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, 1999
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 1-8707
PEC Israel Economic Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Maine 13-1143528
--------------------------------- -------------------
(State of Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
511 Fifth Avenue, New York, NY 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, 1999 there were outstanding 18,362,188 shares of Common
Stock with par value of $1.00 per share.
Page 1 of 25 pages
<PAGE>
PART I - FINANCIAL INFORMATION
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
------------------------
1999 1998
--------- ---------
(In thousands - except
per share amounts)
------------------------
Assets
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 36,447 $ 22,007
Investments 506,280 432,112
Assets of General Engineers Limited 7,812 7,950
Other assets 6,527 4,860
--------- ---------
Total assets $ 557,066 $ 466,929
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable - Banks $ 44,065 $ 20,000
Liabilities of General Engineers Limited 5,051 5,163
Deferred income taxes 42,630 28,487
Other liabilities 10,779 8,054
--------- ---------
Total liabilities 102,525 61,704
--------- ---------
Shareholders' equity:
Common stock, $1.00 par value 31,952 31,952
Additional paid-in capital 105,208 104,616
Accumulated other comprehensive income (46,544) (65,952)
Retained earnings 384,292 354,976
--------- ---------
474,908 425,592
Treasury stock (20,367) (20,367)
--------- ---------
Total shareholders' equity 454,541 405,225
--------- ---------
Total liabilities and shareholders' equity $ 557,066 $ 466,929
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 2 of 25 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For The For The
Six Months Ended: Three Months Ended:
-------------------------- --------------------------
6/30/99 6/30/98 6/30/99 6/30/98
----------- ----------- ----------- -----------
(In thousands-except share and per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Interest and dividends $ 2,491 $ 491 $ 1,243 $ 309
Equity in net income of Affiliated Companies 21,728 22,015 11,371 10,187
Net gain (loss) on issuance of shares by Affiliated Companies 6,522 73 (255) 14
Revenues of General Engineers Limited 5,355 4,554 2,554 2,356
Net gain (loss) on sales of investments in Affiliated Companies 10,531 610 11,331 (86)
Net gain on sales, and changes in market
value, of trading securities 10 3,898 3 553
Other 1,530 1,322 1,066 478
----------- ----------- ----------- -----------
48,167 32,963 27,313 13,811
----------- ----------- ----------- -----------
Expenses:
General and administrative 2,736 1,725 1,386 867
Cost of sales and expenses of General Engineers Limited 5,479 5,049 2,721 2,479
----------- ----------- ----------- -----------
8,215 6,774 4,107 3,346
----------- ----------- ----------- -----------
Income before interest and income taxes 39,952 26,189 23,206 10,465
Interest expense 1,211 499 752 344
----------- ----------- ----------- -----------
Income before income taxes 38,741 25,690 22,454 10,121
Income taxes 9,425 7,763 5,181 2,937
----------- ----------- ----------- -----------
Net income 29,316 17,927 17,273 7,184
----------- ----------- ----------- -----------
Other comprehensive income:
Unrealized gain (loss) on available-for-sale securities
arising during period 16,285 (1,710) 9,568 (1,736)
Reclassification adjustment for gains
included in net income (152) -- (152) --
----------- ----------- ----------- -----------
Unrealized gain (loss) net of tax provision (benefit) of $8,618 and
($920) for the six months ended June 30, 1999 and June 30, 1998,
respectively, and $5,002 and ($937) for the three months ended
June 30, 1999 and June 30, 1998, respectively 16,133 (1,710) 9,416 (1,736)
Translation adjustment, net of tax provision (benefit) of $616 and
($564) for six months ended June 30, 1999 and June 30, 1998,
respectively, and ($376) and ($350) for the three months ended
June 30, 1999 and June 30, 1998, respectively 3,275 (6,837) (1,658) (3,806)
----------- ----------- ----------- -----------
Other comprehensive income (loss) 19,408 (8,547) 7,758 (5,542)
----------- ----------- ----------- -----------
Comprehensive income $ 48,724 $ 9,380 $ 25,031 $ 1,642
=========== =========== =========== ===========
Earnings per common share - basic $ 1.60 $ 0.98 $ 0.94 $ 0.39
=========== =========== =========== ===========
Earnings per common share - diluted $ 1.57 $ 0.93 $ 0.93 $ 0.36
=========== =========== =========== ===========
Weighted average number of shares outstanding 18,362,188 18,362,188 18,362,188 18,362,188
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
Page 3 of 25 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
--------------------
Additional Unrealized Gains Cumulative
Common Paid-in on Available - Translation Retained Treasury
Stock Capital for-Sale Securities Adjustment Earnings Stock Total
------- -------- ------------------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $31,952 $104,616 $ 1,783 ($67,735) $354,976 ($20,367) $405,225
Paid in capital of
Affiliated Companies - - - 592 - - - - - - - - - - - - 592
Change in market value
of available-for-
sale equity securities,
net of tax benefit - - - - - - 16,133 - - - - - - - - - 16,133
Accumulated translation
adjustment, net of tax benefit - - - - - - - - - 3,275 - - - - - - 3,275
Net income - - - - - - - - - - - - 29,316 - - - 29,316
------- -------- ------------------ -------- -------- -------- --------
Balance, June 30, 1999 $31,952 $105,208 $ 17,916 ($64,460) $384,292 ($20,367) $454,541
