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, 1996
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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 13-1143528
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
511 Fifth Avenue, New York, N.Y. 10017
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 687-2400
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
----- -----
As of May 13, 1996 there were outstanding 18,758,588 shares of Common
Stock with par value of $1.00 per share.
Page 1 of 12 pages
<PAGE>
PART I - FINANCIAL INFORMATION
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended:
---------------------------------
3/31/96 3/31/95*
---------------------------------
(In thousands - except per share amounts)
<S> <C> <C>
Revenues:
Interest and dividends $ 310 $ 408
Equity in net income of Affiliated Companies 8,914 5,389
Net gain on issuance of shares by Affiliated Companies 1,304 --
Revenues of General Engineers Limited 2,005 1,415
Net gain on sales of investments 1,187 246
Change in market value of marketable securities 1,457 945
Other 374 (12)
------------ ------------
15,551 8,391
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Expenses:
General and administrative 902 804
Cost of sales and expenses of General Engineers Limited 1,985 1,357
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2,887 2,161
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Income before income taxes and loss from
discontinued operations 12,664 6,230
Income taxes 2,273 967
------------ ------------
Income before loss from discontinued operations 10,391 5,263
Loss from discontinued operations
of General Engineers Limited, net
of income taxes -- (222)
------------ ------------
Net income $ 10,391 $ 5,041
============ ============
Earnings per common share before loss from
discontinued operations $ .55 $ .28
Loss from discontinued operations of General
Engineers Limited, net of income taxes -- (.01)
------------ ------------
Earnings per common share $ .55 $ .27
============ ============
Number of shares outstanding 18,758,588 18,758,588
Dividend per share None None
</TABLE>
* Restated
See notes to consolidated financial statements.
Page 2 of 12 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
March 31, December 31,
-------------------------
Assets 1996 1995
- ------ -------------------------
(In thousands)
--------------------------
Cash and cash equivalents $ 15,249 $ 14,703
Investments 382,417 369,096
Assets of General Engineers Limited 5,207 5,229
Other assets 3,398 3,939
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Total assets $ 406,271 $ 392,967
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Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities:
Liabilities of General Engineers Limited $ 1,842 1,922
Deferred income taxes 30,945 29,192
Other liabilities 4,463 4,566
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Total liabilities 37,250 35,680
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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 3,251 3,226
Cumulative translation adjustment (18,825) (20,143)
Retained earnings 262,609 252,218
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382,215 370,481
Treasury stock (13,194) (13,194)
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Total shareholders' equity 369,021 357,287
--------- ---------
Total liabilities and shareholders'
equity $ 406,271 $ 392,967
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See notes to consolidated financial statements.
Page 3 of 12 pages
<PAGE>
<TABLE>
<CAPTION>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In Thousands)
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, 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 --- --- 25 --- --- --- 25
Change in cumulative
translation adjustment --- --- --- 1,318 --- --- 1,318
Net income --- --- --- --- 10,391 --- 10,391
---------- -------- ----------------- -------------- ---------- ----------- --------
Balance, March 31, 1996 $31,952 $103,228 $3,251 ($18,825) $262,609 ($13,194) $369,021
========== ======== ================= ============== ========== =========== ========
</TABLE>
See notes to consolidated financial statements.
Page 4 of 12 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended:
-----------------------------------------
3/31/96 3/31/95*
-----------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities: (In thousands)
Net income $ 10,391 $ 5,041
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in market value of marketable securities (1,457) (945)
Purchase of marketable securities (2,014) (1,739)
Proceeds from sale of marketable securities 891 1,893
Equity in net income of Affiliated Companies (8,914) (5,389)
Gain on sales of investments (1,187) (246)
Loss on investment in partnerships --- 253
Income of consolidated subsidiaries (272) (272)
Loss from discontinued operations, net of income taxes --- 222
Amortization of premiums on receivables, net --- 21
Net gain on issuance of shares by Affiliated Companies (1,304) ---
Dividends from Affiliated Companies 437 2,978
Decrease (increase) in other assets 1,414 (840)
Provision for deferred income taxes 1,764 162
(Decrease) increase in other liabilities (401) 94
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Net cash (used in) provided by operating activities (652) 1,233
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Cash Flows from Investing Activities:
Repayment of municipal bonds 3,015 ---
Repayment of notes receivable 544 201
Purchase of notes receivable (2,360) (765)
Proceeds from sale of equity interests 3,102 4,960
Purchase of equity interests (3,103) (4,174)
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Net cash provided by investing activities 1,198 222
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Net Increase in Cash and Cash Equivalents 546 1,455
Cash and Cash Equivalents, beginning of period 14,703 20,736
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Cash and Cash Equivalents, end of period $ 15,249 $ 22,191
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for income taxes $ 37 $ 122
</TABLE>
* Restated
See notes to consolidated statements.
