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, 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 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, 1999 there were outstanding 18,362,188 shares of Common
Stock with par value of $1.00 per share.
Page 1 of 23 pages
PART I - FINANCIAL INFORMATION
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
---------------------------
1999 1998
---------------------------
(In thousands - except per
share amounts)
Assets
Cash and cash equivalents $ 26,383 $ 22,007
Investments 484,893 432,112
Assets of General Engineers Limited 7,644 7,950
Other assets 4,529 4,860
--------- ---------
Total assets $ 523,449 $ 466,929
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable - Banks $ 44,223 $ 20,000
Liabilities of General Engineers Limited 4,697 5,163
Deferred income taxes 37,261 28,487
Other liabilities 8,219 8,054
--------- ---------
Total liabilities 94,400 61,704
--------- ---------
Shareholders' equity:
Common stock, $1.00 par value 31,952 31,952
Additional paid-in capital 104,747 104,616
Retained earnings 367,019 354,976
Accumulated comprehensive income (54,302) (65,952)
--------- ---------
449,416 425,592
Treasury stock (20,367) (20,367)
--------- ---------
Total shareholders' equity 429,049 405,225
--------- ---------
Total liabilities and shareholders' equity $ 523,449 $ 466,929
========= =========
See notes to consolidated financial statements.
Page 2 of 23 pages
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended:
---------------------------
3/31/99 3/31/98
------- -------
(In thousands - except share
and per share amounts)
Revenues:
Interest and dividends $ 1,248 $ 182
Equity in net income of Affiliated Companies 10,357 11,828
Net gain on issuance of shares by Affiliated Companies 6,777 59
Revenues of General Engineers Limited 2,801 2,198
Net (loss) gain on sales of investments in Affiliated Companies (800) 696
Net gain on sales, and changes in market
value, of trading securities 7 3,345
Other 464 844
------------ ------------
20,854 19,152
------------ ------------
Expenses:
General and administrative 1,350 858
Cost of sales and expenses of General Engineers Limited 2,758 2,570
------------ ------------
4,108 3,428
------------ ------------
Income before interest and income taxes 16,746 15,724
Interest expense 459 155
------------ ------------
Income before income taxes 16,287 15,569
Income taxes 4,244 4,826
------------ ------------
Net income 12,043 10,743
------------ ------------
Other comprehensive income:
Unrealized gain on available-for -sale securities, arising during
the period, net of tax provision of $3,616 (1999) and
$14 (1998) 6,717 26
Translation adjustment, net of tax provision (benefit)
of $992 (1999) and ($1,632) (1998) 4,933 (3,031)
------------ ------------
Other comprehensive income (loss) 11,650 (3,005)
------------ ------------
Comprehensive income $ 23,693 $ 7,738
============ ============
Earnings per common share - basic $ 0.66 $ 0.59
============ ============
Earnings per common share - diluted $ 0.64 $ 0.57
============ ============
Number of shares outstanding 18,362,188 18,362,188
------------ ------------
See notes to consolidated financial statements.
Page 3 of 23 pages
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Unaudited) (In thousands)
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
-------- ---------- ------------------- ----------- -------- -------- --------
Balance, January 1, 1999 $ 31,952 $104,616 $ 1,783 ($67,735) $354,976 ($20,367) $405,225
Paid in capital of
Affiliated Companies -- 131 -- -- -- -- 131
Change in market value
of available-for-
sale equity securities,
net of tax -- -- 6,717 -- -- -- 6,717
Cumulative translation
adjustment, net of tax -- -- -- 4,933 -- -- 4,933
Net income -- -- -- -- 12,043 -- 12,043
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1999 $ 31,952 $104,747 $ 8,500 ($62,802) $367,019 ($20,367) $429,049
======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
Page 4 of 23 pages
PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended:
---------------------------
3/31/99 3/31/98
---------------------------
(In thousands)
Cash Flows from Operating Activities:
Net income $ 12,043 $ 10,743
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in market value of trading securities (144) (494)
Purchase of trading securities -- (4,936)
Proceeds from sale of trading securities 132 9,951
Equity in net income of Affiliated Companies (10,357) (11,828)
Loss (gain) on sales of investments in Affiliated Companies 800 (696)
Net loss (gain) on sales of trading securities 137 (2,851)
Net gain (loss) on investment in partnerships 77 (198)
(Income) loss of consolidated subsidiaries (43) 162
Net gain on issuance of shares by Affiliated Companies (6,777) (59)
Dividends from Affiliated Companies 259 5,760
Change in other assets and liabilities 958 (1,486)
Provision for deferred income taxes 3,972 2,380
-------- --------
Net cash provided by operating activities 1,057 6,448
-------- --------
Cash Flows from Investing Activities:
Collection of loans 8,449 --
Purchase of notes receivable (1,033) (326)
Proceeds from sale of equity interests -- 2,645
Acquisitions of equity interests (28,163) (44,775)
Return of capital 66 12,582
-------- --------
Net cash used in investing activities (20,681) (29,874)
-------- --------
Cash Flows from Financing Activities:
Proceeds of Bank loan, net 24,000 20,026
-------- --------
Net cash provided by financing activities 24,000 20,026
-------- --------
Net increase (decrease) in cash and cash equivalents 4,376 (3,400)
Cash and cash equivalents, beginning of period 22,007 8,948
-------- --------
Cash and cash equivalents, end of period $ 26,383 $ 5,548
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for:
Income taxes $ 440 $ 416
Interest $ -- $ 144
See notes to consolidated financial statements.
