<PAGE>
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, 1996
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 October 31, 1996 there were outstanding 18,664,388 shares of Common
Stock with par value of $1.00 per share.
Page 1 of 15 pages
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Nine Months Ended: For the Three Months Ended:
-------------------------- ---------------------------
9/30/96 9/30/95 9/30/96 9/30/95
-------------------------------------------------------
Revenues: (In thousands -except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividends $ 749 $ 1,615 $ 191 $ 650
Equity in net income (loss) of Affiliated Companies 15,566 18,764 (1,311) 7,761
Net gain on issuance of shares by Affiliated Companies 1,304 --- --- ---
Revenues of General Engineers Limited 6,050 4,600 1,764 1,666
Net gain on sales of investments 7,002 1,161 2,256 609
Change in market value of marketable securities (345) 3,165 (1,833) 1,041
Other 1,594 530 1,021 263
------- ------- ------- -------
31,920 29,835 2,088 11,990
------- ------- ------- -------
Expenses:
General and administrative 2,375 2,460 632 769
Cost of sales and expenses of General Engineers Limited 6,290 4,599 2,023 1,484
------- ------- ------- -------
8,665 7,059 2,655 2,253
------- ------- ------- -------
Income (loss) before income taxes and loss from
discontinued operations 23,255 22,776 (567) 9,737
Income taxes (benefit) 3,347 4,925 (1,599) 598
------- ------- ------- -------
Income before loss from discontinued operations 19,908 17,851 1,032 9,139
Loss from discontinued operations
of General Engineers Limited, net
of income taxes --- (565) --- (163)
------- ------- ------- -------
Net income $ 19,908 $ 17,286 $ 1,032 $ 8,976
------- ------- ------- -------
------- ------- ------- -------
Earnings per common share before loss from
discontinued operations $ 1.06 $ 0.95 $ 0.06 $ 0.49
Loss from discontinued operations of General
Engineers Limited, net of income taxes --- (0.03) --- (0.01)
------- ------- ------- -------
Earnings per common share $ 1.06 $ 0.92 $ 0.06 $ 0.48
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of shares outstanding 18,751,355 18,758,588 18,736,888 18,758,588
Dividend per share None None None None
</TABLE>
See notes to consolidated financial statements.
Page 2 of 15 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
------------ ------------
Assets (In thousands)
Cash and cash equivalents $ 8,760 $ 14,703
Investments 386,032 369,096
Assets of General Engineers Limited 4,643 5,229
Other assets 3,845 3,939
------- -------
Total assets $403,280 $392,967
------- -------
------- -------
Liabilities and Shareholders' Equity
Liabilities:
Liabilities of General Engineers Limited $ 1,372 $ 1,922
Deferred income taxes 26,382 29,192
Other liabilities 4,841 4,566
------- -------
Total liabilities 32,595 35,680
------- -------
Shareholders' equity:
Common stock, $1.00 par value 31,952 31,952
Additional paid-in capital 103,228 103,228
Unrealized gain on marketable securities, net 1,633 3,226
Cumulative translation adjustment (24,243) (20,143)
Retained earnings 272,126 252,218
------- -------
384,696 370,481
Treasury stock (14,011) (13,194)
------- -------
Total shareholders' equity 370,685 357,287
------- -------
Total liabilities and shareholders' equity $403,280 $392,967
------- -------
------- -------
See notes to consolidated financial statements.
