SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 2-1271
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PEC Israel Economic Corporation
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(Exact name of registrant as specified in its charter)
Maine 13-114-3528
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
511 Fifth Avenue, New York, N.Y. 10017
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 687-2400
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Former name, former address and former fiscal year, if changed since last
report.
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 .
-----
As of November 11, 1994 there were outstanding 18,758,588 shares of
Common Stock with par value of $1.00 per share.
Page 1 of 17 pages
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PART 1 - FINANCIAL INFORMATION.
-------------------------------
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended: For the Three Months Ended:
-------------------------- ---------------------------
9/30/94 9/30/93 9/30/94 9/30/93
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Interest and dividends $ 2,753,690 $ 2,589,085 $ 1,079,749 $ 864,421
Equity in net income of Affiliated
Companies 21,186,831 27,690,068 9,508,131 10,570,408
Net gain on issuance of shares by
Affiliated Companies 6,442,335 11,440,281 54,151 297,525
Revenues of General Engineers Limited 10,195,026 8,303,215 3,533,735 3,151,265
Net gain on sales of investments 355,947 2,017,638 48,356 791,750
Change in market value of
marketable securities (1,332,022) - 583,886 -
Other 406,787 328,443 45,803 374,002
----------- ----------- ----------- -----------
40,008,594 52,368,730 14,853,811 16,049,371
----------- ----------- ----------- -----------
Expenses:
General and administrative 2,114,923 2,547,251 569,894 738,423
Cost of sales and expenses of
General Engineers Limited 10,242,866 7,887,755 3,736,136 2,909,458
----------- ----------- ----------- -----------
12,357,789 10,435,006 4,306,030 3,647,881
----------- ----------- ----------- -----------
Income before income taxes and cumulative
effect of accounting changes 27,650,805 41,933,724 10,547,781 12,401,490
Income taxes 2,176,325 5,993,282 1,042,867 2,052,671
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting changes 25,474,480 35,940,442 9,504,914 10,348,819
Cumulative effect of changes in
accounting for:
Marketable securities 2,472,879 - - -
Income taxes - (1,173,713) - -
----------- ----------- ----------- -----------
Net Income $27,947,359 $34,766,729 $ 9,504,914 $10,348,819
=========== =========== =========== ===========
Earnings per common share before
cumulative effect of changes in
accounting $1.36 $1.91 $0.51 $0.55
Cumulative effect on earnings per
share for changes in accounting for:
Marketable securities .13 - - -
Income taxes - (.06) - -
----------- ----------- ----------- -----------
Earnings per common share $1.49 $1.85 $0.51 $0.55
=========== =========== =========== ===========
Weighted average number of shares
outstanding 18,758,588 18,758,588 18,758,588 18,758,588
Dividend per share None None None None
See notes to consolidated financial statements. Page 2 of 17 pages
</TABLE>
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<TABLE>
<CAPTION>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
Assets
------
Cash and cash equivalents $ 21,794,131 $ 42,665,957
Investments 344,216,900 292,484,875
Assets of General Engineers Limited 8,861,747 8,722,142
Other assets 4,717,608 4,000,416
------------ ------------
Total assets $379,590,386 $347,873,390
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Liabilities of General
Engineers Limited $ 5,669,154 $ 5,484,976
Deferred income taxes 32,365,641 30,214,359
Other liabilities 5,550,148 4,937,184
------------ ------------
Total liabilities 43,584,943 40,636,519
------------ ------------
Shareholders' equity:
Common stock, $1.00 par value 31,952,180 18,758,588
Additional paid-in capital 99,275,536 99,257,071
Retained earnings 228,746,631 200,799,272
Unrealized gain on marketable securities 2,203,240 -
Cumulative translation adjustment (12,978,552) (11,578,060)
------------ ------------
349,199,035 307,236,871
Treasury stock (13,193,592) -
------------ ------------
Total shareholders' equity 336,005,443 307,236,871
------------ ------------
Total liabilities and
shareholders' equity $379,590,386 $347,873,390
============ ============
See notes to consolidated financial statements.
