<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 MARCH 31, 1997
------------------------------------------
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 1-8707
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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 14, 1997 there were outstanding 18,508,388 shares of Common Stock
with par value of $1.00 per share.
Page 1 of 12 pages
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PART I - FINANCIAL INFORMATION
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------------------------
ASSETS 1997 1996
------ --------------------------
(In thousands - except per share amounts)
<S> <C> <C>
Cash and cash equivalents $ 18,899 $ 7,044
Investments 391,972 391,802
Assets of General Engineers Limited 4,929 4,763
Other assets 3,533 4,094
-------- --------
Total assets $ 419,333 $ 407,703
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Liabilities of General Engineers Limited $ 1,628 $ 1,384
Deferred income taxes 25,231 26,428
Other liabilities 8,896 6,015
-------- --------
Total liabilities 35,755 33,827
-------- --------
Shareholders' equity:
Common stock, $1.00 par value 31,952 31,952
Additional paid-in capital 103,282 103,282
Unrealized gain on marketable securities, net 2,758 1,938
Cumulative translation adjustment (30,408) (26,317)
Retained earnings 293,404 280,431
-------- --------
400,988 391,286
Treasury stock (17,410) (17,410)
-------- --------
Total shareholders' equity 383,578 373,876
-------- --------
Total liabilities and shareholders' equity $ 419,333 $ 407,703
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 12 pages
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PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED:
--------------------------
3/31/97 3/31/96
--------------------------
Revenues: (In thousands - except per share amounts)
<S> <C> <C>
Interest and dividends $ 243 $ 310
Equity in net income of Affiliated Companies 12,015 8,914
Net gain on issuance of shares by Affiliated Companies --- 1,304
Revenues of General Engineers Limited 2,155 2,005
Net gain on sales of investments in Affiliated Companies 5,075 992
Net gain on sales, and changes in market
value, of trading securities 64 1,652
Other 450 374
------- -------
20,002 15,551
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Expenses:
General and administrative 934 902
Cost of sales and expenses of General Engineers Limited 2,135 1,985
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3,069 2,887
------- -------
Income before income taxes 16,933 12,664
Income taxes 3,960 2,273
------- -------
Net income $ 12,973 $ 10,391
------- -------
------- -------
Earnings per common share $ .70 $ .55
Number of shares outstanding 18,508,388 18,758,588
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</TABLE>
See notes to consolidated financial statements.
Page 3 of 12 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, 1997
(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, 1997 $31,952 $103,282 $1,938 ($26,317) $280,431 ($17,410) $373,876
Change in market value
of available-for-
sale equity securities,
net of tax --- --- 820 --- --- --- 820
Cumulative translation
adjustment --- --- --- (4,091) --- --- (4,091)
Net income --- --- --- --- 12,973 --- 12,973
------- -------- -------------- ----------- -------- --------- --------
Balance, March 31, 1997 $31,952 $103,282 $2,758 ($30,408) $293,404 ($17,410) $383,578
------- -------- -------------- ----------- -------- --------- --------
------- -------- -------------- ----------- -------- --------- --------
</TABLE>
See notes to consolidated financial statements.
Page 4 of 12 pages
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PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED:
--------------------------
3/31/97 3/31/96
--------------------------
Cash Flows from Operating Activities: (In thousands)
<S> <C> <C>
Net income $ 12,973 $ 10,391
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net gain on sales, and change in market
value, of trading securities (64) (1,652)
Purchase of trading securities (8,762) (2,014)
Proceeds from sale of trading securities 6,220 891
Equity in net income of Affiliated Companies (12,015) (8,914)
Gain on sales of investments in Affiliated Companies (5,075) (992)
Income of consolidated subsidiaries (344) (272)
Net gain on issuance of shares by Affiliated Companies - (1,304)
Dividends from Affiliated Companies 10,275 437
(Increase) decrease in other assets (2,276) 1,414
Provision for deferred income taxes (1,171) 1,764
Increase (decrease) in other liabilities 3,318 (401)
------- ------
Net cash provided by (used in) operating activities 3,079 (652)
------- ------
Cash Flows from Investing Activities:
Collection of municipal bonds - 3,015
Collection of bonds and notes receivable 302 544
Purchase of notes receivable (1,339) (2,360)
Proceeds from sale of equity interests 10,421 3,102
Purchase of equity interests (910) (3,103)
Return of capital 302 -
------- ------
Net cash provided by investing activities 8,776 1,198
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Net Increase in Cash and Cash Equivalents 11,855 546
Cash and Cash Equivalents, beginning of period 7,044 14,703
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Cash and Cash Equivalents, end of period $ 18,899 $ 15,249
------- ------
------- ------
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for income taxes $ 2,045 $ 37
------- ------
</TABLE>
See notes to consolidated statements.