Page 5 of 23 pages
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 10-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 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 actions vigorously.
4. On April 20, 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.
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 151 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 151 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.
Page 6 of 23 pages
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):
For the three months ended March 31,
1999 1998
---- ----
Net income available to common
shareholders--basic ................................... $12,043 $10,743
------- -------
Effect of dilutive securities:
Dilutive effect of PCEs issued by certain
Affiliated Companies ................................ (215) (322)
------- -------
Net income available to common shareholders--diluted .. $11,828 $10,421
======= =======
6. On May 16, 1999, the $24.0 million loan to PEC Israel Finance Corporation
Ltd., which is described in Note 9(c) of the 1998 Financial Statements,
was extended for three months to August 18, 1999.
7. Certain reclassifications have been made to the financial statements for
the three months ended March 31, 1998 to conform with the financial
statements as of and for the three months ended March 31, 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 23 pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Consolidated net income for the three months ended March 31, 1999 rose to
$12.0 million, up from $10.7 million for the three months ended March 31, 1998.
The rise in net income reflected increases of $6.7 million in net gain on
issuance of shares by Affiliated Companies and $1.1 million in interest and
dividend income. The increase attributable to these items was partially offset
by decreases of $3.3 million in net gain on sales, and changes in market value,
of trading securities, $1.5 million in net gain on sales of investments in
Affiliated Companies and $1.5 million in equity in net income of Affiliated
Companies.
Equity in net income of Affiliated Companies for the first quarter of 1999
was $10.4 million compared with $11.8 million for the corresponding 1998 period.
PEC had reduced net income in respect of some of its Affiliated Companies,
principally Elron, which in the first quarter 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 quarter of 1999 was $764,000 compared with $5.5 million for
the first quarter of 1998), Super-Sol and Property & Building. In addition, PEC
experienced net losses in respect of certain other Affiliated Companies,
particularly Tambour which had net income in the first quarter of 1998. This
decrease was partially offset by PEC's recording net income in respect of Scitex
for the first quarter of 1999 compared with a net loss for the first quarter of
1998 when Scitex wrote off in process research and development costs in
connection with its acquisition of Idanit Technologies Ltd. (PEC's share of the
net income of Scitex for the first quarter of 1999 was $440,000 compared with a
loss of $2.9 million for the first quarter of 1998). In addition, PEC had
increased net income with respect to certain Affiliated Companies, especially
El-Yam (PEC's share of El-Yam's net income for the first quarter of 1999 was
$1.5 million compared with $300,000 for the first
Page 8 of 23 pages
quarter of 1998) and Cellcom and PEC experienced reduced net losses with respect
to other Affiliated Companies, particularly Witcom Ltd.
PEC realized a net gain of $6.8 million on issuance of shares by
Affiliated Companies for the three months ended March 31, 1999 compared with a
net gain of $59,000 for the corresponding 1998 period. All of PEC's net gain for
the first quarter of 1999 resulted from Gilat Satellite's sale of ordinary
shares in a public offering in the United States in February 1999.
PEC recorded interest and dividend income of $1.2 million for the first
quarter of 1999 compared with $182,000 for the corresponding 1998 period. In
November 1998, PEC and Discount Investment arranged a two year loan of $90
million to United Pan-Europe Communications N.V. ("UPC"). In February 1999, UPC
prepaid 50% of the loan, and in accordance with the terms of the loan agreement,
paid a fee to PEC which is the primary reason for the increase in interest and
dividend income.