======= ======== ================== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
Page 4 of 25 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended:
------------------------------
6/30/99 6/30/98
------------------------------
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 29,316 $ 17,927
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in market value of trading securities (144) 1,912
Purchase of trading securities - - - (8,365)
Proceeds from sale of trading securities 135 17,289
Equity in net income of Affiliated Companies (21,728) (22,015)
Gain on sales of investments in Affiliated Companies (10,531) (610)
Net loss (gain) on sales of trading securities 134 (5,810)
Net gain on investment in partnerships (723) (424)
Loss of consolidated subsidiaries 22 12
Net gain on issuance of shares by Affiliated Companies (6,522) (73)
Dividends from Affiliated Companies 4,026 12,326
Change in other assets and liabilities 2,083 (307)
Provision for deferred income taxes 4,670 3,233
-------- --------
Net cash provided by operating activities 738 15,095
-------- --------
Cash Flows from Investing Activities:
Collection of loans 9,455 7
Purchase of notes receivable (1,305) (697)
Proceeds from sale of equity interests 14,902 2,645
Acquisitions of equity interests (33,416) (53,511)
Return of capital 66 12,582
-------- --------
Net cash used in investing activities (10,298) (38,974)
-------- --------
Cash Flows from Financing Activities:
Proceeds of Bank loan, net 24,000 20,000
-------- --------
Net cash provided by financing activities 24,000 20,000
-------- --------
Net increase (decrease) in cash and cash equivalents 14,440 (3,879)
Cash and cash equivalents, beginning of period 22,007 8,948
-------- --------
Cash and cash equivalents, end of period $ 36,447 $ 5,069
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for:
Income taxes $ 957 $ 4,036
Interest $ 588 $ 292
</TABLE>
See notes to consolidated financial statements.
Page 5 of 25 pages
<PAGE>
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The December 31, 1998 balance sheet presented herein was derived from the
audited consolidated financial statements of PEC Israel Economic
Corporation and subsidiaries ("PEC" or the "Company") for the year ended
December 31, 1998 (the "1998 Financial Statements").
2. These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 1O-Q and Rule 10-01 of Regulation S-X. The
financial statements should be read in conjunction with the 1998 Financial
Statements for a description of the significant accounting policies, which
have continued without change, and other footnote information.
3. On December 11, 1998, Crandon Capital Partners and Kenneth Steiner,
allegedly shareholders of PEC, instituted a purported class action in the
Supreme Court of New York State, County of New York, against PEC and its
directors. In their complaint, the plaintiff shareholders allege that the
defendants breached their fiduciary duties and engaged in self-dealing
without regard to conflicts of interest in approving, on the date the
complaint was filed, a proposed merger under which a wholly owned
subsidiary of IDB Development would merge into PEC and each shareholder of
PEC other than IDB Development (which then owned 81.35% of PEC's common
stock) would, as a result of the merger, receive $30 in cash for each of
his shares of common stock of PEC. The plaintiffs also assert that the $30
per share price is unfair and inadequate and is below the fair or inherent
value of PEC's assets and PEC's future prospects. PEC believes that the
allegations in the complaint are without merit, and PEC intends to contest
the action vigorously.
On May 3, 1999, Mr. Norman Frank, allegedly a shareholder of PEC,
instituted a purported class action in the Superior Court in Cumberland
County, State of Maine against PEC, PEC Acquisition Corporation ("PEC
Acquisition") and the directors of PEC. In his complaint, the plaintiff
alleges that the $30 cash consideration to be paid to PEC's public
shareholders for each of their shares of PEC common stock in the proposed
merger of PEC Acquisition, a wholly owned subsidiary of PEC's parent
corporation, Discount Investment Corporation Ltd., into PEC is unfair and
grossly inadequate. The plaintiff asserts that in approving the proposed
merger, the defendant directors of PEC breached their fiduciary duties and
engaged in improper, unfair dealing and wrongful and coercive conduct
without regard to their alleged conflicts of interest. PEC believes that
the allegations in Mr. Frank's complaint are without merit and PEC intends
to contest the action vigorously.
4. On April 23, 1999, a subscriber of Tevel Israel International
Communications Ltd. ("Tevel"), a cable television corporation in which PEC
has a 23.7% ownership interest through PEC's holdings in DIC and PEC Cable
TV Ltd., commenced an action in the District Court in Tel Aviv, Israel
against Tevel and Israel's Minister of Communications alleging that Tevel
is a monopoly in its area of operations and that Tevel should compensate
all of its subscribers from May 10, 1996 though April 1, 1999 for the
difference between the price that Tevel would have charged for cable
television services during this period if the cable television market had
been competitive and the price Tevel actually charged, an amount the
plaintiff estimates is New Israel Shekel ("NIS") 260 million
(approximately $63 million). The plaintiff requests that the District
Court recognize his action as a class action on behalf of all of Tevel's
subscribers since May 10, 1996 under Israel's Anti-Trust Law.