10Q-2 Page 5 of 12 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. The results of operations and the statement of cash flows
for the three months ended March 31, 1995 have been restated
to reflect the discontinued operations of General Engineers
Limited. The loss from discontinued operations for the
three months ended March 31, 1995 was $222,000, net of
$65,000 of income tax benefits.
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 12 pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND
-----------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
- -------------------------------------------------------------------------------
Consolidated net income for the three months ended March 31, 1996 rose
to $10.4 million, up from $5.0 million for the three months ended March 31,
1995. The rise in net income reflected increases of $3.5 million in equity in
net income of Affiliated Companies, $1.3 million in net gain on issuance of
shares by Affiliated Companies, $940,000 in net gain on sales of investments,
$510,000 in the market value of marketable securities and $390,000 in other
income. The increase attributable to these items was partially offset by an
increase of $1.3 million in the provision for income taxes.
Equity in net income of Affiliated Companies for the first quarter of
1996 rose to $8.9 million, up from $5.4 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 Super-Sol, Property & Building, Tambour and Tefron, and PEC's
reduced losses in respect of certain other Affiliated Companies, principally
Cellcom (of which PEC's share was $210,000 of continued start up losses compared
to $1.2 million of start up losses in the first quarter of 1995). This increase
was partially offset by PEC's reduced net income in respect of some of its other
Affiliated Companies, particularly Scitex.
PEC realized a net gain on issuance of shares by Affiliated Companies
of $1.3 million for the three months ended March 31, 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. As a result of the sale,
Page 7 of 12 pages
<PAGE>
PEC's ownership interest in Nice decreased from 9.6% to 7.0% 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. As a result
of the sale, PEC's interest in Logal decreased from 6.5% to 4.3% and PEC
realized a net gain on issuance of shares by Logal of $500,000.
PEC realized a net gain on sales of investments of $1.2 million
for the first quarter of 1996 compared to $250,000 for the first quarter of
1995. In the first quarter of 1996, PEC sold a 0.5% ownership interest in
Super-Sol, reducing its ownership interest in Super-Sol to 18.3%, and realized a
net gain of $780,000; sold a 1.4% ownership interest in VocalTec in VocalTec's
initial public offering of ordinary shares in the United States, reducing its
ownership interest in VocalTec after the public offering to 4.0%, and realized a
net gain of $210,000; and sold marketable securities of U.S. companies for a net
gain of $180,000. PEC's net gain on sales of investments for the first quarter
of 1995 resulted from PEC's sale of marketable securities of U.S. companies.
As described in Note 2 of the Notes to the Consolidated Financial
Statements for the year ended December 31, 1995 (the "1995 Notes"), 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
$1.5 million for the three months ended March 31, 1996 compared to $940,000 for
the corresponding 1995 period.
PEC's provision for income taxes for the first quarter of 1996 rose to
$2.3 million from $970,000 for the corresponding quarter of 1995 because PEC's
income before income taxes and loss from discontinued operations of General
Engineers Limited increased to $12.7 million from $6.2 million.
PEC's other income increased to $370,000 in the first quarter of 1996
compared to a loss of $10,000 in the
Page 8 of 12 pages
<PAGE>
corresponding 1995 quarter. PEC's other income in the first quarter of 1996
reflected increased management fees while PEC's other income in the first
quarter of 1995 reflected a loss with respect to PEC's interest in a limited
partnership which PEC sold in January 1995.
SHAREHOLDERS' EQUITY
- --------------------
As discussed in Note 2 of the 1995 Notes, translation differences are
reflected in shareholders' equity as a "Cumulative Translation Adjustment". The
exchange rate of the New Israel Shekel against the U.S. dollar was essentially
unchanged as of March 31, 1996 compared to December 31, 1995. As of March 31,
1996, the Cumulative Translation Adjustment reduced shareholders' equity by
$18.8 million compared to $20.1 million at the end of 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of March 31, 1996, PEC's liquid assets (consisting of cash, money
market funds and marketable securities of U.S. companies) totaled approximately
$38.1 million.
