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 March 31, 1994
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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
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NO .
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As of May 12, 1994 there were outstanding 18,758,588 shares of Common
Stock with par value of $1.00 per share.
Page 1 of 11 pages
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PART I - FINANCIAL INFORMATION
------------------------------
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
For the Three Months Ended:
---------------------------
3/31/94 3/31/93
----------- -----------
Revenues:
Interest and dividends $ 705,955 $ 814,382
Equity in net income of Affiliated Companies 4,970,107 7,035,252
Net gain on issuance of shares by
Affiliated Companies 6,415,178 7,778,505
Revenues of General Engineers Limited 3,317,116 2,529,816
Net gain on sales of investments 329,844 453,384
Change in market value of marketable
securities (1,240,491) -
Other (312,536) (126,315)
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14,185,173 18,485,024
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Expenses:
General and administrative 834,612 1,014,991
Cost of sales and expenses of
General Engineers Limited 3,301,705 2,607,602
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4,136,317 3,622,593
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Income before income taxes and cumulative
effect of accounting changes 10,048,856 14,862,431
Income taxes 257,858 1,598,849
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Income before cumulative effect of
accounting changes 9,790,998 13,263,582
Cumulative effect of changes in accounting for:
Marketable securities 2,472,879 -
Income taxes - (1,173,713)
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Net Income $12,263,877 $12,089,869
=========== ===========
Earnings per common share before
cumulative effect of changes
in accounting $ .52 $ .70
Cumulative effect on earning per share for
changes in accounting for:
Marketable securities .13 -
Income taxes - (.06)
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Earnings per common share $ .65 $ .64
=========== ===========
Number of shares outstanding 18,758,588 18,758,588
Dividend per share None None
See notes to consolidated financial statements.
Page 2 of 11
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PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
March 31, December 31,
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1994 1993
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Assets
------
Cash and cash equivalents $ 36,815,539 $ 42,665,957
Investments 316,667,494 292,484,875
Assets of General Engineers Limited 8,609,350 8,722,142
Other assets 3,966,915 4,000,416
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Total assets $366,059,298 $347,873,390
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Liabilities of General
Engineers Limited $ 5,331,006 $ 5,484,976
Deferred income taxes 32,384,986 30,214,359
Other liabilities 4,922,649 4,937,184
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Total liabilities 42,638,641 40,636,519
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Shareholders' equity:
Common stock, $1.00 par value 31,952,180 18,758,588
Additional paid-in capital 99,265,679 99,257,071
Retained earnings 213,063,149 200,799,272
Unrealized gain on marketable
securities 3,011,617 -
Cumulative translation adjustment (10,678,376) (11,578,060)
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336,614,249 307,236,871
Treasury stock (13,193,592) -
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Total shareholders' equity 323,420,657 307,236,871
------------ ------------
Total liabilities and
shareholders' equity $366,059,298 $347,873,390
============ ============
See notes to consolidated financial statements.
Page 3 of 11
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<TABLE><CAPTION>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1994
Unrealized Gain Cumulative
Common Paid-in Retained on Marketable Translation Treasury
Stock Capital Earnings Securities Adjustment Stock Total
----------- ----------- ------------ ----------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $18,758,588 $99,257,071 $200,799,272 $ --- $(11,578,060) $ --- $307,236,871
Adoption of SFAS 115
for available-for-
sale marketable securities,
net of tax 3,790,603 3,790,603
Issuance of 13,193,592
new common shares
in exchange for
13,193,592 common
shares 13,193,592 (13,193,592) ---
Change in market value
for available-for-
sale marketable securities,
net of tax (778,986) (778,986)
Paid-in capital of
Affiliated Companies 8,608 8,608
Change in cumulative
translation adjustment 899,684 899,684
Net income 12,263,877 12,263,877
----------- ----------- ------------ ---------- -------------- ------------- ------------
Balance, March 31, 1994 $31,952,180 $99,265,679 $213,063,149 $3,011,617 $(10,678,376) $(13,193,592) $323,420,657
=========== =========== ============ ========== ============= ============= ============
</TABLE>
See notes to consolidated financial statements.