Page 3 of 17 pages
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
Additional Unrealized Gain Cumulative
Common Paid-in Retained on Marketable Translation
Stock Capital Earnings Securities Adjustment
----------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $18,758,588 $99,257,071 $200,799,272 $ --- $(11,578,060)
Adoption of SFAS 115
for available-for-
sale equity securities,
net of tax 3,790,603
Issuance of 13,193,592
new common shares
in exchange for
13,193,592 common
shares 13,193,592
Change in market value
for available-for-
sale equity securities,
net of tax (1,587,363)
Paid-in capital of
Affiliated Companies 18,465
Change in cumulative
translation adjustment (1,400,492)
Net income 27,947,359
----------- ----------- ------------ ---------- --------------
Balance, September 30, 1994 $31,952,180 $99,275,536 $228,746,631 $2,203,240 $(12,978,552)
=========== =========== ============ ========== =============
<CAPTION>
Treasury
Stock Total
------------ -------------
<S> <C> <C> <C>
Balance, January 1, 1994 $ --- $307,236,871
Adoption of SFAS 115
for available-for-
sale equity securities,
net of tax 3,790,603
Issuance of 13,193,592
new common shares
in exchange for
13,193,592 common
shares (13,193,592) ---
Change in market value
for available-for-
sale equity securities,
net of tax (1,587,363)
Paid-in capital of
Affiliated Companies 18,465
Change in cumulative
translation adjustment (1,400,492)
Net income 27,947,359
----------- -----------
Balance, September 30, 1994 $(13,193,592) $336,005,443
============ ============
See notes to consolidated financial statements.
Page 4 of 17 pages
</TABLE>
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
For the Nine Months Ended:
9/30/94 9/30/93*
------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 27,947,359 $ 34,766,729
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in net income of
Affiliated Companies (21,186,831) (27,690,068)
Cumulative effect of changes in
accounting for:
Marketable securities (2,472,879) -
Income taxes - 1,173,713
Purchase of marketable securities (14,546,985) (17,177,161)
Proceeds from sale of marketable
securities 3,427,345 6,230,026
Change in market value of marketable
securities 1,332,022 -
Net gain on sales of investments (355,947) (2,017,638)
Income of consolidated subsidiaries (321,512) (637,587)
Loss on investment in partnerships 233,010 317,115
Amortization of premiums
on receivables 158,067 87,294
Net gain on issuance of shares by
Affiliated Companies (6,442,335) (11,440,281)
Dividends from Affiliated Companies 3,421,682 4,581,465
Increase in other assets (951,713) (4,517,752)
Increase in deferred income taxes 840,672 5,378,310
Increase in other liabilities 305,776 792,376
Write-off of deferred charges - 110,457
------------ -----------
Net cash used in operating
activities (8,612,269) (10,043,002)
------------ -----------
Cash Flows from Investing Activities:
Collection of U.S. Government and municipal bonds 10,495,506 2,567,578
Collection of capital notes and loans receivable - 3,923,761
Purchase of notes and bonds receivable (5,771,009) (15,974,405)
Proceeds from sale of investments 2,399,735 1,383,279
Purchase of investments (19,383,789) (16,432,258)
------------ -----------
Net cash used in investing
activities (12,259,557) (24,532,045)
------------ -----------
Decrease in cash and cash equivalents (20,871,826) (34,575,047)
Cash and cash equivalents, beginning
of period 42,665,957 66,040,089
------------ -----------
Cash and cash equivalents, end of period $ 21,794,131 $ 31,465,042
============ ============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during period for income taxes $ 1,045,124 $ 1,336,507
Non-cash Investing Activities:
Sale of shares of an affiliate for
shares of an unrelated company - $ 801,823
See notes to consolidated financial statements.
*Reclassified. Page 5 of 17 pages
</TABLE>
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
Notes to Consolidated Financial Statements
(Unaudited)
1. The December 31, 1993 balance sheet presented herein
was derived from the audited December 31, 1993
consolidated financial statements of the Company and
Subsidiaries.