Page 3 of 15 pages
<PAGE>
<TABLE>
<CAPTION>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
(In thousands)
Unrealized Gain Cumulative
Common Paid-in on Marketable Translation
Stock Capital Securities Adjustment
------ ------- --------------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $31,952 $103,228 $3,226 ($20,143)
Change in market value
of available-for-
sale equity securities,
net of tax --- --- (1,593) ---
Change in cumulative
translation adjustment --- --- --- (4,100)
Purchase of 45,200 shares
of common stock --- --- --- ---
Net income --- --- --- ---
------- -------- ------ --------
Balance, September 30, 1996 $31,952 $103,228 $1,633 ($24,243)
------- -------- ------ --------
------- -------- ------ --------
<CAPTION>
Retained Treasury
Earnings Stock Total
-------- -------- -----
<S> <C> <C> <C>
Balance, January 1, 1996 $252,218 ($13,194) $357,287
Change in market value
of available-for-
sale equity securities,
net of tax --- --- (1,593)
Change in cumulative
translation adjustment --- --- (4,100)
Purchase of 45,200 shares
of common stock --- (817) (817)
Net income 19,908 --- 19,908
-------- -------- --------
Balance, September 30, 1996 $272,126 ($14,011) $370,685
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
Page 4 of 15 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
For the Nine Months Ended:
--------------------------
9/30/96 9/30/95
--------------------------
Cash Flows from Operating Activities: (In thousands)
Net income $ 19,908 $ 17,286
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in market value of marketable securities 345 (3,165)
Purchase of marketable securities (12,120) (31,756)
Proceeds from sale of marketable securities 16,301 23,757
Equity in net income of Affiliated Companies (15,566) (18,764)
Gain on sales of investments (7,002) (1,161)
(Gain) loss on investment in partnerships (232) 265
Income of consolidated subsidiaries (545) (533)
Loss from discontinued operations, net of income taxes --- 565
Amortization of premiums on receivables, net --- 63
Net gain on issuance of shares by Affiliated Companies (1,304) ---
Dividends and interest from Affiliated Companies 7,479 5,766
Decrease in other assets 2,114 728
Provision for deferred income taxes (1,364) (3,423)
Increase in other liabilities 106 6,957
------- -------
Net cash provided by (used in) operating activities 8,120 (3,415)
------- -------
Cash Flows from Investing Activities:
Repayment of municipal bonds 3,015 ---
Repayment of notes receivable 1,155 296
Purchase of notes receivable (4,420) (14,591)
Proceeds from sale of equity interests 8,566 31,925
Purchase of equity interests (21,562) (3,734)
------- -------
Net cash (used in) provided by investing activities (13,246) 13,896
------- -------
Cash Flows from Financing Activities:
Purchase of treasury stock (817) ---
------- -------
Cash used by financing activities (817) ---
------- -------
Net (decrease) increase in Cash and Cash Equivalents (5,943) 10,481
Cash and Cash Equivalents, beginning of period 14,703 20,736
------- -------
Cash and Cash Equivalents, end of period $ 8,760 $ 31,217
------- -------
------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for income taxes $ 3,878 $ 1,754
See notes to consolidated statements.
Page 5 of 15 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
Notes to Consolidated Financial Statements
(Unaudited)
1. The December 31, 1995 balance sheet presented herein was derived from the
audited December 31, 1995 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, 1995 for a description of the significant
accounting policies, which have continued without change, and other
footnote information.
3. As discussed in Note 6(a) of the Notes to the Consolidated Financial
Statements for the year ended December 31, 1995, on April 30, 1995, motions
were filed in the Tel Aviv District Court for recognizing two lawsuits
against Cellcom as class actions on behalf of all the Cellcom subscribers
in accordance with the Consumer Protection Law - 1981. On October 30,
1996, the District Court denied the motions to recognize the two lawsuits
as class actions. The plaintiffs have 45 days to appeal the District
Court's decision.
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 15 pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1995.
Consolidated net income for the three months ended September 30, 1996 was
$1.0 million compared to $9.0 million for the three months ended September
30, 1995. The reduction reflected decreases of $9.1 million in equity in net
income of Affiliated Companies, $2.9 million in change in market value of
marketable securities and $459,000 in interest and dividend income. In
addition, General Engineers had losses before income tax benefit of $259,000
in the third quarter of 1996 compared to income before income taxes of
$182,000 in the corresponding 1995 quarter. The reduction attributable to
these items was partially offset by increases of $1.6 million in net gain on
sales of investments and $758,000 in other income and by a decrease of $2.2
million in the provision for income taxes.
