company's 1996 Annual Report
on Form 10-K.)
(f) Letter dated January 30, 1996 from Charles E. Rickershauser,
Jr. to Lawrence A. Guske relating to the relationship between
the Employment Agreement referred to in Exhibit 10(b) and the
Reorganization. This Letter is substantially identical in all
material respects to the Letter between Charles E.
Rickershauser, Jr. and Johanna Unger. (Incorporated by
reference to Exhibit 10(h) to the Company's 1996 Annual Report
on Form 10-K.)
(g) Letter dated February 8, 1999 from Charles E. Rickershauser,
Jr. to Lawrence A. Guske clarifying the definition of "Change
of Control" found in the Employment Agreement referred to in
Exhibit 10(b) and the Reorganization. This Letter is
substantially identical in all material respects to the Letter
between Charles E. Rickershauser, Jr. and Johanna Unger.
(Incorporated by reference to Exhibit 10(g) to the Company's
1998 Annual Report on Form 10-K.)
(h) Amended and Restated Split Dollar Life Insurance Agreement
dated as of January 1, 1999 between PSG and Janet Rickershauser
(daughter of Charles E. Rickershauser, Jr.). (Incorporated by
reference to Exhibit 10(h) to the Company's 1998 Annual Report
on Form 10-K.)
(i) Further Amended and Restated Executive Retirement Agreement
between PSG and Charles E. Rickershauser, Jr. dated as of March
25, 1999. (Incorporated by reference to Exhibit 10(i) to the
Company's 1998 Annual Report on Form 10-K.)
(j) Agreement dated December 14, 1990 between Berkshire Hathaway
Inc. (Berkshire) and PSG relating to Berkshire's acquisition of
PSG's
15
<PAGE>
Common Stock. (Incorporated by reference to Exhibit 10(i) to
the Company's 1996 Annual Report on Form 10-K.)
(27) Financial data schedule.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Matters relating to executive compensation plans and arrangements can be
found In the following exhibits: (10)(a), (10)(b), (10)(c), (10(d),
(10)(e), (10)(f), (10)(g), (10)(h), and (10)(i).
All exhibits incorporated by reference on or after June 5, 1996 are filed
in PS Group Holdings, Inc. documents (Commission file number 1-7141);
exhibits incorporated by reference before June 5, 1996 are filed in PSG
documents (same Commission file number as PS Group Holdings, Inc.).
(b) Reports on Form 8-K
Current report on Form 8-K dated August 6, 1999 relating to the approval
of the settlement with the CFTB on August 6, 1999 and the approval by the
Federal District Court for the Northern District of California, on August
23, 1999, of the settlement relating to litigation involving
environmental contamination at SFIA.
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 9, 1999
PS GROUP HOLDINGS, INC.
-----------------------
(Registrant)
/s/ L.A. Guske
-----------------------
LAWRENCE A. GUSKE
Vice President- Finance and
Chief Financial Officer and
Authorized Officer of the
Registrant
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,099
<SECURITIES> 19,107
<RECEIVABLES> 2,461
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,933
<PP&E> 50,149
<DEPRECIATION> 0
<TOTAL-ASSETS> 160,374
<CURRENT-LIABILITIES> 16,299
<BONDS> 0
0
0
<COMMON> 84,960
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 160,374
<SALES> 5,789
<TOTAL-REVENUES> 21,147
<CGS> 3,136
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,677
<INCOME-PRETAX> 5,697
<INCOME-TAX> 2,401
<INCOME-CONTINUING> 3,296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,296
<EPS-BASIC> .54
<EPS-DILUTED> .54
</TABLE>