For the three months ended March 31, 1996, PEC received cash dividends
and interest totaling $1.2 million (including $437,000 of cash dividends
received from Affiliated Companies) which substantially exceeded PEC's general
and administrative expenses. During the first quarter of 1996, PEC received a
total of $7.5 million of additional funds of which $3 million was generated from
the repayment at maturity of municipal bonds, $4 million was generated from the
sale of securities and $540,000 was generated from the repayment of loans.
During the first quarter of 1996, PEC purchased marketable securities of U.S.
companies for approximately $2 million. During the same period, PEC purchased
equity and debt securities of several Affiliated Companies for $5.5 million.
The Affiliated Companies in which PEC purchased securities and the purchase
price for such securities consist primarily of Cellcom - $2.1 million (long-term
shareholder loans to Cellcom), VocalTec - $1.3 million (purchased ordinary
shares pursuant to options held by PEC prior to VocalTec's initial public
offering), Renaissance - $920,000
Page 9 of 12 pages
<PAGE>
(reducing PEC's obligation to make additional capital contributions to
Renaissance to $780,000) and Mul-T-Lock - $760,000 (increasing PEC's ownership
interest in Mul-T-Lock to 15.1%).
During April 1996, PEC purchased for $4.5 million an additional 0.55%
ownership interest in Scitex, increasing its ownership interest in Scitex to
6.6%. In addition, PEC has agreed to exercise all rights offered to it to
purchase ordinary shares of Property & Building pursuant to a rights offering in
Israel by Property & Building which is expected to occur in late May 1996. PEC
expects the aggregate purchase price for the shares it will purchase to be
approximately $9.0 million. PEC has also received capital calls from Gemini and
Advent Israel for an aggregate of $1.2 million due in June 1996, which amount
represents the balance of PEC's capital commitments to these partnerships. In
April 1996, PEC sold a 0.6% ownership interest in Super-Sol for $2.6 million,
realizing a gain of approximately $900,000, before income taxes, and reducing
its ownership interest in Super-Sol to 17.7%.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
------------------
On May 3, 1996, Harold Sachs ("Sachs") instituted a shareholder
derivative action in the Supreme Court of New York State, County of New York, on
behalf of PEC, against the directors of PEC, PEC's Israeli parent companies and
certain shareholders thereof. PEC is named as a nominal defendant. In his
complaint, Sachs alleges that PEC's refusal to negotiate with Davidi Gilo
("Gilo") concerning Gilo's conditional proposals to take Scitex private by
purchasing the outstanding ordinary shares of Scitex (including PEC's ordinary
shares of Scitex), first at $20 per share and then at $25 per share, and PEC's
purchase of 181,667 additional ordinary shares of Scitex after Gilo's
announcement of his initial proposal at prices between $18.375 per share and
$19.25 per share, constituted a breach by the defendants of their fiduciary
duties to PEC and its shareholders and a waste of PEC's assets. Sachs also
alleges that the defendants have exposed PEC to liability for damages to
Page 10 of 12 pages
<PAGE>
Scitex by reason of the actions taken by PEC and other major shareholders of
Scitex in respect of Gilo's proposals. The complaint requests that the Court
(i) enjoin PEC from taking any action to prevent a takeover of Scitex, (ii)
require the defendants to pay PEC the amounts by which PEC and its shareholders
have been allegedly damaged by reason of the conduct complained of, and (iii)
require the defendants to pay interest and Sachs' costs and disbursements
related to the action, including attorneys' fees, accountants' and experts'
fees, costs and expenses.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
Exhibit 27 Financial Data Schedule, which is page 12 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, 1996
Page 11 of 12 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, 1996 and
the consolidated statement of income for the three months ended
March 31, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 15,249
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 406,271
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 31,952
<OTHER-SE> 337,069
<TOTAL-LIABILITY-AND-EQUITY> 406,271
<SALES> 0
<TOTAL-REVENUES> 15,551
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,887
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,664
<INCOME-TAX> 2,273
<INCOME-CONTINUING> 10,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,391
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