2. These 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 Rule 10-01 of
Regulation S-X. The financial statements should be
read in conjunction with the audited consolidated
financial statements of the Company and Subsidiaries
for the year ended December 31, 1993 for a description
of the significant accounting policies, which have
continued without change, except as described in Note 3
below, and other footnote information.
3. Effective on January 1, 1994, the Company adopted
Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Under SFAS 115, marketable
debt and equity securities, other than equity
securities accounted for under the equity method, are
reported at fair value, with unrealized gains and
losses from those securities which are classified as
"trading securities" included in net income and
unrealized gains and losses from those securities which
are classified as "available-for-sale securities"
reported as a separate component of shareholders'
equity. Debt securities classified as "held to
maturity" are reported at amortized cost. The
cumulative effect of adopting SFAS 115 as of January 1,
1994 for securities classified as "trading securities"
was an increase in net income of $2,472,879, net of
taxes, or $.13 per share, which increase is reported
separately in the accompanying statements of income.
The effect, net of taxes, of adopting SFAS 115 for
securities classified as "available-for-sale
securities" was an increase in shareholders' equity of
$3,790,603 as of January 1, 1994. As a result of
decreases in the market value of "available-for-sale
securities" since January 1, 1994, the unrealized gain,
net of taxes, from those securities that was included
in shareholders' equity as of September 30, 1994 was
$2,203,240.
Page 6 of 17 pages
<PAGE>
4. On March 24, 1994, pursuant to a plan of
reorganization, PEC Holdings Limited ("PECH"), a Maine
corporation and a wholly owned subsidiary of IDB
Development Corporation Ltd. ("IDB Development"), which
owned 13,193,592 shares of the Company's common stock,
transferred those shares of the Company's common stock
to the Company (which holds them as treasury shares) in
exchange for an identical number of newly issued shares
of common stock. Immediately after the exchange,
pursuant to such plan of reorganization, PECH was
dissolved and distributed to IDB Development the newly
issued shares of the Company's common stock received in
the exchange, resulting in the Company becoming a
direct subsidiary of IDB Development. As a result of
the foregoing exchange, the Company has 31,952,180
issued shares of common stock, par value $1.00 per
share, of which 18,758,588 shares are outstanding and
13,193,592 shares are treasury shares. The issuance of
the new shares was accounted for at par value because
the transaction was among related parties and there was
no change in relative ownership interests among
shareholders.
5. All adjustments (recurring in nature) which are, in the
opinion of management, necessary for a fair presen-
tation of the results of the interim periods have been
included. The results of the interim periods are not
necessarily indicative of the results for the full
year.
Page 7 of 17 pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
RESULTS OF OPERATIONS
---------------------
Three Months Ended September 30, 1994 Compared to Three Months
--------------------------------------------------------------
Ended September 30, 1993
------------------------
Consolidated net income for the three months ended September
30, 1994 was $9.5 million compared to $10.3 million for the three
months ended September 30, 1993. The reduction in consolidated
net income resulted primarily from decreases in equity in net
income of Affiliated Companies and in net gain on sales of
investments and from a loss before income taxes of approximately
$200,000 incurred by General Engineers in the third quarter of
1994 compared to income before income taxes of approximately
$240,000 earned by General Engineers in the corresponding 1993
quarter. The reduction attributable to these factors was
partially offset by an increase in the market value of marketable
securities classified as "trading securities".
Equity in net income of Affiliated Companies for the third
quarter of 1994 was $9.5 million compared to $10.6 million for
the corresponding 1993 period. In the third quarter of 1993,
PEC had approximately $1.7 million of equity in the net income of
C.I.D.L. Inc. ("CIDL"), an Affiliated Company of PEC until PEC
sold its equity interest in CIDL on November 1, 1993 (such equity
in net income resulting from CIDL's sale of its sole asset during
the third quarter of 1993). The reduction in equity in net
income of Affiliated Companies for the third quarter of 1994
reflected this decrease of $1.7 million in respect of CIDL and
losses in respect of some of PEC's Affiliated Companies,
principally CellCom Israel Ltd. ("CellCom"), DEP Technology
Holdings Ltd. ("DEP") (the holding company for PEC's interest in
RDC) and RTS Telecommunications Services Ltd. This reduction was
partially offset by PEC's increased equity in net income of
certain Affiliated Companies, particularly Property & Building
and Super-Sol.
