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, 1995
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------------
Commission file number 2-1271
------
PEC Israel Economic Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maine 13-1143528
- ------------------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
511 Fifth Avenue, New York, N.Y. 10017
- -------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 687-2400
-----------------------------
- --------------------------------------------------------------------------------
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 May 12, 1995 there were outstanding 18,758,588 shares of Common
Stock with par value of $1.00 per share.
Page 1 of 13 pages
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<TABLE><CAPTION>
PART I - FINANCIAL INFORMATION
----------------------------------
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
For the Three Months Ended:
-----------------------------
3/31/95 3/31/94
------------ ------------
Revenues:
<S> <C> <C>
Interest and dividends $ 408,326 $ 705,955
Equity in net income of Affiliated Companies 5,389,425 4,970,107
Net gain on issuance of shares by Affiliated Companies --- 6,415,178
Revenues of General Engineers Limited 2,980,094 3,317,116
Net gain on sales of investments 246,261 329,844
Change in market value of marketable securities 944,512 (1,240,491)
Other (11,889) (312,536)
---------- ----------
9,956,729 14,185,173
---------- ----------
Expenses:
General and administrative 804,565 834,612
Cost of sales and expenses of General Engineers Limited 3,208,839 3,301,705
---------- ----------
4,013,404 4,136,317
---------- ----------
Income before income taxes and cumulative
effect of accounting change 5,943,325 10,048,856
Income taxes 902,148 257,858
---------- ----------
Income before cumulative effect of accounting change 5,041,177 9,790,998
Cumulative effect of change in accounting for marketable securities --- 2,472,879
---------- ----------
Net Income $ 5,041,177 $ 12,263,877
========== ==========
Earnings per common share before
cumulative effect of change in accounting $ .27 $ .52
Cumulative effect on earnings per share for
change in accounting for marketable securities --- .13
---------- ----------
Earnings per common share $ .27 $ .65
========== ==========
Number of shares outstanding 18,758,588 18,758,588
Dividend per share None None
</TABLE>
See notes to consolidated financial statements.
Page 2 of 13 pages
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<TABLE><CAPTION>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
March 31, December 31,
------------ ------------
Assets 1995 1994
- ------ ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 22,191,372 $ 20,736,416
Investments 361,743,628 349,623,830
Assets of General Engineers Limited 8,464,912 9,018,224
Other assets 3,283,306 4,312,494
------------ ------------
Total assets $ 395,683,218 $ 383,690,964
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities:
Liabilities of General Engineers Limited $ 4,746,964 $ 5,262,094
Deferred income taxes 32,441,397 31,702,309
Other liabilities 5,550,000 5,258,196
------------ ------------
Total liabilities 42,738,361 42,222,599
------------ ------------
Shareholders' equity:
Common stock, $1.00 par value 31,952,180 31,952,180
Additional paid-in capital 102,432,363 99,612,887
Unrealized gain on marketable securities, net 3,349,406 2,845,350
Cumulative translation adjustment (10,002,220) (13,114,003)
Retained earnings 238,406,720 233,365,543
------------ ------------
366,138,449 354,661,957
Treasury stock (13,193,592) (13,193,592)
------------ ------------
Total shareholders' equity 352,944,857 341,468,365
------------ ------------
Total liabilities and shareholders' equity $ 395,683,218 $ 383,690,964
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 3 of 13 pages
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<TABLE><CAPTION>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1995
Unrealized Gain Cumulative
Common Paid-in on Marketable Translation Retained Treasury
Stock Capital Securities Adjustment Earnings Stock Total
------------ ----------- -------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $31,952,180 $ 99,612,887 $2,845,350 ($13,114,003) $233,365,543 ($13,193,592) $341,468,365
Change in market value
for available-for-
sale equity securities,
net of tax --- --- 504,056 --- --- --- 504,056
Paid-in capital of
Affiliated Companies --- 2,819,476 --- --- --- --- 2,819,476
Change in cumulative
translation adjustment --- --- --- 3,111,783 --- --- 3,111,783
Net income --- --- --- --- 5,041,177 --- 5,041,177
------------ ------------ -------------- ------------- ------------ ------------ ------------
Balance, March 31, 1995 $31,952,180 $102,432,363 $3,349,406 ($10,002,220) $238,406,720 ($13,193,592) $352,944,857
=========== ============ ========== =========== ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