In addition to seeking compensation, the plaintiff requests that the
District Court order Tevel to reduce its prices to the "market price" as
calculated by the plaintiff for as long as Tevel is a monopoly in its
areas of operations and that the District Court order Israel's Minister of
Communication not to extend Tevel's cable television license. The
plaintiff acknowledges that the prices Tevel charged were less than the
maximum prices Tevel was permitted to charge under its license from
Israel's Ministry of Communications.
Page 6 of 25 pages
<PAGE>
On May 5, 1999, a plaintiff subscriber of Tevel filed an action against
Tevel in the District Court in Tel Aviv, Israel alleging that Tevel
unnecessarily required all of its subscribers to use channel converters
and, as a result, Tevel overcharged its subscribers by NIS 150 million
(approximately $36 million). The plaintiff requests the District Court to
recognize his action as class action and to order Tevel to refund to its
subscribers the alleged NIS 150 million overcharge.
Tevel believes the allegations in both of the foregoing actions are
without merit and Tevel intends to contest both actions vigorously. Tevel
is unable at this stage to evaluate the effect of the two actions on Tevel
and, accordingly, PEC is unable to evaluate the effect, if any, of the two
actions on PEC.
5. The following is a reconciliation of the net income used in the
computation of basic earnings per share to net income assuming conversion
of potential common stock ("PCEs") issued by certain of PEC's Affiliated
Companies (in thousands):
<TABLE>
<CAPTION>
For the For the
Six Months Ended Three Months Ended
------------------- -----------------
6/30/99 6/30/98 6/30/99 6/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income available to common shareholders--basic ............ $29,316 $17,927 $17,273 $7,184
------- ------- ------- -------
Effect of dilutive securities:
Dilutive effect of PCEs issued by certain Affiliated
Companies .................................................. (463) (897) (248) (575)
------- ------- ------- -------
Net income available to common shareholders--diluted .......... $28,853 $17,030 $17,025 $6,609
======= ======= ======= =======
</TABLE>
Basic and diluted earnings per share are computed using the weighted
average number of common shares outstanding during the respective periods
which was 18,362,188. Weighted average number of common shares used in the
computation of basic and diluted earnings per share is not affected by the
assumed exercise of the PCEs issued by the Affiliated Companies and is
therefore the same for both calculations.
6. On August 16, 1999, the $24.0 million loan to PEC Israel Financial
Corporation Ltd., which is described in Note 9(c) of the 1998 Financial
Statements and which had previously been extended for three months to
August 18, 1999, was extended for three months to November 18, 1999.
7. Certain reclassifications have been made to the financial statements for
the three and six months ended June 30, 1998 to conform with the financial
statements as of and for the three and six months ended June 30, 1999.
8. 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 7 of 25 pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended
June 30, 1998
Consolidated net income for the three months ended June 30, 1999
rose to $17.3 million, up from $7.2 million for the three months ended June 30,
1998. The rise in net income reflected increases of $11.4 million in net gain on
sales of investments in Affiliated Companies, $1.2 million in equity in net
income of Affiliated Companies, $934,000 in interest and dividend income and
$588,000 in other income. The increase attributable to these items was partially
offset by increases of $2.3 million in the provision for income taxes and
$519,000 in general and administrative expenses and a decrease of $550,000 in
net gain on sales, and changes in market value, of trading securities.
Equity in net income of Affiliated Companies for the second quarter
of 1999 rose to $11.4 million, up from $10.2 million for the corresponding 1998
period. PEC had increased net income in respect of some of its Affiliated
Companies, principally Elron, which recognized a gain, net of taxes, of
approximately $19.7 million from the sale of its holdings in Elbit Medical
Imaging Ltd. (PEC's share of Elron's net income for the second quarter of 1999
was $2.3 million compared with $410,000 for the second quarter of 1998),
Property & Building (PEC's share of Property & Building's net income for the
second quarter of 1999 was $4.2 million compared with $2.6 million for the
second quarter of 1998) and Gilat Satellite (PEC's share of Gilat Satellite's
net income for the second quarter of 1999 was $1.4 million compared with
$356,000 for the second quarter of 1998). This increase was partially offset by
decreases in PEC's net income with respect to certain Affiliated Companies,
especially Super-Sol (PEC's share of Super-Sol's net income was $117,000 for the
second quarter of 1999 compared with income of $1.4 million for the second
quarter of 1998).
Page 8 of 25 pages
<PAGE>
In addition, PEC incurred losses with respect to certain other Affiliated
Companies, particularly Tambour (PEC's share of Tambour's net loss was $275,000
for the second quarter of 1999 compared with net income of $1.3 million for the
second quarter of 1998) and DIC and PEC Cable TV Ltd.
PEC recognized a net gain of $11.3 million on sales of investments
in Affiliated Companies for the second quarter of 1999 compared with a net loss
of $86,000 for the corresponding 1998 period. During the second quarter of 1999,
PEC realized a net gain of $10.6 million on the sale of its entire 4.2%
ownership interest in Libit Signal Processing Ltd. ("Libit") and a net gain of
$669,000 on the sale of its entire 2.4% ownership interest in Lipman Electronic
Engineering Ltd. ("Lipman"). During the second quarter of 1998, PEC wrote-off
its capital contributions to two corporations which were formed to bid on
infrastructure projects and were unsuccessful.
