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 June 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 August 13, 1996 there were outstanding 18,758,588 shares of Common
Stock with par value of $1.00 per share.
Page 1 of 15 pages
<PAGE>
PART I - FINANCIAL INFORMATION
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended: For the Three Months Ended:
---------------------------- ----------------------------
6/30/96 6/30/95 6/30/96 6/30/95
------------ ------------ ------------ ------------
(IN THOUSANDS -- EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Interest and dividends $ 558 $ 965 $ 248 $ 557
Equity in net income of Affiliated Companies 16,877 11,003 7,963 5,613
Net gain on issuance of shares by Affiliated Companies 1,304 -- -- --
Revenues of General Engineers Limited 4,286 2,934 2,281 1,518
Net gain on sales of investments 4,746 552 3,559 306
Change in market value of marketable securities 1,488 2,124 31 1,180
Other 573 267 199 280
------------ ------------ ------------ ------------
29,832 17,845 14,281 9,454
------------ ------------ ------------ ------------
Expenses:
General and administrative 1,743 1,690 841 886
Cost of sales and expenses of General Engineers Limited 4,267 3,116 2,282 1,759
------------ ------------ ------------ ------------
6,010 4,806 3,123 2,645
------------ ------------ ------------ ------------
Income before income taxes and loss from
discontinued operations 23,822 13,039 11,158 6,809
Income taxes 4,946 4,327 2,673 3,360
------------ ------------ ------------ ------------
Income before loss from discontinued operations 18,876 8,712 8,485 3,449
Loss from discontinued operations
of General Engineers Limited, net
of income taxes -- (401) -- (179)
------------ ------------ ------------ ------------
Net income $ 18,876 $ 8,311 $ 8,485 $ 3,270
============ ============ ============ ============
Earnings per common share before loss from
discontinued operations $ 1.00 $ 0.46 $ 0.45 $ 0.18
Loss from discontinued operations of General
Engineers Limited, net of income taxes -- (0.02) -- (0.01)
------------ ------------ ------------ ------------
Earnings per common share $ 1.00 $ 0.44 $ 0.45 $ 0.17
============ ============ ============ ============
Number of shares outstanding 18,758,588 18,758,588 18,758,588 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
June 30, December 31,
1996 1995
--------- ---------
(Unaudited)
(In thousands)
Assets
Cash and cash equivalents $ 6,542 $ 14,703
Investments 395,641 369,096
Assets of General Engineers Limited 4,930 5,229
Other assets 3,498 3,939
--------- ---------
Total assets $ 410,611 $ 392,967
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Liabilities of General Engineers Limited $ 1,667 $ 1,922
Deferred income taxes 30,666 29,192
Other liabilities 5,679 4,566
--------- ---------
Total liabilities 38,012 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 3,239 3,226
Cumulative translation adjustment (23,720) (20,143)
Retained earnings 271,094 252,218
--------- ---------
385,793 370,481
Treasury stock (13,194) (13,194)
--------- ---------
Total shareholders' equity 372,599 357,287
--------- ---------
Total liabilities and shareholders' equity $ 410,611 $ 392,967
========= =========
See notes to consolidated financial statements.