Page 5 of 12 pages
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PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The December 31, 1996 balance sheet presented herein was derived from the
audited December 31, 1996 consolidated financial statements of PEC Israel
Economic Corporation and subsidiaries (the "Company").
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 for the year ended
December 31, 1996 for a description of the significant accounting policies,
which have continued without change, and other footnote information.
3. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("FAS 128"),
which requires the replacement of primary earnings per share with a
presentation of basic earnings per share. In addition, FAS 128 requires
the presentation of diluted earnings per share for all entities with
complex capital structures. FAS 128 is effective for reporting periods
ending subsequent to December 15, 1997. The Company believes that the
adoption of FAS 128 will not have a material effect on the Company's
consolidated financial statements for the year ending December 31, 1997.
4. Certain reclassifications have been made to the financial statements as of
and for the three months ended March 31, 1996 to conform with the financial
statements as of and for the three months ended March 31, 1997.
5. All adjustments (recurring in nature) which are, in the opinion of
management, necessary for a fair presentation of the results of the interim
periods have been included. The results of the interim periods are not
necessarily indicative of the results for the full year.
Page 6 of 12 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, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Consolidated net income for the three months ended March 31, 1997 rose to
$13.0 million, up from $10.4 million for the three months ended March 31, 1996.
The rise in net income reflected increases of $4.1 million in net gain on sales
of investments in Affiliated Companies and $3.1 million in equity in net income
of Affiliated Companies. The increase attributable to these items was partially
offset by a decrease of $1.3 million in net gain on issuance of shares by
Affiliated Companies, a decrease of $1.6 million in net gain on sales, and
change in market value, of trading securities and an increase of $1.7 million in
the provision for income taxes.
Equity in net income of Affiliated Companies for the first quarter of 1997
rose to $12.0 million, up from $8.9 million for the corresponding 1996 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 Cellcom (of which PEC's share was $2.4 million compared to a net
loss of $210,000 for the corresponding 1996 period), Property & Building (of
which PEC's share was $2.7 million compared to $1.6 million for the
corresponding 1996 period), DIC & PEC Cable TV Ltd. (the holding company through
which PEC holds its equity interest in Tevel) and Delek. This increase was
partially offset by PEC's net loss in respect of Scitex compared to net income
for the corresponding 1996 period and PEC's reduced net income in respect of
some of its other Affiliated Companies.
PEC did not realize any net gain on issuance of shares by Affiliated
Companies for the three months ended March 31, 1997 while it realized a net gain
of $1.3 million for the corresponding 1996 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
Page 7 of 12 pages
<PAGE>
on issuance of shares by Nice of $745,000. 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 $470,000.
PEC realized a net gain on sales of investments in Affiliated Companies of
$5.1 million for the first quarter of 1997 compared to $1.0 million for the
first quarter of 1996. During the first quarter of 1997, PEC realized net gains
of $2.9 million and $2.1 million on sales of 1.4% of Super-Sol and 1.5% of Nice,
respectively. These sales reduced PEC's ownership interest in Super-Sol to
16.2% and in Nice to 3.5%. During the first quarter of 1996, PEC realized net
gains of $780,000 and $210,000 on sales of 0.5% of Super-Sol and 1.4% of
VocalTec, respectively.
As discussed in Note 2 of the Notes to the Consolidated Financial
Statements for the year ended December 31, 1996 (the "1996 Notes"), PEC does not
provide deferred income taxes with respect to undistributed earnings of, and
gains on issuances of shares by, Affiliated Companies that are more than 50%
owned by the IDB Group or in which the IDB Group has effective control
("Majority-Owned Affiliated Companies"). Such amounts are currently expected to
be permanently reinvested in the Majority-Owned Affiliated Companies. PEC's
provision for income taxes for the first quarter of 1997 rose to $4.0 million
from $2.3 million for the corresponding quarter of 1996 principally because of a
decrease in the proportion of income from undistributed earnings of Majority-
Owned Affiliated Companies.