Page 4 of 11 pages
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PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
For the Three Months Ended:
3/31/94 3/31/93*
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Cash Flows from Operating Activities:
Net income $12,263,877 $12,089,869
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in net income of
Affiliated Companies (4,970,107) (7,035,252)
Cumulative effect of changes in
accounting for:
Marketable securities (2,472,879) -
Income taxes - 1,173,713
Purchase of marketable securities (9,225,997) (7,373,023)
Proceeds from sale of marketable
securities 347,167 2,313,335
Change in market value of marketable
securities 1,240,491 -
Net gain on sales of investments (329,844) (453,384)
(Income) loss of consolidated
subsidiaries (1,361) 28,228
Loss on investment in partnerships 334,682 202,853
Amortization of premiums
on receivables 50,193 17,460
Net gain on issuance of shares by
Affiliated Companies (6,415,178) (7,778,505)
Dividends from Affiliated Companies 1,020,220 569,160
Increase in other assets (340,320) (171,173)
Increase in deferred income taxes 56 1,406,847
Increase in other liabilities 104,052 534,501
Write-off of deferred charges - 110,457
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Net cash used in operating
activities (8,394,948) (4,364,914)
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Cash Flows from Investing Activities:
Collection of U.S. Government obligations 2,766,455 -
Purchase of notes and bonds receivable (1,496,142) (3,264,943)
Proceeds from sale of investments 2,210,884 -
Purchase of investments (936,667) (5,891,574)
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Net cash provided by (used in)
investing activities 2,544,530 (9,156,517)
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Net Decrease in Cash and Cash Equivalents (5,850,418) (13,521,431)
Cash and Cash Equivalents, beginning
of period 42,665,957 66,040,089
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Cash and Cash Equivalents, end of period $36,815,539 $52,518,658
=========== ===========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during period for income taxes $ 134,696 $ 114,507
See notes to consolidated financial statements.
*Reclassified.
Page 5 of 11
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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 and $3,011,617 as of
March 31, 1994.
Page 6 of 11 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
presentation 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 11 pages
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
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Three Months Ended March 31, 1994 Compared to Three Months
------------------------------------------------------------
Ended March 31, 1993
--------------------
Consolidated net income for the three months ended
March 31, 1994 was $12.3 million compared to $12.1 million
for the three months ended March 31, 1993. The increase in
consolidated net income resulted primarily from a reduced
provision for income taxes and the effect of PEC's adoption
of Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") in the first quarter of 1994 (which
increased consolidated net income in the first quarter of
1994 by a cumulative effect adjustment of approximately $2.5
million, offset in part by a reduction in revenues in
the first quarter of 1994 of approximately $1.2 million
for changes in the market value of marketable securities).
The increase in consolidated net income also resulted from
the effect of PEC's adoption of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes"
("SFAS 109") in the first quarter of 1993 (which
reduced consolidated net income in the first quarter of 1993
by a cumulative effect adjustment of approximately $1.2
million). The increase attributable to these factors was
partially offset by decreases in equity in net income of
Affiliated Companies and in net gain on issuance of shares
by Affiliated Companies.
Equity in net income of Affiliated Companies for the
first quarter of 1994 was $5.0 million compared to $7.0
million for the corresponding 1993 period. The reduction in
net income of Affiliated Companies for the three months
ended March 31, 1994 reflects PEC's reduced net income in
respect of some Affiliated Companies, principally Scitex,
El-Yam, Tel-Ad, Elron and Tambour. This reduction was
partially offset by PEC's increased net income in respect of
certain other Affiliated Companies, particularly DIC and PEC
Cable TV Ltd. (the holding company for PEC's interest in
Tevel) and Super-Sol.
Net gain on issuance of shares by Affiliated Companies
for the three months ended March 31, 1994 resulted
principally from the exercise in February 1994 of all the
then outstanding one year options to purchase ordinary
shares of Tambour, which options Tambour sold in February
1993 in an initial public offering in Israel of ordinary
shares and one and two year options to purchase ordinary
shares. As a result of the exercise of options to purchase
ordinary shares of Tambour in the first quarter of 1994, PEC
realized a gain on issuance of shares by Tambour of
approximately $5.9 million for the three months ended March
31, 1994 and PEC's ownership interest in Tambour was reduced
Page 8 of 11 pages
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from 44.9% to 41.3%. During the first quarter of 1994, PEC
also realized a gain on issuance of shares by Lego of
approximately $528,000 as a result of Lego's initial public
offering in Israel in January 1994, which reduced PEC's
ownership interest in Lego from 16.0% to 13.0%. During the
first quarter of 1993, PEC realized a gain on issuance of
shares by Tambour of $7.0 million as a result of Tambour's
public offering and realized a gain on issuance of shares by
Mul-T-Lock of $718,000 as a result of Mul-T-Lock's sale of
ordinary shares in a private placement.