PEC recorded dividend and interest income of $1.2 million for the
second quarter of 1999 compared with $309,000 for the corresponding 1998 period.
In November 1998, PEC and Discount Investment arranged a two year loan of $90
million (the "UPC Loan") to United Pan-Europe Communications N.V., of which 50%
was prepaid in February 1999. The primary reasons for the increase in interest
and dividend income are the interest on the UPC Loan, which did not exist during
the second quarter of 1998, and the recording of fee income in the second
quarter of 1999 from the prepayment of 50% of the UPC Loan.
PEC's other income rose to $1.1 million for the second quarter of
1999, up from $478,000 for the corresponding 1998 quarter. This increase
primarily resulted from increased income from partnerships in which PEC is a
partner, particularly Gemini Israel Fund L.P., Gemini Israel II Limited
Partnership and Renaissance Fund LDC.
PEC's general and administrative expenses increased to $1.4 million
for the second quarter of 1999 from $867,000 for the corresponding 1998 quarter
primarily because of costs associated with the proposed merger between PEC and a
subsidiary of Discount Investment pursuant to which Discount Investment will
acquire all of the shares of common stock of PEC held by the public.
Page 9 of 25 pages
<PAGE>
PEC's provision for income taxes increased to $5.2 million for the
second quarter of 1999 from $2.9 million for the second quarter of 1998
primarily because PEC's income before income taxes increased to $22.5 million
for the second quarter of 1999 from $10.1 million for the corresponding 1998
quarter.
PEC's comprehensive income rose to $25.0 million for the three
months ended June 30, 1999, up from $1.6 million for the corresponding 1998
period. PEC's unrealized gain on available-for-sale securities, net of taxes,
increased PEC's comprehensive income by $9.4 million for the second quarter of
1999 compared with a reduction, net of tax benefit, of $1.7 million for the
corresponding 1998 period. PEC's translation adjustment, net of tax benefit,
reduced PEC's comprehensive income by $1.7 million for the second quarter of
1999 compared with a reduction, net of tax benefit, of $3.8 million for the
corresponding 1998 period. The exchange rate of the New Israel Shekel declined
approximately 1.0% against the U.S. dollar as of June 30, 1999 compared with
March 31, 1999 while such exchange rate declined 1.9% as of June 30, 1998
compared with March 31, 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Consolidated net income for the six months ended June 30, 1999 rose
to $29.3 million, up from $17.9 million for the six months ended June 30, 1998.
The increase in net income reflected increases of $9.9 million in net gain on
sales of investments in Affiliated Companies, $6.4 million in net gain on
issuance of shares of Affiliated Companies and $2.0 million in interest and
dividend income. The increase attributable to these items was partially offset
by a decrease of $3.9 million in net gain on sales, and changes in market value,
of trading securities and increases of $1.7 million in the provision for income
taxes and $1.0 million in general and administrative expenses.
Equity in net income of Affiliated Companies for the first six
months of 1999 was $21.7 million compared with $22.0 million for the first six
months of 1998. PEC experienced decreased net income with respect to certain
Affiliated Companies, principally Elron, which in the first half of 1998
recognized a gain of approximately $36.5 million from the sale by its affiliate,
Elbit Medical Imaging Ltd., of Elbit Medical's ultrasound division (PEC's share
of Elron's net income for the first half of 1999 was $3.1 million compared with
$5.9 million for the first half of 1998), Super-Sol (PEC's share of Super-Sol's
net income was $1.1 million for the first six months of 1999 compared to $3.3
million for the corresponding 1998 period) and Tambour with respect to which PEC
incurred a loss compared to net income for the first half of 1998 (PEC's share
of Tambour's loss was $368,000 for the first half of 1999 compared with net
income of $1.8 million for the first half of 1998). PEC's decreased net income
with respect to the foregoing Affiliated Companies was substantially offset by
increases recorded by some of PEC's other Affiliated Companies. PEC recorded net
income in respect of Scitex for the first half of 1999 compared with the first
half of 1998 when Scitex wrote off in process
Page 10 of 25 pages
<PAGE>
research and development costs in connection with its acquisition of Idanit
Technologies Ltd. (PEC's share of the net income of Scitex for the six months
ended June 30, 1999 was $708,000 compared with a loss of $2.8 million for the
six months ended June 30, 1998). In addition, PEC had increased net income with
respect to certain of its Affiliated Companies, especially El-Yam (PEC's share
of El-Yam's net income for the first half of 1999 was $3.0 million compared with
$1.3 million for the first half of 1998), Property & Building (PEC's share was
$6.7 million for the six months ended June 30, 1999 compared with $5.5 million
for the six months ended June 30, 1998) and Gilat Satellite (PEC's share was
$1.8 million for the first half of 1999 compared with $620,000 for the first
half of 1998).
PEC realized a net gain on sales of investments of $10.5 million for
the six months ended June 30, 1999 compared with $610,000 for the corresponding
1998 period. During the first half of 1999, PEC realized net gains of $10.6
million and $669,000 on the sales of its entire ownership interests in Libit and
Lipman, respectively, and incurred a net loss of $800,000 on the write-off of a
loan to Unitel Vocal Communication Ltd., a start-up corporation. During the
first half of 1998, PEC realized a net gain of $696,000 from the sale of its
entire ownership interest in Lego Irrigation Ltd. and incurred a net loss of
$90,000 from the write-off of its capital contributions to two corporations
which were formed to bid on infrastructure projects and were unsuccessful.