Page 4 of 13 pages
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<TABLE><CAPTION>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
For the Three Months Ended:
3/31/95 3/31/94
------------ ------------
<S> <C>
Cash Flows from Operating Activities:
Net income $ 5,041,177 $ 12,263,877
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of changes in
accounting for marketable securities --- (2,472,879)
Change in market value of marketable securities (944,512) 1,240,491
Purchase of marketable securities (1,738,983) (9,225,997)
Proceeds from sale of marketable securities 1,893,162 347,167
Equity in net income of Affiliated Companies (5,389,425) (4,970,107)
Gain on sales of investments (246,261) (329,844)
Loss on investment in partnerships 253,454 334,682
Income of consolidated subsidiaries (50,269) (1,361)
Amortization of premiums on receivables, net 20,860 50,193
Net gain on issuance of shares by Affiliated Companies --- (6,415,178)
Dividends from Affiliated Companies 2,978,269 1,020,220
Increase in other assets (840,728) (340,320)
Provision for deferred income taxes 162,334 56
Increase in other liabilities 93,565 104,052
------------ ------------
Net cash provided by (used in) operating activities 1,232,643 (8,394,948)
------------ ------------
Cash Flows from Investing Activities:
Collection of notes receivable and U.S. Government obligations 201,250 2,766,455
Purchase of notes receivable (765,391) (1,496,142)
Proceeds from sale of equity interests 4,959,987 2,210,884
Purchase of equity interests (4,173,533) (936,667)
------------ ------------
Net cash provided by investing activities 222,313 2,544,530
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,454,956 (5,850,418)
Cash and Cash Equivalents, beginning of period 20,736,416 42,665,957
------------ ------------
Cash and Cash Equivalents, end of period $ 22,191,372 $ 36,815,539
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for income taxes $ 122,367 $ 134,696
</TABLE>
See notes to consolidated statements.
Page 5 of 13 pages
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PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
Notes to Consolidated Financial Statements
(Unaudited)
1. The December 31, 1994 balance sheet presented herein was
derived from the audited December 31, 1994 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, 1994 for a description of the
significant accounting policies, which have continued without
change, and other footnote information.
3. In May 1995, the Company and Israel Discount Bank of New York
("IDBNY") agreed in principle that the Company will sell to
IDBNY all of the Company's nonvoting preferred shares of IDBNY
for approximately $27 million, a price that equals PEC's
carrying value of those shares. The proposed sale is subject
to the completion and signing of a definitive agreement and to
the approval of appropriate regulatory authorities. While the
proposed sale will not result in a gain for financial
statement purposes, PEC will realize a gain for tax purposes,
for which PEC will provide approximately $3 million of additional
income taxes.
4. 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 6 of 13 pages
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND
-----------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 1995 Compared to Three Months Ended
- ----------------------------------------------------------------
March 31, 1994
- --------------
Consolidated net income for the three months ended March 31,
1995 was $5.0 million compared to $12.3 million for the three
months ended March 31, 1994. The reduction in consolidated net
income resulted primarily from the absence in the first quarter
of 1995 of any net gain on issuance of shares by Affiliated
Companies ($6.4 million for the first quarter of 1994) and from an
increase in the provision for income taxes. The decrease in
consolidated net income also resulted from 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. The decrease
attributable to these factors was partially offset by the positive
effect of a change in the market value of marketable securities in
the first quarter of 1995.
Equity in net income of Affiliated Companies for the first
quarter of 1995 rose to $5.4 million, up from $5.0 million for the
corresponding 1994 period. The increase in equity in net income
of Affiliated Companies for the three months ended March 31, 1995
reflects PEC's increased net income in respect of some Affiliated
Companies, particularly DIC and PEC Cable TV Ltd. (the holding
company for PEC's interest in Tevel), Tambour and Tel-Ad (which
had losses in the first quarter of 1994). This increase was
offset by PEC's losses in respect of certain other
Affiliated Companies, principally CellCom (approximately $1.2
million of start up losses), RTS, Bulk Trading and DEP Technology
Holdings Ltd. (the holding company for PEC's interest in RDC).