PEC's interest and dividend income decreased in the
first quarter of 1994 compared with the corresponding period
of 1993 primarily because of lower interest rates and a
reduced amount of liquid assets (approximately $71.8 million
at the end of the first quarter of 1994 compared to
approximately $78.9 million at the end of the corresponding
period of 1993). See Liquidity and Capital Resources. The
amount of liquid assets was reduced principally due to the
net purchase of securities of new and existing Affiliated
Companies and securities of other Israeli companies.
The net gain on sales of investments for the three
months ended March 31, 1994 of $329,844 resulted from PEC's
sale of a small portion of the shares of Maxima and its sale
of marketable securities of U.S. companies while its net
gain on sales of investments for the corresponding period of
1993 of $453,384 resulted from PEC's sale of marketable
securities of U.S. companies. PEC's other income for the
first quarter of 1994 reflects principally a greater loss
with respect to PEC's interest in a limited partnership
compared with the corresponding period of 1993.
General and administrative expenses for the three
months ended March 31, 1994 declined compared with the three
months ended March 31, 1993 due in part to the write-off in
the first quarter of 1993 of approximately $110,000 of
deferred American Stock Exchange listing fees for PEC's
common stock.
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 reduced
provision for income taxes in the first quarter of 1994
compared to the corresponding quarter of 1993 is primarily
attributable to an increase in the proportion of income from
undistributed earnings of, and gains on issuances of shares
by, Majority-Owned Affiliated Companies in the first quarter
of 1994 compared to the corresponding quarter of 1993.
As discussed in Note 3 to the financial statements for
the three months ended March 31, 1994, effective on January
1, 1994, PEC adopted SFAS 115, which requires PEC to report
debt and equity securities, other than equity securities
accounted under the equity method, at fair value with
Page 9 of 11 pages
<PAGE>
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. The
cumulative effect of adopting SFAS 115 for securities
classified as "trading securities" was to increase PEC's
consolidated net income for the first quarter of 1994
by approximately $2.5 million, net of taxes. This increase
was partially offset by a decrease of approximately $1.2
million in the market value of "trading securities" in the
first quarter of 1994.
Effective January 1, 1993, PEC adopted SFAS 109 which
required PEC to change from the deferred method to the
liability method for financial accounting and reporting for
income taxes. The cumulative effect of PEC's adoption of
SFAS 109 was to decrease PEC's consolidated net income for
the first quarter of 1993 by approximately $1.2 million.
SHAREHOLDERS' EQUITY
--------------------
As discussed above and in Note 3 to the financial
statements for the three months ended March 31, 1994, PEC
adopted SFAS 115 effective on January 1, 1994. The effect
of adopting SFAS 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 and by approximately $3.0 million as of March 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
As of March 31, 1994, PEC's liquid assets (consisting
of cash, short-term bank deposits, marketable securities of
U.S. companies and marketable bonds and notes) totaled
approximately $71.8 million.
For the three months ended March 31, 1994, PEC received
cash dividends and interest totaling $1.7 million (including
$1 million of cash dividends received from Affiliated
Companies) which substantially exceeded PEC's general and
administrative expenses. During the first quarter of 1994,
PEC received a total of $5.4 million of additional funds of
which $2.6 million was generated from the sale of securities
and $2.8 million was generated from the collection of U.S.
Government obligations. During the same period, PEC
purchased securities of several Affiliated Companies for
approximately $937,000, purchased marketable securities of
U.S. companies for approximately $9.2 million and purchased
capital notes of an Affiliated Company for approximately
$1.5 million.
Page 10 of 11 pages
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PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security-Holders.
----------------------------------------------------
At a Special Meeting of Shareholders held on March 22, 1994,
the shareholders approved an amendment to the Articles of
Incorporation, as amended, to increase the authorized common
stock from 30,000,000 shares to 40,000,000 shares. Proxies for
the meeting were solicited pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended. A total of
17,769,581 shares of common stock were voted in favor of the
amendment, 32,921 shares of common stock were voted against the
amendment and 16,759 shares of common stock abstained.
Signatures
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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
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(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: May 13, 1994
Page 11 of 11 pages