Page 11 of 25 pages
<PAGE>
PEC realized a net gain of $6.5 million on issuance of shares of
Affiliated Companies for the first six months of 1999 compared with a net gain
of $73,000 for the corresponding 1998 period. Substantially all of PEC's net
gain for the first six months of 1999 resulted from Gilat Satellite's sale of
ordinary shares in a public offering in the United States.
PEC recorded dividend and interest income of $2.5 million for the
six months ended June 30, 1999, up from $491,000 for the six months ended June
30, 1998. The primary reasons for this increase are interest on the UPC Loan,
which did not exist during the first half of 1998, and fee income arising from
the prepayment of 50% of the UPC Loan in February 1999.
PEC's general and administrative expenses increased to $2.7 million
for the first half of 1999, up from $1.7 million for the first half of 1998
primarily because of costs associated with the proposed merger between PEC and a
subsidiary of Discount Investment.
PEC's provision for income taxes increased to $9.4 million for the
first half of 1999, up from $7.8 million for the first half of 1998 primarily
because PEC's income before income taxes increased to $38.7 million for the
first half of 1999 from $25.7 million for the corresponding 1998 period.
PEC's comprehensive income rose to $48.7 million for the six months
ended June 30, 1999, up from $9.4 million for the corresponding 1998 period.
PEC's unrealized gain on available-for-sale securities, net of taxes, increased
PEC's comprehensive income by $16.1 million for the first half of 1999 compared
with a reduction, net of tax benefit, of $1.7 million for the corresponding 1998
period. PEC's translation adjustment, net of taxes, increased PEC's
comprehensive income by $3.3 million for the six months ended June 30, 1999
compared with a reduction, net of tax benefit, of $6.8 million for the
corresponding 1998 period. The exchange rate of the New Israel Shekel increased
approximately 2.1% against the U.S. dollar as of June 30, 1999 compared with
December 31, 1998 while such exchange rate declined 3.7% as of June 30, 1998
compared with December 31, 1997.
Page 12 of 25 pages
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, PEC's liquid assets (consisting of cash and
money market funds) totaled approximately $36.4 million.
For the six months ended June 30, 1999, PEC received cash dividends
and interest totaling $7.2 million (including $4.0 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 and interest expenses. During the first half of 1999, PEC also
generated cash totaling $24.6 million, of which $12.9 million was realized from
PEC's sale of its entire 4.2% ownership interest in Libit, $8.4 million was
generated from the repayment by Cellcom of shareholder loans, $1.4 million was
realized from PEC's sale of its entire 2.4% ownership interest in Lipman, and
$548,000 was generated from PEC's sale of some of its shares of Isrotel.
During the first half of 1999, PEC Israel Finance Corporation Ltd.
("PECFC"), a wholly owned subsidiary of PEC, borrowed $24.0 million from a bank
to finance the purchase of a 0.63% ownership interest in United Pan-Europe
Communication N.V., a cable television company whose shares are publicly traded
on the NASDAQ National Market System under the trading symbol "UPCOY". This loan
is unsecured, bears interest at a rate of 5.75% per annum, is guaranteed by PEC
and matures on August 18, 1999. The bank in its discretion may request PECFC to
provide security for the loan. PECFC and the bank have agreed to extend the
maturity of the loan for an additional three month term at an annual interest
rate equal to the sum of LIBOR for three month loans on August 17, 1999 plus
0.75%.
During the first half of 1999, PEC purchased equity and debt
securities of several existing Affiliated Companies and other corporations for
approximately $34.7 million, including $5.2 million of securities purchased
during the second quarter of 1999. The securities purchased during the second
quarter of 1999 and their purchase price consist primarily of a 0.49% ownership
interest in Elron - $2.1 million; a 25% ownership interest in TeamWorks
Technology Ltd., a developmental stage multimedia software company - $1.0
million; a 5.4% ownership interest in
Page 13 of 25 pages
<PAGE>
Given Imaging Ltd., increasing PEC's ownership interest to 8.7% - $685,000; a
3.9% ownership interest in Witcom Ltd., increasing PEC's ownership interest to
8.9% - $556,000; and a 1% ownership interest in Klil - $481,000.
In July 1999, PEC purchased a $600,000 convertible debenture of
E.D.S.L. Communication Ltd., a developmental stage company providing residential
communication access solutions ("EDSL"), which is convertible into a 6.7%
ownership interest in EDSL, and made a shareholder contribution to Mondex of
$376,000.
Page 14 of 25 pages
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 10(i) Application for Foreign Currency Loan (Floating
Interest) dated August 16, 1999 between the First
International Bank of Israel Ltd. and PEC Israel
Financial Corporation Ltd., which begins on page 17 of
this report.
Item 27 Financial Data Schedule, which is page 25 of
this report.