Equity in net loss of Affiliated Companies for the third quarter of 1996
was $1.3 million compared to equity in net income of $7.8 million for the
corresponding 1995 period. The reduction primarily reflected an operating
loss and special charges at Scitex (of which PEC's share was $10.0 million
compared to a loss of $2.2 million in the corresponding 1995 quarter
attributable to special charges) and reduced net income in respect of certain
Affiliated Companies, principally Property & Building, DEP Technology
Holdings Ltd., through which PEC holds its ownership interest in RDC-Rafael
Development Corporation Ltd., and El-Yam. This reduction was partially
offset by reduced losses in respect of Cellcom (of which PEC's share was
$186,000 compared to $1.8 million in the third quarter of 1995), and by
increased net income in respect of certain Affiliated Companies, particularly
Super-Sol and DIC and PEC Cable TV Ltd., through which PEC holds its
ownership interest in Tevel.
Page 7 of 15 pages
<PAGE>
The market value of PEC's marketable securities decreased by $1.8 million
for the three months ended September 30, 1996 compared to an increase of $1.0
million for the corresponding 1995 period. The decrease reflected PEC's sale
of marketable securities during the third quarter of 1996 which resulted in net
gain on sales of investments for the quarter.
PEC realized a net gain on sales of investments of $2.3 million for the
third quarter of 1996 compared to $609,000 for the third quarter of 1995. In
the third quarter of 1996, PEC sold a 0.2% ownership interest in Nice,
reducing its ownership in Nice to 5.2% and realizing a net gain of $274,000,
and sold marketable securities of U.S. companies and options for a net gain
of $2.0 million. PEC's other income increased to $1.0 million for the third
quarter of 1996 from $263,000 for the corresponding 1995 quarter, primarily
because of increased management fees and income from limited partnerships,
principally Gemini.
PEC's interest and dividend income decreased to $191,000 for the third
quarter of 1996 compared to $650,000 for the corresponding 1995 quarter
primarily because of a decrease in PEC's liquid assets (consisting of cash,
money market funds, short-term bank deposits, marketable securities of U.S.
companies and marketable bonds) from approximately $60.1 million as of September
30, 1995 to approximately $28.3 million as of September 30, 1996. See
"Liquidity and Capital Resources". Liquid assets were reduced principally
because of the net purchase of securities of new and existing Affiliated
Companies and securities of other Israeli companies.
PEC recorded an income tax benefit of $1.6 million for the third quarter
of 1996 compared to a provision for income taxes of $598,000 for the
corresponding 1995 quarter. PEC's income tax benefit resulted from its
equity in net loss of Affiliated Companies other than Majority-Owned
Affiliated Companies. As discussed in Note 2 of the Notes to the
Consolidated Financial Statements for the year ended December 31, 1995, PEC
does not provide deferred income taxes with respect to undistributed earnings
of, and gains on issuances of shares by, Majority-Owned Affiliated Companies.
Page 8 of 15 pages
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1995.
Consolidated net income for the nine months ended September 30, 1996 rose
to $19.9 million, up from $17.3 million for the nine months ended September 30,
1995. The rise in net income reflected increases of $5.8 million in net gain on
sales of investments, $1.3 million in net gain on issuance of shares by
Affiliated Companies and $1.1 million in other income and a decrease of $1.6
million in the provision for income taxes. In addition, PEC realized a loss
from discontinued operations of General Engineers Limited, net of income taxes,
of $565,000 in the first nine months of 1995 while PEC did not realize any such
loss in the corresponding 1996 period. The rise attributable to these items was
partially offset by decreases of $3.2 million in equity in net income of
Affiliated Companies, $3.5 million in change in market value of marketable
securities and $866,000 in interest and dividend income.