PEC's net gain on sales of investments for the three months
ended September 30, 1994 was approximately $48,000 compared to a
net gain of approximately $790,000 for the three months ended
September 30, 1993. The net gain on sales of investments for the
third quarter of 1994 resulted principally from the sale of
marketable securities of U.S. companies while the net gain on
sales of investments for the corresponding 1993 quarter resulted
primarily from PEC's sale of 30% of the shares of Tefron.
Page 8 of 17 pages
<PAGE>
As discussed in Note 3 to the financial statements for the
three months and nine months ended September 30, 1994, effective on
January 1, 1994, PEC adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"), which requires PEC to report debt and
equity securities owned by PEC, other than equity securities accounted
for under the equity method, at fair value with unrealized gains and
losses from those securities which are classified as "trading
securities" included in net income and unrealized gains and losses
from those securities which are classified as "available-for-sale
securities" reported as a separate component of shareholders'
equity. In the third quarter of 1994, PEC experienced an increase
of approximately $584,000 in the market value of "trading securities".
PEC realized a net gain on issuance of shares by Affiliated
Companies of approximately $54,000 in the third quarter of 1994
compared to a net gain of approximately $300,000 in the third quarter
of 1993. PEC's net gain on issuance of shares by Affiliated Companies
in the third quarter of 1994 resulted from the issuance of shares by
Logal pursuant to the exercise of options while the net gain on
issuance of shares by Affiliated Companies in the third quarter of
1993 resulted from the issuance of shares by Tambour and Gilat
Communication pursuant to the exercise of options.
The increase of approximately $215,000 in PEC's interest and
dividend income for the three months ended September 30, 1994 as
compared with the corresponding 1993 quarter resulted primarily from
an increase of approximately $170,000 in the dividend accrued on PEC's
nonvoting preferred stock of IDBNY. Although the amount of PEC's
liquid assets decreased in the third quarter of 1994 compared to the
corresponding 1993 quarter (approximately $62.1 million at the
beginning of, and $50.4 million at the end of, the third quarter of
1994 compared to approximately $75.7 million at the beginning of, and
$70.7 million at the end of, the third quarter of 1993), PEC's
interest and dividend income for the third quarter of 1994, excluding
its dividend income with respect to its nonvoting preferred stock of
IDBNY, was approximately equal to such income for the corresponding
1993 quarter primarily because of higher interest rates. See
"Liquidity and Capital Resources". The amount of liquid assets was
reduced principally because of the net purchase of securities of new
and existing Affiliated Companies and the securities of other Israeli
companies.
The decrease in other income for the three months ended September
30, 1994 as compared to the three months ended September 30, 1993
reflected principally the receipt of less
Page 9 of 17 pages
<PAGE>
fees for management services.
General and administrative expenses for the third quarter of 1994
decreased compared to the corresponding 1993 quarter principally due
to a reduced provision for employee pension expenses.
PEC's provision for income taxes decreased for the three months
ended September 30, 1994 compared with the corresponding 1993 quarter
primarily because of the decrease in income before income taxes for
the three months ended September 30, 1994 compared to the
corresponding 1993 quarter. PEC does not provide deferred income
taxes with respect to undistributed earnings of, and gains on
issuances of shares by, Majority-Owned Affiliated Companies. The
provision for income taxes as a percentage of income before income
taxes decreased in the third quarter of 1994 compared with the
corresponding 1993 quarter principally because of an increase in the
third quarter of 1994 in the proportion of income from undistributed
earnings of Majority-Owned Affiliated Companies to net income and
because of an increase of approximately $900,000 in the provision for
income taxes in the third quarter of 1993 as a result of the increase
in August 1993 in the U.S. federal corporate income tax rate from 34%
to 35% for taxable income greater than $10 million. The provision for
income taxes in the third quarter of 1993 reflected a capital loss for
tax purposes that PEC realized upon its sale of 30% of the shares of
Tefron in September 1993, which reduced PEC's provision for income
taxes in that quarter by approximately $1.7 million.