Page 15 of 25 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: August 16, 1999
Page 16 of 25 pages
Exhibit 10(i)
The First International Bank of Israel Ltd. August 16, 1999
Tel-Aviv Main Branch
Dear Sirs,
Whereas on February 17, 1999 we signed a Request for a loan in foreign currency
(hereinafter: "loan application") which is attached hereto and forms an integral
part hereof;
And whereas in the loan application we requested you to grant us a loan in the
amount of U.S. $24,000 000 (Twenty four million) due date August 18, 1999
("loan") and you granted the loan to us;
And whereas the due date of the loan will expire on August 18, 1999;
We accordingly request you to extend the validity of the loan for a period of 3
months up to the new expiry date on November 18, 1999.
All other terms and conditions of the loan as stipulated in the loan
application, remain unchanged.
Yours faithfully,
PEC Israel Finance Corporation Ltd.
[Borrower's signature] -----------------------------------
By: s/JON BOOCK s/MICHEL DAHAN
-----------------------------------
Title:
-----------------------------------
We, the undersigned, as signatories on a Special Guarantee as stipulated in the
loan application, hereby confirm that the expiry date of the a/m loan has been
extended with our knowledge and consent and that our guarantee of the
obligations of PEC Israel Finance Corporation Ltd. towards you under the loan
remains in full force and effect.
PEC Israel Economic Corporation
Guarantor's signature: By: Frank J. Klein, President
-----------------------------------
Date: August 16, 1999
-----------------------------------
Page 17 of 25 pages
<PAGE>
THE FIRST INTERNATIONAL BANK OF ISRAEL LTD. A SAFRA BANK
APPLICATION FOR FOREIGN CURRENCY LOAN [FLOATING INTEREST]
The First International Bank Customer's name: PEC Israel Finance
of Israel Ltd. Tel Aviv Main Corporation Ltd.
Branch Account No: 467057
Date: August 16, 1999
Dear Sirs:
Within the scope of the General Debit Agreement signed between us
(hereinafter the "debit agreement") and subject to our obligations towards you
therein and under any other document signed and/or to be signed by us, we
request you to grant to us a foreign currency loan (hereinafter - "the loan") on
the terms set forth below:
1. LOAN CURRENCY AND AMOUNT
The loan will be in U.S. Dollars (hereinafter - "the loan currency") in
the amount of $24,000,000.
2. REPAYMENT OF PRINCIPAL
The principal amount of the loan will be repaid in the loan currency:
o by ______ monthly/quarterly/semi-annual consecutive and equal installments
of ___________ each on the ____ day of the month commencing on
________________.
o by _____ consecutive and equal installments of ________________ each on
the last day of March, June, September and December in each year
commencing on _________________.
|X| in one bullet payment on November 18, 1999.
o by installments in amounts and on dates as follows:
the sum of _____________ on _______________.
the sum of _____________ on _______________.
the sum of _____________ on _______________.
the sum of _____________ on _______________.
the sum of _____________ on _______________.
3. LOAN INTEREST
a. Interest payment dates
Interest on the loan will be paid in the loan currency on the
following dates:
|X| on the principal payment dates specified in clause 2 above.
o on the last day of each calendar month commencing on ______________
and a final payment on the date of payment of the final
installment of loan principal.
o on the last day of March, June, September and December in each year
commencing on __________________, and a final payment on the date of
payment of the final installment of loan principal.
o monthly/quarterly/semi-annually on the __________________ of each
month commencing on the _______ and a final payment on the date of
payment of the final installment of loan principal.
Page 18 of 25 pages
<PAGE>
b. Interest periods
Interest on the outstanding principal amount of the loan will be
computed by you in relation to interest periods.
The first period will run from the date of disbursement of the
loan up to the first interest payment date stipulated in sub-para.
a) above or the deferred date pursuant to para. 4 below (exclusive
of such date). Subsequent interest periods will run from an
interest payment date (inclusive of such date) to the next
following interest payment date stipulated in sub-para. a) above
or the deferred date pursuant to para. 4 below (exclusive of such
date).
c. Rate of interest and manner of determination
The principal amount of the loan outstanding from time to time
shall carry daily interest from the date of disbursement of the
loan up to the principal payment date(s), calculated according to
the actual number of days elapsed based on a year of 360 days, at
the Foreign Currency Base Rate (as defined below) determined from
time to time by the Bank for the first day of each interest
period, plus 0.75% p.a. "Foreign Currency Base Rate" herein shall
mean the interest rate determined by the bank from time to time,
based on interest rates prevailing in international currency
markets, for loans in the loan currency and for a period of 1, 2,
3, 6 or 12 months (each such period being hereinafter referred to
as a "fixed period") according to the interest period stipulated
in sub-para. b) above PROVIDED HOWEVER that:
1. in a loan where interest is payable in a lump sum
concurrently with the principal amount and the period of the
loan does not coincide with any fixed period, the Foreign
Currency Base Rate for the loan will be the Foreign Currency
Base Rate determined by the bank for the first fixed period
which is immediately longer than the period of the loan;
2. in a loan where interest is payable by installments and the
first and/or the last interest period(s) is/are shorter than
the intervening interest period(s), the Foreign Currency Base
Rate for the first and/or the last interest periods (as the
case may be) will be the Foreign Currency Base Rate determined
by the bank for a fixed period coinciding with the intervening
interest period(s).