Page 3 of 15 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Unrealized
Gain on Cumulative
Common Paid-in Marketable Translation Retained Treasury
Stock Capital Securities Adjustment Earnings Stock Total
--------- --------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 31,952 $ 103,228 $ 3,226 ($ 20,143) $ 252,218 ($ 13,194) $ 357,287
Change in market value
of available-for-
sale equity securities,
net of tax -- -- 13 -- -- -- 13
Change in cumulative
translation adjustment -- -- -- (3,577) -- -- (3,577)
Net income -- -- -- -- 18,876 -- 18,876
--------- --------- ---------- ---------- --------- --------- ---------
Balance, June 30, 1996 $ 31,952 $ 103,228 $ 3,239 ($ 23,720) $ 271,094 ($ 13,194) $ 372,599
========= ========= ========= ========= ========= ========= =========
</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 Six Months Ended:
------------------------
6/30/96 6/30/95
-------- --------
(In thousands)
Cash Flows from Operating Activities:
Net income $ 18,876 $ 8,311
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in market value of marketable securities (1,488) (2,124)
Purchase of marketable securities (6,599) (3,390)
Proceeds from sale of marketable securities 6,344 5,733
Equity in net income of Affiliated Companies (16,877) (11,003)
Gain on sales of investments (4,746) (552)
Net loss on investment in partnerships 120 253
Income of consolidated subsidiaries (481) (116)
Loss from discontinued operations,
net of income taxes -- 401
Amortization of premiums on receivables, net -- 42
Net gain on issuance of shares by
Affiliated Companies (1,304) --
Dividends and interest from
Affiliated Companies 3,191 4,168
Decrease in other assets 1,786 577
Provision for deferred income taxes 1,946 3,027
Increase in other liabilities 912 83
-------- --------
Net cash provided by operating activities 1,680 5,410
-------- --------
Cash Flows from Investing Activities:
Repayment of municipal bonds 3,015 --
Repayment of notes receivable 789 250
Purchase of notes receivable (2,668) (1,273)
Proceeds from sale of equity interests 7,810 4,960
Purchase of equity interests (18,787) (7,270)
-------- --------
Net cash used in investing activities (9,841) (3,333)
-------- --------
Net (decrease) increase in
Cash and Cash Equivalents (8,161) 2,077
Cash and Cash Equivalents,
beginning of period 14,703 20,736
-------- --------
Cash and Cash Equivalents, end of period $ 6,542 $ 22,813
======== ========
Supplemental Disclosures of
Cash Flow Information:
Cash paid during period for income taxes $ 1,271 $ 922
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. 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 June 30, 1996 Compared to Three Months Ended June 30, 1995
Consolidated net income for the three months ended June 30, 1996 rose to
$8.5 million, up from $3.3 million for the three months ended June 30, 1995. The
rise in consolidated net income reflected increases of $2.4 million in equity in
net income of Affiliated Companies and $3.3 million in net gain on sales of
investments and a decrease of $687,000 in the provision for income taxes. The
increase attributable to these items was partially offset by decreases of $1.1
million in change in market value of marketable securities and $309,000 in
interest and dividend income.
Equity in net income of Affiliated Companies for the second quarter of 1996
rose to $8.0 million, up from $5.6 million for the corresponding 1995 period.
The increase in equity in net income of Affiliated Companies reflected PEC's
increased net income in respect of some of its Affiliated Companies,
particularly DIC and PEC Cable TV Ltd. (the holding company for PEC's interest
in Tevel), Delek (which was not accounted for on the equity method in the
corresponding 1995 quarter) and Tefron, as well as PEC's reduced losses in
respect of Cellcom (of which PEC's share was $866,000 of continued start up
losses compared to $2.0 million of start up losses in the second quarter of
1995). This increase was partially offset by PEC's reduced net income in respect
of some of its other Affiliated Companies and by losses in respect of Scitex
compared to income in the second quarter of 1995.
PEC realized a net gain on sales of investments of $3.6 million for the
second quarter of 1996 compared to $306,000 for the second quarter of 1995. In
the second quarter of 1996, PEC sold a 1.3% ownership interest in Nice, reducing
its ownership
Page 7 of 15 pages
<PAGE>
interest in Nice to 5.7% and realizing a net gain of $1.3 million, sold a 0.6%
ownership interest in Super-Sol, reducing its ownership interest in Super-Sol to
17.7% and realizing a net gain of $900,000, and sold marketable securities of
U.S. companies for a net gain of $1.4 million. PEC's net gain on sales of
investments of $306,000 for the second quarter of 1995 resulted from PEC's sale
of marketable securities of U.S. companies.
PEC's interest and dividend income decreased to $248,000 for the second
quarter of 1996 compared to $557,000 for the corresponding 1995 quarter
primarily because of a decrease in the amount of 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 $40.2 million as of June
30, 1995 to approximately $30.1 million as of June 30, 1996. 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.
Although PEC's income before income taxes and loss from discontinued
operations increased to $11.2 million for the second quarter of 1996 from $6.8
million for the corresponding 1995 quarter, PEC's provision for income taxes for
the second quarter of 1996 decreased to $2.7 million from $3.4 million for the
corresponding 1995 quarter. PEC provided approximately $3.0 million of
additional income taxes in the second quarter of 1995 as a result of PEC's sale
to Israel Discount Bank of New York ("IDBNY") in July 1995 of all of PEC's
nonvoting preferred shares of IDBNY, which sale did not result in a gain for
financial statement purposes but did result in a gain for tax purposes.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Consolidated net income for the six months ended June 30, 1996 rose to
$18.9 million, up from $8.3 million for the six months ended June 30, 1995. The
rise in net income reflected
Page 8 of 15 pages
<PAGE>
increases of $5.9 million in equity in net income of Affiliated Companies, $4.2
million in net gain on sales of investments, $1.3 million in net gain on
issuance of shares by Affiliated Companies and $306,000 in other income. The
increase in net income also reflected a loss from discontinued operations of
General Engineers Limited, net of income taxes, of $401,000 in the first half of
1995. The rise attributable to these items was partially offset by decreases of
$636,000 in change in market value of marketable securities and $407,000 in
interest and dividend income and an increase of $619,000 in the provision for
income taxes.