Nine Months Ended September 30, 1994 Compared to Nine Months ended
------------------------------------------------------------------
September 30, 1993.
-------------------
Consolidated net income for the nine months ended September 30,
1994 was $27.9 million compared to $34.8 million for the nine months
ended September 30, 1993. The reduction in consolidated net income
resulted primarily from decreases in equity in net income of
Affiliated Companies, in net gain on issuance of shares by Affiliated
Companies and in net gain on sales of investments and from a loss
before income taxes of approximately $50,000 incurred by General
Engineers during the first nine months of 1994 compared to income of
approximately $415,000 earned by General Engineers in the
corresponding 1993 period. The reduction attributable to these
factors was partially offset by the effect of PEC's adoption of SFAS
115 effective January 1, 1994 (which increased consolidated net income
in the first nine months of 1994 by a cumulative effect adjustment of
approximately $2.5 million, net of taxes, offset in part by a
reduction in revenues in the first nine months of 1994 of
approximately $1.3
Page 10 of 17 pages
<PAGE>
million for changes in market value of marketable securities). PEC's
adoption of Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" effective January 1, 1993
reduced consolidated net income in the first nine months of 1993 by a
cumulative effect adjustment of approximately $1.2 million.
Equity in net income of Affiliated Companies for the nine months
ended September 30, 1994 was $21.2 million compared to $27.7 million
for the nine months ended September 30, 1993. The reduction in net
income of Affiliated Companies for the first nine months of 1994
reflected PEC's reduced equity in net income in respect of some of
PEC's Affiliated Companies, principally Tefron (for which PEC
eliminated approximately $2.0 million of reserves in the first nine
months of 1993, resulting in an increase in equity in net income of
Affiliated Companies in that period by that amount), CIDL (an
Affiliated Company until PEC sold its equity interest in CIDL on
November 1, 1993, which company sold its sole asset in August 1993,
resulting in PEC recognizing approximately $1.7 million in equity in
net income of Affiliated Companies for this transaction in the first
nine months of 1993), Scitex and El-Yam. This reduction also
reflected losses in respect of some of PEC's Affiliated Companies,
particularly DEP and CellCom. The reduction attributable to these
factors was partially offset by PEC's increased equity in net income
in respect of certain other Affiliated Companies, particularly
Property & Building, DIC and PEC Cable TV Ltd. (the holding company
for PEC's interest in Tevel) and Tambour.
PEC realized a net gain on issuance of shares by Affiliated
Companies of approximately $6.4 million for the first nine months of
1994 compared to approximately $11.4 million for the first nine months
of 1993. Approximately $5.9 million of PEC's net gain on issuance of
shares by Affiliated Companies for the first nine months of 1994
resulted from the exercise in February 1994 of all the then
outstanding one year options to purchase ordinary shares of Tambour
and approximately $528,000 of such net gain resulted from Lego's
initial public offering in Israel in January 1994. The net gain on
issuance of shares by Affiliated Companies for the first nine months
of 1993 resulted principally from Tambour's sale in February 1993 of
ordinary shares and one and two year options to purchase ordinary
shares in an initial public offering in Israel and the subsequent
exercise of some of those options and from Gilat Satellite's sale in
April 1993 of ordinary shares in an initial public offering in the
United States.
The net gain on sales of investments for the nine months ended
September 30, 1994 of approximately $355,000 resulted from PEC's sale
of a small portion of the shares of Maxima and its
Page 11 of 17 pages
<PAGE>
sale of marketable securities of U.S. companies. The net gain
attributable to these factors was partially offset by losses on the
sale of marketable bonds of the U.S. Government and of a U.S.
Government sponsored corporation. PEC's net gain on sales of
investments for the nine months ended September 30, 1993 of
approximately $2.0 million resulted from PEC's sale of 30% of the
shares of Tefron, PEC's sale of marketable securities of U.S.
companies and PEC's sale of a small portion of the shares of Maxima.