PEC did not realize any net gain on issuance of shares by Affiliated
Companies for the three months ended March 31, 1995 while it realized
$6.4 million for the corresponding 1994 period. During the first
quarter of 1994, PEC realized a gain on issuance of shares by Tambour
of approximately $5.9 million as the result of the exercise by option
holders of one and two year options to purchase ordinary shares of
Tambour and realized a gain on issuance of shares by Lego of approximately
$528,000 as a result of Lego's initial public offering of ordinary shares
in Israel in January 1994.
Page 7 of 13 pages
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As described in Note 2 of the Notes to the Consolidated
Financial Statements for the year ended December 31, 1994 (the
"1994 Notes"), in accordance with SFAS 115, PEC reports
debt and equity securities, 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. The market value of
"trading securities" increased by $944,512 for the three months
ended March 31, 1995 compared to a loss of $1.2 million for the
corresponding 1994 period.
PEC's interest and dividend income decreased to $408,326 in
the first quarter of 1995 compared with $705,955 for the
corresponding period of 1994 primarily because PEC did not
recognize any dividend income on its nonvoting preferred shares
of IDBNY in the first quarter of 1995 since PEC agreed in principle
in May 1995 to sell those shares. See "Subsequent Events".
General Engineers had a loss of $228,745, before tax
benefit, for the three months ended March 31, 1995 compared to
income of $15,411, before income taxes, in the corresponding
quarter of 1994.
The net gain on sales of investments for the three months
ended March 31, 1995 of $246,261 resulted from PEC's sale of
marketable securities of U.S. companies while its net gain on
sales of investments for the corresponding period of 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. PEC's other income for the first quarter of 1995
reflects principally increased fees for management services and a
reduced loss with respect to PEC's interest in a limited
partnership compared with the corresponding period of 1994. PEC
sold its interest in the limited partnership in January 1995.
As discussed in Note 2 of the 1994 Notes, PEC does not
provide deferred income taxes with respect to undistributed
earnings of, and gains on issuances of shares by, Majority-Owned
Affiliated Companies. Although income before income taxes and
cumulative effect of accounting change decreased to $5.9 million
in the first quarter of 1995 compared to $10.0 million in the
corresponding 1994 quarter, the provision for income taxes in the
first quarter of 1995 increased to $902,148 from $257,858 in the
corresponding 1994 quarter. This increase was attributable
primarily to a reduction in the proportion of income from
Page 8 of 13 pages
<PAGE>
undistributed earnings of, and gains on issuances of shares by,
Majority-Owned Affiliated Companies in the first quarter of 1995
compared to the corresponding quarter of 1994 (in which PEC had a
$5.9 million net gain on issuance of shares by Tambour, a
Majority-Owned Affiliated Company).
Shareholders' Equity
- -------------------
As a result of increases in the market value of "available-
for-sale securities" since January 1, 1995, the unrealized gain,
net of taxes, from those securities that was included in
shareholders' equity as of March 31, 1995 was approximately $3.3
million compared to $2.8 million as of December 31, 1994.
As discussed in Note 2 of the 1994 Notes, translation
differences are reflected in shareholders' equity as a
"Cumulative Translation Adjustment." During the first quarter of
1995, the New Israel Shekel appreciated approximately 2% against
the U.S. dollar. As of March 31, 1995, the Cumulative Translation
Adjustment reduced shareholders' equity by $10.0 million compared
to $13.1 million at the end of 1994.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of March 31, 1995, PEC's liquid assets (consisting of
cash, money market funds, short-term bank deposits, marketable
securities of U.S. companies and marketable bonds) totalled
approximately $39.8 million.