Equity in net income of Affiliated Companies for the nine months ended
September 30, 1996 was $15.6 million compared to $18.8 million for the
corresponding 1995 period. The decrease reflected an operating loss and
special charges at Scitex (of which PEC's share was $10.3 million compared to
a loss of $1.2 million in the corresponding 1995 period attributable to
special charges), decreased net income in respect of certain Affiliated
Companies, principally Property & Building and El-Yam, and losses in respect of
Liraz and Lego compared to income in the corresponding 1995 period. This
decrease was partially offset by increased net income in respect of some of
PEC's Affiliated Companies, principally Super-Sol, DIC and PEC Cable TV Ltd.,
Tefron, Tambour and Delek, and reduced losses in respect of Cellcom (of which
PEC's share was $1.3 million in the first nine months of 1996 compared to
$5.1 million in the corresponding 1995 period).
PEC realized a net gain on sales of investments of $7.0 million for the
first nine months of 1996 compared to $1.2 million for the corresponding 1995
period. During the nine months ended September 30, 1996, PEC realized a net
gain of $1.7 million on the sale of a 1.1% ownership interest in Super-Sol, a
net gain of $1.8 million on the sale of a 1.5% ownership interest in Nice, a net
gain of $3.3 million on the sale of marketable securities of U.S. companies and
options and a net
Page 9 of 15 pages
<PAGE>
gain of $210,000 on the sale of a 1.4% ownership interest in VocalTec. All of
PEC's $1.2 million net gain on sales of investments for the nine months ended
September 30, 1995 resulted from PEC's sale of marketable bonds of the U.S.
Government and marketable securities of U.S. companies.
PEC realized a net gain on issuance of shares by Affiliated Companies of
$1.3 million for the first nine months of 1996 while it did not realize any net
gain for the corresponding 1995 period. In January 1996, Nice sold American
Depositary Shares representing ordinary shares of Nice in a public offering in
the United States and PEC realized a net gain on issuance of shares by Nice of
$800,000. In March 1996, Logal sold ordinary shares in an initial public
offering in the United States and PEC realized a net gain on issuance of shares
by Logal of $500,000.
The market value of PEC's marketable securities decreased by $345,000 for
the nine months ended September 30, 1996 compared to an increase of $3.2 million
for the corresponding 1995 period. The principal reason for this decrease was
the sale of marketable securities during the first nine months of 1996 which
resulted in net gain on sales of investments for this period.
PEC's other income increased to $1.6 million for the first nine months of
1996, up from $530,000 for the corresponding 1995 period. PEC's other income
for the first nine months of 1996 reflected increased management fees and income
from limited partnerships, principally Gemini.
PEC's interest and dividend income decreased to $749,000 for the first nine
months of 1996 compared to $1.6 million for the corresponding 1995 period,
primarily because PEC's liquid assets decreased. Liquid assets were reduced
principally because of the net purchases of securities of new and existing
Affiliated Companies and securities of other Israeli companies.
Although PEC's income before income taxes and loss from discontinued
operations increased to $23.3 million for the first nine months of 1996 from
$22.8 million for the corresponding 1995 period, PEC's provision for income
taxes decreased to $3.3 million for the 1996 period from $4.9 million for the
corresponding 1995 period. This decrease in the provision for
Page 10 of 15 pages
<PAGE>
income taxes reflected an increase for the nine months ended September 30, 1996
in the proportion of income from undistributed earnings of Majority-Owned
Affiliated Companies compared to the corresponding 1995 period.
SHAREHOLDERS' EQUITY
As a result of decreases in the market value of "available-for-sale
securities" since January 1, 1996, the unrealized gain, net of taxes, from
those securities that was included in shareholders' equity as of September
30, 1996 was $1.6 million compared to $3.2 million, net of taxes, as of
December 31, 1995.