Equity in net income of Affiliated Companies for the six months ended June
30, 1996 rose to $16.9 million, up from $11.0 million for the corresponding 1996
period. The increase in equity in net income of Affiliated Companies for the
first half of 1996 reflected increased net income in respect of some of PEC's
Affiliated Companies, principally Tefron, Tambour, Super-Sol and Caniel, and
reduced losses in respect of Cellcom (approximately $1.1 million of continued
start up losses in the first half of 1996 compared to $3.2 million of start up
losses in the corresponding 1995 period). This increase was partially offset by
losses in respect of Scitex compared to income in the first half of 1995.
PEC realized a net gain on sales of investments of $4.7 million for the
first half of 1996 compared to $552,000 for the corresponding 1995 period.
During the first half of 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 $1.3 million on
the sale of a 1.3% ownership interest in Nice, a net gain of $1.5 million on the
sale of marketable securities of U.S. companies and a net gain of $210,000 on
the sale of a 1.4% ownership interest in VocalTec. All of PEC's $552,000 net
gain on sales of investments for the first half of 1995 resulted from PEC's sale
of marketable securities of U.S. companies.
PEC realized a net gain on issuance of shares by Affiliated Companies of
$1.3 million for the six months ended June 30, 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
Page 9 of 15 pages
<PAGE>
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
of Logal of $500,000.
PEC's other income increased to $573,000 for the first half of 1996
compared to $267,000 for the first half of 1995. PEC's other income for the
first half of 1996 reflected increased management fees while PEC's other income
in the first half of 1995 reflected a loss with respect to PEC's interest in a
limited partnership which PEC sold in January 1995.
PEC's interest and dividend income decreased to $558,000 for the six months
ended June 30, 1996 compared to $965,000 for the six months ended June 30, 1995
primarily because the amount of PEC's liquid assets decreased. 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.
Although PEC's income before income taxes and loss from discontinued
operations increased to $23.8 million for the first half of 1996 from $13
million for the first half of 1995, PEC's provision for income taxes for the
first half of 1996 was $4.9 million compared to $4.3 million for the first half
of 1995. As discussed above, PEC provided approximately $3.0 million of
additional income taxes in the first half of 1995 as a result of PEC's sale to
IDBNY in July 1995 of all of PEC's nonvoting preferred shares of IDBNY. See
"Results of Operations - Three Months Ended June 30, 1996 Compared to Three
Months Ended June 30, 1995".
SHAREHOLDERS' EQUITY
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 June 30, 1996 compared to December 31, 1995. As of June 30,
1996, the Cumulative Translation Adjustment reduced shareholders' equity by
$23.7 million compared to $20.1 million at the end of 1995.
Page 10 of 15 pages
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, PEC's liquid assets (consisting of cash, money market
funds and marketable securities of U.S. companies) totaled approximately $30.1
million.
For the six months ended June 30, 1996, PEC received cash dividends and
interest totaling $4.6 million (including $3.2 million of cash dividends
received from Affiliated Companies). During the first half of 1996, PEC received
a total of $18 million of additional funds, of which $3 million was generated
from the repayment at maturity of municipal bonds, $14.2 million was generated
from the sale of securities and $789,000 was generated from the repayment of
loans. During the same period, PEC purchased equity and debt securities of
several Affiliated Companies for approximately $21.5 million, including $16.0
million of securities purchased during the second quarter of 1996. The
Affiliated Companies in which PEC purchased securities during the second quarter
of 1996 and the purchase price for such securities consisted primarily of
Property & Building - $9 million (of which $8.2 million was to purchase ordinary
shares pursuant to a rights offering and the balance was to purchase additional
ordinary shares, increasing PEC's ownership interest in Property & Building by
0.4% to 37.6%), Scitex - $4.7 million (increasing PEC's ownership interest by
0.55% to 6.6%), Renaissance - $555,000 (reducing PEC's obligation to make
additional capital contributions to Renaissance to $154,000) and Gemini and
Advent Israel (capital contributions of $1 million and $175,000, respectively,
completing PEC's capital commitments to these limited partnerships). During the
first half of 1996, PEC also purchased marketable securities of U.S. companies
for approximately $6.6 million.