For the three months ended March 31, 1995, PEC received cash
dividends and interest totalling $4.1 million (including $3
million of cash dividends received from Affiliated Companies)
which substantially exceeded PEC's general and administrative
expenses. During the first quarter of 1995, PEC received a total
of $7.1 million of additional funds of which $5 million was
generated from the sale of a limited partnership interest, $1.9
million was generated from the sale of securities and $200,000
was generated from the collection of a loan. During the same
period, PEC purchased securities of several Affiliated Companies
for approximately $4.2 million (of which approximately $2.3
million was for the purchase of securities of CellCom and
approximately $1.2 million was for additional capital
contributions to Renaissance Fund LDC, reducing PEC's obligation
to make additional capital contributions to Renaissance to $1.6
Page 9 of 13 pages
<PAGE>
million), purchased marketable securities of U.S. companies for
approximately $1.7 million and purchased capital notes of
Affiliated Companies for approximately $765,000 (almost all of
which was for capital notes of DEP Technology Holdings Ltd.).
SUBSEQUENT EVENTS
- -----------------
In May 1995, the Company and Israel Discount Bank of New
York ("IDBNY") agreed in principle that the Company will sell to
IDBNY all of the Company's nonvoting preferred shares of IDBNY
for approximately $27 million, a price that equals PEC's carrying
value of those shares. The proposed sale is subject to the
completion and signing of a definitive agreement and to the
approval of appropriate regulatory authorities. While the
proposed sale will not result in a gain for financial statement
purposes, PEC will realize a gain for tax purposes, for
which PEC will provide approximately $3 million of additional
income taxes.
On April 27, 1995, CellCom Israel Ltd. ("CellCom"), a company
recently formed to establish and operate Israel's second cellular
telephone network, announced that following complaints by its
subscribers concerning problems in initiating and completing
telephone calls through its network, CellCom and the manufacturer
of certain types of digital cellular telephones concluded that
some of these telephones cause, under certain circumstances, a
blocking of CellCom's network. Most of CellCom's subscribers are
using these types of telephones. CellCom and the manufacturer
are jointly seeking an appropriate solution to these problems.
On April 27, 1995, CellCom temporarily ceased the sale of any
cellular telephones and connection of new subscribers to its
network, and until the resumption of these activities CellCom's
subscribers will not be charged for air time of telephone calls
initiated by them through CellCom's network. As of May 15, 1995,
PEC had a 9.5% equity interest in CellCom. Subject to the approval
of Israel's Minister of Communications, an additional 2% equity
interest in CellCom will be transferred to PEC. As of March 31, 1995,
PEC's carrying value of its interest in CellCom was $7.4 million and
PEC anticipates making additional investments in CellCom, including
approximately $3 million in the second quarter of 1995.
On April 30, 1995, motions were filed in the Tel Aviv
Page 10 of 13 pages
<PAGE>
District Court for recognizing two lawsuits against CellCom as
class actions on behalf of all of CellCom's subscribers in
accordance with Israel's Consumer Protection Law - 1981. In these
lawsuits damages are being sought from CellCom in connection
with problems in using the network claimed to be in one lawsuit
approximately $33.4 million and in the other lawsuit $26.7 million
in addition to a refund not yet quantified of unjustifiable charges
for telephone calls made through CellCom's network. As of May 15,
1995, the court had not scheduled any hearing of the above motions
to determine which one of these lawsuits, if any, will be recognized
as a class action, and CellCom had not been required to respond thereto.
CellCom has stated that it intends to vigorously contest the lawsuits and
their recognition as class actions.
CellCom has also stated that at this stage CellCom is unable to
estimate the effects of the foregoing events on CellCom's financial
condition or results of operations.
Page 11 of 13 pages
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
Exhibit 27 Financial Data Schedule, which is page 13
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: May 15, 1995
Page 12 of 13 pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
FINANCIAL DATA SCHEDULE
-----------------------
This schedule contains summary financial information extracted from the
consolidated balance sheet as of March 31, 1995 and the consolidated
statement of income for the three months ended March 31, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 22,191,372
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 395,683,218
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 31,952,180
0
0
<OTHER-SE> 320,992,677
<TOTAL-LIABILITY-AND-EQUITY> 395,683,218
<SALES> 0
<TOTAL-REVENUES> 9,956,729
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,013,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,943,325
<INCOME-TAX> 902,148
<INCOME-CONTINUING> 5,041,177
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,041,177
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