The increase in other income for the first nine months of 1994
reflected principally a reduced loss with respect to PEC's interest in
a limited partnership compared with the first nine months of 1993.
PEC's interest and dividend income increased in the first nine
months of 1994 by approximately $160,000 compared to the first nine
months of 1993 because of an increase of approximately $190,000 in the
dividend accrued on PEC's nonvoting preferred stock of IDBNY in the
first nine months of 1994 compared with the corresponding 1993 period.
Although the amount of liquid assets decreased in the first nine
months of 1994 compared to the first nine months of 1993
(approximately $75 million at the beginning of, and approximately
$50.4 million at the end of, the first nine months of 1994 compared to
approximately $87 million at the beginning of, and approximately $70.7
million at the end of, the first nine months of 1993), PEC's interest
and dividend income for the nine months ended September 30, 1994,
excluding PEC's dividend income from its nonvoting preferred stock
of IDBNY, was approximately equal to such income for the nine months
ended September 30, 1993 primarily because of higher interest rates.
See "Liquidity and Capital Resources". The amount of liquid assets
was reduced principally because of the net purchase of securities of
new and existing Affiliated Companies and securities of other Israeli
companies.
General and administrative expenses for the first nine months of
1994 decreased compared to the first nine months of 1993 due in part
to the write-off of deferred American Stock Exchange listing fees for
PEC's common stock during the first nine months of 1993 and to reduced
provisions for employee pension expenses.
PEC's provision for income taxes decreased for the first nine
months of 1994 compared with the first nine months of 1993 primarily
because of the decrease in income before income taxes for the first
nine months of 1994 compared with the first nine months of 1993. The
provision for income taxes as a percentage of income before income
taxes decreased in the first nine months of 1994 compared with the
corresponding 1993 period principally because of an increase in the
first nine months of 1994 in the
Page 12 of 17 pages
<PAGE>
proportion of income from undistributed earnings of, and gains on
issuances of shares by, Majority-Owned Affiliated Companies to net
income and because of an increase of approximately $900,000 in the
provision for income taxes in the first nine months of 1993 as a
result of the increase in August 1993 in the U.S. federal corporate
income tax rate from 34% to 35% for taxable income greater than $10
million. The provision for income taxes in the first nine months of
1993 reflected a capital loss for tax purposes that PEC realized upon
its sale of 30% of the shares of Tefron in September 1993, which
reduced PEC's provision for income taxes in that period by
approximately $1.7 million.
SHAREHOLDERS' EQUITY
--------------------
As discussed above and in Note 3 to the financial statements for
the three months and nine months ended September 30, 1994, PEC adopted
SFAS 115 effective on January 1, 1994. The effect of adopting SFAS
115 for securities classified as "available-for-sale securities" was
to increase shareholders' equity, net of taxes, by approximately
$3.8 million as of January 1, 1994. As a result of decreases in the
market value of "available-for-sale securities" since January 1, 1994,
the unrealized gain, net of taxes, from those securities that was
included in shareholders' equity as of September 30, 1994 was
approximately $2.2 million.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
As of September 30, 1994, PEC's liquid assets (consisting of
cash, money market funds, short-term bank deposits, marketable
securities of U.S. companies, marketable bonds and a limited
partnership interest which PEC may cause to be redeemed upon 15 days
to 45 days prior notice) totaled approximately $50.4 million.
For the nine months ended September 30, 1994, PEC received cash
dividends and interest totaling $6.2 million (including $3.4 million
of cash dividends received from Affiliated Companies) which
substantially exceeded PEC's general and administrative
expenses. During the nine months ended September 30, 1994, PEC
received a total of $16.3 million of other funds of which $5.8 million
was generated from the sale of securities and $10.5 million was
generated from the collection of U.S. Government and municipal bonds.