PEC incurred a net loss on sales of investments in Affiliated Companies of
$800,000 for the first quarter of 1999, all of which is attributable to PEC's
write-off of a loan to Unitel Vocal Communication Ltd., a start up corporation.
During the first quarter of 1998, PEC realized a net gain of $696,000 on the
sale of its entire 13.2% ownership interest in Lego Irrigation Ltd.
PEC's comprehensive income rose to $23.7 million for the three months
ended March 31, 1999, up from $7.7 million for the corresponding 1998 period.
PEC's translation adjustment, net of taxes, increased PEC's comprehensive income
by $4.9 million for the first quarter of 1999 compared with a reduction, net of
tax benefit, of $3.0 million for the corresponding 1998 period. The exchange
rate of the New Israel Shekel increased approximately 3.0% against the U.S.
dollar as of March 31, 1999 compared with December 31, 1998 while such exchange
rate declined approximately 1.7% as of March 31, 1998 compared with December 31,
1997. PEC's unrealized gain on marketable securities, net of taxes, increased
PEC's comprehensive income by $6.7 million for the first quarter of 1999
compared with $26,000 for the corresponding 1998 period.
Page 9 of 23 pages
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, PEC'S liquid assets (consisting of cash and money
market funds) totaled approximately $26.4 million.
For the three months ended March 31, 1999, PEC received interest and cash
dividends totaling $1.9 million (including a $258,000 dividend from an
Affiliated Company, which does not affect PEC's net income for financial
statement purposes), which exceeded PEC's general and administrative and
interest expenses. During the first quarter of 1999, PEC also generated cash
totaling $8.6 million, of which $8.5 million was generated from the repayment by
Cellcom of shareholder loans.
During the first quarter 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 ("UPC") 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 May 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 the
same interest rate.
During the first quarter of 1999, PEC also purchased securities of several
existing Affiliated Companies and other corporations for approximately $29.2
million. The securities purchased and their purchase price consist primarily of
a 0.63% ownership interest in UPC - $24.3 million; a 5.6% ownership interest in
CosmoCom, Inc. (an Internet call center software company)-$1.0 million; $1.0
million loan to an affiliate to enable such company to purchase a 5.6% ownership
interest in CosmoCom, Inc.; a 1.5% ownership interest in Klil - $658,000; a 2.9%
ownership interest in Combact Diagnostic Systems Ltd. - $635,000; a 0.2 %
ownership interest in Property & Building - $601,000; and additional shareholder
contributions to Mondex - $581,000. Discount Investment purchased the same
percentage ownership interests in UPC, CosmoCom, Inc. and Mondex on the same
terms as PEC and purchased on the same terms as PEC such number of additional
shares of Klil and Property & Building as was needed to maintain the same
proportional ownership interest in such companies relative to PEC.
Page 10 of 23 pages
In April 1999, PEC purchased an additional 0.44% ownership interest in
Elron for $2.1 million and purchased a 25% ownership interest in TeamWorks
Technology Ltd., a development stage multimedia software company, for $1.0
million.
Page 11 of 23 pages
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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.
The plaintiff seeks, among other things, to enjoin the proposed
merger and to be paid unspecified damages and attorneys fees. To date, no motion
to enjoin the proposed merger has been made.
The plaintiff's allegations of the defendants' wrongdoing and the
relief he seeks are substantially similar to the allegations made and the relief
sought in the purported class action filed on December 11, 1998 by Crandon
Capital Partners and Kenneth Steiner in the Supreme Court of New York State,
County of New York, which is described in Item 3 of Part I of PEC's Annual
Report on Form 10-K for the year ended December 31, 1998.
PEC believes that the allegations in Mr. Frank's complaint are
without merit and PEC intends to contest the action vigorously. To date, none of
the defendants have been required to answer, move or otherwise respond to the
complaint and no discovery has been taken.
Page 12 of 23 pages
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 10(i) Application for Foreign Currency Loan (Floating
Interest) dated May 11, 1999 between The First
International Bank of Israel Ltd. and PEC Israel Finance
Corporation Ltd., which begins on page 15 of this
report.
Exhibit 27 Financial Data Schedule, which is page 23 of this
report.
Page 13 of 23 pages
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 17, 1999
Page 14 of 23 pages