As discussed in Note 2 of the Notes to the Consolidated Financial
Statements for the year ended December 31, 1995, translation differences are
reflected in shareholders' equity as a "Cumulative Translation Adjustment". The
exchange rate of the New Israel Shekel depreciated approximately 2% against the
U.S. dollar as of September 30, 1996 compared to December 31, 1995. As of
September 30, 1996, the Cumulative Translation Adjustment reduced shareholders'
equity by $24.2 million compared to $20.1 million at the end of 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, PEC's liquid assets (consisting of cash, money
market funds, marketable securities of U.S. companies and bonds issued by the
Government of Israel) totaled approximately $28.3 million.
For the nine months ended September 30, 1996, PEC received cash dividends
and interest totaling $9.5 million (including $7.5 million of cash dividends
received from Affiliated Companies). During the nine months ended September 30,
1996, PEC received a total of $29.1 million of additional funds, of which $3
million was generated from the repayment at maturity of municipal bonds, $24.9
million was generated from the sale of securities and $1.2 million was generated
from the repayment of loans. During the same period, PEC purchased equity and
debt securities of several new and existing Affiliated Companies for
approximately $26 million, including $4 million of securities purchased during
the third quarter of 1996. The existing Affiliated Companies in
Page 11 of 15 pages
<PAGE>
which PEC purchased securities during the third quarter of 1996 and the purchase
price for such securities consisted primarily of Delek - $1.1 million
(increasing PEC's ownership interest by 0.5% to 2.6%), Cellcom - $859,000
(representing accrued interest on existing shareholder loans from PEC which has
been added to the principal of the outstanding loans), Property & Building -
$710,000 (increasing PEC's ownership interest in Property & Building by 0.4% to
38%), Isrotel - $359,000 (increasing PEC's ownership interest by 0.3% to 2.2%)
and Tambour - $262,000 (increasing PEC's ownership interest by 0.2% to 42.8%).
In addition, during the third quarter of 1996, PEC purchased for $528,000 a
13.2% ownership interest in Soundesigns Multimedia Communication Systems Ltd.
("Soundesigns"), a company engaged in computer communications. Discount
Investment Corporation Ltd., PEC's sister corporation ("Discount Investment"),
also purchased the same percentage interest in Soundesigns on the same terms as
PEC. During the first nine months of 1996, PEC also purchased marketable
securities of U.S. companies for approximately $12.1 million.
During October 1996, PEC acquired a 3.3% limited partnership interest in
the PAMOT Fund ("PAMOT") in consideration for PEC's agreement to contribute
up to $500,000 to the capital of PAMOT, of which PEC has paid $125,000.
PAMOT is a newly formed fund comprised of five parallel limited partnerships
that will operate together to evaluate, develop and own technologies
developed at the Weizmann Institute of Science. Discount Investment also
purchased a 3.3% ownership interest in PAMOT on the same terms as PEC.
On November 4, 1996, PEC purchased for $1.2 million an additional 6.9%
ownership interest in Liraz, increasing its ownership interest in Liraz to
16.2%. Discount Investment also purchased the same percentage ownership
interest in Liraz as PEC on the same terms as PEC.
On July 18, 1996, PEC announced that it would purchase up to 500,000 shares
of its common stock from time to time in the open market at its discretion,
taking into account such factors as price and prevailing market conditions.
During the third quarter of 1996, PEC purchased 45,200 shares of its common
stock for
Page 12 of 15 pages
<PAGE>
$817,000 and during October 1996, PEC purchased an additional 49,000 shares of
its common stock for $798,000, reducing the number of outstanding shares of
PEC's common stock to 18,664,388.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27 Financial Data Schedule, which is page 15 of this report.
Page 13 of 15 pages
<PAGE>
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, 1996
Page 14 of 15 pages
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of September 30, 1996 and the consolidated
statement of income for the nine months ended September 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,760
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 403,280
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 31,952
<OTHER-SE> 338,733
<TOTAL-LIABILITY-AND-EQUITY> 403,280
<SALES> 0
<TOTAL-REVENUES> 31,920
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,255
<INCOME-TAX> 3,347
<INCOME-CONTINUING> 19,908
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,908
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