The Foreign Currency Base Rate for the first interest period is _____%
p.a. and the full interest rate for the first period is _____% p.a. At the
end of each interest period, the bank will determine the Foreign Currency
Base Rate for the following interest period and notice of the full
interest rate for such period will be sent to us.
4. DEFERRED PAYMENT
In this paragraph "business day" means a day on which transactions
in the loan currency are carried out in your bank.
Page 19 of 25 pages
<PAGE>
If any date for payment of principal and/or interest and/or
commission shall fall on a day which is not a business day in the bank,
the date for effecting such payment shall be deferred to the next
following business day and interest up to such date will be calculated
accordingly.
5. INTENTIONALLY DELETED
6. EFFECTIVE COST
The effective cost of the loan is ______%.
7. TAXES DUTIES AND OTHER CHARGES
a. Without derogating from our aforementioned obligations, we undertake
to pay to you any amount demanded by you to pay any tax, duty or
fees that you have been and/or may be obliged to pay and/or which we
have been obliged and/or may be obliged to pay in connection with
the loan as well as in the event that the bank may demand immediate
repayment of the loan for any reason before the scheduled maturity
date(s).
b. All amounts due from us under the loan will be paid to you by us
in full without deduction, set-off or withholding whatsoever in
respect of taxes, levies, duties, fees or any other impositions,
present or future (hereinafter "tax") levied on any such amount
(hereinafter: "payment"). Should we be required to deduct or
withhold tax at source from any payment in accordance with the
requirements of applicable law (except Israeli Law) and/or any
competent authority, we shall effect such payment increased at the
required rate to ensure that after deduction or withholding as
aforesaid, you will receive on the due date such amount as you
would have received had no such deduction or withholding been made
as aforesaid.
8. INCREASED COST
If the result of any law or regulation or change in the
interpretation or application thereof after the date hereof or compliance
by you with the requirements or directives of the Bank of Israel or other
competent authority (including, but without limiting, those relating to
liquidity or reserve requirements) is that the cost to your bank of
making, funding or maintaining the loan or any part thereof is increased
compared to the cost on the date of disbursement; then and in each such
case:
a. you shall notify us in writing of such event and of the rate
of increase (hereinafter "notice of increase").
b. we shall pay such additional amount as you shall determine
will compensate you for such increased cost and/or dilution of
yield.
c. we shall be entitled to prepay the outstanding amount of the
loan together with all interest accrued thereon subject as
stated below:
Page 20 of 25 pages
<PAGE>
1. prepayment shall take place on a principal payment date
as stated in para. 2 above provided that such day is a
business day as defined in para. 4 above. Should such
day not be a business day we may effect payment on the
next following business day.
2. we shall give you not less than thirty days' prior
written notice of the prepayment. Such notice shall be
irrevocable and may not be changed.
3. we shall pay you, in respect of any amount of principal
prepaid as aforesaid, a prepayment commission (if any)
payable on the date of prepayment.
4. we shall pay you, in respect of the period between the
date of giving a notice of increase and actual
repayment, the additional amount referred to in sub-
para.(b) above.
9. LOAN CONVENTION
a. You may at any time at your discretion convert the unpaid
balance of the loan or any part thereof into a shekel loan
linked to the loan currency and you may reconvert the same or
any part thereof and repeat such conversions, each conversion
as aforesaid being referred to hereinafter as a "conversion".
b. A conversion will be effected by making a new loan available,
in shekels or the loan currency as the case may be, in the
amount that the bank wishes to convert out of the existing
loan and the proceeds of the new loan will be used to redeem
all or part of the existing loan.
c. For so long as a loan is maintained in shekels, the principal
amount thereof and interest thereon shall be linked to the
middle rate (as defined in para. 5 above) of the loan currency
as published by you from time to time.
d. For the avoidance of doubt, we note that no change shall take
effect by reason of any conversion, in the amount of
principle, interest or commission payable by us to you in the
loan currency had such conversion not taken place.
e. Save as aforesaid, the terms and conditions of the loan as
specified herein shall remain unchanged.
10. PREPAYMENT
We shall be entitled to prepay all or any part of the
outstanding principal amount of the loan or interest thereon or any
part thereof before the payment date(s) stipulated above provided we
obtain your prior written consent thereto. You may attach such
conditions to your giving consent as you shall deem fit.
11. EURO
a. We acknowledge that the occurrence or non-occurrence of an
event connected to the Economic and Monetary Union of the
European Community (hereinafter: the "Union") shall not of
Page 21 of 25 pages
<PAGE>
itself cause the cancellation of (by way of frustration or
otherwise) or give a right to cancel the loan or to change any
of its terms save as stated in para.b) below.
b. If the loan currency is a national currency which, according
to decisions taken or to be taken within the scope of the
Union will be cancelled and replaced by a common European
currency (hereinafter: "Euro" even if such currency will be
given another name), the following provisions shall apply:
1. In the transition period between 1st January 1999 and
31st December 2001 or such other expiry date as shall be
determined, we may instruct you on any interest payment
date stipulated in para. 3a) above to convert the
outstanding account of the loan to Euro provided we give
you at least 15 days prior written notice of such
intention.