SHAREHOLDERS' EQUITY
As a result of increases in the market value of "available-for-sale
securities" since January 1, 1997, the unrealized gain, net of taxes, from those
securities that was included in shareholders' equity as of March 31, 1997
increased to $2.8 million from $1.9 million as of December 31, 1996.
As discussed in Note 2 of the 1996 Notes, translation differences are
reflected in shareholders' equity as a "Cumulative Translation Adjustment". The
exchange rate of the New Israel Shekel declined approximately 3.3% against the
U.S.
Page 8 of 12 pages
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dollar as of March 31, 1997 compared to December 31, 1996. As of March 31,
1997, the Cumulative Translation Adjustment reduced shareholders' equity by
$30.4 million compared to a reduction of $26.3 million at the end of 1996.
NEW ACCOUNTING STANDARD
As discussed in Note 3 of the Notes to PEC's Consolidated Financial
Statements for the three months ended March 31, 1997, in February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, Earnings per Share ("FAS 128"), which requires the
replacement of primary earnings per share with a presentation of basic earnings
per share. PEC believes that the adoption of FAS 128, which is effective for
reporting periods ending subsequent to December 15, 1997, will not have a
material effect on the Company's consolidated financial statements for the year
ending December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, PEC's liquid assets (consisting of cash, money market
funds and marketable securities of U.S. companies) totaled approximately $42.5
million.
For the three months ended March 31, 1997, PEC received cash dividends and
interest totaling $10.8 million (including $10.3 million of cash dividends
received from Affiliated Companies, which do not affect PEC's net income for
financial statement purposes), which substantially exceeded PEC's general and
administrative expenses. During the first quarter of 1997, PEC also generated
cash totaling $16.9 million, of which $6.2 million was realized from the sale of
marketable securities of U.S. companies, $10.4 million was realized from the
sale of shares of Affiliated Companies (Super-Sol - $6.9 million, Nice - $2.7
million and Lipman - $847,000) and $302,000 was realized from the sale of bonds.
During the first quarter of 1997, PEC purchased marketable securities of
U.S. companies for $8.8 million and purchased equity and debt securities of
several new and existing Affiliated Companies for approximately $2.2 million.
The $2.2 million
Page 9 of 12 pages
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consisted primarily of $528,000 of capital loans to DEP Technology Holdings
Ltd. (the company through which PEC holds its equity interest in RDC),
$466,000 contributed to Bulk Trading Corporation Ltd. in connection with
PEC's sale of its equity interest in this company, $287,000 of loans to
Cellcom, $194,000 of capital contributions to Renaissance (completing PEC's
capital commitment to this company) and $498,000 of equity and debt
securities purchased from Nitzanim Initiative Center Limited ("Nitzanim"), a
new Affiliated Company in which PEC acquired a 25.05% equity interest.
Nitzanim is engaged in the development of commercial non-military projects
and technologies based on the know-how of Soreq Nuclear Research Center, a
nuclear research center operated by the Israeli government. PEC has agreed
to make up to $3.6 million of additional capital contributions and loans to
Nitzanim during the next four years. Discount Investment Corporation Ltd.,
PEC's sister company ("DIC"), also acquired a 25.05% interest in Nitzanim on
the same terms as PEC.
During April 1997, PEC purchased for $2.2 million a 5% equity interest in
Libit Signal Processing Ltd. ("Libit"), a developer of modem technologies and
products for advanced digital communication applications. DIC also acquired a
5% equity interest in Libit.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27 Financial Data Schedule, which is page 12 of this
report.
Page 10 of 12 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/ Frank J. Klein
-----------------------------------
Frank J. Klein
President
/s/ William Gold
-----------------------------------
William Gold
Treasurer, Principal Financial Officer and
Principal Accounting Officer
Date: May 15, 1997
Page 11 of 12 pages
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,899
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 419,333
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 31,952
<OTHER-SE> 351,626
<TOTAL-LIABILITY-AND-EQUITY> 419,333
<SALES> 0
<TOTAL-REVENUES> 20,002
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,933
<INCOME-TAX> 3,960
<INCOME-CONTINUING> 12,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,973
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