During the same period, PEC purchased equity securities of several
Affiliated Companies for approximately $19.4 million (of which $9.6
million was purchased in the third quarter of 1994), purchased
marketable securities of U.S. companies for approximately $14.5
million and purchased capital
Page 13 of 17 pages
<PAGE>
notes of Affiliated Companies for approximately $5.8 million (of which
approximately $3.8 million was purchased in the third quarter of
1994). Almost all of the capital notes purchased during the third
quarter were issued by CellCom.
The securities of Affiliated Companies that were purchased in the
third quarter of 1994 consist primarily of an additional 0.3% equity
interest in Elron that was purchased on the Tel Aviv Stock Exchange
(the "TASE") for approximately $600,000 (increasing PEC's equity
interest in Elron to 12.27%), additional shares of Elron that were
purchased for approximately $2.7 million pursuant to Elron's rights
offering to shareholders whose shares were registered in Israel (which
purchase did not change the percentage of PEC's equity interest in
Elron), an additional 6.6% equity interest in Liraz Systems Ltd.
("Liraz") and options to acquire an additional 6.5% equity interest in
Liraz, which equity interest and options were purchased in market
transactions on the TASE and pursuant to an agreement for
approximately $1.9 million (increasing PEC's equity interest in Liraz
to 7.4%), an additional 0.7% equity interest in "Delek" - The Israel
Fuel Corporation Ltd. ("Delek") that was purchased in market
transactions on the TASE for approximately $1.8 million (increasing
PEC's equity interest in Delek to 2.0%), an additional 0.1% equity
interest in Scitex that was purchased in the over-the-counter market
in the United States for approximately $525,000 (increasing PEC's
equity interest in Scitex to 6.1%) and an additional 2.51% equity
interest in Gilat Communication that was purchased pursuant to the
exercise of options for approximately $415,000 (increasing PEC's
equity interest in Gilat Communication to 12.54%). In addition,
during the third quarter of 1994, in response to a capital call from
The Renaissance Fund LDC ("Renaissance"), PEC made a capital
contribution to Renaissance of approximately $915,000, increasing the
amount PEC has contributed to Renaissance to $2.2 million and leaving
a balance of approximately $2.8 million that PEC is obligated to
contribute to Renaissance.
On November 1, 1994, PEC purchased an additional 4.0% equity
interest in Nice pursuant to the exercise of options for approximately
$1.3 million (increasing PEC's equity interest in Nice to 10%).
Elron is currently offering its shareholders whose shares are
registered in the United States rights to purchase both ordinary
shares of Elron and warrants which are exercisable for ordinary shares
of Elron. The rights are exercisable until November 29, 1994. PEC
intends to exercise all rights offered to it for Elron shares owned
by PEC and registered in the United States for an aggregate purchase
price of approximately $825,000.
Page 14 of 17
<PAGE>
In addition, Elron has granted to PEC and DIC an option to acquire and
exercise all rights which are not exercised by November 29, 1994,
one-third of such rights to be acquired by PEC and two-thirds by
DIC. The maximum exercise price for PEC under this option is
approximately $445,000.
Page 15 of 17 pages
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
Exhibit 27 Financial Data Schedule, which is page 17 of
this report.
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.
PEC ISRAEL ECONOMIC CORPORATION
-------------------------------
(Registrant)
/S/James I. Edelson
-------------------------------
James I. Edelson
Executive Vice President
/S/William Gold
-------------------------------
William Gold
Treasurer, Principal Financial
Officer and Principal Accounting
Officer
Date: November 14, 1994
Page 16 of 17 pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary finanical information extracted from the
consolidated balance sheet as of September 30, 1994 and the consolidated
statement of income for the nine months ended September 30, 1994 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 21,794,131
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 379,590,386
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 31,952,180
0
0
<OTHER-SE> 304,053,263
<TOTAL-LIABILITY-AND-EQUITY> 379,590,386
<SALES> 0
<TOTAL-REVENUES> 40,008,594
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,357,789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,650,805
<INCOME-TAX> 2,176,325
<INCOME-CONTINUING> 25,474,480
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,472,879
<NET-INCOME> 27,947,359
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
</TABLE>