2. If we do not instruct you as aforesaid, you shall
convert the outstanding balance of the loan into Euro on
the date of expiry of the transition period or, if such
date does not fall on an interest payment date
hereunder, on the immediately preceding interest payment
date stipulated in para. 3a) above.
3. Conversion of the loan into Euro as aforesaid shall be
effected in accordance with the standard procedure in
force in the bank and without charge.
4. Save for the change of the loan currency to Euro, no
change in the terms of the loan shall occur as a result
of the conversion referred to in sub-paras. 1) and 2)
above and the provisions of this application shall
continue to apply as prescribed herein.
12. GOVERNING LAW AND JURISDICTION
We hereby irrevocably agree and undertake as follows:
a. This application and all matters relating thereto shall be
governed by and construed in accordance with the laws of the State
of Israel.
b.
1. The competent courts in Israel as stated in sub-para. 2) below
shall have sole jurisdiction to hear any dispute deriving from
this application.
2 The sole place of jurisdiction for the purposes hereof shall
rest with the competent court in Jerusalem, Tel Aviv-Jaffa,
Haifa, Beersheva or Nazereth, whichever is closer to the
location of the Bank's branch at which the account mentioned
above is maintained.
c. We hereby waive the raising of any plea of objection in respect of
the jurisdiction as provided in sub-clause (b) above in any claim
proceeding or dispute deriving herefrom or in connection with this
application, and we shall not plead that the court as aforesaid is
not the convenient or appropriate forum.
d. Our consent to jurisdiction as provided in sub-clause (b) above
shall not impair your right to take legal proceedings against us
Page 22 of 25 pages
<PAGE>
in any other competent court in Israel or abroad, and the taking of
legal proceedings in a particular court shall not prevent you from
taking legal proceedings in another court, whether simultaneously or
otherwise.
e. We hereby give our general consent that in any claim or legal
proceeding filed in the court or before another judicial authority
in connection with this application, any relief or remedy may be
given and any proceeding shall be taken in connection with a claim
as aforesaid, including, and without derogating from the
generality of the foregoing, proceedings for the execution,
enforcement and realisation of any assets or property (unconnected
to the actual use or intended use of the said property or assets),
and we also agree to any order or judgment given in any claim and
proceeding as aforesaid.
f. Without derogating from any other legal provision regarding the
service of process, we hereby consent that any process or claim
filed as above shall be served on us at the address furnished to you
by us from time to time as the address for the dispatch of mail.
13. INTENTIONALLY DELETED
14. IRREVOCABLE INSTRUCTIONS
We hereby give you irrevocable instructions to debit our account indicated
below with the amounts in the loan currency for payments of principal,
interest and commission (hereinafter: "amounts due") or such amount in NIS
as shall be required to purchase the loan currency amount equivalent to
the amounts due, as the case may be, on the payment dates stipulated above
on the conversion dates, on the deferred dates or on payment dates
determined by you if we shall be obliged to make immediate repayment of
the loan under the Debit Agreement as the case may be (hereinafter - the
"agreed repayment dates"), and we undertake to pay any amount debited to
our account as aforesaid on the due date.
|_| Account of the type _______ in the loan currency and in the absence
of sufficient balance to cover the amounts due-a debitory account
for an indeterminate period in the loan currency or, in your
discretion, our NIS current account.
|_| Our NIS current account.
We acknowledge and warrant that all sums debited to our account as
aforesaid and not paid when due shall, in the absence of a credit balance
or agreed overdraft, carry default interest at an agreed rate or, in the
absence of agreement, at the highest rate prevailing in your bank on
overdue debit balances in foreign currency or local currency as the case
may be.
15. EXCHANGE RATE
For the purpose of carrying out this agreement, every sale of loan
currency shall be calculated at the lowest rate for transfers and drafts
published by you on the date of sale and every purchase shall be
Page 23 of 25 pages
<PAGE>
calculated at the highest rate for transfers and drafts published by you
on the data of purchase unless a different rate is agreed between us
further to a request to buy or sell currency, as the case may be, served
by us on you not later than 11:00 a.m. on the date of purchase or sale as
aforesaid.
16. APPLICABILITY OF DOCUMENTS
The provisions of the debit agreement and account-opening documents
(hereinafter "documents") shall also apply to our obligations hereunder
provided that in case of conflict between the provisions of this
instrument and the documents, the provisions of this instrument shall
prevail.
17. INTERPRETATION
In this instrument the plural shall include the singular and vice-versa.
PEC ISRAEL FINANCE CORPORATION LTD.
s/JON BOOCK s/MICHEL DAHAN
-----------------------------------
Signature of applicants(s)
Page 24 of 25 pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of June 30, 1999 and the consolidated statement of
income for the six months ended June 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 36,447
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 557,066
<CURRENT-LIABILITIES> 0
<BONDS> 44,065
0
0
<COMMON> 31,952
<OTHER-SE> 422,589
<TOTAL-LIABILITY-AND-EQUITY> 557,066
<SALES> 0
<TOTAL-REVENUES> 48,167
<CGS> 0
<TOTAL-COSTS> 8,215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,211
<INCOME-PRETAX> 38,741
<INCOME-TAX> 9,425
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,316
<EPS-BASIC> 1.60
<EPS-DILUTED> 1.57
</TABLE>