During July 1996, PEC purchased additional shares of Affiliated Companies
for approximately $2.5 million of which $1.1 million was for additional ordinary
shares of Delek (increasing PEC's ownership interest by 0.5% to 2.6%), $710,000
was for additional ordinary shares of Property & Building (increasing PEC's
ownership interest by 0.4% to 38.0%), $262,000 was for additional ordinary
shares of Tambour (increasing PEC's ownership interest by 0.2% to 42.8%) and
$236,000 was for additional ordinary shares of Isrotel (increasing PEC's
ownership interest by 0.2% to 2.0%).
Page 11 of 15 pages
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Item 1 of Part II of PEC's Quarterly Report on Form
10-Q for the quarterly period ended on March 31, 1996 in which PEC discloses
that a shareholder derivative action on behalf of PEC has been instituted
against the directors of PEC, PEC's Israeli parent companies and certain
shareholders thereof.
On May 8, 1996, Freyda Tavin ("Tavin") instituted a class action in the
Supreme Court of New York State, County of New York, on behalf of the
shareholders of Scitex (other than the defendant shareholders)(the "Tavin New
York action") against Scitex, the directors of Scitex, certain officers of
Scitex, the four largest shareholders of Scitex, including PEC, PEC's Israeli
parent companies and certain shareholders thereof. In her complaint, which was
served on PEC in June 1996, Tavin alleges that PEC and the three other largest
shareholders of Scitex caused Scitex to (i) refuse to negotiate with Davidi Gilo
("Gilo") concerning Gilo's conditional proposals to take Scitex private by
purchasing the outstanding ordinary shares of Scitex, first at $20 per share and
then at $25 per share, and (ii) fail to explore any other bona fide offers by
potential acquirors for the purchase of Scitex. Tavin claims that such alleged
action, and the purchase of 1,090,000 ordinary shares of Scitex by PEC and the
three other largest shareholders of Scitex after Gilo's announcement of his
initial proposal, constituted a breach by PEC and the other defendants of their
fiduciary duty to Scitex and its shareholders. The complaint requests that the
Court (i) declare the action to be a proper class action, (ii) enjoin the
defendants from taking any action to prevent a takeover of Scitex, (iii) order
Scitex to take certain measures with respect to possible future transactions,
and (iv) require the defendants to pay Tavin and the other members of the class
damages and other monetary relief, including attorneys' and experts' fees, costs
and expenses.
On May 15, 1996, Tavin filed in Superior Court of the Commonwealth of
Massachusetts, County of Middlesex, a substantially identical complaint against
the same defendants as in the Tavin New York action, requesting the same relief
from the Court. PEC believes it has meritorious defenses to both Tavin actions.
Page 12 of 15 pages
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders on June 4, 1996, the shareholders
elected twelve directors, each for a term of one year. Proxies for the meeting
were solicited pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended. A total of 16,821,896 shares were voted with respect to the
election of directors, and there were no broker non-votes. The tabulation of the
votes cast for each nominee for director was as follows:
NUMBER OF SHARES
---------------------------------
NAME OF NOMINEE WITHHELD AUTHORITY
FOR DIRECTOR VOTED FOR TO VOTE
- --------------- ---------- ------------------
Raphael Recanati 16,805,087 16,809
Frank J. Klein 16,795,599 26,297
Robert H. Arnow 16,798,435 23,461
Joseph Ciechanover 16,800,899 20,997
Eliahu Cohen 16,798,199 23,697
Roger Cukierman 16,420,424 401,472
Alan S. Jaffe 16,798,324 23,572
Hermann Merkin 16,801,887 20,009
Harvey M. Meyerhoff 16,805,487 16,409
Oudi Recanati 16,797,724 24,172
Alan S. Rosenberg 16,800,799 21,097
Richard S. Zeisler 16,801,787 20,109
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: August 14, 1996
Page 14 of 15 pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of June 30, 1996 and the consolidated statement of
income for the six months ended June 30, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,542
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 410,611
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 31,952
<OTHER-SE> 340,647
<TOTAL-LIABILITY-AND-EQUITY> 410,611
<SALES> 0
<TOTAL-REVENUES> 29,832
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,822
<INCOME-TAX> 4,946
<INCOME-CONTINUING> 18,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,876
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
